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Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2020 results conference call. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Mr. Klaus Holse. Please go ahead, sir.
Thank you very much, and a warm welcome to all of you joining our Q3 and first 9 months of the year review. Before we get started, I would kind of take you to Slide #2 and the disclaimer that I would advise you to read if you haven't done so already. And that kind of governs everything we're going to be saying during the day. On Slide #3, you see the agenda. First off is the highlights for the Q3, which I will do. Then we go to a more detailed review of the financials, which Michael Rosenvold, our CFO, will do. And Michael will also cover the 2020 outlook, and then we will jump to the Q&A that we'll both participate in. If we move to the next slide, Slide #4, you see Q3 at a glance. And what you see is that our order inflow in the quarter was actually quite good. We had 4 new SimCorp Dimension deals being signed, 2 in Asia, 1 in the U.S. and 1 that we haven't disclosed, but we'll get back to that in a minute. The revenue growth wasn't quite as good given that some of the deals we got only ended up in the order book given that there are some conditions that need to be met before we can bring them to revenue. Also, the revenue growth went down by almost 15%, given the comparison we have to Q3 last year, where we had a large deal in Asia that we revenue recognized in the year that came out of the order book. EBIT kind of follows the revenue, and it is down by EUR 12.8 million at EUR 22.4 million for this year. The growth in software updates and support is at a little less than 7%, so coming down slightly over last year. Organic growth in the quarter alone was 1.5%, so a slower growth there given the number of new orders. Professional service is about flat, and free cash flow, a little bit down over last year. If we move to the next slide and look at the 9-month all up, then we see order intake of a total of 10 deals, 7 new SimCorp Dimension deals and 3 SimCorp Coric contracts. Order intake a little bit down over last year, down by EUR 4.6 million, sitting at EUR 58.5 million for the 9 months. Revenue growth down by about 5%, depending on whether you look at local or reported currencies, and EBIT also decreasing over last year, sitting at EUR 65.9 million. All of this, of course, related to the uptick in order flow and the revenue recognized in last year of the big contract. Order book sits at EUR 43.8 million, that's up EUR 4.7 million over last year, reflecting, as I said, that some of these deals were moved to the order book and were not taken as revenue. Professional services growing 3%, and the free cash flow up almost 7% over last year, which is actually quite positive. Michael is going to give us a little more detail on that in a minute. So that is the overview of the financials both from the third quarter and the 9 months that preceded. If we move to the next slide, you see the new clients that have come in to SimCorp. The ones we have signed in Q1 and Q2, with this -- we've walked through -- as we walk through the second quarter. And in the third quarter, as I said, we signed 4 new deals, 2 in Asia, 1 of them the Central Bank of Sri Lanka, and then 1 that is undisclosed and then 1 in the U.S. What you also see is that all of these deals kind of covers the full front to back, which we think is important and kind of signifies that we have some strength, and 2 of them are in the cloud. The last one in the U.S. is kind of a full plate almost. If you could say it that way, it's in the cloud and also has our Datacare service as well. If we move to the next slide, you will see that Q4 is off to a good start. From the point of signing new clients, we've got a new Coric client in the U.S. We got Allianz Global Investors in Germany as a customer on a middle offices solution. A little bit unusual that it didn't have the back office, the front office but only middle office, so a point solution in that sense, we think it's an interesting deal for us and allows us to do more, hopefully, with Allianz as we move forward. And then the last deal is in Australia and Australian asset manager that is going to use SimCorp Dimension for front and middle office and is in the cloud and also using the data warehouse. So all in all, off to a good start. Each kind of the average size of these 3 clients is a little lower than what we often see, but we think we are off to a good start and has -- and will probably talk about pipeline more in the call as we go. And we do expect to sign more deals as we move throughout the fourth quarter. If we then move from kind of the financials and the customers and into the next slide and just talk a little bit about what we see in the operating environment out there. Then it is pretty much what we've seen also in the past, kind of the fee pressure, the cost pressure. We are seeing that multi-assets is increasingly growing. And I would say the focus on ESG capabilities, so environmental and sustainable investment, is growing. That is clearly something that all of the -- both asset managers and asset owners are starting to pay a lot of attention to, given kind of where the world is. We still see industry consolidation, polarization. We've talked about this. We've seen Franklin Templeton acquiring Legg Mason, being one of the biggest deals done. So this is really on the go, in many ways, a good trend for us given that the bigger get bigger and get more complicated, which is a good market for us. The drive, the digitization of the client experience is something that's really high on the agenda for many of our customers and the prospects out there and also the drive for efficiency and so on. And as you can see, kind of the implications for IMS vendors that we listed on the right, we see these trends as good for us. It is a -- we think it's a good market to be in, and we think that the trends are supporting us to the next years and the future after that as well. If we move to the next slide, I just