Simcorp A/S

CSE:SIM

Earnings Call Transcript 2022-Q4

[Operator]

Good day, and thank you for standing by. Welcome to the SimCorp A/S, Q4 Report 2022 Conference Call. At this time, all participants are in a listen only mode. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, CEO, Christian Kromann. Please go ahead.

[Christian Kromann, executive]

Thank you very much, and good morning to everybody, and welcome to SimCorp's Q4 '22 reports. So first, on page 2, the disclaimer that you all know. So let's quickly go on to the agenda on page 3. I'm going to start by giving you a strategic update followed by a walk-through of the key highlights from 2022. Then Michael will take us through the financial review and finally, walking us through the financial outlook and the updates to that and then wrapping up with the Q&A. So let's start by summarize a little bit on what we looked at from a Q4 point of view. I would say, generally, from my point of view, I really hope that with what we are announcing today is that it's going to be easier going forward to understand the numbers around SimCorp, but it's also that we give you good reasons for understanding why we are excited about the transformation of the company. Four key points for '22. So in the end, obviously somehow a crazy Q4, which I think you can all understand that ended the financial year '22 in line with expectations. So we're obviously extremely happy and extremely proud about that. What is potentially even more interesting is that we can now see that the transformation is really confirmed by the market by the new way of disclosing our revenues, it's also possible to now see the sales business revenue in isolation. And you can see that, that's now growing more than 30% in '22, which for us is an important data point that allow us to now accelerate our investments. It's also an important part of the executive summary that we are now, for the first time, really taking cost efficiency seriously and with the announcement of the fuel program. And then finally, we're obviously excited to disclose outlook both for '23, but also give you some indications of where we are moving towards from a midterm point of view.But let's start to go a little bit back and remind ourselves on the strategy of SimCorp as we see it as of '23. So a lot of these slides somehow is linking back to the Capital Markets Day we had in October, but with some level of granularity and also now with numbers going with them as we committed to all of you. The way we look at the company these days is at 3 plus 3. And what we talk about here is 3 growth levels and 3, what we call now excellence levels. The growth levels is what we talked about for quite a while. It's extending the platform in line with the expectations of our customers to continue to support the entire value chain of any investment firm in the world that has an investment portfolio of roughly EUR 10 billion, as we've talked about when we defined our addressable market several times. The second part is the SaaS acceleration. And obviously, that comes in 2 parts. It comes through new customer acquisition, where we continue to see the trend we've seen in the last couple of years that new customers go straight to SaaS, but we also now see an improved volume of customers moving towards SaaS as part of their transformation -- and I think we delivered pretty good on that number in '22. But what we are particularly excited about is all the preparation we've done for the pipeline leading into '23 and beyond. And then finally, the ecosystem scaling, where we start to see now a real sizable ecosystem around SimCorp, but we also see what we can see in one of the later slides that the amount of customers coming through these partnerships is also now generating some real volume. The excellent levels is something we work quite immensely on, especially in the later part of '22 leading into '23. And it comes in 3 buckets. The operating model excellence we talked a bit about in some of the meetings we had jointly last year. I would say that has now created the structure of the firm, the leadership structure, but also how we work as a company. Commercial excellence is a lot about getting more bang for the buck in terms of the investments we have from cost of sales point of view, basically raising the overall sales effectiveness across the entire company. A lot of that work was performed in Q4, but I was also spreading into Q1 and leading into a relatively fundamental change of the way we go to market, which is also exciting, but also needed given the transformation of the company. And then finally, cost excellence as a real handle in our journey towards improved profitability as a company. Next page, we talk about the inflection point several times. I would now say with the new disclosure, allowing you to see that we are now at that critical inflection point. We are the fact on our SaaS company. But as we also say, SaaS is a journey also for SimCorp. The attractiveness of the window is obvious, we would say. And hopefully, you'll also start to see that in the numbers as well. So we think it's a great opportunity that we have to see and the way we have to see that is now. The impact of that transformation is real and is also significant. We spent a lot of time talking about that towards the end of last year in the model capacity. Now we are capable of putting some numbers on it as well. It hits the organization in terms of how we work. It certainly hits the business mix and with all the elements that has. And finally, it also hits the economic model. But it's worth understanding that this is coming through a very exciting opportunity as a whole from a top line point of view. I wanted to quickly reflect on the SaaS business, and now I'm on page 8. So we are now, as of end of '22, we are now at 64 SaaS clients that are every day relying on SimCorp. Not all of them are live yet, as you would imagine, they come through as they come through. And it's certainly exciting to see that we are -- we at least have a goal lie every month, and it's probably even more frequent than that these days, which is really, really great. We also got the first new Tier 1 bank on SaaS -- that also marks an important point for us because that means we are now