Temenos AG

SIX:TEMN

Earnings Call Analysis

Temenos Exceeds Q3 KPIs, Raises Full-Year Guidance

Temenos exhibited solid performance in Q3, building on an impressive first half. A stable sales environment facilitated a 15% jump in Annual Recurring Revenue (ARR) to $687 million, exceeding 80% of product revenue. Transition to a subscription-based model is set to surpass 70% of the subscription and term license mix for the fiscal year. Total software licensing increased by 25% and maintenance revenue grew by 6%, reflecting strong subscription renewals and contractual increases. These positive trends allowed for a significant 44% EBIT growth, a 14% rise in product revenue, and $28 million in free cash flow. Given the robust performance and ongoing transition to a recurring revenue framework, Temenos lifted full-year projections, forecasting 13%-15% ARR growth, at least 8% EBIT growth, and a minimum of 7% EPS growth.

Continued Revenue Growth and Strong Transition to Recurring Revenue

The company sustained robust revenue momentum, with its Annual Recurring Revenue (ARR) surging to $687 million, up by 15% compared to the prior period. This growth reflects significant contributions from subscription, SaaS, and maintenance segments. Subscription revenue alone spiked by an impressive 36% for the quarter, demonstrating robust market adoption.

Operational Efficiency and Earnings Leverage

Operational efficiency remained a focal point, leading to an EBIT (Earnings Before Interest and Taxes) increase of 44% for the quarter. Moreover, this financial discipline translated into a six percentage point expansion of the EBIT margin, reaching 25.2%. A subsequent underpinning of profitability was noted, with net profit climbing by 60%, fueled by lower financing costs and favorable foreign exchange movements.

Solid Cash Flow Performance

Cash flow conversion exceeded expectations, with the last twelve months' conversion rate at 107%, indicating efficient conversion of earnings before interest, taxes, depreciation, and amortization (EBITDA) into operational cash. This performance aligns with projections, expecting a minimum conversion of 100% for the full year 2023.

Raised Financial Guidance Indicates Confidence

Bolstered by strong Q3 results and strategic gains, the company has confidently revised upward its full-year guidance. It now anticipates ARR to grow between 13-15%, EBIT growth of at least 8%, and EPS (Earnings Per Share) growth of at least 7%, reaffirming its dedication to long-term financial targets.

Strategic Investments in Growth and Innovation

The company is not resting on its laurels; SaaS revenue is projected to grow approximately 24-25% for the full year of 2023, which will be bolstered by both the acquisition of new customers and increased consumption among existing clients. Investments in R&D and innovation are driving an increased product cost, anticipated to continue supporting an aggressive product and service launch schedule slated for January 2024.

Long-Term Ambition Reflects Ongoing Success

Looking ahead, the company has set ambitious mid-term targets that resonate with its successful growth narrative. It targets achieving an ARR of at least $1.3 billion, EBIT of at least $570 million, and free cash flow of a minimum of $700 million in the mid-term, underpinning its financial strength and market position.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, welcome to the Temenos Q3 2023 Results Conference Call and Live Webcast. I'm Sasha, the Chorus Call operator. I would like to remind you that all participants will be listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] At this time, it is my pleasure to hand over to Adam Snyder, Head of Investor Relations. Please go ahead, sir.

[Adam Snyder, executive]

Thank you very much, and thank you all for joining us today. Before we discuss the results, I would first like to introduce Thibault Tersant, our Nonexecutive Chairman, who will be making some introductory remarks. Thibault, please go ahead.

[Thibault de Tersant, executive]

Yes. Thank you, Adam, and thank you all for joining the call today. Before Andreas and Takis runs through the quarterly results, I wanted to briefly join the call to provide an update on the January announcement around the CEO succession. As you may be aware, I am leading a Board committee comprising Independent Directors to find our next CEO, and we have retained a leading executive search firm to assist us with this.

Firstly, I feel it is important to state that I am delighted with the progress of the business in the last 12 months. The business has continued to perform strongly, and the Board is fully supportive of the company's strategy, which the management team is executing well.

Regarding the CEO search, although we are pleased with the quality of candidates we are evaluating, we also appreciate that it is a critical decision. And we also want to ensure a seamless succession for the benefit of all stakeholders.

Since we cannot control all elements of the timing of this appointment, the Board has therefore resolved to extend the period, during which Andreas Andreades will maintain his duties as CEO from the end of 2023 until a new CEO is appointed. This is to provide stability for the transition to take the company forward in its next stage of growth.

We are focused on securing the best possible successor to lead the business with the right mix of skills to deliver on our growth plans. And I'm very pleased that Andreas is willing to continue as CEO until his successor is appointed.