wanted to kind of talk about -- we did this in the quarter before, kind of some of the strategic imperatives and so on we've done, given that we completed the strategy process. Then it might be just important to just highlight them once again. It kind of has 3 components, 2 or 3 strategic imperatives. One is the customer experience, leadership. And there, we are focused on the customer success, which is why -- and we talked about this before, we created these customer engagement teams that are now working with the clients. And we've now kind of completed the client #100, review of kind of what their success criteria is, how we best support this. So it's actually kicked into motion and having a really good effect on our engagement with existing clients. It is clearly also something that allows us to give a premium experience to -- an individualized premium experience to each of the customers. And then right now, we are working on how do we also, you can say, industrialize this, so how do we make -- how do we enable ourselves to also sign smaller deals with a lower touch of clients. So that's something we're working on at the moment. Everything as a service is where a lot is happening. It's all based on us selling outcomes rather than just selling optionality. It includes us owning the operations and continuous delivery. We see that with what we're doing with SimCorp in the cloud and Datacare and Coric Engage are also 2 good examples of this that are having good traction in the market. And we're moving kind of from the one product, the SimCorp Dimension product, to have a suite of offers that goes into the market, Coric Engage, Coric Datacare. And you're going to see more like that as we go. Kind of where quite a bit of the focus has been in the last quarters, it's been on the ecosystem enabled innovation. It's building the open platform, having more APIs in the system, that's progressing. We're seeing more partnerships being signed both with custodians, with fintech companies and so on. So we are becoming a part of a growing ecosystem, and that allows the customers more optionality in terms of what they use for the various pieces of functionality they need from the system, whether that comes from us or whether that comes from a partner. So it allows us to cover more there from the customer, and it allows us -- the customer to have optionality. All of this, of course, it's on top of the cloud and the technology transformation we're doing there. So all in all, we are moving ahead. The customer experience leadership, I would say we've come far, a good long way. Everything as a service, we are maturing that. And then the ecosystem-enabled innovation is kind of where the focus is and where the build-out is right now. And in a minute, we're going to talk about one of the partnerships in that as well. If we move to the next slide, I just wanted to highlight kind of the everything as a service, kind of where we're going today. And I think we've shown this slide before. I just wanted to repeat it that it's the platform as a service, software as a service, everything as a service, that's a journey we're on. Today, we deliver the platform as a service, mostly with IBM. The Azure offer with Microsoft is being prepared and out there. And then we will, in due time, offer software as a service offering that will be based on Azure, and that will also cover the everything as a service. That's kind of the way forward for us as we go. We are seeing, as you saw in the deal signed, quite a bit of success with bringing our customers to the cloud, as that the 13 deals signed this year, it's almost half of those that are cloud-based deals. If we move to the next slide. Then out of the strategy process came an update on the must-win battles. You will see some of these are repeats of what we've seen in the past year. Front office, alternatives, Datacare is clearly there, but the emphasis is on Coric Engage, the new client engagement platform, the digitized version of this for clients is in there. And then the cloud offer that we're going to make along with Microsoft and Azure is clearly a must-win battle that we expect more customers to sign on, both new customers but also existing customers. So that kind of concludes the part of the kind of report back from the strategy process. And then the last slide I will cover is the announcement we made in October that we entered into kind of a letter of intent with -- for a strategic partnership with State Street. I think it's a long-standing partnership we've already had with State Street in Europe, where they're using our software for outsourcing to a number of clients. And now the intent of this is that State Street will use SimCorp Dimension front to back for insurance clients in EMEA. We think that's very interesting for us to have State Street offer all of their outsourcing services on top of a fully front-to-back solution from SimCorp Dimension. It will allow the customers to have access to Simcorp Dimension in the cloud with all the multi-asset capabilities, the advanced accounting and so on and then, on top of that, the managed services and the outsourcing capabilities that State Street has. It will give access also to State Street's Alpha platform, where there's data management, there's a middle office and costing services that comes from this. And that kind of sits on top. And then again, if a customer has a different preference than SimCorp Dimension as the front to back, if they really, really want another solution like State Street Charles River, then that's actually possible as well. We're not going to be locked into this. There is optionality in this, just like there's optionality that we talked about in the open platform. But the idea is initially front to back on SimCorp Dimension. The contract with State Street is being negotiated, and it is our expectation that it'll get signed in the fourth quarter. But the guidance that we've given you doesn't include that it will be signed in the fourth quarter. With that, I think I'll transition to Michael to give us a little more detail on the financial review.