playing the big league, which once again certify the value proposition, and we're super excited about that. Client conversions, and I'm fully aware that conversions is a terminology we use a lot. So let me just make a clear link to the growth in conversions that you saw in Q4. And here, I mean conversions from traditional license contracts to subscription contracts. We said throughout all of '22 that we push extremely hard on preparing our customers towards the journey towards SaaS or even BPaaS. The consequence of that push is that you need to create the foundation from a contractual point of view, but you also need to prepare a lot of work in terms of moving them to SaaS, the timeline related to SaaS and all of that. And what you see now is that that's going ahead at a very high pace. It's also fair to say that sometimes you end up doing the contractual framework before you actually do the SaaS transformation. And that's just a matter of fact that some of these things take a longer time. So we are pushing ahead very aggressively to continue to nurture the pipeline. And I am happy to say that we are going into '23 with a record high pipeline in terms of customers that want to move from on-prem to SaaS. And I think that's also in that light that you have to see the conversion that was done in '22 Q4. We are now fully up and running with operations and investment accounting services. We have live customers on both. That's very exciting and it's generally creating a lot of new momentum in combining those services with what I would say, SimCorp classic value proposition of selling our front-to-back value proposition as a piece of software as a service. So the combination is really now starting to proving very strong. We believe we have a competitive advantage in terms of cost of ownership, we believe that it can be even better. And a lot of the investments we are accelerating in '23 is to make sure that we continue to build on that momentum with all that goes with that, but I'm sure we will come back to that during the presentation as well. We also strongly believe that investment into automation is a very, very important part, certainly in the way we operate SimCorp in terms of how we provide services to our customers. But it's also automating how we operate as a company, whether it's our finance system, HR systems or whatever support system we are using inside SimCorp, we also have to use technology to become smarter in that. Then in the end, it's all about building a competitive and profitable SaaS business. We now have the demand function clear. Now we need to make sure that we build on long-term profitability. And I know we're going to come back to that quite a bit. '23 is going to be an exciting growth year, but it's also going to be an exciting investment year. We decided to do both within the same financial year, which, as you can imagine, keeps us extremely busy, but we believe the opportunity is right here right now, and that's why we are doing what we're doing. We groove our investments into multiple buckets, but there's a couple of buckets that are worth highlighting as we talk to investors and the rest of the audience these days. Front office, you would have heard of our front office through the last many years. We believe there's still more to do and there's more market share to capture. So in the end, we are putting more development on that and even more commercial efforts to make sure that we also conquer some parts of the front of office alone, opportunities that are I think we have a very good foundation, but we are excited that we can also do more there. We got some very new and exciting people joining the team, and they come with strong experience from some of our competitors as well. We are also spending a lot of money on making sure that all the investments we put into development is coming out with the best possible outcome. So we're actually automating a lot of the platform and engineering practices by using what I would say is probably industry standard tooling. -- but not fully rolled out across SimCorp as of now, and that's going to create some really interesting scalability and return on investments when we go into the years beyond '23. From a SaaS acceleration point of view, there's 2 buckets that we are spending money on, there's TCO of SaaS. That has a lot to do with accelerating automation and optimizing the infrastructure, but it also has to do by building an intelligent way of getting access to talent wherever they sit in the world, and that's also a topic we're going to come back to. And then finally, BPaaS, very exciting feedback from the market. Now it's all about taking that from a relatively early-stage value proposition to now taking it into scalability and making sure we continue to win that market as well. Finally, we already talked a little bit about that. We need to make sure that we really use the large commercial structure we have to the absolute best abilities and that means combining our strong proximity to customers with a global scalable backbone of capabilities that allows us to win. So I would say these are the 5 primary buckets. We obviously continue to invest. It's important that the word accelerated is noticed. It's not about a brand-new investment plan. It's about pushing those investments harder through in '23, allowing us to move on our profitability journey from '24 and beyond. We are initiating a cost efficiency program -- it's not about a cost-cutting exercise. It is obviously in isolation has a positive impact on costs, but it is ultimately a program we are initiating to make sure that we can both fund and fuel our -- sorry, and elevate our investments and the ultimately journey towards higher profitability as we go. First and foremost, the accelerated investments as we just went through, we are doing that because we believe there is a growth potential over and above where we currently are, and that also includes the time, the speed of getting there. So in the end, we are launching the program to ultimately and it's designed to sharpen and improve the underlying run operations, allowing us to spend that money on what we believe will drive the long-term potential of the company. Unfortunately, it has the effect today that we are saying