Temenos AG

SIX:TEMN

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, welcome to the Temenos Q1 2023 Results Conference Call and Live Webcast. I am Pasha, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.At this time, it is my pleasure to hand over to Andreas Andreades, Executive Chairman and acting CEO. Please go ahead, sir.

[Andreas Andreades, executive]

Thank you, operator. Good afternoon, and thank you for joining today's call to run through our Q1 results. You can find the presentation on our website. I will run through the key developments in Q1 and the outlook for the rest of the year, and then I will hand over to Takis as usual to run through financials. All the usual disclosure is available in the presentation, but I will not be going slide by slide.Starting with our performance. We delivered a strong start to the year with excellent growth across total software licensing at 12% constant currency. ARR up 15% and free cash flow at 20% as well as EBIT at 11%, picking up 2 percentage points of margin. We are capitalizing on our strategic advantage that we outlined in detail at our Capital Markets Day in February, we benefit from a cloud-native, functionally reach and upgradable platform that is totally agnostic to the size of our client or the deployment method. The rise of cloud is driving our growth, both for our subscription revenue, where clients can deploy the software on-premise or in the cloud and run it themselves and our SaaS revenue, where the software is deployed on Temenos Banking Cloud and run by our cloud operations teams.We had a lot of success in Q1 with top-tier banks across multiple geographies. In the U.S., we signed with Regions, the 27th largest bank in the U.S. for core banking transformation and the Temenos Banking Cloud. In Latin America, we signed a very exciting deal with a leading bank also for domestic core banking transformation in the cloud. Our Middle East region also performed very well with the top bank in EMEA expanding significantly their relationship with us this quarter. And in Europe, we signed a deal with a top 10 global bank headquartered in Europe for the global transformation of the wealth business. So it's clear we are winning with the world's largest banks on the strength of our platform.Our subscription transition is progressing well with subscription licenses contributing 77% of the license mix this quarter. Term licenses are down to 11% of total software licenses and about 5% of total product revenues. We also delivered a strong SaaS ACV of nearly $90 million with significant contribution from new business in particular as well as some additional consumption from existing clients. Together, our subscription and SaaS drove strong ARR growth of 15%, and our cash flows are benefiting from the positive working capital dynamics of the SaaS business, which minimizes the impact of the shift from term license to subscription with a minimum cash flow point from the transition behind us.Looking elsewhere in the business, our services margin improved path to profitability this quarter as our service cost base starts to normalize. A number of projects have been completed, and we have reached the inflection point in services revenue. I'm happy with the progress we made in the last few months in the services business, and I'm looking forward to more improvement over the next few quarters.Overall, there was no further lengthening of sales cycles in Q1. Banks now have relatively more visibility on 2023 and medium term, they are benefiting from a high interest rate environment. The response of regulators on funding challenges was swift and robust, and this gives us confidence for the trajectory in the short term. As a result, I expect the sales environment to remain stable this year with some banks still cautious around their IT spend.Our pipeline continues to develop positively across bank tiers and geographies, with increasing demand for SaaS and cloud, a good number of Tier 1 deals developing in the pipeline. And we are delivering on our commitment for the completion of the transition to recurring revenues in 2023. We've seen an underlying acceleration in total software licensing, which grew 14% this quarter, excluding customized development licenses. Our partners will continue to do most of the client-specific work, allowing us to focus our R&D on innovation and reusable product that creates strong recurring revenues.The investments we made in 2022 across both R&D and sales gives us a solid platform for growth in 2023, and we have already seen this in Q1 with our EBIT benefiting from these investments and good cost management. I'd also like to flag that we are already -- that we already reached the minimum cash flow point from the subscription transition with a positive working capital impact of the SaaS business more than offsetting the remaining negative working capital from the subscription transition.Lastly, I'd like to remind you that we are focused on ARR as our primary KPI, given our subscription transition and growth in SaaS, which are driving recurring revenues. ARR is expected to reach more than 70% of total revenue this year and more than 80% of our product revenues. Our strong growth in ARR is also driving increasing visibility on profit and free cash flow.And with this, now I'd like to hand it over to Takis to talk through the numbers for the quarter.