Thanks a lot, Klaus. And I will start with a little apology. For those of you who have had a chance to read through the interim report, you might have noticed that there is a little -- there's a lot about revenue recognition and what is revenue recognition, what is order book, and is it revenue recognized over time or upfront, do we have opt-out clauses and stuff like that. But that is a necessity to inform you about the different options. And also, I would say, we have really aimed at being as transparent as possible, so you have all the details available. But of course, it takes a little time to digest, and an apology for that. But that's the world we're living in and also with the accounting regulation we are using. But going into the detail here on Page 14. As Klaus also rightly said, it is a tough comparison because in Q3 last year, we had a very large revenue recognition of a deal in Asia, and we also had a large conversion of a deal also in Asia. So you can say the comparison numbers are quite high in Q3 2019. Despite that, we generated a decent margin of 22% in reported currency. And when you look at it organic, 24%, so a 24% organic margin in this quarter. And you can say the revenue -- the negative revenue growth was very much due to the tough comparison but also that some of the wins we had in Q3, revenue recognition were deferred. If we go to the next slide, it's illustrated in a good way. I believe that it is a tough comparison, so Slide 15, it is a tough comparison, Q3 '19 with a 30% margin. And if you actually look at it over a 5- year horizon, then both the EBIT and the margin is on level with the other 4 years. Moving on to the 9 months performance, a little bit similar story, tough comparison, a margin organically of 23%. And if you look at the revenue growth, then an organic negative growth of 7%, again, impacted by the combination of some large orders in '19 and deferral of revenue recognition in 2020. And again, moving to Slide 17, if you look at the last 5 years, you can actually see that the 9 months 2020 is the second highest margin we have achieved within the last 5 years but lower than the record high last year. Then going to Slide 18, where we are describing the order intake. We do see, despite the fact that we have COVID-19 implications, a growth in the order intake of 14%, so 2.6% -- EUR 2.6 million higher than the same quarter last year. And you can see, in the order intake, we have a conversion of EUR 4.5 million. That conversion is not revenue recognized, but it's included in the order intake. But we had a conversion of the same size last year of EUR 4.9 million. That was actually also revenue recognized for both an order intake and a revenue recognition in 2019. So you could say net-net, there's no impact on the order intake from conversions because they were of the same size in Q3 in '20 and in '19. Of the 4 deals we signed in 2020, 2 of the deals were included both in order intake and revenue. One deal was included in order intake, but revenue recognition has been deferred. And for one deal, there's no order intake and no revenue recognition as that will be done over time. So in -- over the next 2 years, that will be both included in order intake and in revenue. Then we had 2 renewals in Q3 2020, where we had 2 of the clients we signed in early 2016. They were auto-renewed for at least 2 years, and we are now, you can say, in discussions and negotiations how long that -- the renewal should be, but they were auto-renewed for 2 years. That will be revenue recognized in Q1 2021. But as they are also renewed, they are included in the order intake in this quarter. So that's how that is treated. We have on Slide 19 tried to illustrate and explain how the renewal works. So this is dummy numbers, so these are not real numbers, it's an illustration. But you can see here on the right-hand side how it works when you have a contract renewal. So if you had made a 5-year deal, in 2016, your revenue recognized upfront EUR 5 million, and then you had maintenance of EUR 1 million every year. If you make a 2-year auto-renewal, there is no price adjustments, there's no -- nothing else, then you will revenue recognize upfront the EUR 2 million and then have a maintenance of EUR 1 million. If, for instance, the renewal period would be 5 years instead of the 2 years, then, of course, you will have the EUR 5 million in revenue recognition upfront. And as I said earlier on, we will revenue recognize these renewals in Q1 2021, and that will be at least 2 years, but it could also be a longer period than 2 years. That depends on what we agreed with these 2 clients later in the year. Then moving on to Slide #20. Looking at our order book, which has actually increased during the quarter, so if you compare it to the end of last quarter, it increased by almost EUR 5 million. And comparing to end of last year, it increased by EUR 5.6 million. So we have seen an increase in the order book, meaning -- and that was exactly what we mentioned earlier on that we have signed new contracts where we have not revenue recognized yet and thereby increasing the order book. Then going to Page 21, where we have the different revenue streams. You can see that both new license sales and add-on license sales are lower than last quarter, while software updates and