goodbye to 120 good colleagues, and that is currently happening in SimCorp as we speak. And that allows us to do a couple of different things, both automate a lot of the functions that we have that can be automated through technology, but it also means that we are changing the footprint of the employees compared to where we were 5 years ago, where all of our employees were proximity to customers, they are now being more spread, both from a global footprint point of view, allowing us to provide a 24/7 service to the customers we have, but also from an access to talent point of view. The consequence of that is that we are using the already existing hubs we have in moreso Manila, but we are also accelerating our capacity in India, and then we plan to establish a footprint south of the border in the U.S., allowing us to also build up capacity over there. The program comes with EUR 20 million nonrecurring restructuring cost that allows us to push this through as fast as possible. Then I'm at the key highlights, and there are many, but let me just quickly take you through some of the key ones. Even though first half was a bit slow last year, still quite a lot of things are actually happening. In January, we got the first North American client to migrate to SaaS. That was a clear milestone and that's going extremely well. We got the first line on our investment accounting services in February. In March, we had the first go-live on our new digital engagement platform, followed by the second IAS deal and then a successful go-live of our first customer in Philippines. In April, we had the third IAS client, and they're all live by the way. And we had the largest client communications Coric deal signed ever. We had the first kind of full scale get together with our customers in post-COVID times with more than 750 participants in Nice. In May, we established the partnership with Challenger, which has now been relabeled Artega. The company is now fully up and running. And we are quite excited that we are starting to see the first customers arriving at our doorstep and hopefully, we can celebrate that in not too distant future. In July, we had the first customers going live on iOS, the investor in insurance operation services -- investment operation services, sorry. In December, September, we signed the first customer in Africa in October, the first customer in Malaysia. And in November, we actually finalized the first transformation from a Nordic customer to our SaaS platform, and then we also signed the new Tier 1 bank in the U.S. Finally, in December, I could talk forever about what happened in December. I'm not going to do that. But a couple of highlights. We signed the first full-service investment operation services front in North America and with Intec, and we signed a very large traditional SimCorp classic front-to-back customer in EMEA. And if I sum all of that up, -- that got us to 11 new customers joining our community in '22. I would say, I wish I could do multiply Q4 with fourth and it would have been an outstanding year. But as you all know, H1 was a bit slow for quite a few reasons. But obviously, we're quite excited about the momentum that we built in both Q3 and Q4, and that is now also leading into Q1, where we have already signed the first new customer in North America. It's not announced yet for quite a few reasons. We see a lot of strong growth in our existing customers. That's also continuing, and we actually start to really getting the time down that it takes to work with the customer, plan how the SaaS transformation is going and getting their commitment. We got that down to 6 weeks in one particular instance, I hope we can move towards the 6 weeks, even though that still some of these discussions takes a long time because of the security and many other good things that needs to check. I'm also particularly excited about the fact that we take our customers' life. So we have 13 new customers that went live for the first time during last year, which is a very nice result for us because that drives people's ability to speak to references and you create excitement in the overall market. And then finally, 5 new SaaS migrations also went live proving that it can be done. In a traditional format, on the next couple of pages, we are highlighting who bought what. You can see that it's becoming increasingly difficult to get people to disclose their names. But you can also see that if we take the 11 quite a few front-to-back deals, which we are particularly happy about, but we also see a good flow of the new type of deals where you're spreading across the entire service value proposition. And then to the final slide on this, which is page 16, you will see that we actually signed 10 general play clients in '22, which means that this concept is now starting to prove a real volume of deals. It's still smaller deals than we would normally see in the addressable market of SimCorp. But on the other hand, the cost of sales for the SimCorp is 0. One of them was actually within our addressable market. So it's exciting to see that the model is also proving that, and it's something we're certainly excited to now see hopefully a little further into '23 and beyond. On page 17, I just want to remind everybody of some of the stats that we shared when we together in the Capital Markets Day. The opportunity for SimCorp remains to be huge from a new customer acquisition point of view. So a total market of EUR 6.5 billion with around 1,800 a little bit more than 1,800 potential customers to get where we already have 271 to be very accurate of them already. It's actually 272 now based on what I just said. So we're moving in the right direction.Sometimes when we talk about all of the other things, it's sometimes good to take a step back and remind ourselves that there is a large potential market out there. Just to give a little bit of a breakdown, which we normally do. On the next page, you see the 271 clients and the 1815 split across regions. So obviously, we have 23% market share in EMEA, but I would say there is more growth to be generated in all 3 regions, and that's certainly how we are focusing as of '23 and beyond. So with those words, over to you, Michael, for giving us the numbers side of the story.

