Temenos AG

SIX:TEMN

Earnings Call Analysis

Temenos Sees ARR Growth Amid Sales Challenges in Q3

In Q3 2024, Temenos reported a 9% year-over-year increase in Annual Recurring Revenue (ARR), reaching $761 million, although software licensing revenues fell to $96 million amid sales execution issues in the Middle East and Africa. Free cash flow declined by 21%, but adjusted for one-off payments, it grew 26%. Going forward, the company anticipates 5% growth in total software licensing for Q4, with full-year ARR growth guidance revised down to 11-12%. EBIT is expected to increase by 7-9%, while EPS is projected to grow 6-8% amid ongoing efficiency initiatives. Temenos remains committed to bolstering its sales force and expanding its SaaS offerings.

A Challenging Quarter with Lessons Learned

Temenos faced a challenging Q3 2024, particularly in the Middle East and Africa (MEA) region, where sales execution issues adversely affected software licensing revenue. Despite these hurdles, the company reported total software licensing revenue of $96 million, slightly below consensus expectations. The team acknowledged these setbacks and took immediate steps to strengthen sales leadership in the affected region, ensuring better oversight moving forward.

Solid Growth in Annual Recurring Revenue

On a more positive note, Temenos experienced growth in Annual Recurring Revenue (ARR), which reached $761 million, marking a 9% year-over-year increase. This growth underlines the company's strategy of transitioning toward a more recurring revenue model. Subscription revenue grew by an impressive 17% this quarter, reflecting a strong engagement with existing customers despite some internal execution challenges.

Cost Management and Operational Efficiencies

Temenos managed to reduce operating costs by 1% during the quarter, which is remarkable especially in the face of annual salary increases and hiring activities. This has been attributed to the company's efficiency programs, which aim to streamline operations and lower variable costs. The EBIT showed significant resilience, growing by 19%, with a 4 percentage point increase in EBIT margin, showcasing effective cost management amidst revenue fluctuations.

Revised Guidance: Cautious Optimism Ahead

Looking towards Q4, Temenos has adjusted its revenue guidance downward in light of recent performance. The company expects total software licensing growth of about 5% for Q4, a revision from previous forecasts of 3% to 6%. Nonetheless, they maintain their EBIT growth guidance at 7% to 9%, indicating confidence in operational efficiencies and planned investments. EPS guidance remains unchanged, projected to grow between 6% to 8%.

Free Cash Flow and Share Buyback Activities

The company generated $22 million in free cash flow, a 21% decrease year-on-year due to one-time investigation-related payments. However, if adjusted for these impacts, free cash flow would have risen by a notable 26%. In line with its capital allocation strategy, Temenos completed a CHF 200 million share buyback in September, effectively buying back 4.3% of its registered shares. The balance sheet remains healthy, with leverage expected to trend down to the lower end of the 1.5x to 2x target range by year-end.

Strategic Leadership and Structural Changes

In a bid to enhance operational efficiencies and support growth, Temenos has been actively recruiting key talent, including a new Chief Product and Technology Officer. The leadership team expressed enthusiasm for leveraging this new talent to refine their products and sales strategies. They are focused on enabling a more streamlined organizational structure aimed at improving accountability within teams, particularly in sales operations.

Future Prospects and Market Opportunities

Despite recent challenges, Temenos' management remains optimistic about Q4 and beyond, particularly in the U.S. and Western European markets. The demand for their SaaS solutions continues to grow, and recent client success stories illustrate the efficacy of Temenos' offerings. As they stabilize their sales execution and enhance their operational capabilities, the organization aims to capture more of the growing demand in core banking solutions.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, welcome to the Temenos Q3 2024 Results Conference Call and Live Webcast. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Jean-Pierre Brulard, CEO. Please go ahead.

[Jean-Pierre Brulard, executive]

Thank you, operator, and good evening, good afternoon. Thank you all for joining us today for our Q3 2024 results call. And I would like to first talk through our key performance and operational highlights for the quarter before handing over to Takis.