Thank you. And I am, of course, available to discuss this and any other topic with our shareholders. Please do get in touch with our Investor Relations team if you would like to follow up on this. I will now hand over to Andreas to continue the call.

[Andreas Andreades, executive]

Thank you, Thibault. Good evening, good afternoon. Welcome to our Q3 results call. I'd like to thank you for joining the call today. As usual, I will first talk through our performance, the market environment and some of the highlights from the quarter before handing over to Takis to run through the financials.

Looking first at our performance in Q3, we continued to build on our strong first half performance, with good momentum across our KPIs. The sales environment has been stable for 4 quarters now. And while the core banking market is clearly growing, some banks are still cautious around IT spend.

We continue to see positive development in our pipeline through the quarter, and there are a number of large deals that are progressing very well. Our ARR continues to grow very well, up 15% to reach USD 687 million at the end of Q3, which is over 80% of our product revenue. We are making excellent progress on our transition to a recurring revenue business, which is being driven largely by the growing demand for SaaS as well as cloud across our client base.

It's important to remember that it is not just our SaaS revenue that is benefiting from this trend but also a significant portion of our subscription revenue and the associated maintenance that is also directly linked to our software being implemented and running cloud environments by our clients themselves.

We are making great progress on our subscription transition and expect subscriptions to make up over 70% of our subscription and term license mix for FY '23, delivering on our targeted value uplift, including [ 4 ] renewals. We now expect renewals to move to subscription or SaaS as standard, going forward. Combining this with our SaaS revenue, which grew 23% in Q3, overall, our total software licensing grew a strong 25%, admittedly on a low [ base ].

We also saw an acceleration in our maintenance growth rate to 6%. This was driven by a few factors, including [ healthy ] subscription signings, the value uplift we are achieving on renewals as well as contractual CPI increases that we have in our recurring revenue contracts.

Churn continues to be best-in-class. The acceleration in our maintenance revenue is the strongest validation of the quality and the health of our licensing business, and I'm particularly pleased about this.

This contributed to our product revenue growth of 14% in the quarter. We continue to maintain good cost control while focusing on investments in our product, with product cost up [ 7% ] in the quarter. And we delivered excellent EBIT growth as a result of 44% and generated $28 million of free cash flow.

So to put our performance in context, our total software license growth is 12% in the 9 months to the end of September. And for the last 12 months, it is a growth of 6%. And maintenance revenue is accelerating to 6% growth. Our drive towards a recurring revenue model with strong value creation in our subscription and SaaS business as well as excellent [ PLN ] and cash flow leverage is now well advanced.

And more importantly, we have by now largely restored the margin investment we made in the last 3 years as SaaS revenues accelerated and are close to restoring the associated cash flow investment as well as that from the shift to subscription.

Therefore, with this strong performance and the visibility we have for balance of year, we've raised our full-year guidance for ARR, EBIT and EPS. We now expect ARR to grow 13% to 15%, EBIT growth of at least 8% and EPS growth of at least 7%. We have reconfirmed our other guidance metrics.

Now clearly, demand for SaaS and cloud are a key driver of our performance, and therefore, our greatest focus in terms of R&D and innovation. We've proven our cloud-native capabilities many times, benchmarking ourselves rigorously against industry standards and going above and beyond this to deliver a truly cloud-native platform for our clients.

Our engagements with leading Tier 1 banks that are selecting us as their chosen core banking vendor implementing native architectures on any cloud, including Azure, AWS as well as IBM is the best validation of this. As a result, throughout 2023, we've extended our lead against our competitors, both traditional and nontraditional.

I will say again that our strategy is simple. We offer a fully composable platform to our larger clients and fully packaged, easy-to-implement point services delivered as fast to the rest of the market, is gaining traction, is increasingly successful.

Now looking at the performance across regions, we had another good performance in the Americas, with incremental consumption from the SaaS client base, sales into existing customers as well as new logos.

During Q3, we made a step-change in sales capabilities in North America, building a seasoned team of core banking experts, clearly attracted by our success, our superior technology as well as our leadership vision for the U.S. market. I believe that our sales capability in North America is today at its [ peak ] since the inception of Temenos.

We saw an acceleration in Europe with strong sales execution and improving market conditions. We also signed several new logos and had a contribution from the wealth deal we signed in Q1 as well as benefiting from value uplift on renewals. The only other point I would note is that we have not seen any impact from the evolving situation in the Middle East, and we'll continue to monitor this close.

We also had a good level of contribution from Tier 1 and 2s at 42% in the quarter and nearly 50% of total software licensing over the last 12 months, which is part at pre-pandemic levels and is in line with our expected run rate.

Now looking at the services business, we had sequential growth in revenue. And our services business has been profitable every quarter this year. Our aim is to continue this trend of profitable growth, going forward, as we [ bring ] our partner-focused model as well as delivering high value-add services to our clients.