[Michael Bjergby, executive]

Yes. Thank you Christian, and good morning to everyone on the call. So starting with the Page #20 and the Q4, then the activity in Q4 was, as Christian already mentioned, extraordinary with record reported revenue and 5 new customers signed, 3 of them based in North America, which is positive. It's good to see that we win these large front-to-back deals against our core competitors and we signed 14 conversions from perpetual agreements in Q4, some of them with into our SaaS platform. Order intake was DKK 125 million, and the reported revenue grew 28.6% with an EBIT margin of 41%. So a very solid quarter from a reported numbers perspective. Free cash flow was low in Q4, which is not unusual as we tend to sign a lot of deals with our payments and have a relatively large share of our tax payments in that quarter. Moving to the full year on slide #21. -- then the overall message is, of course, to be delivered according to plan, and we delivered according to the guidance. Backward-looking AR was 12.4% in local currencies and organic growth was 9.4% on reported revenue. Local currency EBIT margin ended at 23.4% and all of these within the ranges provided at our latest guidance. We saw a significant increase in the order book, and we signed on contract, the sign-on contract is some EUR 40 million higher than last year. The free cash flow was $47.2 million, and I will come back to that later in the presentation. So the order intake on slide #22 really illustrates our dynamic busy and interesting that Q4 really was and especially December, which was my first month in December or in the company and exciting to see the energy in the commercial organization. The order intake was the highest ever in a quarter and completely different league than what we had in H1 of '22, which all practical matters, was acquired here for many reasons. I will not want to spend more time on this slide because with the introduction of forward-looking ARR, I think we are actually looking at a number which is more relevant and more important to really consider our good business SSS and subscription company. So moving to slide 23. We announced last week 3 supplementary financial disclosures. And these are not meant as being supplementary as a nice to have information, but really core to how we want to drive and manage our organization in unity going forward. The previous revenue segmentation has SimCorp well for years as a software company, but the key value drivers of our SaaS subscription business is better reflected with the new KPIs. The key business driver and really the number that we will look for is the forward-looking ARR. This is going to be our top priority, what we focus on, how we incentivize our salespeople and how we make commercial decisions. It's both an indicator of our success towards SaaS, but it also really reflects the underlying development of our--business. ARR is also a leading indicator for ratable revenue development. And the ratable revenue is not the measure that we're going to use to track the commercial and transformation success, but it's a financial number that shows the cash revenue development in the current year. As such, it's important financially, not so much on how we manage the business. And one example of that is, of course, that the additional license sales to prefers customers has immediate effect on ratable revenue, but actually, that's not the kind of revenue that we prefer as we are transforming into a fast company. So moving to slide #24, then we have the new revenue segmentation. And I want to focus on our growth in the SaaS business. We are seeing significant growth both in SaaS licenses, and this is driven by the win of the Tier 1 bank that Christian also mentioned. But it's also the conversions into SaaS that we did in Q4. On top of this, we see that SaaS services, which is the ongoing revenue on our SaaS platform grew 57% in Q4. So we have very strong momentum in the SaaS revenue development grew for the year, 31% but accelerating through each quarter in 22.Moving to the next slide and slide #25. And here, we are assessing the forward-looking development of ARR. So we added net EUR 35.6 million of annual contract value to our book of business during 2022. The 11 new customers added in the ballpark of around SEK 10 million, which was partly offset by churn of 6 smaller dimension clients and 2 of them, which was actually decided in previous years, but less finally in 2022. Indexation was also supportive to the SPB, but the main driver of all of them was the expansion of current customers and especially the conversions to SaaS and really shows the potential that we can do on our core business from al these sale conversions that we are tracking again. Finally, on the ratable revenue, we see solid growth also in our cash revenue reflected by the 8.4% as we grew in 2022, approximately 3 percentage points is coming from FX. And in Q4, the ratable revenue was slightly lower than for the full year, and this is due to the comparison as we signed a number of perpetual LF deals in Q4 2021, so different revenue mix in the comparison base. On the cost side, on slide #27, it has been a year with quite significant investments following years in '21 and also in '20 with a very low cost growth. So we see cost of sales growing and this is really reflecting the higher cost to serve of the SaaS