Temenos AG (TEMN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Temenos' Q2 2026 Results Conference Call and Live Webcast. I am Moira, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Takis Spiliopoulos, CEO and Interim CFO. Please go ahead.

Good afternoon, good evening. Thank you for joining our Q2 '26 results call. As usual, I will talk you through our key performance and operational highlights for the quarter before updating you on our financial performance. Starting on Slide 6. We had a strong start to the quarter and a stable sales environment throughout. However, we saw a small number of mainly large and new logo deals [ timed ] out at the end of the quarter. Most of these deals were in Europe. Importantly, none of these deals have been lost. We have also been able to sign the majority of the slipped subscription and SaaS revenue in the first 3 weeks of Q3 '26, which confirms the confidence we have in our pipeline conversion. These deals include one of the largest banks in Central and Eastern Europe as well as a Tier 1 European bank. With a robust start to the third quarter and very good visibility driven by a strong pipeline of large and new logo deals, we have given explicit guidance for Q3 '26 with subscription and SaaS expected to grow at least 30% year-on-year. We have also reconfirmed our 2026 guidance and 2028 targets. APAC performed particularly well this quarter, signing a large new logo in the ASEAN region as well as multiple deals with existing customers. We also saw good momentum in the U.S., signing a deal with a regional bank to migrate to Temenos core banking on South. We had another strong quarter of premium maintenance signings, which helped drive our profitability along with strong operational leverage in the business. We continue to execute on our strategic roadmap making investments across the business, particularly in core banking expertise in India and U.S. development teams. We also closed the acquisition of additiv strengthening our wealth proposition and accelerating AI-driven orchestration in line with the product roadmap we presented at the Capital Markets Day. Temenos clients across all tiers, especially Tier 1s and 2s, have shown strong interest for the additiv wealth offering. Lastly, our free cash flow continues to perform very well with strong double-digit growth this quarter. Moving to Slide 7. We signed a number of key deals in Q2 '26 and I'd like to highlight a couple of these. As I mentioned, in APAC, we signed a large deal with a new logo for core and digital in both the bank and its digital subsidiary to help them enhance the digital experience for their customers and to accelerate product innovation. We also extended our partnership with a number of existing clients, including a Tier 1 bank in Japan, who are using our platform to accelerate their speed to market. In Europe, we extended our SaaS partnership with a digital subsidiary of a major European bank. And in North America, we signed a deal to migrate the client to our SaaS core banking for retail lending. These are just a handful of the deals we signed in the quarter and demonstrate the breadth and depth of our global client base and the increasing demand for our market-leading products. Turning to Slide 8. We continue to focus on maximizing the value we deliver to our clients. Alrajhi, the world's largest Islamic bank with over 20 million customers and more than USD 260 billion in assets, based in Saudi with a growing young and digital first population seeking innovative and personalized banking services. Alrajhi is a long-standing client of Temenos, who values our deep Islamic banking expertise, proven capabilities and established presence in the region. We migrated them across more than 500 branches to the latest Temenos core banking platform, enabling them to significantly reduce product launch cycles from weeks and months to days. They now have a strong foundation for continuous innovation and to provide next-generation digital banking experiences. Turning to Slide 9. At TCF, we also announced that Questbank in Canada had gone live from Temenos SaaS. This was another encouraging milestone for our North America business. Questbank, part of Questrade Financial Group, is launching Canada's newest digital bank to challenge incumbents in the market and needed a highly scalable core banking platform that enables them to launch products fast with real-time data and strong regulatory compliance to support their growth. The core platform was implemented in 9 months with new deposit and lending products and the existing mortgages business moved across to the Temenos core. It is another example of the depth and breadth of our business, where we are partnering across all tiers of banks from fintechs getting new banking licenses to building composable core modules with the world's largest banks. Moving to Slide 10. We have made good progress on our product roadmap with a number of announcements at TCF, our client forum, in May. We launched composable retail deposits and composable retail lending as part of progressing Lever B of our corporate strategy, which focuses on building out composable core solutions for the world's largest banks. These 2 new cloud-native core banking solutions allow banks to modernize their deposits and lending operations incrementally rather than undertaking a full co replacement. These enable banks to modernize critical revenue-generating businesses in a phased and cost-effective manner. The solutions can be deployed independently, integrate with existing technology environments through APIs and help banks accelerate innovation while reducing the risk and disruption typically associated with large-scale transformation programs. And turning to the next slide. We also announced the launch of Intelligent Core and Intelligent Digital. This is the next step in our AI product roadmap, extending AI across both core and digital banking. We are working with our clients to address some of the largest pain points in banking technology, applying AI to the installed run and upgrade life cycle, enabling faster deployments, greater automation and simplified upgrades. We announced several agentic AI capabilities at TCF, including copilots for workbench, payments, FCM and wealth as well as conversational studio for digital. Together, these demonstrate how we are converting decades of banking expertise into practical AI capabilities. The launches are a key part of our broader strategy to embed AI across our entire product portfolio, further differentiating our offering and directly supporting our clients' growth. Moving to Slide 12. Temenos continues to be recognized as the market leader in the core banking space. This is now our 21st year as the global leader in core banking in the IBS sales league table, and we ranked 1st in 15 categories overall. I was pleased to see us run first in nearly every region and