So starting with the highlight of Q3, I was pleased that we saw continued engagement from customers for the quarter. Sale cycles already normalized in Q2 and the sales environment was stable across all our regions. We saw strong demand from our installed base in Q3 as well as signing a good number of new clients. However, we did have some sales execution issues in our Middle East Africa region, which resulted in total software licensing of revenue of $96 million, a bit below consensus expectations. We have carried out a deep review of our sales pipeline and addressed the sales leadership issue with our CRO stepping into support the Middle East African region through Q4 as we look to strengthen our sales team.

This issue was limited to Middle East, Africa region and we have already taken the necessary action to address it. On the point of leadership, I am pleased on the good progress we are making to attract talent. In particular, I am pleased Barb Morgan has joined our Chief Product and Technology Officer, and we will continue to invest on new talent across the business as we execute our investment plan. Looking at other KPIs, ARR reached $761 million in Q3, up 9% year-over-year. Free cash flow was down 21%. However, adjusting one-off payments we made relative to the independent investigation, free cash flow grew a very healthy 26% in the quarter.

We have issued slightly revised guidance for FY '24 and guidance for Q4 taking a conservative view on our Q4 pipeline. However, importantly, our EBIT and EPS guidance are unchanged. So as customer success, we are very focused on our customer success. In Q3, we had another 61 go-lives across our products and now reached 224 go-live in the first 3 quarters of the year. And combining the effort made our professional services team and partners, we continue our strong success in helping our customers modernize.

To demonstrate our customer-centric approach, I'd like to focus on one particular customer case study from Q3. MidWestOne Bank is a regional bank in the U.S. with operation across 4 states. They went live in Q3 with Temenos digital onboarding, consuming it as a SaaS on AWS. And MidWestOne wanted to improve and streamline their customer digital experience and enhance their own operation efficiency. Having a nicely scalable platform was really important for them. So they chose Temenos to achieve their operation and business goal. And using Temenos for onboarding and origination, our client has already seen a significant improvement in speed, performance and customer engagement through their digital channels, with customers completed an application in an average of 2 minutes.

We are very proud to work with MidWestOne as we look to expand our presence in the U.S. banking market. I also like to share a deal win in this quarter from the Middle East, Africa region. Boubyan Bank is the second largest Islamic bank in Kuwait. They have selected Temenos to modernize their core banking, and they will migrate to Temenos core banking across the retail, corporate and wealth operations. And Boubyan has a vision to become one of the top Islamic banks in the world with innovative products and services.

It's a testimony of the strength of our core banking product that they have chose to work with Temenos. And I'm confident we have a strong competitive position in the Middle East and Africa region, where we would continue to invest to capture this fast-growing market. I will give more details on how we will continue to increase our market share across geographies in the strategic plan, we will present at our Capital Market Day in November 12.

This market-leading position and competitive strength is also recognized by the latest industry analyst reports. We were once again ranking first in the IBS sales league tables for our core banking as well as been ranking first in many other categories, including digital channel, NEO and challenger banks and retail payments. IDC also published the review of core banking vendors across North America, EMEA and APAC, and Temenos continues to be a leader in every single market.

We have continued to reinforce the strength of our leadership team this quarter with the hiring of Barb Morgan as our new Chief Product and Technology Officer. And Barb is a fantastic hire for Temenos, bringing 25 years of experience, leading global product development organization with particular expertise in Banking and Financial Services. She joined us from London Stock Exchange Group. And prior to this, she served as Chief Technology Development Officer at FIS leading their global payments and banking product engineering. Barb has a strong background in integrating AI technology, building high-performance team and launching transformative products, working closely with sales operation to deliver growth. I'm delighted to have her already on board and look forward to introduce her at the CMD next November 12.

Lastly, I would like to give an update on our priorities going forward. We have defined our senior leadership team with -- which is the 40 leaders below executive committee, and they are already actively contributing to our strategic plan, and they will be key to driving cultural change across the organization. We have been attracted new talent, in particular in sales. We have started to execute our investment plan with hire in the U.S. and continue to recruit sales in both U.S. and Western Europe in particular. In terms of go-to-market, in addition to push ahead with new hire, we are laser focused on our operational excellence.