Now finally, our EBIT grew 44% in the quarter, and we had a 6 percentage point improvement in EBIT margin, even with 7% growth in our product cost base as we continue to invest in R&D and innovation.

With this, I'll now hand it over to Takis to talk through the numbers for the quarter. Over to you, Takis.

[Panagiotis Spiliopoulos, executive]

Thank you, Andreas. Starting with Slide 18, I'll give an overview of the quarter. All figures are non-IFRS and in constant currency, unless otherwise stated.

Our key highlights for the quarter is ARR, which reached $687 million, up 15%, with strong subscription, SaaS and maintenance growth all contributing. Subscription revenue was $24 million, an increase of 36% for the quarter. This was 55% of the subscription and term license mix. And with our largest quarter still ahead of us, I expect subscription to be over 70% of the license mix for the full year compared to only 44% of the license mix in 2022.

SaaS revenue was up 23% in the quarter, with 13 million of SaaS ACV. Our SaaS revenue continues to benefit from a combination of new logos, additional ACV consumption from existing clients and [ overages ]. I remain confident in delivering SaaS growth of around 24% to 25% for the full year 2023.

Overall, we had a very strong quarter, with total software licensing up 25%, also supported by the modest comparison base. Maintenance growth accelerated again to 6%, as Andreas has explained, and total revenue was up 10%. I was pleased to see sequential growth in service revenues with profitability maintained, which is also our expectation, going forward.

EBIT was up 44% in the quarter, and our EBIT margin expanded 6 percentage points to 25.2%. We had another good [ crush ] quarter, generating $55 million of operating cash and $28 million of free cash flow. DSOs ended up -- sorry, DSOs ended the quarter at 124 days, flat sequentially, and expect DSOs to step up in Q4 with the subscription growth we are forecasting.

Looking at the balance sheet. We ended the quarter with $722 million of net debt and leverage at 1.8x. We also received an investment-grade rating of BBB with stable outlook from Fitch in September and raised a CHF 200 million bond on the back of this, noting we have a bond maturing in November.

Moving to Slide 19, clearly, the growth rates this quarter must be taken in the context of the modest comparison base. Aside from this, we did have a strong quarter across all our product revenue lines, with our recurring revenue, in particular, showing excellent growth.

We are seeing the benefit from the value uplift from subscription, both for new contracts and for renewals. And we are benefiting from CPI-linked price increases in our recurring contract. Our cost base was up 2% this quarter. But as you will see on the next slide, within this, our product costs were up 7% as we continue to invest in R&D and innovation.

Lastly, we delivered 60 million of EBIT in the quarter, and our EBIT margin expanded 6 percentage points in constant currency.

Next on Slide 20, we have like-for-like revenues and costs, adjusting for the impact of M&A and FX. The figures are all organic and therefore, in line with our constant currency growth rates.

Just to focus on the cost base for a minute, you can see that we continue to benefit from quite a significant decline in services costs as we had guided at the start of the year, which were down 16%. And this masks the growth in our product-related cost base, which was up 7% in the quarter.

Looking at FX, the U.S. dollar strengthened against most of our key currencies this quarter, acting as a headwind on revenues. However, we also had a tailwind on costs, mainly due to the weaker Indian rupee. Overall, there was a small positive impact from FX on EBIT of less than 1 million.

On Slide 21, net profit was up 60% in the quarter, slightly ahead of EBIT growth, benefiting, in particular, from lower financing costs and FX. I still expect our full-year tax rate to be between 19% and 21%, probably above the midpoint of that range. EPS for the quarter was up 61%.

On Slide 22, our Q3 '23 LTM cash conversion was at 107%, 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 the full year 2023.

Next on Slide 23, we have the key changes to the group liquidity over the quarter. We generated operating cash of 55 million and ended the quarter with 87 million of cash on balance sheet and net borrowings of 740 million. Our leverage stood at 1.8x, and I expect this to decline further by the end of the year.

On Slide 24, we have our revised 2023 guidance, which is non-IFRS and constant currency. We have raised our guidance for ARR from 12% to 14% growth to 13% to 15% growth, our EBIT guidance from at least 7% growth to at least 8% growth and our EPS guidance from at least 6% growth to at least 7% growth, and we have reconfirmed the rest of our guidance metrics. We have put the EBIT and free cash flow bridges into the appendix for reference.

Lastly, on Slide 25, we have our midterm targets that we announced at the CMD in February. These are for ARR to reach at least 1.3 billion, EBIT to reach at least 570 million and free cash flow to reach at least 700 million in the midterm. With that, I hand back to Andreas to conclude.