[Panagiotis Spiliopoulos, executive]

Thank you, Andreas. Moving to Slide 15, I'll give you an overview of our financial performance. All figures are in constant currency, unless otherwise stated. We delivered $33.8 million of subscription revenue for the quarter with a subscription share of 77% of the license mix in Q1 '23, I expect it to be around this level of percentage of the mix over the coming quarters as well. SaaS revenue was up 30% in Q1 '23, and with the strong start ACV in this quarter and from last year, we have a good level of SaaS revenue locked in for the following quarters and good visibility to hit our expected 2023 target. Total software licensing grew 12%, driven by subscription and South. While the headwind from the decline in customized development licenses is now behind us, there was a 2% negative impact on Q1 '23. Excluding this headwind, total software licensing grew 14% in Q1 '23 in constant currency.Maintenance grew 3% as indicated and in line with the growth of Q4 '22. Total revenue grew 4%. EBIT was up 11%, benefiting from good cost management, the anticipated improvement in services and the investments we made last year. Our EBIT margin improved by 2 percentage points to 29.7%. Operating cash amounted to $71 million, up 17%, with our operating cash conversion of 108%. We delivered $39 million of free cash flow, up 20%. For the full year, I still expect free cash flow to grow in line with ARR of at least 12%. DSOs ended the quarter at 125 days, down 4 days sequentially, and we ended the quarter with $716 million of net debt and with a leverage of 1.9x. I expect our leverage to decrease further by the end of the year.Moving to Slide 16. Subscription and SaaS revenue were really the key highlights in the P&L this quarter. The subscription becoming the significant majority of the license mix by the end of the year. As Andres mentioned, we signed a number of deals with top-tier banks across different geographies. I would flag that the deal with the top global bank headquartered in Europe was signed in Q1 '23, and that revenue will be unlocked once we hit various milestones over the course of 2023.I would also highlight that operating costs were up 2% this quarter. We already made significant investments in 2022 in R&D, cloud and sales, and we will continue making targeted investments this year in the same area. We are also benefiting from the normalization of our services cost base as anticipated with a number of loss-making projects now [line]. Lastly, we delivered $67 million of EBIT in the quarter, and our EBIT margin expanded 2 percentage points in constant currency.Next, on Slide 17, we have like-for-like revenues and costs, adjusting for the impact of M&A and FX, although we have not done any M&A since 2019, the figures are all organic and therefore, in line with constant currency growth rates. I have already outlined the main impacts on revenue and cost this quarter. In terms of FX, we saw the dollar strength creating a headwind on revenues, in particular, from the euro, while we saw some tailwind on costs, in particular from sterling and rupee. Overall, we had a small positive impact at EBIT from FX this quarter of slightly more than $1 million. On Slide 18, net profit was up 11% in the quarter, a touch lower than the EBIT growth, with the impact from higher financing costs and the higher tax rate. EPS for the quarter was up 10%.On Slide 19, Q1 '23 LTM cash conversion was 108%, well above our target of converting at least 100% of IFRS EBITDA into operating cash. We also expect our cash conversion to be at least at 100% for 2023.Next on Slide 20, we show the key changes to the group liquidity over the year. We generated total operating cash of $71 million and ended the quarter with $112 million of cash on balance sheet and net borrowings of $729 million. Our leverage was at 1.9x and are expected to decline further by the end of the year.On Slide 21, we reconfirm our 2023 guidance, which is non-IFRS and in constant currency. We are guiding for ARR growth of at least 12% driven by the move to subscription and the strong growth of our SaaS revenue. We started the year with a significant majority of our ARR locked in through committed SaaS revenue, subscription and maintenance and our strong Q1 23 SaaS ACV and subscription revenue will also contribute to this. We are guiding for total software licensing of at least 6%. This combined subscription, term license and SaaS revenue. As a reminder, we already have approximately 10 percentage points of total software licensing growth locked in from SaaS ACV signed in 2022 and early 2023.I would also flag that the headwind from the decline in customer development licenses is now behind us, and this alone acted as a circa 5% headwind on total software licensing in 2022. This is an additional reason why we feel comfortable with our TSL guidance for 2023. As a quick reminder, our confidence in our SaaS revenue growth comes from 3 elements: strong new logo wins in 2022 and in Q1 '23; the improved visibility on the additional consumption from existing clients; and the introduction of overage revenues in 2022, where we charge customers at a premium for consumption over the contracted volumes until they commit to more incremental ACV.In fact, SaaS revenue growth just from new logo wins in the last few quarters is higher than reported SaaS revenue growth, and this also helps the visibility for future SaaS growth. We are guiding for EBIT growth of at least 7% and EPS growth of at least 6%. We also expect our free cash flow to grow in line with ARR, certainly, 12% growth for 2023 with a material contribution from growth in deferred revenue. We feel comfortable with our free cash flow guidance, given the strong visibility we have from SaaS revenue and ARR growth. However, we are also being prudent at this stage as it's still early in the year. We still expect cash conversion to remain at over 100% of IFRS EBITDA into operating cash. Lastly, we expect the 2023 tax rate of 19% to 21%.Next on Slide 22. This is a slide we showed last quarter, so I won't spend too much time on it. It outlines the elements impacting our EBIT in 2023. This is for illustrative purposes only to give you a feel of the relative size of contribution of the different elements. Essentially, SaaS and maintenance profit growth will have a positive impact as well as the improving profitability of our services business through the year. This will be offset by our investments in selected areas of the business, some wage inflation and increased variable costs.On Slide 23, again, for illustrative purposes only, we have outlined the moving parts of our free cash flow this year. A considerable part of our free cash flow growth will be driven by the strong growth in deferred revenues from SaaS, bearing in mind that any SaaS contracts signed this year will contribute to deferred revenue growth. We will also have a stronger contribution from subscription, where we now also collect the second year of cash from contracts signed last year. These tailwinds more than offset the negative impact from lower term licenses. This is the last time we have this headwind from term licenses as the transition to subscription will be largely complete by the end of the year.Lastly, on Slide 24, we have our midterm targets that we have announced at the Capital Markets Day in February. These are for ARR to reach at least $1.3 billion added to reach at least $570 million and free cash flow to reach least $700 million.With that, I will hand back the mic to Andreas to conclude.