platform. But also, we see the innovation that we're doing and the automation that we are having SaaS customers come on board. We're continuing to invest in R&D, growing 16% year-over-year with the very appreciated increase of expansion of asset classes such as ESG and alternative, but also adding cloud-native applications and enhancing the SaaS platform from the investments in R&D. On the last slide, our 2022, our look at the free cash flow and the year ended at $47.2 million, which is a decrease of around SEK 30 million compared to last year. The free cash flow is impacted by the special items of around 10 million, which is predominantly cash payments. Additionally, we see that a larger share of revenue this year is coming from the upfront revenue recognition, which do not have cash impact as you know. So with that review, I will leave 2022 when a look for the future and skip slide 29 and go to slide #3. So the transformation from software to a SaaS company has a significant impact on our culture, the important parameters for our competitiveness, but not least also on our financials. And this journey is what we have outlined in the announcement today. Our journey is not very different from other companies that have been through this transformation from software to SaaS, although it's a bit different for us than what we usually call a swallowing the fish concept because we continue to see very strong growth momentum. We see 5 overall drivers of the profitability with different timing impacts, as illustrated on slide #31. So currently, we are negatively impacted by the unfavorable revenue mix as SaaS and BPaaS becomes a larger part of the revenue. And at this point, it's still subscale for us from a profitability perspective.On top of this, we are investing quite significantly in the transformation. These negative factors is going to be offset by the positive drivers that we have outlined in the lower bottom of the slide. So we have now launched program--, as the Christian said, and the financial impact of the program is supporting us, but it's really not huge. The real purpose of this is that it's going to be critical for our culture and our way of working to really drive financial performance and become cost efficient in everything we do. If it is also going to fund our investments this year and with the investments, we believe that we can take this business to a completely different place. So the current development is positive, and that is the real driver of how we get back to record high profitability. That's the scale and profitability of SaaS products, as we are called here, and it's the revenue acceleration that we are already seeing coming from the ARR growth, which in turn will turn into double-digit ratable revenue and reported revenue. So internally, we are tracking the gross margin, as we have outlined on the page slide #32, we are tracking the gross margin through the number of FTEs required for SaaS client. In the early stages, it required quite significant increase in FTEs to add on new customers. And this will continue for some time, but it is going to be reduced gradually as we move forward. And at some point in time, we also see that the number of FTE can reduce with automation even as we add on new clients. And this is not a 2-year journey, but it's absolutely critical inflection point for reaching our profitability target and how to get there and how fast to get there is really a function of both time, the automation that we do as well as the customers coming on to the platform. With those marks on the midterm targets of reaching a record high profitability and growing double digit, we'll move to 2023 and the guidance. So what it doesn't mean is that we see in 2023, we see really an acceleration of both growth from ARR perspective, but also from a ratable revenue perspective. The EBIT margin will be slightly lower than last year, which is -- which can be seen from the midpoint of our cost guidance is higher than the midpoint of our revenue guidance. I should note that reported organic growth is expected to grow in line with the organic ratable revenue. So the drivers of the EBIT margin is outlined on my final slide today. In a growth company like SimCorp, we have to drive operating leverage on overhead cost as we go. And this effect is a bit lower than usual in 2023 and due to the high inflationary environment, which both impact you see the cost of premises, the salary increases required but also the cost of the cloud storage. The growth from revenue coming from SaaS impacted gross margin at this time. And at the same time, we are building for SaaS and BPaaS customers upfront. An example of this is Intec, our largest BPaaS customer, which go live in 2023 and will pay once the services are delivered. In that sense, you can say that our cost is serving the ARR and actually not the reported revenue. Increased strategic investments will be offset by our by -- more than offset by our cost efficiency program. So we are not here to optimize the short-term performance, but we really want to make sure that we invest properly in the business because this is what matters when we are reaching and fulfilling our potential to reach record high profitability at a very different top line in the midterm. That concludes my part of the presentation, and I'll hand over to the operator, I think, for the Q&A session.