[Andreas Andreades, executive]

Thank you, Takis. And so to conclude, we had 4 strong quarters restoring Temenos back to growth. Looking forward, we expect a stable sales environment for the remainder of the year and for our subscription revenue to be over 70% of our subs and term mix for 2023. The cash flow drag from the subscription transition is now behind us, and we are seeing value uplift across new deals and renewals.

Our execution is solid, [ both ] the impact of the rise of cloud and SaaS as well as the shift to a recurring subscription model are well understood within the Temenos organization as well as our client and prospect base. And our ability to compete intensely and win the key deals in the market is strengthened.

We are investing for growth in our product business. We are seeing positive development in our pipeline, including our own large deals. And there is a very clear and growing demand for SaaS and cloud across client Tiers.

Now, with our shift to a recurring revenue model, we expect ARR and free cash flow to continue growing strongly this year and into 2024. And finally, we have a number of very exciting product and SaaS service launches planned for January 2024.

With that, operator, I'd like to open the call to a Q&A, please.

[Operator]

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

[James Goodman, analyst]

Just firstly, I mean you've mentioned a stable sales environment now for a number of quarters and expect it to remain so. But I think it would be helpful if you could elaborate a little bit on your client conversations and what you're factoring into Q4 assumptions as we come into the final quarter of the year.

Specifically, if we look at the implied guidance between SaaS and licensing, I think on the SaaS side, Takis, you said you're comfortable 24% to 25%. I think that sounds just slightly softer than the 25% you've been talking to. It implies, I think, a slightly slower SaaS into the year. So is there something that we should understand?

And on the license side, I think it's about a mid-teens decline. So I'm interested in the level of conservatism or buffer that you've been able to sort of build into that really versus the stable sales environment.

And then finally, I know it's early and you made a couple of comments already about the ARR and cash developments into '24. But any other sort of early indications you could give us in terms of how you're thinking about setting up the budget for '24 would be, I think, helpful in terms of starting to bridge towards the medium term. Thank you.

[Andreas Andreades, executive]

Let me take first, if you like, the business side of the question, and then I'll hand over to Takis to respond on the numbers.

You asked about the conversation with clients in Q4 and going into 2024. We largely see [ TV ] like banks being business as usual. On the one hand, banks generally making -- they are having a very profitable year on the back of interest rates and the yield curve being where it is. But at the same time, there is, if you like, a conservatism, which has been around throughout the year, given people, if you like, facing uncertain 2024. It Is not clear whether inflation will come down, and I suppose nobody knows that.

But largely, the message, I'd say, is that it's business as usual and banks are investing. And as you saw the last 12 months, we are delivering significant growth. And this is the environment we are operating in across both, if you like, the SaaS side of the business as well as the cloud, which is the on-prem component of the drive towards core banking renovation. Takis, do you want to take the number side of it?

[Panagiotis Spiliopoulos, executive]

Yes. James, let me start first with the license part and what you're trying to imply. I mean first of all, keep in mind, Q4 '22 was a very strong one, which obviously also benefited from, as we had indicated at that time, 10 million plus of slip deals from Q3 to Q4, so that was definitely also a help in Q4 and provides for a tough comparison base.

And the second one is we have been prudent throughout the year and throughout the quarters. We still have, as we always indicated since the start of the year, a number of larger deals in the pipeline, which need to close. And I think this is -- and with what Andreas said, stable environment, we want to remain prudent, and this is how we had built originally the 2023 guidance, which is still valid.

Specifically on SaaS, this is still in line, so no change, 24% or 25%. We still try to get to this -- or 204, 205 million, as we had said right from the beginning or actually since last year, when we had said it should make up 10% of TSL growth. So that's still valid.

If you remember, H1 '23 growth rates benefited from easier comps as we had the final revenues moving to HCL of our P&L in H1 2022. So that makes it for -- pushed up the growth rates a bit now H2 '23 as a tougher comps or basically the normalized comps because there is no impact from HCL anymore. And this is why you perceive the slowdown in SaaS in Q3 and Q4. But the full year, 24%, 25% is still valid, no change to that or anything in terms of underlying assumption or performance.

On 2024, yes, we will provide detailed guidance on -- for 2024 in February. I think Andreas gave a bit the background in terms of IT spending, what we see. If you think about what we said in February, these trends are all still valid, yes? So with the shift to subscription largely complete by the end of the year, we will see a further increase of ARR as a percentage of product revenues and also total revenues, so getting one step closer to our midterm target.

In terms of ARR, you would expect to see an acceleration from what we guide for this year. And clearly, free cash flow growth should considerably accelerate, given we're also now through the shift to transition -- shift to subscription and the negative impact we had seen. The trough was already reached last year. So clearly, free cash flow growth will considerably accelerate.