[Andreas Andreades, executive]

Thank you, Takis. And so, to give a quick summary, we continue to press with our strategic advantage of the cloud-native packets and upgradable platform that can be implemented on-premise or in the cloud. Our pipeline is developing nicely, and we are making excellent progress on our transition to subscription and a recurring revenue business. Demand for SaaS and cloud is increasing and driving our revenue growth and our investments in 2022 have given us a strong platform for growth in 2023. I expect our ARR to continue growing strongly, which will increase our visibility on profit and free cash flow with more than 95% of product revenues now being recurring, I actually expect ARR and total product revenue growth to converge over time.With that, operator, I'd like to open the call to Q&A. Thank you.

[Operator]

[Operator Instructions] The first question is from James Goodman from Barclays.

[James Goodman, analyst]

And firstly, maybe just we could dig into the situation in the banking backdrop a little bit more. And maybe you could structure the answer there between the U.S. sort of regional bank situation and anything that's affecting your conversations regarding your pipeline there. But also in Europe with the Credit Suisse scenario, could you talk about any direct impact? And if you're baking in a stable environment this year, I mean, are you comfortable that, that's a sufficient buffer given the backdrop.Second question around the successful move from term licenses to subscription. I wondered, are you still seeing really parity there in terms of the proportion of license that's unbundled into the quarter on those deals? And maybe you could answer that through commenting on any upsell you're able to achieve if you're seeing any average duration sort of increase there or maybe the sort of price element more generally in terms of the impact on the quarter?

[Andreas Andreades, executive]

Thank you, James, it's Andreas. I'm going to take the first answer and then Takis will take -- the first question, and then Takis will take the second one. In terms of the banking market, what we are seeing, we do expect overall a stable sales environment for 2023, consistent with the assumptions we made, if you like, at the beginning of the year. Within the regional banking market in the U.S., let me say first of all that we haven't seen an impact in our business from the events, if you buy around that segment of the market. We clearly signed regions in Q1, which is an important data point. For sure, this has been in the pipeline for quite some time, but still it does show that banks in that segment are making decisions.And what I wanted to say is that the regional banking market is a very large group of banks, very diverse. Some of them extremely conservative with very successful franchises in both retail banking and corporate. And these banks they continue to go about their businesses and investing in infrastructure and technology and anticipating the needs of their customers. So for us, it is business as usual in that segment. I wanted also to remind everybody that this is just one segment of the U.S. market that we are operating. We are selling to neobanks and fintechs. Banking-as-a-Service and embedded finance is big in the United States. And its funding part of our growth as well as credit unions where we've got a successful franchise with more than 600 credit unions being already clients of terminals.So just to wrap it up. No, we haven't seen an impact, and we continue to operate, if you like, with confidence and successfully in that part of the market. The second part of your question related to Credit Suisse in Europe. As we previously committed -- communicated, we didn't have any direct impact from that. I think your question was about direct impact. And we do not. And Credit Suisse continues to use our software, and we expect that it will continue to use our software for a quite some time. What is happening in Switzerland is perhaps an opportunity for us. And therefore -- and overall, in European banking, we haven't seen, if you like, stresses coming out of that event that would concern us. So that's all-in-all on your first question. Takis?