And we are starting our efficiency program to reduce management layers across the organization. For products and technology with our new leadership on board, we are reviewing our product and technology road map to simplify it and define the key areas of innovation we want to focus on. And even more importantly, we have defined our strategic and operational plan and the road map for executing this. We will share that at the Capital Market Day on November 12.

Now I would like to hand over to Takis to take through the other business and financial highlights of the quarter.

[Panagiotis Spiliopoulos, executive]

Thank you, Jean-Pierre. On Slide 14, I'll start with an overview of the quarterly financials. All figures are non-IFRS and in constant currency unless otherwise stated. While our software licensing revenue was impacted by sales execution issues, our ARR continued to grow, reaching $761 million at the end of Q3 '24, up 9% year-on-year. ARR is now equal to 85% of our product revenue or 75% of total revenue over the last 12 months. It shows the amount of progress we have made in moving to a recurring revenue business model.

Despite the quarterly P&L volatility, we have very good visibility on our cash flow growth over the coming 12 months from our strong ARR. SaaS ACV this quarter was $9.4 million and included 2 new logo wins. We expect sizable deals to sign soon and therefore, to drive strong growth in Q4 SaaS ACV. Maintenance continued its strong growth trajectory, again, up 10% in Q3 '24. I expect maintenance growth of around 8% to 9% in Q4 '24 as we start to lap strong comparatives. Total revenue grew 4% for the quarter, and EBIT was particularly strong, up 19%, again, benefiting from lower variable costs across commissions and bonuses, some of which will revert in Q4 '24. We have been expanding our sales coverage since July with a particular focus on sales in the U.S. and Western Europe, but these new hires from Q3 and Q4 will only have a limited impact on costs this year.

We generated $22 million of free cash flow this quarter, which was down 21% year-on-year as we absorb the full impact of the independent investigation in our Q3 cash flow. However, excluding this impact, our free cash flow would have grown 26% this quarter and 21% year-to-date. DSOs were 134 days at quarter end, and I now expect DSOs to be slightly higher by year-end than in 2023 due to the change in revenue mix we have seen this year with greater contribution from subscription licenses and lower contribution from SaaS.

Looking at capital allocation and the balance sheet, we completed our CHF 200 million share buyback in September, purchasing 4.3% of the registered shares. These shares will be canceled next year post our AGM. We ended the quarter with $775 million of net debt and leverage at 1.8x, and this should trend down by year-end towards the lower end of our target range of 1.5x to 2x.

Moving to Slide 15. It is worth noting that subscription grew 17% this quarter, even with the sales execution issues we faced with sales into our installed base, particularly strong in the quarter. Operating costs were down 1% in the quarter despite the annual salary increases in July and sales hiring as we have started to benefit from some of the cost savings we are realizing from our efficiency program and with lower variable costs in the quarter. EBIT grew 19% with the EBIT margin expanding by 4 percentage points.

On Slide 16, 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. Our services costs were down another 9% and our services margin continued to improve. Product costs were up only 1% as we started to benefit from our efficiencies program, while continuing to invest in key areas around sales, product and technology.

We will continue hiring in Q4, and we'll give more details on our investment plan as well as efficiencies at the Capital Markets Day in November. For Q4, as an indication, I'd expect our cost base to increase by more than $30 million sequentially, driven by the usual seasonality and with higher commissions and variable costs, in particular, driving the increase. I would also like to flag that our net capitalized development costs have continued to decline, coming down to $1.3 million in Q3 '24. We now expect net capitalized development cost to be around $12 million for the year, down from $18 million from 2023. Looking at FX, there was almost 0 impact on EBIT this quarter.

On Slide 17, net profit was up 24% ahead of EBIT with higher tax charges offset by FX gains. EPS was similarly up 25% in the quarter.

On Slide 18, our LTM cash conversion was 115%, well above our target, and we expect a strong cash quarter in Q4, as usual.