Now we have done a lot of investments last year and also this year in SaaS and cloud. So SaaS gross margin, let's see where we end up this year, but we should see a considerable step-up next year as well. And given what we see year-to-date for ACV and also Q4, a good understanding of the installed base and the overages, which we generate, we would expect to see very good SaaS growth also next year for 2024.

And maybe a last one on cost. I think we've clearly, delivered also on the cost side, what we said on services, but we, at the same time, have also maintained our investment plan, yes. And this is something we also continue to expect for next year.

And overall, I think when we look at the exit run rate for costs for Q4, I think maybe around 170 million is the right number. And then you attach some growth on top of that. We'll continue to invest in product. We're just looking at the consensus, which has a 50 million, 5-0, cost increase 2023 over 2024. And I think this is considering wage inflation and investments. I think this is a number we feel comfortable right now.

[Operator]

The next question is from Mohammed Moawalla with Goldman Sachs.

[Mohammed Moawalla, analyst]

Great. My question was really relating to kind of the assumptions again around the Q4. You obviously talked about not including some of these sort of larger deals. Is there anything over and above that that's kind of concerning you in terms of the kind of shape of the construction of the guidance? Now I know the macro environment is still quite unpredictable, but are you seeing anything in terms of sort of sales cycles that's changed?

And then secondly, obviously, execution has been a lot better. I wonder if you could kind of outline what have been sort of the key factors that have kind of driven this improved execution. And as we move into sort of 2024 from a sales execution standpoint, how much more kind of headroom you still have in terms of kind of improving the efficiency of the sales organization?

[Andreas Andreades, executive]

I'll take that, Mohammed. Thank you very much for the question. Let me talk a little bit about the stuff we have been doing the last year in order that we get to a point where we're executing in a solid way and explain where we go with this.

First of all, we went back, as you recall, to our very tried-and-tested methodology for forecasted quarters. And we are in a position quarter in, quarter out to identify the right level of pipeline and cover what we need in order to make sure that we are comfortably delivering on the quarter.

But it's not only that. We've upgraded a significant part of the organization this year. We made significant changes seen in Europe. Middle East and Africa has been performing very solidly for a couple of years. Last year, we made quite significant changes, perhaps, if you like, quiet in South America, in North America. And this year, we've significantly upgraded our U.S. sales organization.

We now have, probably, the most seasoned, if you like, core banking sales organization we've ever had in North America. These are people that have joined us from competitors. They've been attracted by our vision, but not only the vision, actually, the execution and what we do in the marketplace, the products and the technology.

So it's been quite fundamentally, if you like, [ racing ]. But at the same time, going back to basics, which is what Temenos over the years, was able to do. And we had a year of change, subscription or other, perhaps 18, 21 months of change. The shift to subscription has been a significant change, but we were able to rationalize it, explain the value prop, manage it within the sales organization and presented prospects in a convincing way. And we are getting the results we're getting.

And ultimately, for me -- and I know that 25% or 24% license growth is a -- total software license growth is a very impressive number, but for me, the most pleasing effect impact of the quarter, the most pleasing number in the quarter. And the [ year ] today, it is the acceleration of the maintenance revenues because that is the ultimate validation that we are we are on track.

And looking into 2024, there's still a lot from a sales execution we can do better. And we target those. It's about automation, it's about data and systems and using AI to forecast more accurately, and it's being able to manage complex deals more upscale. It's about how we manage pricing and discounts at the sales level. So massive amount of work we've done and a lot of work, but we'll still keep doing for 2024.

So Takis, can you just take the number side of it, the Q4 and, if you like, the impact on the guidance?

[Panagiotis Spiliopoulos, executive]

Yes. So let me try to go there. Mo, If you look at the number just for licensing, which was implied in the guidance from the start of the year, around minus 6%, minus 7%, that's still valid, yes. If we just look at the license number, was minus 3 in Q1, minus 16 in Q2, 28% plus, Q3 and an implied minus 14 in Q4. So pretty much similar to what we've seen in the first half.

And when we built the guidance, we were obviously aware about, "Okay, where do we have stronger comparison basis and where we have easier ones." So this was all reflected.

We have not changed the outlook. Clearly, we have seen what happened last year in Q3 with large deals, we have learned. We, as Andreas explained, are back to the old model, has a much better forecast to coverage ratio. But I think we feel comfortable with the guidance and clearly feel comfortable that we deliver the necessary amount also from large deals for Q4 to get there.

And again, keep in mind, Q4 '22 benefited from, as we had said, 10 million of slip deals from Q3. So if you normalize for this, the growth rate for Q4 looks actually quite okay..

[Mohammed Moawalla, analyst]

That's correct. Thank you both.

[Andreas Andreades, executive]

Mo, just to repeat what I've said the last 3 quarters. We look at big deals on a portfolio basis. We don't distinguish small deals or big deals. For us, it's -- it's the level of the pipeline, it's the level of the cover. And if we have the pipeline, the cover, we are confident to make a forecast.