[Panagiotis Spiliopoulos, executive]

Yes. Maybe let me add to Credit Suisse. James, clearly, it's not just an important and long-standing customer. But actually, we see an opportunity to do more business in an enlarged group as part of UBS whenever that happens and to expand the business with UBS. And the integration will take 3 to 4 years. What we see and hear here in Switzerland is that Credit Suisse brand will be retained in quite some areas. So we don't see a risk to what we currently have in terms of business with Credit Suisse today, which is largely a maintenance revenue stream and even in a worst-case scenario and this will probably not be much more than 1% of our maintenance revenue base, so something that is definitely handled on.On subscription, bear in mind that since we announced it, all the new deals or almost all new deals that came into the pipeline were for subscription -- 5-year standard subscription term and clearly this business continues throughout Q1 and this is the standard default model. Now you will still see long-term term licenses and brands to convert them, but our teams as terms term licenses and this have been in there term license supporting the pipeline and where customers for whatever reason don't want to convert, but that you see this is a small part. And it's actually even lower than it looks because keep in mind on the term licenses, we also report this customized development element. So the real term license deal number is faced, even is much lower than you see in the Q1 reported number. We still have some term license business throughout the year. I'm very happy with the 77% mix we achieved in Q1, and that should be definitely be the target for the year.

[James Goodman, analyst]

That's really helpful. But just on pricing specifically, I mean, can you comment on that because you switched ultimately to this new pricing subscription format or can you say if pricing was a certain tailwind to growth?

[Panagiotis Spiliopoulos, executive]

Yes. We don't -- I mean, we don't look at pricing per se now because we haven't converted any deals probably maintained in the first quarter of last year where we said we would expect an uplift on this 30% to 60% range. That was clearly something we would still say was the realized number. Now when subscription deals come in, and clearly, we sell them at a higher value because there is a benefit for the client as well. So you would expect on a like-for-like basis, if there was anything converted, it would still be in that range.

[Operator]

The next question is from Toby Ogg from JP Morgan.

[Toby Ogg, analyst]

Perhaps firstly, just on the guidance. So you're coming with 12% total software licensing growth on arguably the most difficult comp of the year. As you mentioned, customized license headwinds are now behind you. You said the sales environment has stabilized and no impact from the regional banking crisis. So what's holding you back from upgrading the minimum threshold of 6% on the total software licensing guidance? And similar question on the EBIT guidance as well, just given that you're trending well above that minimum threshold? And then, just on the CEO search, any update on how that's progressing?

[Andreas Andreades, executive]

Toby, let me take the obvious question first. Now as we said at the start of the year, in February, when we gave the guidance, yes, we expect a stable environment, but there is still some uncertainty out there. Now we delivered 2 months later, stable environment as [indiscernible] said, we still continue to be stable. But I think we all agree there is still some uncertainty out there in terms of what foremost shape the economy will take soft landing, no landing, hurst lending. So that's #1, and we try to be good about.#2, I think we still stand by what we said. There is still a large number of large Tier 1 and Tier 2 banks in the pipeline and which we also have as part of our portfolio of deals we want to sign. So timing can always be something which is difficult to predict. So I would say, yes, it's an early success, but let's get us -- let's give us some more visibility on what's happening with the larger deals, and there still can be volatility between the quarter.Now EBIT, which is, as we have seen now with Q1, if we deliver a better EBIT number that is pure profit drops down to EBIT. So EBIT guidance is linked to really the TSL guidance. We're comfortable in making the investments we plan to do 2% constant currency cost growth if you exclude the services cost reversal of improvement, we're investing quite a bit cost is up 6%, excluding services, which, as we had said at the start of the year would have a sizable positive impact on our cost base. So if you want the underlying investment is still being done excluding services. So I think we feel comfortable and at this point in time, I think it's the right prudent guidance we issued in February, which is still valid.

[Panagiotis Spiliopoulos, executive]

I'll take the second question on the CEO search. As we communicated before, the process is underway. It's led by [Thibault] and the Board and Tibor will update the market when it's appropriate.

[Operator]

The next question comes from Levin Josh from Autonomous.

[Josh Levin, analyst]

Two questions for me. With regards to the Regions deal you won in the U.S., why do you think you want it? What specifically differentiated Temenos from its competitors? And then the second question, the company is a state of flux and uncertainty. You're still looking to bring in a new CEO and then the CEO will need to devise his or her strategy. How do you manage that flux and uncertainty vis-a-vis your employees? How do we keep them focused and motivated?