Moving to Slide 19. The main impact on liquidity this quarter was the share buyback. We generated $52 million of operating cash and bought back $187 million worth of shares in the quarter. We ended the quarter with $107 million of cash on balance sheet and net borrowings of $798 million. Our leverage is at 1.8x and I expect our leverage to be towards the lower end of our target range by year-end. We do not currently plan to launch another share buyback this year, but given our strong cash generation and assuming no acquisitions, we would have scope for further buybacks next year.

And lastly, on Slide 20, we have given some guidance for Q4 '24 and revised our 2024 guidance, which are non-IFRS and in constant currency. I would note that our EBIT and EPS guidance for the full year has not changed. Given the sales execution issues in Q3, we have taken a more conservative view on our Q4 pipeline. In Q4, '24 strategically, we are expecting total software licensing growth of about 5%. For the full year, we are guiding for ARR growth of 11% to 12%, down from about 13% and now expect flattish total software licensing growth instead of 3% to 6%.

We still expect EBIT to grow 7% to 9%, which gives us plenty of headroom to make our planned investments this year whilst also benefiting from our efficiencies program, which we started in Q3. And we still expect EPS to grow 6% to 8%. Lastly, we now expect free cash flow to grow at least 12%, which takes into account the 5 percentage points headwind from the independent investigation payments and the lower forecast total software licensing growth. Our tax rate is expected to remain in the 20% to 22% range. As previously stated, we will be revisiting our midterm targets at the Capital Markets Day in November.

With that, operator, please, can we open the call for questions.

[Operator]

[Operator Instructions] The first question is from Chandra Sriraman with Stifel.

[Chandramouli Sriraman, analyst]

I have a couple of questions. Just wanted to get your thoughts in terms of the conversion rates in geographies other than MEA where you had some execution issues. Are they back to the pre-Hindenburg levels? That was my first one. Second one, in terms of the guidance for Q4, I'm just trying to get a sense of how conservative you are, given that the SaaS side of the business is growing around mid-single digits. As of now, do you think you're conservative enough for Q4 specifically? And just wanted to get a sense of the various moving parts within the DSL side of things.

[Jean-Pierre Brulard, executive]

Okay. So I will take the first part of the question. So in a way, in the 3 other geos in the U.S. for North Americas, Europe and APAC, our pipeline conversion was, in a way, more or less the same that we observed the last quarter. No surprise. The surprise came from Middle East, as we mentioned, which was mostly on the execution of the closing of the deals. That in a way, we have some last-minute surprises in this conversion of pipeline.

But given that, learning lesson from that, in a way, to the second part of your question as well, having analyzed the pipeline in 2 different lenses. One, all the deals below $1 million, we apply the conversion rate of the last quarter and Q4 last year and Q4 the year before. And for all the deals, more than $1 million, I'm talking about in a way, the software licensing outside the SaaS. We review carefully one by one. And this time, I was involved personally with a CRO to review deal by deal in a way the range and our estimate to be close in the quarter. So it's a mix between, in a way, conversion rate to your first part of the question. And to me -- and to be one by one on the major deal and our range is more than $1 million, and we have reviewed this deal, and we continue to review this deal on periodic way as well.

So it's the reason why, I mean, in a way, it's based on our pipeline. And as you know, in Q4, we cannot create additional pipeline. So it's based on our current assessment of the pipeline and the conversion rate that we are quite conservative. And of course, we have a range of deals that could increase, but it's a balancing act, but in a way, our estimate about the conversion of the pipeline.

[Panagiotis Spiliopoulos, executive]

Yes. Chandra, I think you pointed out the main building blocks with SaaS being almost locked in $57 million, $58 million, somewhere there. I think the remaining delta is what we expect to contract on the licensing side, almost all from coming from subscription. So no change to the evolution there.

[Chandramouli Sriraman, analyst]

Okay. Because that was my -- just a follow-up on the SaaS side of things. You've grown in the first 3 quarters by around 10%. So with $57 million, $58 million is that locked in and with no overages included that could be upside? Or should we assume $57 million, $58 million is the most reasonable number for Q4 in terms of SaaS.