support grew 1.5% in this quarter, and professional services grew organically 1%. Going to the next slide, Slide 22. It's a split of the add-on license revenue. And here, you can see that we actually had a low additional regular license sales in Q3 of EUR 3 million, which is almost EUR 6 million lower than the year before. So I will say add-on license sales in this quarter was relatively modest. If we look at the 9 months, then the additional license sales was -- or regular license sales was EUR 20 million, which was EUR 2 million lower than the year before. Then going to the cost development. I think we have done as we said we would do when COVID-19 broke out, we took some cost reduction measures in terms of travel restrictions, hiring freeze and postponement of salary increases. We also told you that based on these actions, we believe that we would have a normal high cost growth in Q1 because that was before we took the actions and then gradually decrease the cost growth quarter-by-quarter. And if you look at the table, you can see cost growth was 10% in the first quarter, it was flat in the second quarter, and it was actually negative by 6% in the third quarter when you look at it organically. So I think we have walked the talk and executed as we told you we would execute. At the same time, we still invest into product development. So when you look at the different cost lines, the only cost line growing is our R&D cost, while cost of sales, sales and marketing and admin cost is declining organically when you look at it over a 9-month period. Then going to Slide #25. The cash flow development, we believe it shows that we have a strong cash generation underpinning our resilient business model. So despite the fact that revenue is lower than the year before and EBIT is lower than the year before, the free cash flow is actually going up with 7%, so underpinning the subscription model and the resilient business model. Looking at the 12 months cash conversion, it is above 100%, which we are pretty pleased with. Then going to Slide #27, our full year -- full guidance. That is unchanged compared to what we communicated in relation to our Q2 interim report and our company announcement dated in October 12, 2020. So we still expect in local currency a revenue growth of between minus 5% and plus 5% and an EBIT margin in local currency between 22% and 27%. It's a pretty wide range, we know that, but it's also relatively uncertain world. And we also are, you can say from a guidance point of view, dependent on timings of single deals and, of course, also the deal Klaus talked about earlier on at this call. So that's the reason for the wide range, even though there's only 3 months left of this year. Then before we go to Q&A, we still plan to hold a Capital Market Day in April 28. If possible at all, if a vaccine is arriving and people are allowed to travel again, we would like to have the Capital Market Day at least together with our user conference. If that is not possible, we will have it virtually. But we will tell you more about that when we know more. But we have kept the date. And now we will hand over for Q&A.
[Operator Instructions] Your first question comes from the line of Claus Almer from Nordea.
A few questions from my side. The first is more a clarification. Klaus, I heard you saying that State Street order was not included in the guidance. Is that correctly understood? It will be the first one.
So what -- with the wide guidance we have from minus 5% to plus 5%, then we will stay within that guidance even if the State Street order is not signed. That was the intention.
Okay. Good. That makes a lot of sense. Then a question regarding the software updates that, again, is down Q-over-Q. Normally, it is growing given your order intake. So maybe you can put some color on why it is declining.
I think there are several reasons for that. So first of all, there is a small organic growth. So if you take it Q3 2020 to Q3 2019, which is our comparison, then there is a small organic growth. But without being technical, if it is then higher or lower than Q2 and FX impact on that, then I will say the reason why it's not growing, as you have seen in the past, is twofold. It's, of course, because of the impact of the conversions, and that's also what we inform you about whatever we do a conversion because of the technicality that you take revenue upfront and thereby reducing your maintenance going forward, then there is an impact on that. And then -- and that's the main reason. And then, of course, also, there is an FX impact as well.
Yes. Am I -- the revenue growth in this year is slower, which also impact it.
Yes. That's mainly new deals coming in from a new perspective.
That I all understand. It's more like if you compare to Q2, when we saw the same in Q2 versus Q1, so as you are having new clients coming in, software updates should be increasing compared to the quarter before. If not, you have this client conversion, obviously, that's a drag. But also if you are losing clients or there could also obviously be some FX impacts. But is it a rare case that we see it declining compared to the quarter before. So maybe it would be very helpful if you could provide some color to. Are you losing clients, is that the reason? Or it's more about the client conversion and FX?