[Operator]

Next question is from Toby Ogg from JPMorgan.

[Toby Ogg, analyst]

Perhaps just firstly, on the maintenance reacceleration there to the 6% versus the sort of 3% to 4% run rate we've been at for a while, why do you think the acceleration has materialized now? And should we be building in this rate of growth as the new run rate for the maintenance revenue stream, going forward?

And then secondly, just on the SaaS piece, so you've mentioned that future term contract renewals are expected to move to subscription or SaaS out standard. Could you give us a sense for the split between the two as it stands? And whether you're seeing signs that the SaaS mix is starting to grow on the renewal side?

[Andreas Andreades, executive]

The maintenance -- I'll take the first part of it, and then I'll hand over to Takis. The maintenance is accelerating because we are delivering a value uplift through the subscription model. And it's taken a couple of quarters, if you like, for this to gain momentum and to start gaining pace and cumulatively to be meaningful, if you like, in the growth in the quarters.

Now, given the number of data points we have, what I said in my prepared remarks is that we expect renewals to move to subscription or SaaS as standard because we've had quite a few contracts last 21 months that have moved. We understand the economics of it. And we are at the point of saying, "Yes, we believe the data points, we believe the numbers and there is a trajectory, and this is going to take place."

Now you need to bear in mind that we have not yet actively encouraged our existing clients to move to SaaS, this has not been a priority for us until now. You will see us focusing that -- on that activity much more from 2024 onwards.

And as I said in my prepared remarks, we are very excited about the products and the services launches we are going to be making in 2024. In fact, I'm taking this call from our Indian office in Bangalore, where we've been working with the team on a lot of exciting announcements for January. And part of that will be a far more proactive way of encouraging our client base to move over to SaaS.

So it's not been a priority until now, it will become a priority from 2024 onwards. So that's, if you like, the business side of the question. Over to you, Takis for a comment on the modeling and the numbers.

[Panagiotis Spiliopoulos, executive]

Yes. Toby, back on maintenance. Yes, we've seen an acceleration from 3% in Q1, over 4%, Q2 and then 6% in Q3. And Andreas mentioned already, some of the reasons, the -- clearly, the uplift we've seen on new subscription signings. Clearly, the uplift also on renewals has a positive impact, then, also on maintenance.

And then it's -- what we said last year already, once you are very stringent on implementing the CPI clauses and you don't wave it and you stick to it, which obviously in a low interest rate or low CPI environment wasn't done in all cases now, it's very difficult to sign a contract without the CPI clause. So that's something you will see following through, obviously, also in the future.

And the last one, we did put a lot of emphasis at the start of the year with Andreas on what we call the premium maintenance services, yes, which also has shown very good growth. So 4% for the year, given the H1 numbers a bit lower, 4% for the year is right number. Let's see in February what we're going to guide for next year.

But if you think about the building blocks in place and if we should see an acceleration in our product business, in our subscription business, that should eventually follow through. But I think it's too early for specific guidance, but these are the building blocks how to model it in the future.

[Operator]

The next question is from Chandra Sriraman with Stifel.

[Chandramouli Sriraman, analyst]

Just a couple from my side. So Takis and Andreas, you were talking about the uplift from moving to subscription. You had given us an indication of what kind of uplift you would expect. Do you have a sense of what it is in the last 21 months that you have managed through this migration? That's my first question.

The second one is on Europe. Now we have had 2 quarters of good performance in Europe, admittedly of an [ EV ] base. But nevertheless, are you seeing some kind of trend here or still a few one-off deals that are moving beneath it?

[Panagiotis Spiliopoulos, executive]

Okay. Let me take the uplift question, Chandra. Since we introduced subscription early 2022, and we were always saying we would expect to see an uplift as other enterprise software players have seen, we gave a range of [ 30% ] to 60%, which we have reiterated. And now with more and more data points, as you correctly point out, we can definitely confirm that we are in that range, yes. This is as much as we can say now.

[Andreas Andreades, executive]

Let me take the Europe question. We talked earlier in the year about green shoots, and we were anticipating a gathering of momentum, and we actually delivered on that, we saw that in Q3. If you look at the -- our European business across both licensing and SaaS, probably Europe is having its best year ever. It's because the business is played licensing and SaaS. It still doesn't show through the numbers, but in terms of underlying performance, Europe is having a great year.

So I know it's taken a little bit of time to come out of COVID and European banks have been slower than in North America, but we are seeing much better execution as well as much better market conversion. And therefore, we are confident that the European story will continue.