[Andreas Andreades, executive]

I'll take both questions. We won Regions Bank on the strength of our platform, our products on the technology credentials, on the upgradability and functional richness of the platform, the scalability, the localization. We have a U.S. model plan that is proven and our capability to run successful SaaS operations. And in fact, if you look at the whole of this like competitive advantage, it's our view that we are significantly ahead of our U.S. competitors, the U.S. in companies. And ultimately, this is why we won it. We've got successful references in the United States. And when it comes to running mission-critical systems on modern platform, a successful reference is clearly very, very important.Now your second question regarding forecast and of employees and in general, how we operate. We have a very exciting year ahead of us. We have a very exciting strategy. What is happening with the platform and the product and with winning the best banks in the world as customers is what drives our people. When quarter after quarter, we are winning, if you like, top-tier banks that are doing quite advanced and firing transformations with us, that excites people. We also have a very stable management team that is very focused and committed to the business. And they are also very, very excited with what is happening with Temenos. So while you may think that there is uncertainty because of a CEO transition, I'd say people take that in their stride and they say, well, Temenos is winning. And therefore, I find it a very exciting place to be. So that's how we go.

[Operator]

The next question is from Chandramouli Sriraman from Stifel.

[Chandramouli Sriraman, analyst]

Just a couple from my side. Firstly, I noticed a big bounce in the competitive deals. I was just wondering what drove this changed, particularly in a difficult macro, I would assume you go back to add-ons to the installed base. Is this the impact of the move to subscriptions or anything else that you could highlight? And my second question is on ACV growth. It's been in low single digits for the last 5 quarters. You have highlighted the impact of the Bacs business. But just wondering, are you still comfortable with the 25% growth in SaaS revenues for the year?

[Andreas Andreades, executive]

Thank you for the questions. I'll take the first one and then Takis will deal with the second one. I think what is happening in the market is that the maturity of cloud solutions and I've been saying that Temenos is really creating the SaaS market for the core banking industry. We've been leading this industry for years. And people are looking at us to bring a mature cloud solution to the market that is functionally reached that you can run for their banks, prober Tier 1 organizations, complex organizations on modern cloud-native software. And I think what we've seen in the last 3 or 4 years progressively, I think the bigger banks, okay, we had COVID. We had all of that.But I think what banks have been waiting really is for that maturity in the solution. And we are crossing significant milestones in that we are actually proving the solution. And we are getting to the point where top organizations are able to put their trust in Temenos. And I think this is what is happening, and it's happening both across, if you like, the subscription side as well as the SaaS side of the business. I think that subscription pricing and the subscription model, while perhaps has some impact in making the sales job easier because you are not really selling CapEx, you are selling OpEx. I don't think it's so fundamental in moving the market. But certainly, the majority of the -- of what we put on offer is moving the market. And I think we are winning in a significant way. So that's on the top-tier deals, the bigger deals. Takis, perhaps you take the question on ACV.

[Panagiotis Spiliopoulos, executive]

Yes, thanks, Chandra. And clearly, we've put in this staff growth slide showing the quarter for this purpose because what we have seen in the past, we have had volatile ACV quarters depending on whether we have additional consumption from existing clients or just new logos, I'll get to that. So it's hard to predict when the additional consumption will hit in a particular quarter, but we have a good idea for the full year. Now what you need to keep in mind, and we gave the disclosure for the full year. We had a new local growth of more than 80% in 2022. Now the ACV from new clients was up 3x this quarter in Q1 '23. So if you look at this, it shows the underlying strength of our SaaS offering, winning new clients. I think it's also a testimony to the maturity of our SaaS offering. So we expect, yes, there will be volatility in the future as well.But if I look at the visibility we have from Q1 now and Q2 will show very good growth on ACV again. So with -- if you want page 1, '23 ACV look in or what we plan to deliver, we have a very good visibility on delivering the 25% SaaS growth for the full year to feel very comfortable on this one. And don't forget, we also benefit from overage clients using the platform above the purchase volumes as I explained, they pay a higher price, which they then drive more incremental ACV. So again, another strong ACV quarter ahead, which will protect our full year SaaS revenue growth guidance.

[Operator]

The next question is from Woller Knut from Baader Bank.

[Knut Woller, analyst]

Just on the deferred revenue side, it looks like deferred revenues didn't follow the total revenue growth in the first quarter. And looking at the sequential development, we learned that a $28 million decline, probably also helped you to deliver the good start to the year. At least, if I put it into historical perspective, the years prior to 2020 to the contribution from deferred revenues was noticeably lower than the minus $28 million we have seen now in Q1. So you also mentioned the large deal in Europe. So why didn't we see here a stronger tailwind from this large deal in Europe?Takis for you, if I understood you correctly said that the revenues will hit the P&L once milestones are hit. Then secondly is also the deferred revenue momentum, the reason why you're still sticking to Q1 because if we strip out deferred revenues then the underlying momentum from new business was apparently then not as strong as the reported numbers suggest. Is that a fair way to look at things?