So on clients lost, we will kind of have that when we get to end of Q4. We always inform you of the clients lost in a given year. But typically, the clients lost in a given year, they will have paid maintenance in that year, and then they'll be lost for the coming years. So what is out of 2020 you will have seen at the reporting at the end of 2019, basically. Then we announced anything we had -- we knew of at the time. But it's good feedback. We'll see if we can detail it more.
Okay. It's at least a strange trend which will be very helpful to better understand at least. Then the order intake from the system clients or the traditional ALF, maybe you can give an update on the front office module, which there should at least be a lot of potential for selling that to the existing clients. So why is it, as you also mentioned during the presentation, that it is -- it continues to be on the low side?
So I'm not trying -- I'm not sure what the question is. Why is a lever on the low side given that there's a front office opportunity, if that's the question, then the answer is that on the ALF side, we keep selling. We've also sold front office to existing clients in this period. We just have a slower quarter -- third quarter is a slower quarter on ALF than we had a year ago. And that means that we'll have the more normal trend that we see that we need a bigger ALF quarter in the fourth quarter. So that's just the way it is.
Okay. So looking at the full year, and I know, as you also said, there's more uncertainty than we normally see, but if you look at 2020 versus 2019, how do you think ALF would have -- will trend in the underlying part of ALF?
I think that if you look at our fourth quarter 2020 compared to our fourth quarter 2019, then more needs to be signed in that fourth quarter than we had in the previous year. Last year, '19 was a little bit unusual in the sense that we actually managed to get quite a bit of the ALF signed in the first 3 quarters of the year, and then we have an unusually slower fourth quarter in ALF last year than we've had in previous years. This year, we'll have to come back to the normal rhythm of a slower first 9 months on ALF and then a strong fourth quarter on ALF. That's kind of what we're predicting, that's what's in the guidance, and that's what the pipeline shows us we can do.
Your next question comes from the line of Magnus Jensen from SEB.
I have 2 questions. One is actually sort of a follow-up to the one that Claus just asked about the add-on licenses, why it is so weak this year so far. I mean because one of the things that you do actually -- of course, it's COVID-19, but that could be an explanation. But because you have actually increased your engagement, as you said in one of the slides, with your existing clients, so one would think that, that will result in an actual increase in add-on licenses. So a comment on that. And then the other question is regarding to your cost, as you described in one of your slides, you've seen a reduction in cost over the year. Could you give some indication for Q4 if we should continue to see this decline into the fourth quarter? That's my question.
Thank you. I can take those, and then Klaus can supplement me. I would say, first of all, when you take the additional license sales, it's not like we have had a huge drop in the first 9 months of this year. So we have generated EUR 36 million in add-on licenses compared to EUR 38 million last year at the same time. So it's not like a shoes job. But of course, we would have liked more, and you're absolutely right that Q3 was not as strong as we were aiming for. But I think you need to wait to make, you can say, your judgment call until we have finished Q4 because, as Klaus also said, we do have a relatively strong pipeline for Q4. And we do expect a higher Q4 ALF sale than we had in last year. So in my opinion, you should wait making your judgment until you have seen the full year. In terms of cost, then it's quite clear that we will not travel a lot in Q4 neither. And it's also quite clear that we'll not have a lot of internal meetings. So that will continue into Q4. On the other hand, of course, we will look into our pipeline and our outlook for the future. And if we believe there is a need to manning up in some areas, then we will do so based on our outlook for the future. But most of those costs will not be Q4 cost. But if we are doing something that will probably be -- that will be something you will see going forward, which will be aligned with what we believe will be the revenue expectations for the coming year. So I will say you should also expect a modest cost development in Q4.
Okay. Just a small follow-up to the costing. How much of your admin is actually fixed versus variable? I guess it's a big part because it has been declining over the year. Could you be more specific on admin?
That's -- at least you can say. We also have travel costs included in our admin. So -- and we also have the meeting activities and stuff like that included in admin. So that is, by nature, variable. There's also, you can say, remuneration-related bonus, stuff like that, which is in admin. And that is, of course, also variable to some degree based on performance and so on. So a lot of it is fixed by nature, but because it's headcount, but there's also some variable parts.
Your next question comes from the line of Poul Jessen of Danske Bank.