[Operator]

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

[Frederic Boulan, analyst]

Two, if I may. First of all, on the license numbers in Q3, pretty high percentage in the mix of subscription and term license mix versus the previous quarters. Can you explain what's going on there? And whether you think that's temporary, seems to imply that? But would be good to give us some color on what has driven that strong growth in [ terms of ] license.

And then second, a couple of months ago, we saw you guys were seeing [ special ] interest in [ private ] equity firms. Anything you can update us on that? Anything you're looking for in particular, in terms of criteria or the progress you can [indiscernible] would be great.

[Panagiotis Spiliopoulos, executive]

Fred, let me take the one on the mix subscription versus term. I mean, first of all, Q3 '23 was still well ahead of what we delivered last year. And for that, I wouldn't read too much on to individual quarter because it depends on a number of things, the timing of closing individual deals with some of them, which have been in the pipeline for some while, as term, and this is something we can't really control.

This is why we say, okay, we're confident for 70% plus for the full year, but there will be still some deals remaining, which either have been introduced last year as term and are still running, given the long sales cycle we had by -- but in Q4, you should see the vast majority being subscription, so you get to the full-year number, yes.

And for next year -- and also keep in mind, we have this customized development which is the 20 million run rate we had last year and this year, this is always booked as term as well. So this is also skewing this number. So I wouldn't read anything into the quarter volatility. Q4 will be substantially up, and then we're basically done. Still have some few remaining deals in there for '24, but that's minimal.

On the [ PE ], Adam will give you the answer.

[Adam Snyder, executive]

[indiscernible].

[Operator]

The next question is from Laurent Daure with Kepler Cheuvreux.

[Laurent Daure, analyst]

I also have two questions. The first is, I'm sorry, I would like to come back on your fourth quarter assumption, not on the revenue side, but more on the cost side because it seems from your guidance that a large part of the license drop you're expecting in Q4 is going to come directly through the bottom line. So any special cost increases and variable renovation that might impact the Q4 cost base?

And my second question is more a general question, is if you could give us an update over the first, let's say, 9 months of the year on the trend of your different businesses between the front to back, the wealth management, fund management. So pretty good overview would be very welcome.

[Panagiotis Spiliopoulos, executive]

Okay. I'll take the cost one and then let Andreas talk about front to back and the individual product.

On the cost, as you've seen, we've delivered the cost as we had indicated for Q3, that's the first one. We had said it would grow 20 million to 25 million, to a large extent, driven by wage inflation, which came in from the salary increases in July, but clearly, also some investments, which were a bit phased from the first half. And the rest was obviously with performance. We obviously had variable costs accruing, commissions, bonuses, given we're tracking in line with the guidance. And I think this is what we have seen.

Now for Q4, clearly, and we've slightly increased the EBIT guidance to reflect some of this cost may -- across the different lines, may come in a bit smaller. I think for Q4, we would look at a sequential increase of around 14 million, as implied by the guidance. To a large extent, this is variable. Again, commission, bonus accruals, SaaS cost with the growth and a bit of investments, yes.

So I think, again, being very transparent on what we do. And we saw at the end of Q3, we were tracking slightly better across the cost line, and this is why we gave you the 1% guidance increase.

[Andreas Andreades, executive]

I'll take the color on the different businesses. The 3 areas of the business that did particularly well, if you like, in the 9 months is clearly the core side of the business, was across both on-premise and SaaS. Wealth performed very, very strongly, as you probably have covered from our client announcements over the last 12 months.

And also payments, there is a lot of business that is going on in payments. And we are in an excellent position with our [ terminals ] payment hub platform to capitalize on that. We announced one of the key deals earlier in the year with Convera. So yes, these are the drivers of growth. And I think they will continue into the next 12 months.

[Operator]

The next question is from Charles Brennan with Jefferies.

[Charles Brennan, analyst]

I'm going to try three varied ones, if I can. Firstly, there's been a lot of questions around the Q4 assumptions, but can I try asking the question in a different way? You beat some consensus expectations for software licensing in Q3. You broadly kept the full-year guidance unchanged at 6% growth. That implies that we should be downgrading our Q4 expectations. Is that the conclusion that you're hoping we come to? Or are you assuming that we just [ add ] the Q3 outperformance to the full year?

Secondly, it sounds like there's a slight shift in focus from subscription to SaaS. Can you just touch on the ACV trends in that light? It looks like ACV in the first 9 months is only up 10% year-on-year. I might have hoped for something a little bit stronger than that. And secondly, SaaS has got a slightly slower revenue recognition profile than subscription. Is there anything we need to think about there as we think about the '24 modeling?

And lastly, I don't know if Thibault is still around. But just on the new CEO search, the statement seems to stress that both external and internal candidates are being considered. Is there any scenario in which Andreas continues in the CEO role? Or is that a scenario that we should take off the table?