[Panagiotis Spiliopoulos, executive]

Thank, Knut. Okay. So the way we look at it is deferred revenues comparing it to the recurring revenues because this is where you pay ahead. And deferred revenues grew actually 11% on the current side. If we do it across current and noncurrent, the growth was 7%. This compares to recurring revenues on an LTM basis, growing 9%, so it's not far off. There can be always deviations depending on what kind of advanced cash collections we had, and that was maybe a bit higher in the year. But clearly, we would expect deferred revenues to largely track on a yearly basis as we have seen last year, the growth in recurring revenues above that. So we would expect to see clearly some acceleration there. I think 1, 2 percentage points delta can always happen in a particular quarter.Now the European deal you were referring to, clearly, this is -- yes, we signed that, but there was -- we didn't talk about the rev rec, if you want. Clearly, that will be dependent, as we said, on some milestones throughout the year. So there was very limited revenue from this deal in Q1 and obviously also then limited cash.

[Knut Woller, analyst]

Okay. And do I understand it correctly, Takis, that this is already included in the deferred revenues?

[Panagiotis Spiliopoulos, executive]

No. It's not included.

[Knut Woller, analyst]

Okay. Not in the deferred revenues. Okay. Got it. And just getting the market on certain marketing costs, which have only been up 3% despite the solid total software licensing growth, how can I square that?

[Panagiotis Spiliopoulos, executive]

Yes. I think on the individual costs and the IFRS costs are always a bit difficult to read because there are some restructuring costs in there. And there is obviously also the IFRS costs included in there. So if you look at -- as I mentioned, the -- if you want the sales and marketing costs underlying showed quite good growth. This is -- there is nothing specific in there. Clearly, we have, as Andres mentioned, we had invested ahead quite a bit last year. We still do incremental hirings. What definitely has increased on a year-on-year basis is travel. Now there is quite a bit more travel, which is included in our guidance. So we'll continue to selectively hire senior salespeople, especially to maintain the strong trend we have seen with the larger clients.

[Operator]

The next question is from Frederic Boulan from Bank of America.

[Frederic Boulan, analyst]

If we can get an update on how you -- what are you seeing from a competitive standpoint versus some of the -- your main U.S. players. I think you gave us a very useful contrast and compare that the CMD, but just to maybe give us an update on what you're seeing, any particular player, whether that's incumbent some of the last generation ones being more impactful. And then looking at your mix, Tier 1 Tier 2 at 45%, that's improving. If you can maybe discuss your expectations on that going forward, if you expect to see that dynamic continuing this year?

[Andreas Andreades, executive]

For competitiveness, if you like for the U.S. market, as I said earlier, I believe that what we've managed to achieve in the U.S. is to be well ahead of our competitors, improving a modern or that can run successfully at scale with American, if you like localization, American regulations. And also the maturity of a SaaS or a SaaS operation that can large that can run successfully large operations. When we talked at Capital Markets Day about our SaaS business running 150 million account installations. Now this kind of sizes of operations, they are extremely rare, if at all existent in a modern SaaS business. And it's disadvantage that we are pressing ahead with -- in the United States. And this would apply to all U.S. incumbents and it would also apply also with respect to newcomers because they haven't proven this. And when we compete for a mission-critical application like core banking, having proven it is Vitus. So it is about the maturity of what we offer. It is about the modern technology, the scale, the localization and having done it successfully in other banks.

[Panagiotis Spiliopoulos, executive]

Fred, let me take the second part. Clearly, yes, we have seen a high percentage in terms of competitive deals, but that's a result of what we said before we won against competition quite some larger new deals, new logos, which obviously helped this ratio. I would not read too much into one particular quarter. We usually look at this, and this is why we disclosed the numbers on an LTM basis, which can smooth in the quarterly volatility. Given our large installed base, we always said maybe 60% of the business should come from add-ons from the installed base and 40% from new logos, we are very happy that we keep winning new logos, especially good logos and with large deals, but probably that won't be the case in every quarter, considering timing is difficult to predict.

[Operator]

The next question is from Mohammed Moawalla from Goldman Sachs.