I have a question about the software extensions or contract extensions. You have some in this quarter due to this automated extension. But also to understand given the slide you have, the Slide 19, the way it shows as being normal here, you have a 5-year contract worth EUR 5 million in licenses. And then the renewals should put up in installments more or less EUR 2 million each. How should we see it in general? Should we expect that when you get an extension of a 5 or 6 or 7-year contract, then it's not being extended by 5 years or 7 years but in smaller parts going forward.
The way we've constructed the contract, and now it gets a little bit technical, again. The way the contract is constructed is that in the quarters before, the contract expires. The agreement we have with the client is that unless they do something, it also renews for another 2 years at the current -- at -- kind of at the same software, same offering, same services, same everything, if contract renews at the same for 2 years. That gives us the 6 months from the auto-renewal to the expiry of the contract to actually negotiate the renewal with the client. And our expectation is that for the ones that you've seen in this quarter, in the third quarter -- somebody needs to mute their phone. What we've seen in this quarter is a -- these 2 that are auto-renewing or the contracts that are auto-renewing in this quarter, we are now negotiating the real renewal. That is most likely going to take place in this quarter as these are contracts that would renew in Q1 of next year.
So Poul, you can say we have a ride, and we have secured a 2-year prolongation because we have not been notified that they were not to renew, and that's why we now have to include it in our order book. No revenue recognition is taken, of course, and then we have 6 months to find out what should then be the length of the new contract. But it will minimum be 2 years.
Does that mean that when you stop the negotiations now, you could come in, let's say, Q1 or Q2 and then do another 5 years on top of the ones so that we expect that it's not these smaller parts, but then you get the long-term extension? Or it could be 7 years or what?
Yes. Correct. Yes.
Correct.
Yes. Yes. And that's also what is stated on Slide 19 that the renewal contract link can still be adjusted.
Okay. And then on the State Street contract, I know it's not exclusive. But can you tell something about the dynamics here? I guess that State Street has similar agreements with other of your competitors. So who is addressing who? Is the State Street coming to you because they want to improve their competitiveness in, let's say, Northern Europe or is it you're going to State Street because you want to improve your go-to-market strategy?
So in this case, it is -- we've been a partner with State Street for many years in the German-speaking markets. They have seen success with this. They've seen growth in this business. They acquired another big business, Dealis, a year ago, and they see good traction with this. Then they also see the opportunity that they can win more insurance clients in outsourcing if they use SimCorp Dimension compared to if they use anything else they have in their current platform. So they want to extend this agreement and have us together go to market against European insurance companies. So that's kind of how it goes. I don't think State Street has similar agreements with anybody else.
Okay. And then a final one, that's one of the small ones. You mentioned Allianz as a client here on ILF. I've been back to my database and where I find that you signed Allianz back in 2002 and at that time mentioned as being the biggest client at that time. So how can it be an ALF contract if they've been there for 18 years?
That's because in the meantime, it became something slightly different. So the history of 18 years with Allianz kind of brings us back to the discussion we had a minute ago. So Allianz was a customer in 2002. Then Allianz and DekaBank in a few years later formed what is called Dealis, Deka, Allianz. So that was Dealis. That was a common company that the 2 owned that then ended up owning the SimCorp contracts. So now Dealis was the customer on behalf of DekaBank and Allianz. And then a couple of years ago, State Street acquired Dealis. So Allianz on the back office is actually one of the German-speaking customers that the State Street serves today using SimCorp Dimension, but it's not a direct customer of ours, which is why when we now sign this middle office agreement with them, they become a new customer again. So that's the indirect way of getting there.
Yes. And finally, on the guidance for the full year, the reason why you keep the low end of the guidance, that's because the State Street contract is not signed.
Correct.
Your next question comes from the line of Anthony [indiscernible] from UBS.
It's Hannes Leitner from UBS. I have also a couple of questions. So the first one is just a general question being 6 months into the pandemic around the pipeline. Given you have usually quite a long lead time for contract wins, I would assume that most of the deals announced year-to-date have actually been started or have been started in the late 2019 or early 2020. Maybe you can talk there a little bit about the recent development and also how those budget, IT budget shifted from your customers. Is there any pull forward in the way they are thinking in terms of shifting to the cloud, et cetera? That's the first question.