[Panagiotis Spiliopoulos, executive]

Okay. Let me take the Q4 one and the ACV SaaS, and then Andreas will talk about the CEO search.

So on -- I think on the Q4 guidance, yes, it was, I think, on consensus maybe a 4 million, 5 million beat on total software licensing. The guidance is at least 6%. So we've given you basically how we model it. So the rest, I think has been answered, yes. I think we fared well so far with our prudence. And whether we're going to end up at 6% or 7% at the end of the year, let's see. But I think we feel well with the current guidance.

Now ACV, so if you look at ACV, nothing has changed in terms of the revenue recognition we take ACV. And what we always said is we start recognizing the corresponding SaaS revenues about 3 months later. So the ACV we signed this quarter and, let's say, whatever signed in September may be impacting a bit in December, but this is basically a run rate for the next year. And whatever we sign in terms of ACV for Q4 will be then full for the next year.

Now ACV year-to-date, it's, I think, a reasonable growth. We had, in the past, some volatility. And I think this is something where we continue to see because you -- the new local trends, I think, is strong. But clearly, we can't really time overages and incremental business on a quarterly basis.

We have good visibility on a full-year basis, but I think the individual quarters can vary quite a bit. So year-to-date, we're 9%, almost 10%. Q1 was flat. Q2, 88. Q3 is now minus. So I think Q4 should then see, on an easier base, good growth again. And the CEO, I'll hand back.

[Thibault de Tersant, executive]

[indiscernible] I would just want you to [ go ] the statement in the Q2 results press release. We certainly stated Andreas will retain his duties as CEO until the new CEO is appointed. Other than that I have [ nothing to say more ].

[Operator]

The next question is from Michael Briest with UBS.

[Michael Briest, analyst]

Yes. Obviously, a lot of questions have been done already. Just in terms of the cloud, it sounds like it's going to get another push next year. But the margins of the CMD were reported to be in the high 50s, maybe 60s to the prior year. Can you give any sense on where that trend is now and what you're doing to improve it, if it still needs to be improved?

And then Andreas, I think you talked about quite a lot of change in the salesforce in North America. Can you maybe put some figures around that in terms of the percentage of people that have changed the sort of -- maybe total number of headcount that's been added if it's been increased?

[Panagiotis Spiliopoulos, executive]

Okay. Let me start, Michael, with the SaaS gross margin. And clearly, we have been saying and have been talking about the investments we've been taking last year and also this year. I think, ultimately, we are building the foundation for the next few years to get to the midterm targets.

So there's a lot of investment in automation, and there is a lot of investment also in the product. And what we had shown last year was basically a run rate of 64% margin. Now we're not giving quarterly disclosure on the margin. I think this would be just an additional KPI. But clearly, we're going to report in February on the progress.

With all the investments we have done, I think you would -- Andreas has mentioned before, we should see a considerable step-up in SaaS margin already, 2024. And I think we've shown how we're going to get to the 80% in the midterm. And I think we're on track to do this. Andreas, you want to add something to that?

Okay. It looks like we've lost Andreas temporarily. Let me take the U.S. question.

[Andreas Andreades, executive]

Apologies. I think I'm back.

[Panagiotis Spiliopoulos, executive]

Sorry, go ahead.

[Andreas Andreades, executive]

Apologies. First, just let me round off the margin question. What differentiates Temenos is that we have a single technology base, single code, single configuration, and we package it. And that makes the model very, very efficient. And if I look at what we have in line for launching in terms of SaaS services in 2024, I'm very comfortable with the engineering side of it driving, increasing and better margins over a period of time for the term of SaaS business.

Now moving on to the U.S., let me say that we changed a significant part of the sales organization. The sales organization, the people that joined were attracted from our core banking competitors. And as I said in my prepared remarks, they've recognized both the vision but also the technology, and they've chosen to be with a company that is actually winning. So that was more or less done between Q2 and Q3.

[Michael Briest, analyst]

Okay. I mean it normally takes a while for new people to be productive and build pipeline, you're obviously not. Or is that some of your factoring into the short-term outlook?

[Andreas Andreades, executive]

It's been factored into our forecast. But these people are significant operators in the core banking world with significant contacts and access to the market. So we are not concerned by the pipeline buildup. That's part of business as usual.

[Panagiotis Spiliopoulos, executive]

Michael, to add on this, clearly, we have been saying we will invest. It's not just product and innovation but also sales and marketing. And clearly, in the Americas, both North and South are one region where we are able to attract the right talent and also invest into the future growth. And it shows also in our Americas share in terms of performance.

[Operator]

There are no more question at this time.

[Andreas Andreades, executive]

Thank you very much for joining today's call. It's been a pleasure. And I wish you a very good afternoon or evening, wherever you may be. Thank you very much.

[Operator]

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

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