[Mohammed Moawalla, analyst]

Two from me. Firstly, just on the investments, you talked about sort of investing significantly in 2022. What sort of gives you the comfort that sort of that rate of investment was sort of sufficient as you sort of look forward? And how would you sort of think about potentially any revenue upside or top line upside? Would you be kind of inclined to invest in a way or drop to the bottom line? And then as relates to that to the comment you made that Q1 saw sort of kind of lower rate of OpEx growth. Do you expect that sort of pace of OpEx to perhaps increase as we move through the year? Or should we sort of assume this run rate?The second question on the top line, you sort of talked about not really seeing much of a kind of an impact from what's going on at this stage. But as you sort of maybe help us kind of understand the different deal flow in the pipeline where they are at different stages. How have you sort of risk appraised that pipeline and maybe some of the assumptions you've taken around sort of close rates over the course of the year, that would be great.

[Andreas Andreades, executive]

I'll start with the last one because your questions were quite a few. So I'm not sure I remember the first one. So I'll start with the last one. As I said, we expect a stable environment for sales and closing rates in the year. Clearly, we see different dynamics across the world. We had a very strong MEA, Middle East Africa business in Q1, and we expect that to continue. The U.S. is growing very robustly. We talked a little bit about Europe, we expect Europe to improve in the second half and also the comps are getting easier in the second half for Europe. So we are -- if you like operating the final and the pipeline on a weekly basis, and we are looking at it. As I said, what we reported Q4 that we look at it on a portfolio basis. And we want to have enough cover in our pipeline to be able to deliver on our forecast. So not much different, if you like, to what we have usually done. And given what we have in the final at this point in time, feel confident about the balance of the year.

[Panagiotis Spiliopoulos, executive]

Let me take the cost one and I think we still have the same approach as we communicated in February, the rates. And while the headline numbers in terms of cost growth may look low. The underlying, I think, is still a healthy rate of investments. Yes, we had mid-teens plus cost growth last year, also on an underlying basis. But what you need to keep in mind, it's clearly the raise about $15 million to $20 million tailwind on services costs, which will not recur this year. And that's providing ample headroom for investing. Obviously, we got wage inflation around 5%, maybe a bit more. This is offset to efficiency gains across the organization, which we do not as part of a large program. But clearly, when it comes to that efficiency gains across leases across other costs and so on. So we have plenty of room for investments, as I mentioned, simply from the tailwind from lower services cost and then still have some on top, which we can come clearly look at variable costs growing, especially on SaaS. SaaS is growing quite substantially. So that's on that one.In terms of run rate of cost, no cost will obviously increase sequentially and then more throughout also the second half of the year. So clearly, the $159 million is a good number, but it will increase. You will also see Q2, Q3, Q4, that cost increase on a year-on-year basis, what we feel comfortable with the cost growth for this year. Again, keep in mind 15 plus, $15 million, $20 million of tailwind from last year from services.

[Operator]

The next question is from Michael Briest from UBS.

[Michael Briest, analyst]

Just trying to dig in a little bit on to the Regions Bank deal. It was announced at the end of March, did it make it into ACV for the quarter? Would that be the full scope, I mean, the way the deal is described is like quite a substantial renovation of the client thinking back to something like Commerce bank, that was a multiyear program. Can you maybe talk about how much of the business is already in the book, if you like, and how quickly it converts to revenue? Traditionally, we see sort of plus of delay between signing and revenues. And then in terms of the headcount, I think last year, packages fell by 5% through the course of the year, so as full-time employees. Can you talk a little bit about the phasing of that because that might have an implication to the cost base if you had a lot more people on the payroll in Q1 last year than this year and is headcount growing again? And if you can address maybe Andre, that the attrition was quite high last year, still how much that's come back down by?

[Panagiotis Spiliopoulos, executive]

Hi, Michael. Yes, on the regions deal, this was a South ACV deal signed in March. So that has been in the ACV number we reported. As we always said, there is a time lag between the ACV deal being reported. And then once we start recognizing revenue once it is live on the platform of about 1/4, so no revenues from regions recognized so far.

[Andreas Andreades, executive]

I'll take the headcount and attrition question. First of all, let me say that we've seen quite a significant reduction in attrition during the second half of last year. And in fact, this continued even lower in Q1 of this year. So very comfortable with the way it's trending. We -- in Q1 of this year, we we've as part of our SaaS, if you like, development plans, we've changed a lot the way we are operating in our development organization and also in India. And we've changed the way we organize this core teams and so on and so forth. And while this was not a cost exercise because any headcount reduction that we have as a result of that, we've invested back in capability almost immediately either with more senior people or different skills, different SaaS skills and so on and so forth. So a lot has gone there, and I'm very pleased with the way that has that has developed. So perhaps the headline headcount number might actually not show much growth this year, but the inflation number, the salary inflation number that Takis talked about will flow through to, if you like, the total salary cost and employment costs as it were of the business.