So I would say that you're correct that the deals we've signed so far with customers we've met at some point. But that actually goes for most, I would say, even in our pipeline that we're dealing with both for fourth quarter and for 2021, there's customers that have issued an IFP maybe after the pandemic broke out. But that we met 3 years ago because we -- it's a small customer base, and we keep going through the customer base. So it will typically be a customer we met at some point in this. But the IFP might have come out now that the pandemic is out. If you look at the pipeline in general, I would say we're actually quite pleased to see how many IFPs are still coming out. We're still -- customers that are engaging in making purchases of software even with this going on. I think it's a little slower than you would probably see in a normal year but still at a very, very healthy level and at a level where our pipeline continues to build, new prospects are coming into the pipeline every month. So that's actually something we're quite happy with.
Okay. And then could you give us -- basically elaborate a little bit more on the latest announcement around Coric that multiple customers have chosen or intending to use it? Maybe you can elaborate, is there a shift of the product and of the market? Is there a better traction now? It's not reflected in your announcements yet, except one deal. And then also on the back there, can you give us an update on the Generali contract? Is this now concluded? And is this also playing anyway? Is this the same offering now for State Street then or -- because that's also quite an insurance-focused product business, isn't it?
Yes. So let's start with Coric. What you've seen across the 4 quarters that we are listing on the 2 slides, there are actually 4 Coric deals in there. So we're seeing good traction on Coric. And especially in the U.S., we're seeing very good traction on Coric. And that reflects back to what we talked about before that the engagement with -- for the asset manager, that the engagement with their customers is more and more digitized for the Coric client reporting product that we've got actually fits that quite well. The next generation of this, which we're calling Coric Engage, which is a more portal-based solution, is also kind of at the core of this in the sense of some customers are heading off for this. Others are saying I really need the client reporting you've got today. But given the future, you also show with a portal-based product, we are very confident that this is something you're investing in also for the long term. So Coric is something that is showing good traction, and we expect it to keep having good traction given the need for asset managers to digitize. It's also interesting that these are customers that we don't have -- or a number of these are customers we don't have on SimCorp Dimension. These are large asset managers that doesn't have anything else from SimCorp but are now acquiring Coric, giving us a relationship with them to potentially do more. So we're quite happy about kind of the Coric engagement on this one. Then the second question you asked was...
If the State Street deal, the contract deal is the same software...
With Generali, where the Generali is done, we are nearing to get the insurance accounting on Generali. We've completed most of the Generali project, all of the asset management and so on. There's still a little bit to be done on the insurance side on this, but that's tracking as it should. It is not -- if they wanted to outsource kind of their operations, then State Street might be a good option, but that's not at least what we're hearing from Generali now. They might change their mind and have that. And then State Street would be a good alternative for that, should that be the case.
Your next question comes from the line of Gautam Pillai from Goldman Sachs.
A couple of questions from my end. Firstly, can you give us an update on the cloud product? You do mention in today's release that Dimension as a service is now available on Microsoft Azure. In your process of getting to a 3-tier architecture, is this a major milestone? And how are you tracking against your internal product pipeline plan? And secondly, on the State Street contract, just a question on the revenue recognition. It entirely depends on when you actually send the contract. If you sign the contract at some point in December, will you still recognize the revenues in the year, and hence, the guidance could be equal, it could come at or above the top end of the guidance? That's one question on the State Street contract specifically. Secondly on that point, does this open up a bigger addressable opportunity with other custodians around the world?
Yes. Let me see if I can answer question #1 and 3, and then Michael can talk about the revenue on State Street. First of all, the cloud product, the 3 tier, we are making good progress on that. We've invested a little less given COVID in this, so it's probably going a little longer. But in the meantime, we are providing quite a bit of other value in the product. And we're still capable of making the product run in the Microsoft Azure cloud infrastructure with what we have. And then we'll continue the lift to the 3 tier, and that's actually progressing a little slower given the investment level we put in this year. And we'll keep investing in that next year as well. In the meantime, we have provided quite a bit of this. You've seen half of the customers that we've signed up this year being in a cloud version, not Azure yet, that will probably come next year, the first Azure customers that we'll see. And then as for State Street, will other custodians want to do something like this with us? That I'll have to say time will show kind of where they land in this spectrum. We are just very happy that State Street has decided that for their insurance offering, they will do this. Then whether other outsourcers of middle office and so on will realize that they need a more modern platform than what they have, time will show.