[Panagiotis Spiliopoulos, executive]

Yes. This is -- I think this is where we should land as we said back in -- after Q1 results, when we said full year sales revenue would end up at 9% to 10%. That's still valid, and you are correct, no overages are included in that.

[Operator]

Next question is from Frederic Boulan with Bank of America.

[Frederic Boulan, analyst]

Two questions, please. First of all, to Jean-Pierre around kind of key priorities. I think last time we discussed you identified go-to-market as a key focus area initially. Any further thoughts in terms of key investment areas for you 5 months into the job around technology, breadth of the offering, et cetera. And then keen to understand a bit more what has changed on the software license side, so I get it on MENA, but anything else. I think that you guys are pretty confident back at Q2 is -- about reaching about 10% growth in H2. Now we're looking at -- you guided to 5% in Q4. So anything else beyond MENA that we should be aware of?

[Jean-Pierre Brulard, executive]

Okay. So basically, Q3, it's mostly focused on Middle East Africa. Traditionally, we have a significant numbers and new logo coming from Middle East Africa. As you may know as well, it was driven by our Middle East Africa leader. I mean Will Moroney that has been promoted to CRO. And basically, I ask for Will to come back time for us to search on new leaders in Middle East to review the pipeline, to review the deal one by one to know, first of all, what's happened and to make the corrective action as well very quickly.

So from last board as well, we have made a significant progress on go-to-market operational excellence. So one, we have recruited one VP of Sales Operations that joined us in September. He was working with me in the past as well based in London, German VP and he is in charge to bring the rigor and discipline in our operational excellence, starting, of course, with forecast and pipeline and larger deal, which is basically absolutely important in regards of what's happened in Q3, but as well is working on looking forward on coverage, territory segmentation, pricing, discounting, compensation, et cetera, et cetera, just to bring the right level of standard in our sales execution and as well to make an assessment about the sales skills and about the sales enablement as well.

So a complete assessment and review in a way to elevate the standard of go-to-market. So it's absolutely important. Regarding product and technology, we have completed our assessment that we will present in Capital Market Day. It will be absolutely a good foundation for Barb Morgan as well to start with. And she was part of the final step of this assessment as well to know what kind of incremental investment we need to do to fulfill our 2025 plan and more importantly, our 3-year plan. So it's a little bit -- it's not the occasion to lay out, of course, what we will discuss in Capital Markets Day. But to your question, Frederic, we have now a good assessment where we are in terms of product and technology.

And last point as well regarding the update, if you remember well, last time, I was telling you that we have released some investment for sales coverage in the U.S. And we are middle of the journey. I told you that we would like to complete between 10 and 11 hiring by the end of the year to be up and running for 2025. We have already hired on the next -- on the last 2 months, 5 reps, that are signing up the working contract with us in the U.S. And we continue the effort as well to be on track for 2025 in terms of U.S. coverage.

[Operator]

The next question is from Toby Ogg with JPMorgan.

[Toby Ogg, analyst]

Just coming back on the Q4 kind of assumptions and the review, just to check, so deals below $1 million, you're assuming the same conversion as in prior Q4, just to check that I heard that right. And if that's the case, what gives you the comfort on that conversion assumption.

And then for the deals above $1 million gone through one by one. Again, what have you assumed here just in terms of conversion rates, just to give us comfort around that on the Q4. And then just in terms of the MEA shortfall, specifically, what is the current status of those deals that were meant to be closed in Q3. And what are you building in for Q4 with respect to the closure of many of those deals that are still in the pipe?

[Jean-Pierre Brulard, executive]

For your question. So in a way, as I mentioned, we apply a statistical conversion less than $1 million. So of course, is statistical, but we took into account the dynamic of Q4, Q4 last year, the Q4 before. And of course, the dynamic of Q1, Q2, Q3, which is a little bit different. But in a way, I'm pretty confident on the methodology that we have a pretty good conversion rate in regard of the past. And to take a balancing stance as well. For the rest, we cannot apply to my view, it's my philosophy, a statistical conversion as we have a couple of binary deals as well. And in a way, we need to go really one by one. The change of methodology here that we did that very early on the quarter.

