Temenos : 2021 Q2 RESULTS CALL TRANSCRIPT

Full Reviewed Transcription

Temenos Group

Q2 2021 Results

2021-07-21 at 6:30 pm CET

Duration: 63 minutes

COMPANY REPRESENTATIVES

Max Chuard CEO

Panagiotis Spiliopoulos CFO

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Temenos Group 2021-07-21 - 6:30 pm CET

PRESENTATION

Operator

Ladies and Gentlemen, welcome to the Temenos Q2 2021 Results Conference Call and Live Webcast. I am Sacha, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the Conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing * and 1 on your telephone. For operator assistance, please press * and 0. The Conference must not be recorded for publication or broadcast.

At this time, it is my pleasure to hand over to Max Chuard, CEO. Please go ahead, Sir.

Max Chuard

Thank you. Good afternoon, and thank you all for joining today's call. I hope you've been able to access our results presentation on our website. As usual, I will start with some comments on our Q2 performance, and then I will hand over to Takis for an overview of the financials, before giving some concluding remarks.

Starting on slide 7, we had strong momentum in the second quarter, as more banks embarked on digital transformation journeys, in response to the pandemic, and the ongoing structural pressures on traditional banking models. We also benefit from significant numbers of new entrants to the market. Our success with new entrants and challenger banks has driven significant growth in SaaS ACV, which were up 409% in Q2. Combined with strong license growth, this has delivered excellent growth in total bookings of 1% and 4%.

Our total booking this quarter are higher than they were, in Q1, in Q2 2019, demonstrating the strength of recovery and underpinning our future outlook. We introduced total booking as new KPI this year, to reflect the increasing contribution from SaaS and to enable you to track the over growth in our business. Our EBIT grew 16% this quarter, and our EBIT margin expanded by 300 basis points, driving strong operating and free cash flow generation. With a strong momentum in our business, we have raised our SaaS ACV guidance for the year, to between 50% to 60%, up from between 40% to 50%. We have reconfirmed the order guidance items, which Takis will run through later on.

Moving to slide 8, we had significant SaaS ACV growth this quarter, up 409%, with ACV of 17.4 million Dollars, our highest ever ACV quarter.

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Temenos Group 2021-07-21 - 6:30 pm CET

The U.S. was the strongest contributor by region, and we expect this to continue going forward. We signed a number of new SaaS logo this quarter, as well as, benefiting from volume growth within some existing clients, who have rapidly scaled the business.

On slide 9, you can see that our SaaS growth is largely incremental to the business. Large banks are buying licenses from us, to progressively renovate the bank, based on packaged business capabilities, and those will be run, either on-premise or in the cloud directly themselves, or with a hybrid model that combines the 2. Mid to lower tier banks are also largely on-premise, renovating the entire bank, and we do see increasing use of cloud and SaaS in this segment.

And finally, challenger banks and FinTechs are almost entirely SaaS for the operations, and this is where we see the incremental demand, and we can achieve rapid SaaS ACV growth with successful plans at the scale the business massively.

Turning to slide 10, we had an excellent total booking growth of 104% this quarter. Total booking hit 165 million Dollars, which is higher than what we had in Q2 2019, and as you know, 2019 was our best year so far, so this reflects the strong sales momentum we see in the business. Demand this quarter was broad based, across most geographies and products. Total booking is a key metric for us, as this... it drive growth in our backlog and increases our long term visibility. It underpins our guidance for the year, shows we are building backlog for 2022, and give us confidence in our 2025 targets. Our growth in total bookings was driven by significant growth in SaaS, as well as, strong growth in licenses. As with Q1, we also saw an increase in average tenure this quarter, compared to last year.

On slide 11, we saw continued momentum in the second quarter, building on Q1, with the sales and development improving across most geographies. All regions delivered double-digit growth in the quarter, with the U.S. in particular, having another very strong performance. The U.S. was again, the largest contributor to total software licensing.

In Europe, we are seeing a recovery that is following the trajectory of the U.S., with a short time lag. Our European deal pipeline is building up very nicely, and we expect strong sales growth in the second half of the year. Activity with Tier 1 and Tier 2 banks is also increasing across all regions, and in fact, we are strengthening our sales organization to address this. We had 16 new clients win in the quarter, and our services teams and partners delivered 15 implementation go-lives.