[Michael Briest, analyst]

Okay. And Takis, is that mean that the full scope of regions bankers in this year this quarter's ACV, there won't be more in a year or 2 as far as your -- let's assume successfully upsell?

[Panagiotis Spiliopoulos, executive]

Yes. Keep in mind, there is just one part of the bank we're doing right now. Now with every large bank and every large client, we always have the ambition to do more business here over the course of the year. So I think there is -- let us get -- let us get to that in terms of what is the size. It's only -- I think if you look about -- we only do the systems for customer records and deposits. Now every large bank has a lot more business lines. And as we have seen with all the large Tier 1 clients, Tier 2 clients over the course of the year, once you're successful, you can generate a lot more business than the initial one.

[Operator]

The last question comes from the line of Justin Forsythe from Credit Suisse.

[Justin Forsythe, analyst]

Just a couple for me, if you don't mind. So I understand the Regions Bank win, obviously, a big win, 27th largest bank in the U.S. according to your numbers. I guess can you talk about the competitiveness there? Was there an existing core processing platform in the background there? Or was that insourced? And just around the market sizing, like have you done any of research around, for instance, the number of banks who look to migrate their core? And on a given year, say, I don't know, is it low single digits, mid-single digits, et cetera, within the U.S.? And how many of those are coming from incumbents versus an in-store solution, meaning competitive takeaway versus not?And the other question was around Europe. So I think you did call out a little bit of the weakness there. I think you also mentioned during the call that there was less concern in the environment in Europe. You also though highlighted at the CMD that you had pretty high win rates against competition. So I mean, can you talk a little bit about the dynamics there? Does that just mean there's not deals out there to win? Do you expect the environment to be more robust in 2Q, 3Q, 4Q? And just your thoughts on the European market going forward.

[Andreas Andreades, executive]

Okay. I'll try and take them in turn. Of course, there was an incumbent in regions. We're not privy to disclose the incumbent vendor in the bank. But let me say that, as I said earlier, this was a highly competitive bid and we came out very, very strongly with that. Now how -- and also let me say that the bank, as you would expect, has existing relationships with most U.S. incumbent vendors for other software. So the relationships with incumbent players were there. As far as the U.S. market is concerned, we share in Capital Markets Day a lot about the size of the opportunity as well as the segments of the market that we are competing with. I believe I was very clear that we are focusing on particular segments of the market and not the entire U.S. market, and that continues to be the case. I have to say that out of all the regions in the world, I see more growth and more activity today in the United States than I see in Europe or in Asia. So we are confident about the level of activity in that market.Now moving over to Europe. We do have, as you said, very competitive, if you like win rates and I can confirm that. And if you like the slower development of Europe is not a win rate issue for us. It's more an evolution of the market and the point at which the market is embracing what is happening with cloud, the rise of cloud and the right of new technologies and updates at the pace with which banks are actually embracing this and moving forward with bigger projects. And as I said, we do expect an improvement in the European comps for the second half of the year.

[Panagiotis Spiliopoulos, executive]

Justin, maybe to add. Keep in mind, Q1 '22, we had near about signed in Europe, which was quite a sizable deal. So Europe had a particularly difficult comparison based on top of it. But yes, H2 clearly should be better for Europe.

[Justin Forsythe, analyst]

Got it. That's really helpful. Both of you really appreciate it. I just wanted to clarify a little bit that first question. So I guess my point was, understood that the third-party spend market is quite robust within the U.S. and globally as you correctly called out in the CMD slides, I guess what I was getting at is that market in reality, given you don't have, I guess, as much share as you might in Europe is kind of prerequisite on banks churning their existing vendor or if it's in-sourced moving to someone like yourself. So I guess I was trying to get your view, if you have one as to how often banks you believe are doing that in the U.S. because it feels like that would be your -- the biggest part of your opportunity going forward?

[Andreas Andreades, executive]

Okay. That I understand the question better. The top-tier banks as in the top money center banks, if you like, are mostly in-sourcing technology. But below that, let's say, below the top 5 or 6 banks in the United States, most of the rest of the market is actually using third-party software. So they are quite used to working with vendors.

[Justin Forsythe, analyst]

Okay. Got it. And you don't have a view on the percentage kind of churning each year?

[Andreas Andreades, executive]

Very difficult to say.

[Operator]

That was the last question.

[Andreas Andreades, executive]

Thank you very much, everybody, for joining and for your participation on the call. Thank you very much.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.