[Operator]

Thank you. [Operator Instuctions] We will take our first question, and the question comes from the line of Daniel Djurberg from Handelsbanken. Please go ahead your line is open.

[Daniel Djurberg, analyst]

Thank you, operator and good morning and hi guys. I have starting off with a question on the quite large reorganization we did 120 redundancies. Can you comment more on this process? -- i.e will all these individuals be informed more or less today? And how to keep focus on the customer side, if you can give any guidance on how much will be within sales, admin, R&D and -- or if it's even mix, it feels like you're -- as you spoke about Manila, India, Mexico that I guess you will be more into the R&D and perhaps remote sales support or something, but any comments there would be helpful. Thanks.

[Christian Kromann, executive]

Happy to do that. So first and foremost, it's both a good and a bad day in SimCorp today. So getting rid of 120 colleagues is never easy. So it's been a key design criteria that it was done fast and to minimize the security of the situation. So by 1:00 today, everybody will be in the know and we can basically move on in the way we have to move on. So that is a key part of what we do and that to a certain extent, also what probably the acceleration of announcing our numbers. When you then ask about a bit more detail. So if you look at it, that's also linked to the relatively large growth in our SaaS business and the fact that we are investing quite aggressively this year, we're obviously hiring quite a few people as well. The predominant part of those hirings will be in locations where we have both access to talent where they are time zone wise in a good spot, but they also come in at a lower cost rate than what you see. The other part of what we do is automating our work and that both in terms of what is -- the more we can automate in terms of running SimCorp on behalf of our customers, but it's certainly also automating the work we do as a company. So once we look at the split between the 120, is literally across the entire organization, where we can see jobs that can either be automated that goes away or where you can find the same talent in a better way somewhere else. But that's not unique to any part of the organization that's -- so a very simple example is that Michael's team has implemented Workday for finance and HR. And that means that we now have technology automating some of these processes allowing us to start to think differently about the profiles and the locations that we need to drive that work. But that goes across the entire organization. So I would say there's no group where it is more significant than others. There's obviously the locations where we have more people than others have a larger number of people leaving.

[Daniel Djurberg, analyst]

Yes. Good luck for that process really. And also a question on the 2023 target on the ratable growth at 6% to 11%. You still have the 23 with signed revenue of that is up roughly 13%. So is this mostly because there is looking at cash revenue, you ratable that, that is lower than looking at the revenues more of accounting also that the cash cancellate or how to think on the differences? Or is it more that you're a bit cautious on the guidance here in the rate growth?

[Michael Bjergby, executive]

No, I think I will take that answer. So I think if you look at the reported revenue growth, then that is correct, that is 13%. But FX has been helping us quite a lot. So if you look at it in organic terms, which is the right comparison, the reported growth was 9.4%. If you then look at the ratable revenue part is growing at 5.4%. So in that sense, you can say that the rest of that growth is coming from an increase in upfront revenue recognition, which can both come from additional license sales, from initial license sales or from conversions. But in essence, what we're saying is that if you exclude for the upfront revenue recognition, then the ratable revenue growth will increase from 5.3% in 2022 to 6% to 11% in 2023. And this is driven, of course, by the SaaS business.

[Daniel Djurberg, analyst]

Perfect. Very helpful. And may I also ask you a little bit of housekeeping here on the EUR 20 million restructuring charges in '23. Will it be the majority coming here in Q1? Or will it be evenly spread? Or any comments on the...

[Michael Bjergby, executive]

Yes, there will be -- since the majority of lease costs are related to severance payments. So there will be a relatively big part coming now. However, there is also building up the new places. It's also double, let's say, double rolls in some periods during the year, and there also the last part, which is a consultancy support on some automization and digitalization of processes, which will be more spread. So overall, Q1 will probably be more weighted towards Quon, but it will be spread across all quarters in the year. Yes. Obviously, a lot of questions, but I will let someone else in having got back to the queue. Thank you so much. -- for Q1.

[Operator]

Thank you. [Operator Instructions] e will take our next question, and the question comes from the line of Thomas Poutrieux from Exane BNP Paribas. Please go ahead your line is open.

[Thomas Poutrieux, analyst]

Good morning Christian, and-- Look, I've got a couple of questions. The first one is more on the kind of macro environment in Q3. You mentioned clients becoming more cautious in the decision-making process, which I believe led to engagement on SaaS especially in Europe. And you're not mentioning this anymore in this Q4 release. So does that mean that you've seen actually an improvement on decision making compliance going back to normal?

[Christian Kromann, executive]

Good question. Something we spend a lot of time on, right? So if we take the client side first, I guess, somehow people make decisions in Q4 anyway. I think we were a bit concerned when we went into Q4, as we also shared with you. I think right now, there's probably an expectation that it's going to be a little bit of a softer landing. And then somehow, we obviously like the fact that that's what is happening because then things are not getting that as wobbly as they are. But I think no matter what, what has happened has created a shock to the industry from the point of view that people now know that they need to do something about their cost base. And right now, that is driving technology conversations. So to a certain extent, that's good for us. And that also drives SaaS automation and all of that stuff. So everything we got on the shelf is somehow an interesting part for the organization. I think for us, if that continues that it is a soft landing, I think that's good. If some other turmoil kind of happens, then we need to watch it, right? So -- and that is also backed by the fact that we're entering into '23 with a sizable qualified pipeline, both in terms of moving existing customers to SaaS but also net new customers to the list. So I think somehow probably a little bit of a better feeling, but I'm still really concerned about Ukraine, as you would imagine. And the world economy as sort is somewhat also a little bit tricky to see through. Then the inflationary push is probably also something we monitor. So obviously, there's a direct impact on cost, both in terms of whatever third-party costs we have, but also our colleagues somehow, we are trying with a prudent approach from a salary increase point of view. But obviously, it's still a competitive market regardless of what's going on in the U.S. We have some level of protection, which I think we also talked about pivotal from our contracts with our customers, but I would say high inflation is still net negative for us. So I would say, all in all, not too bad compared to what it was 3 to 6 months ago. So let's hope it continues.