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Temenos Group 2021-07-21 - 6:30 pm CET

On slide 12, I'm very proud that we again topped the sales league tables for the year. With IBS, we were ranked number 1 seller for core banking, for 16 years in a row, which is an amazing achievement. We were also the number 1 seller for digital banking and channels, retail payments and risk management. This year IBS introduced a new category for sales, to neo-banks and challenger banks, which is a very fast growing segment, targeted by a number of neo-vendors. We have invested heavily in our SaaS and cloud capabilities over the past few years, to ensure we are highly competitive in this segment, and being ranked number 1 in this new category is a strong statement of our capabilities, our competitive positioning and the investments we've made so far.

With Forrester, we were the top global power seller for the 15th year, and in fact this year we were the only vendor to be ranked as a global power seller with a 20% increase in new named deals, and with 3 times as many deals as the next vendor in the ranking, so that's quite impressive. I'm very pleased with this confirmation of our market leadership, and the efforts of all our product, sales and marketing teams, who fully deserve the credit for this success.

Moving now to slide 13, I'd like to give a quick update on the 2 strategic partnerships announced earlier this year. In our partnership with Salesforce, as you know, we are combining Salesforce CRM capabilities with transactional capabilities from Temenos Infinity, the product integration is nearly complete, and sales activity have already commenced with strong level of interest. The second partnership was a strategic agreement with DXC, to offer the bank's clients a digital transformation path for core banking. We have a number of workshops and early stage sales processes on the way, and are looking to potentially expand the relationship to offer all the products into the U.S. market.

Turning to slide 14, our U.S. business continues to perform very well, and was the largest contributor to our total software licensing, with strong growth in both license and SaaS. We had a number of new U.S. logos signed in the quarter, and looking forward, it is the largest contributor to our global ACV pipeline this year. We have continued investing in our sales team in the U.S., which is translating into pipeline growth, and we expect our strategic partnerships, as I mentioned, with Salesforce and DXC to also contribute to future growth. And finally sales activity with large U.S. clients is also increasing.

Finally turning to slide 15, we are seeing increased activity with Tier 1 and Tier 2 banks in the market. And therefore, we are proactively responding to this and have announced two expanded roles in our Executive Committee to strengthen our global sales leadership.

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Temenos Group 2021-07-21 - 6:30 pm CET

First, Philip Barnett is taking the role of President of Global Accounts in addition to his Strategic Partner responsibilities. He is building a dedicated sales team focusing on strategic and complex Tier 1 and Tier 2 accounts to capture the increased demand we see in this market. And I think this is very exciting.

Jean-Paul Mergeai is being promoted to President International Sales with responsibility for sales across Europe, Middle East and Africa as well as Asia PAC. Jean-Paul took over responsibility for Asia earlier this year and has already had great success. And we are very confident he will replicate this in Europe. Jacqueline will continue as President of the America with responsibility for sales both across North and South America.

On that, I will now hand over to Takis to talk through the numbers for the quarter.

Takis Spiliopoulos

Yes, thank you, Max, and hello, everyone, from my side as well. On slide 17, I'll start with an overview of the quarterly financial performance. All figures are in constant currency unless otherwise stated.

SaaS revenue was up 24% in Q2, '21 driven by strong ACV growth in prior quarters, but offset by the impact of HCL. Total software licensing grew a strong 16% and maintenance grew 3% in line with guidance and in line with Q1,'21 giving total revenue growth of 8%. EBIT grew 16% and the EBIT margin expanded by 300 basis points to 36.2% driven by the operational leverage in our business model.

We had another very strong cash quarter with operating cash flow of 112 million, up 19% and free cash flow of 87 million, up 24%. DSOs ended the quarter at 106 days, down 1 day year-on-year and also down 1 day sequentially. Our net debt is now just above 1 billion and our leverage is at

2.3 times having paid out the 2020 dividend and executed 194 million of the 200 million share buyback program. With our strongest cash quarter ahead in Q4 '21, we expect our leverage to be around 2.1 times by year end, therefore unchanged year-on-year.

Moving to slide 18, SaaS revenue grew a strong 24% despite the HCL headwind. We have had several from quarters of ACV growth and with most of the HCL headwinds behind us, I expect a sequential improvement in SaaS revenue of 2 million to 3 million in Q3 '21 and an even stronger sequential improvement in Q4 '21 as the ACV growth is reflected in the P&L.

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