We mobilize as well of the executive resources to help to close this deal. And as well, it was a more bottom-up approach coming from the reps for the sales representative themselves. I would like to avoid to have all the stacking of management which is, in a way, believe what the other manager will say and the other manager and then at the sales account manager. The need really as we are in Q4 as well is the end of the commission for many of them as we have annual plan of commission to know exactly where we are to go one by one about the risk and exposure of each deal. And to make our judgment about how many of these deals will be closed and of course, it's not an exact science, will be closed in the quarter, balancing the risk and the opportunity.

[Panagiotis Spiliopoulos, executive]

Toby, maybe on your last part of the question, clearly, we are expecting a lot more than ultimately the miss to the consensus on the licensing side of $3 million, $4 million, I think it's fair to assume that a considerable part of those deals have signed in the first few weeks. But clearly, we're taking a conservative approach given what happened and also listening to, I would say, the new paradigm, the new philosophy we are implementing now.

[Operator]

The next question is from Sven Merkt with Barclays.

[Sven Merkt, analyst]

Just a few on the efficiency program you launched. Can you speak a bit what is behind the program. My sense was always that Temenos rather underinvested at least in some areas. So what layers and what complexity are you trying to address here? Can you also then quantify the size of the program in terms of cost savings but also the restructuring costs. And then maybe, finally, I know you will hear more about this at the CMD, but how should we read the efficiency program regarding how you plan to balance growth and profitability.

[Jean-Pierre Brulard, executive]

Thank you for your questions, Sven. In a way, we have launched 2 steps of the program. The first step, what I call a linear organization. And we work on the span of control. I already mentioned that last call as well in July. And I'm very pleased with the progress we have made. To give you numbers. We started with 1,157 managers. And as we talk today, we have 760. So we went down close to 400 managers less. That doesn't mean that we lay off the 400 manager as many managers, they have 1 or 2 reported and they were mostly individual contributors.

And I'm working with our Chief People Officer as well to create 2 distinguished career path, one for the people manager and the other one for the individual contributor based on expertise in each domain as well. In terms of stacking of our lay off, we came down from 11 lay off at the worst case between me and individual contributor to 9. I would like to go further and to go to 7. But I have to say that it has been done without any waves, without any restructuring plan and we will continue to do that, not only for cost saving and Takis will take this point. But as well to give to our manager more empowered, maintain more accountability.

I was mentioning what's happened in Middle East is clearly that. We have an MD in Middle East, and we have 4 or 5 layers between the MD and the sales reps. So at the end of the day, that is not helping with the accountability and empowerment. And it's a clear lesson of what we are doing is going to the right direction. And I can say that as well for the product and technology and accountability as well. So I'm pleased with the progress but not fully satisfied. We need to go a little bit further.

[Panagiotis Spiliopoulos, executive]

Yes, let me take the rest of the question. So in terms of costs, as you have seen with increased restructuring costs by $7 million. That's due to the efficiency program we have started. It's really about going through the entire company. As Jean-Pierre said, the complexity in terms of management layers, sometimes matrix organization overlays. So this is across the entire company, whether it's product sales, G&A. So this we have initiated. We have some good progress and delivery is more to be concluded by the end of the year when we want to be in the target state. And for this, this will be the restructuring costs.

In terms of savings, so far this year, it's a mid-single-digit number. By the end of the year, we'll probably be quite a bit higher. And as the savings come first and the investment, we're not holding back on investments. This is something which clearly is helping the bottom line as we have seen on the EBIT. Now going forward, I think the -- not wanting to preview what we're going to talk about in November.

But as a principle, and we have started this already last year and even before. There is a lot more entrepreneurial mindset at Temenos, i.e. self-funding is the name of the game as a premier approach. And then once we have exhausted all these efficiency savings and then there is a lot we can still do. Imagine we just started and already found a quite sizable number. So clearly, self-funding is principle #1. And the rest that is required is going to be incremental investment, yes.