second in North America, where we continue to focus on expanding our footprint in the U.S. We also won the world's best core banking solution award from Euromoney, another demonstration of the strength of our core banking product. Now on Slide 13, we announced the acquisition of additiv in June and closed the transaction on 17th July. This acquisition accelerates our product roadmap, in particular, for mass affluent as well as giving us strong AI orchestration capabilities for complex journeys. Overall, there are 3 key drivers for this acquisition. Firstly, it extends our reach into the mass affluent segment where we already had ambitions to expand. additiv's market-leading mass affluent offering enables wealth managers to provide personalized advice at scale and significantly shortens delivery cycles. It gives us an immediate footprint and offering in this fast-growing market. Secondly, additiv gives us strong foundation to build out complex retail and corporate journeys in the future, in particular, for credit origination and accelerates our ability to offer a state-of-the-art digital onboarding and origination solution to our client base. And lastly, it complements our AI strategy with purpose-built AI-enabled experience and orchestration. We are working with the additive team to build out more AI use cases across their orchestration platform over time. The founder-led team will continue to run additiv on a stand-alone basis for the foreseeable future. On Slide 14, we continue to make good progress on our strategic execution priorities. Our product road map is progressing well. as we have already shown, and we are investing across the business. I was pleased to welcome Brian DuVal, our new President North America, who joins from SS&C and previously FIS. He brings a wealth of experience and deep knowledge of the U.S. core banking market. Rodrigo Silva is moving to President LatAm to focus on growing our business in key markets in that region, in particular, Brazil, where we see a very significant opportunity. On the product side, we closed another round of key role hires in our India and U.S. teams and we have continued to roll out AI tools across the business as part of our AI strategy. I will now run through our Q2 '26 financial highlights, focusing on constant currency non-IFRS financials. On Slide 16, we delivered another quarter of double-digit ARR growth despite the slipped deals in the quarter, helped by our premium maintenance signings and a good level of SaaS ACV signings. Product revenue declined marginally year-on-year, but grew a healthy 6% in H1 '26, also helped by the strength of our premium maintenance signings and our strong performance in Q1. Turning to Slide 17. Subscription and SaaS declined 13% in Q2 '26 and 4% in H1 '26 due to the slipped deals. As I mentioned before, importantly, none of these deals were lost, and the majority of the slipped subscription and SaaS revenue was already signed in the first 3 weeks of Q3 '26. Total revenue grew 1% in the quarter and 6% in H1 '26 with maintenance and services revenue growth offsetting the impact from subscription and SaaS. Now on Slide 18, non-IFRS EBIT grew 4% in Q2 '26 and 10% in H1 '26 and non-IFRS EPS grew 7% in the quarter and 12% in H1 '26. Our cost base was broadly flat in the quarter and up 4% in H1 '26 with an increase in fixed costs, offset by lower variable cost accruals. We continue to hire and invest in the business. However, strong premium maintenance signings and operational leverage mean we are still able to deliver strong growth in profitability. Now let me highlight a few items on Slide 19. ARR grew 11% to reach $881 million at quarter end despite the ongoing headwind from the BNPL customer and the lower subscription and SaaS revenue, giving us strong visibility on future recurring revenue and cash flow. Maintenance again grew double digit, up 12% in the quarter, largely due to the strength of premium maintenance signings. We now guide for maintenance growth of 8% for the full year, slightly up from 7% to 8% previously as we are continuing to take a prudent view on the continued demand for premium maintenance across our customer base. On profitability, our EBIT margin improved by 1 percentage point to 41.3% year-on-year, reflecting strong operating leverage. Our margin will normalize in H2 '26 with ongoing investment in the business and greater variable cost accruals that we typically see in the second half of the year. Moving to nonoperating items on Slide 20. Net profit was up 2% in the quarter and EPS grew 7%. This was achieved despite an increase in net finance charges and taxes partially offset by FX with our tax rate this quarter, marginally higher than the expected full year tax rate of 19% to 21%. We canceled additional shares after the AGM in May from the 2025 buybacks, which also benefited EPS. On Slide 21, we generated free cash flow of $74 million in the quarter, up 14% year-on-year, driven by strong ARR growth, solid EBIT to cash conversion and our disciplined approach to capital allocation. This remains a key metric for us given our move to a subscription license model in 2022. On Slide 22, we have the changes in group liquidity in the quarter. We generated $127 million of operating cash in the quarter, paid $118 million in dividends and bought back $10 million of shares in our latest buyback, which ended in April. We ended the quarter with a leverage at 1.4x within our target range of 1 to 1.5x. Turning to Slide 23. A few comments on our debt leverage and capital allocation. We completed our share buyback program for a total of CHF 100 million in April 2026 with shares representing 1.9% of registered capital purchase. We also canceled approximately 4 million shares purchased in the 2025 share buyback after our AGM in May, and our reported net debt stood at $691 million at quarter end. I would also flag that we expect our leverage to be within our target range of 1 to 1.5x by year-end, including the acquisition of additiv. Next, we have reconfirmed our 2026 guidance, which is non-IFRS and in constant currency, except EPS and free cash flow, which are reported. The acquisition of additive is expected to be marginally accretive to ARR and subscription and SaaS and neutral on EBIT, EPS and free cash flow. The 2026 guidance includes the headwind from the termination of the BNPL client in 2025, which we have given on the slide. There will be no further headwind from this beyond 2026. We have also given guidance for Q3 '26. Given we already signed the majority of the slipped subscription and SaaS revenue from Q2 '26, we expect subscription and SaaS revenue growth of at least 30% in the quarter. And lastly, we have reconfirmed our 2028 targets based on our strong first year of execution confidence in our strategic positioning, good visibility and continued conversion of our pipeline. Operator, can we please open up for questions.