[Thomas Poutrieux, analyst]

All right. And maybe second question on my end. Perhaps you could provide a little bit more detail on the path to the return with 25% EBIT margin. I mean what exactly the time frame here? Is it 4 years? Is it 5 years? And then obviously, 2023 will be an investment year that we understand, but should we expect also 2024 to the an investment here as well? Or should we start to see some property leverage already kicking in 2024?

[Christian Kromann, executive]

I think we -- it's a couple of things, right? So I think the word accelerated is quite important to understand what we do in '23. So we're never going to stop investing as long as kind of customers out there. But what we're doing in '23 is really to say, instead of kind of spreading these investments over the next 3 or 4 years and continue to have this conversation that we currently have with you, we kind of pump everything into '23. And at the same time, we also start with a restructuring program. So we basically we grow the company, we accelerate investments and we do something fundamentally to the cost base all at the same time. We believe it's the right time to do it because it's a great opportunity for SimCorp. Then the next key parameter is the pace of the move to SaaS. And currently, our expectation is that there will be a steady flow, allowing us to move towards 28% and in EBIT at a steady pace from now on. And obviously, implicitly, when I say that, then that means that 23 will be a low point. But what can change that is if that pace gets higher because then there is more short-term costs in getting more SaaS customers on as we go. And then you would see 24 also the impact. But then you would expect that once, then you're out of that, then the curve towards 24% becomes deeper and you can kind of reverse that argument the other way around that you could get quicker towards 28%, but then it's going to be -- take longer time to get really there. So I think what we currently expect, based on everything we see is that 23 will be a low point and then we start to move towards 28%. If you then ask about when we are at 28%, then we're going to be less precise.

[Thomas Poutrieux, analyst]

Thank you very much.

[Operator]

Thank you. [Operator Instructions] Your next question comes from the line of Poul Jessen from Danske Bank. Please go ahead your line is open.

[Poul Jessen, analyst]

Yes, thank you. I have a few questions as well. Just starting on the ordering. You mentioned on the revenue, how much of the revenue which is coming from conversions that's 59%, but you don't comment on the order side unless you put a lot of $24 million in orders comes from conversions.

[Christian Kromann, executive]

So you -- the line was a little bit bad in the middle, Paul, can you repeat?

[Poul Jessen, analyst]

Yes, can you hear me now?

[Christian Kromann, executive]

Yes, we can hear you now.

[Poul Jessen, analyst]

Yes. Okay. About the conversion issue, you mentioned that 59% of the revenue of the license revenue is conversions. But as you also have a large increase in the backlog. I was just wondering how much of the order intake of EUR 124 million comes from conversions?

[Christian Kromann, executive]

Yes. Thank you. So we'll start with that question. That will be in the same ball part of -- on the revenue contribution.

[Poul Jessen, analyst]

Okay. And then you get 14 conversions in the quarter. 12 of these are 2 subscriptions still on-prem. I was just wondering when you want to move to assess BPaaS, I would have assumed that you have ambitions of more being on the SaaS instead of being on-prem subscriptions. What shall make you accelerate the process? That's one part of it. And secondly, if a client signed for a 7-year on-prem subscription instead of the perpetual. Does that mean that you should now wait 5, 7 years before he moves on to assess? Or do you expect that to happen within the new contract per...

[Christian Kromann, executive]

Good question, Poul. I think what we experienced last year was quite a lot of, I would say, processes that was relatively fundamental to the client relationship that we have. So that typically included a revamp of the usage of SimCorp dimension. It more or less always included a SaaS transformation at a given point of time. And finally, to some extent, included a level of conversation about BPaaS and whatever shape formal comes. Once you realize that, that's the journey, which I would say is more or less the situation with all the conversions that we did in Q4. Then you sit down and plan that out with the customer. And there can be many reasons why there is a delay. And in some cases, it was also a contractual delay because before when doing SaaS transformation with large financial groups, the contracting part for the SaaS part is complicated.And then what we did in joint relationship with the customer, we said, all right, let's get the foundation in place. So somehow we are engaged or a little bit more than that. And then we start to add the additional services on top of that as we go. And that's basically why we now say we are basically moving into -- sorry, into '23 with a record size or pipeline of SaaS because we've already done the foundation work with those customers. I know then you start to have the revenue impact in Q4 and all of that stuff. But for us, it's really a part of a journey, and I think that's quite important. I think there's 1 or 2 customers where it was another dynamic, but the vast majority of all those conversions is the first step of a journey. And yes, to your point, it will basically be coterminous with the contractual terms that we now have agreed to. If you -- if no customer is listening, then you would say, all right, we're already half Brexit, right? And then somehow, we can move on from that.