And as you know, we do have other very good clients in this field already, which we are very happy about. And there is good momentum and progress with these clients as well. So it's not a needle. We are flexible in this and can do it with several partners. In terms of revenue recognition and as this -- the State Street deal is like any other deal. So in the aspect of if we -- as part of the deal sale, licenses and given the right to use a license and given the ins-file then we will revenue recognize the license part in that period. So that also means if we signed a deal in December, and that deal include that they will give the right to use the license, then we will revenue recognize license part. All the services will, of course, be revenue recognized as we go and as we deliver the services because, in such a deal, there will be a lot of services involved in deal as well. And as we also stated in the announcement of October 12, there is both, you can say, some new licenses, but there's potentially also a conversion from the existing agreement into a subscription agreement. And that part will also be revenue recognized if we do that conversion.
And Michael...
And on the -- and we said at -- on the October 12, we said, if this happens and the conversion happens, then we will most likely end up in the positive end of our guidance.
Got it. And on the revenue recognition, my question was does it matter whether you sign it on December 1 or December 30?
No.
No.
Okay. I have one more follow-up on the financials, and this is on free cash flow. In fact, free flow was quite strong in Q3 and actually grew 7% in the first 9 months when EBIT was down 30%. Typically, on the IFRS 15, we should see a lower cash conversion. Michael, can you explain the dynamics here at least and how should we think about free cash flow going forward?
Yes. And this is the tricky part. And it is because we are deferring revenue. So if you look at the contract assets, the contract assets are actually not increasing compared to the beginning of -- end of last year. So it means that we have revenue recognized less this year, and that's also why you get, you can say, a cash conversion above 100%. I would say, in a normal year where we grow, let's say, 10%, and then we are having a lot of subscriptions agreements which we revenue recognize, then you should certainly expect lower than 100% cash conversion because then you will recognize something where the cash flow will be coming over the coming 5 to 7 years. It is very much related to the revenue recognition of licenses.
Your last question comes from the line of Claus Almer from Nordea.
Just a few follow-up. The first question goes to the order intake and maybe more on the pipeline. If you look at Q3 orders, several of these orders seem to be more state-owned entities. And I guess these are slightly less COVID-19-exposed. But if you look at the pipeline for Q4 especially, how does that mix look like?
The mix in Q4 is -- there's big deals, more deals, the state owned, pension funds, there's none, it's a good mix of things. And I would say at least the 2 state-owned in Asia was probably some of the more COVID-impacted in some sense given that if you're in Asia, you're state-owned, you're used to coming to the office at least 5 days a week, the infrastructure for working in the cloud is not perfect. And then when you suddenly all at home and you have to coordinate between IT, procurement, legal, the business and so on in a nonoptimal way, that actually ended up taking a little longer than it should. Not that they didn't get to sign, but it took a little longer to kind of get everything up and running and get negotiated and all of this. But in the fourth quarter, we've got a good mix of all of these, and we are -- for some late stage, for some a little earlier, we are negotiating contracts with a few, and it's the usual where we are in Q4, would make us anything...
Okay. Then the second question is more me being a bit confused. Looking at your ALF, so order intake from existing clients excluding conversions. Then if you look at -- as I heard you talking about the performance year-to-date, then it was not that different from 9 months last year. But if I do the math, then it's down by around 40% year-over-year. So maybe you can -- did I misunderstood what you said? Or what's the difference?
I think that what Michael gave you was the total number of ALF, which is EUR 36 million this year and EUR 38 million last year.
But if you look at SimCorp Dimension ALF 9 months compared to the same period last year, then it's down 40%. But -- so we're talking about totally different numbers in order intake. I am only talking about order intake.
No, no, I was talking revenue, sorry, I was talking revenues.
Okay. So -- but it is rightly that from an order intake point of view, and why is this a big difference? Normally you can intake -- you can recognize the revenue one as ALF when the contract is signed.
That depends on, for instance, I just told you that we had a big one here in -- what that actually goes the other way, a big one in Q3, where we will revenue recognize it in Q4. So the conversion we made in Q3, which will be in ALF, that was an order intake in Q3, but it will be revenue recognized in Q4.
That's why I'm talking about excluding conversions, just -- well, nevermind.
Yes, yes.
So my numbers is not wrong. Okay. That's good.
Thank you. We have no further questions at this time. Please go ahead.
I'm not sure how I can follow your 40% decline, but we can take that off-line.
Exactly. That's easier.
Very good. If there are no more questions, then we will say a big thank you for dialing into this call, and we look forward to meeting all of you somewhere virtually on the road over the next few days and weeks. And then we look forward to welcome you back in early February for the annual report. Thank you very much, and have a great day.
Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. You may now all disconnect. Speakers, please stand by. Thank you.