[Operator Instructions] The first question comes from the line of Frederic Boulan from Bank of America.

Frederic Boulan, Bank of America. If I can start maybe with the pretty vast differences we've seen the momentum between the different regions. And if you can spend a bit of time on what's driving that, in particular, when we look at the strong performance in Asia versus the U.S. or Europe? I mean, is it different competitive dynamics, difference in product portfolio or simply kind of macro or [indiscernible] cycle considerations?

Fred, yes, let me address this. We -- I mean we had a strong start to the quarter and overall, a stable sales environment across all regions throughout the quarter but it was really a number of larger deals and new logos, which were enclosed in the final weeks of June, and this is mainly in Europe. Now as you are aware, sales cycles are 12 to 18 months for core solutions, which can make precise timing of closing the deal quite difficult, especially for larger and new logo deals. The majority of the slip subscription and SaaS revenue already signed in the first 3 weeks, including one of the largest banks in Central Eastern Europe in the Tier 1 European bank. So again, I need to highlight that no deals have been lost. We're -- I think we have been awarded everywhere selected vendor status. So we expect to sign the reminder of the slip deals in the next few weeks. And this is what's giving us the very good visibility into a strong Q3 and why we have guided for at least 30% subscription and SaaS growth and have reiterated the '26 guidance. From a regional perspective, yes, APAC had a good quarter, also thanks to our larger deals. I think the Americas, which includes both North and LatAm, I think there was more a difficult comparison base, which we didn't manage to lap. Remember, we had a large Brazilian deal in Q2 '26. The U.S. performed -- or North America performed largely as expected. Middle East can always be volatile, but no issues there. In Europe, clearly, we had an accumulation of especially larger deals and new logos, which we timed out. So I wouldn't read anything specific into the regional performances.