[Poul Jessen, analyst]

So you're saying that part of those -- when you talk about a strong pipeline for conversions to SaaS in '23, that includes some of those who went for subscription in...

[Christian Kromann, executive]

They are the ones that are highly qualified. So a couple of them are already in contractual discussions. Some of them are now running a proof of concept, and they're kind of moving along the funnel.

[Poul Jessen, analyst]

Okay. And you also said that part of the first step was to add new services. Does that mean that the cash flow of those who went for subscription also adds to the cash flow because in general, we have shown that it's cash flow neutral to go from perpetual to subscription.

[Christian Kromann, executive]

On the pure licensing side, you mean...

[Poul Jessen, analyst]

No, on the total cash flow from maintenance and license. So if you add -- if part of this move to a subscription solution includes add-on services, then I was just wondering, does that mean that the subscription contract will have a higher cash flow than they had previously?

[Michael Bjergby, executive]

Yes, that's absolutely right. And that's what we see with a number of the subscriptions that we add new money as part of that, so it can be new modules, additional users, et cetera. And then there is cash impact assets delivered a tele... Yes.

[Poul Jessen, analyst]

Okay. Two more questions. One is that you mentioned that the SaaS clients are being integrated very well. I was just wondering, with the numbers you gave us or the more detailed disclosure, we can see that there was a reversal of a SaaS client in Q3. What's the story behind that reversal then?

[Michael Bjergby, executive]

So maybe, unless you know the story best. I was going to hear the time for...

[Christian Kromann, executive]

No, it's true. Unfortunately, we have a reversal of an American client. It's still a client. However, part of what we are of the functionalities that we sold to them have been handed back. So that's been a reduction in say, that's been to that time. And the client is still a client of SimCorp, not just a little bit more.

[Poul Jessen, analyst]

Okay. And last question. Back at the CMD in October and also when you gave the guidance for the full year, you had an acceleration of the process towards SaaS in the guidance for this year, and it was commented on the Capital Markets Day. I was then wondering now that you do additional acceleration. Is that because you have learned more since the Capital Markets Day? Or was that already part of the 2023 at that time?

[Christian Kromann, executive]

You mean acceleration of the investments?

[Poul Jessen, analyst]

Yes, to do further investments into the platform and thereby diluting the margins.

[Christian Kromann, executive]

I think what the -- where we arrived at is, I guess, 2 parts, right? So one is what we also said at the CMD, the potential is larger, right? And we see that, and we are capturing that. But I think we also got to a point where we said, we can't continue for every year that passes on to say, all right, now we need to invest a little bit more, both because we think it's super annoying, but I think most of you would share that view as well. We need to get to a point where we get it done, and then we start to move in the other direction. So we kind of -- and we know it's risky somehow, but we need to get it over with and get on the right side of the curve and start to grow the margin also on the SaaS business, and that's really the argument.

[Poul Jessen, analyst]

Okay. Thank you. That's all for me. Thank you.

[Christian Kromann, executive]

I don't think there's any more on the telephone line, but there is one on the web, and it's from -- asked if the margin guidance based on ratable revenue or reported revenue.

[Michael Bjergby, executive]

Yes. So that's a very important question, I think, because the margin guidance is based on reported revenue, and that's a very clear reason for that. Of course, you can look at the ratable profit, if you want to look at what is the cash flow generation. But you cannot look at the ratable profit to see what is the underlying business or what is the business without upfront revenue recognition because there is clearly costs related to upfront revenue recognition. So -- which is not included in the ratable revenue and therefore will not be included in this ratable profit measure. So for example, in ILF, there's quite significant sales efforts, sales commissions, legal work on and which is cost, which do not create any ratable revenue within that potential year. So that's why it doesn't make sense to actually look at the profit of the business based on ratable revenue. It makes sense if you don't want to look at the cash for the current year, but that's not value creating looking forward. So the reported or the margin is based on reported revenue. It doesn't seem like there's any further questions. Is that correct, operator?

[Operator]

Yes, there seems to be no further questions at this time.

[Christian Kromann, executive]

Okay. Thank you very much, everybody. See you on the road.

[Operator]

That concludes today's conference call. Thank you for participating. You may now disconnect.