• Total Software Licensing Revenue: $96 million, below consensus expectations.
• Annual Recurring Revenue (ARR): $761 million, up 9% year over year.
• Free Cash Flow: Down 21% year over year; adjusted for one-off payments, grew 26% in the quarter.
• Total Revenue Growth: 4% for the quarter.
• EBIT Growth: 19%, with EBIT margin expanding by 4 percentage points.
• Subscription Growth: 17% for the quarter.
• Net Profit: Up 24% for the quarter.
• Earnings Per Share (EPS): Up 25% for the quarter.
• Net Debt: $775 million, with leverage at 1.8 times.
• Guidance for FY24: EBIT and EPS guidance unchanged; ARR growth revised to 11%-12%; free cash flow expected to grow at least 12%.

• Warning! GuruFocus has detected 5 Warning Signs with TMSNY.

Release Date: October 23, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Temenos AG (TMSNY) reported a 9% year-over-year increase in ARR, reaching $761 million in Q3.
• The company successfully signed a significant number of new clients and maintained strong demand from its installed base.
• Temenos AG (TMSNY) achieved 61 go-lives across its products in Q3, totaling 224 go-lives for the year, demonstrating strong customer success.
• The company is making strategic hires, including Bob Morgan as the new Chief Product and Technology Officer, to strengthen its leadership team.
• Despite sales execution issues, Temenos AG (TMSNY) maintained its EBIT and EPS guidance for FY24, indicating financial stability.

Negative Points

• Sales execution issues in the Middle East Africa region led to software licensing revenue falling below expectations at $96 million.
• Free cash flow was down 21% year-over-year, impacted by one-off payments related to an independent investigation.
• The company revised its FY24 guidance, taking a conservative view on Q4 pipeline due to sales challenges.
• Temenos AG (TMSNY) experienced volatility in its quarterly P&L, affecting visibility on cash flow growth.
• The company faces challenges in reducing management layers and improving operational efficiency, which are part of its ongoing efficiency program.

Q & A Highlights

Q: Can you provide insights on conversion rates in regions other than the Middle East, and how conservative is the Q4 guidance? A: In regions like North America and Europe, pipeline conversion rates were consistent with previous quarters. The Middle East faced execution issues, but we've taken corrective actions. For Q4, we've applied historical conversion rates for deals under $1 million and reviewed larger deals individually, ensuring a conservative approach.

Q: What are the key priorities and investment areas for Temenos, and what has changed in the software license side? A: Our focus is on improving go-to-market strategies and operational excellence. We've recruited a VP of sales operations to enhance sales execution. The Q3 shortfall was mainly due to the Middle East, and we've taken steps to address this. We're also investing in product and technology to support our growth plans.

Q: How are you addressing the efficiency program, and what are the expected cost savings and restructuring costs? A: We've reduced management layers and are focusing on empowering managers. The efficiency program has led to $7 million in restructuring costs, with mid-single-digit savings expected by year-end. We're balancing growth and profitability by self-funding investments through efficiency savings.

Q: Can you explain the recent performance in Europe and the status of the Julius Baer project? A: Europe's performance was as expected, with no significant issues. Regarding Julius Baer, they remain a key client using our software across various regions, and recent reports suggesting otherwise are incorrect.

Q: How should investors model the subscriptions and licenses line given its volatility? A: Subscription accounting is similar to term licenses, and volatility is inherent. By year-end, term licenses will contribute minimally, with subscription being a key driver. We're working on improving predictability by increasing pipeline and reducing dependency on large deals.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.