The next question comes from the line of Josh Levin from Autonomous Research.

Two questions from me. You said that you've already signed the majority of the slipped deals in 3Q '26. Does the at least 30% subscription and SaaS revenue guidance for 3Q '26 assume that you signed the remainder of the slip deals, what happens if you don't sign the remainder of the slip deals? And then also, you've mentioned it's mostly Europe, the slippage, so the deals that were timed out in Europe, is there a lengthening of the European bank decision cycle, some macro regulatory factors, competitive dynamics? I mean, what's driving the slippage? And why is it mostly in Europe?

Yes. Let me take this. Now on I think the slip deals, yes, we expect everything to be signed in Q3, and we've already seen good traction else, you wouldn't qualify them as slip deals. So, yes. On your second question, I think with larger and especially also new logos, it's about understanding the procurement process. And if you deal with the bank for the first time, this can bring up surprises, especially towards the end of the quarter. So we didn't see anything specific lengthening. It was really about understanding in full the approval processes the procurement processes. And as we had -- this is always the tricky part to get from how long does it take to get from being awarded a selected vendor i.e., winning the deals to get to terms and conditions, procurement with a new logo, it's always difficult to time. So nothing what we have seen in terms of lengthening sales cycles anything specific.

The next question comes from Mark Hyatt from Morgan Stanley.

Quick one on maintenance, please. Growth was very strong again in Q2. I know you've called out [indiscernible] in your prepared remarks. But if you could give us a bit of a breakdown of the drivers of what's driving that result. That would be really helpful. And previously, you've said that maintenance growth, I think, should moderate going forward from the high levels that we saw last year. So is the strength that you've seen in the first half of the year consistent with that expectation? Or has that been stronger than expected? And if you could give any color in terms of how we should think about that in the second half, that would be really helpful.

Mark, Happy to take that one. Maintenance growth of 12%, clearly was strong and we expected high single digit, low double digit. So it came out a bit better. and clearly shows the continued strong momentum. However, and this is important to highlight. This is customers also getting real value for this. So it's an attractive value proposition for clients. That's something we have seen getting a lot of traction with the premium offerings. The second element, which is also working into maintenance is, it also reflects the CPI-linked uplift, the value uplift we get from subscription deals. So it's not just the premium part. On -- we're having now 13% in H1 '26. We think we should be at 8% for the full year. So now for Q3, you're probably going to be around the 5% mark, and then Q4 will be the remaining. We clearly have now tough comparison basis ahead for Q3 and Q4, also because the overall pool in terms of the opportunity doesn't grow that much. I mean we get the new clients in, but there is always a delay. So clearly, that's what we see as the right number for the year. And beyond '27, '28 as we had commented, it's probably around the 5% to 6% mark, so it should then normalize.

The next question comes from the line of Toby Ogg from JPMorgan.

Just on the Q -- can you hear me? Can you hear me?

Yes, sir, we can hear you.

Yes, we can hear you.

Can you hear me? Yes. Sorry about that. Just on the Q3 subscription and SaaS guide for at least 30%, how much of that would you say is underpinned by those slip deals that you've already signed and then the remaining that you expect to sign? And therefore, how much is sort of left to do kind of beyond that deal slippage tailwind just as we think about building confidence around that 30%-plus guide for Q3. And then just more broadly around the full year subscription and SaaS guide, how confident are you around that? And what's kind of driving that confidence at this point?

Toby, so if you ballpark numbers, what we have done, given approximately, if you take consensus as reference, a $20 million miss on subscription and SaaS that has been entirely moved into the Q3 guidance. So we didn't really see a lot of other changes. That was the thinking and given the traction we have seen in the first 3 weeks and the rest is expected over the next days and weeks, this is what we put behind. Now where does our confidence not just for Q3, but also the full year come from? It's clearly, we have invested a lot in our sales force in the last 18 months, mostly last year. And clearly, you see now a lot happening in the pipeline already at the start of the year, especially across new logo deals and especially larger deals. So we are -- when I look at the second half pipeline, it's -- it's a significant increase versus last year, H2, H1 but also H1 this year. So that gives a lot of visibility and underpins our confidence that this isn't really a major issue in terms of the deals, it's really timing, what we see. And the early traction in Q3 confirms that. So yes, we are confident, and this is why we have reconfirmed our guidance.