But clearly, we should -- we're still targeting a very profitable growth model also in the future. And as we mentioned in July already, there are a lot of areas which so far have been untouched, and we're looking at every single item in the company, no stone unturned. And clearly, there is a lot to do and a lot of potential here in terms of savings.

[Operator]

The next question is from Laurent Daure with Kepler Cheuvreux.

[Laurent Daure, analyst]

Also, I have 2 questions on my side. The first 1 is on your cost in the third quarter, down 1%. So it's a second quarter in a row where even if you're now targeting lower sales for the year, you managed to keep your EBIT at the same level. Could you try to break down your cost evolution between the underlying cost growth efficiency program and the variable component. So any granularity on this would be very helpful. And the second one is on the SaaS ACV, you briefly alluded to potential deals that were coming. It's true that in recent quarters, your ACV in SaaS was below $10 million. Does it mean that your aspiration is return to a few quarters with an ACV, let's say, back in the past $15 million or $20 million.

[Panagiotis Spiliopoulos, executive]

Okay. Let me take the ACV question first. Let's get Q4 done. But clearly, from today's view, it should be a very strong quarter. Comparison base relatively easy. So yes, it's going to be a very healthy double-digit number. We don't want to look into the future given there is volatility we have seen in the past. But I think there are -- this is evidence that there are large deals happening on SaaS ACV as well, given the lengthy sales cycle also for this one, it's difficult to time, but we have a very good visibility on larger deals.

On the cost evolution, the year-on-year cost evolution, minus 1%. I think what you should still consider and it's a good part of keeping costs flat and still be able to do investments is our services costs, which have come down quite a bit. We delivered what we said, getting all those rev projects live over the last months and moving to a different implementation model, much less externals to be used. So that clearly helped.

Now on the costs, I think it's probably helpful to look at it on an LTM basis. We had the cost base growing 2% there. And when you exclude services, which clearly was substantially down, sales and marketing costs were up 7%. Overall, other costs grew 4%. So there is growth in those areas which we have been targeting. So there is nothing holding back in terms of investment as Jean-Pierre explained. But cost efficiencies kick in immediately, clearly, given also the -- that there was not hitting our targets. There were a bit less variable accruals on commissions and bonuses.

But overall, I mentioned the cost savings impact from the efficiency program, you add services costs, you add the investments and you still arrive at this current cost base. And we haven't changed the cost base for the full year, yes. So from Q3 to Q4, we're going to see substantial investments as we have seen a substantial cost growth as we have seen in the past, always variable is going to be $20 million higher quarter-over-quarter investment over $5-plus million, clearly travel and so on. So we're not holding back is definitely really the efficiencies providing room for maneuver.

[Jean-Pierre Brulard, executive]

And if I may add something, Laurent, that Second part of the efficiency is about to be fit. We need to keep our muscle intact and to eliminate fatness. Maybe to give you a concrete example, we have -- if I take the sales cost, we have only 20% of our costs, which is individual quota carriers. And the 80% is overhead manager, I mean, helper, et cetera. So it's not the question for us to reduce the overall cost. But you rebalance as well between quota carriers and helpers. And if I take a parallel with the product organization, to have, in a way, more developers, more architects and less helpers at ISO perimeter more or less.

So it's -- basically the second part of the program, I think we touch base the easy one, which is a stacking of layers. The second part is to have a fit organization in a way to reinvest in the key contributors of the growth of the company, which is not rocket science in the software industry, which are developers and architects on one side and sellers on the other side.

[Laurent Daure, analyst]

Jean-Pierre, the point I was getting to, to be clear is when you look 2024 as a whole, and the variable remuneration, I was just thinking if there was no specific headwind for next year. If you were not holding back a bit bonuses and things like this to protect your earnings that you have the negative impact next year?

[Panagiotis Spiliopoulos, executive]

Well, we are not holding back anything in that respect for -- in our cost projection, which is part of the guidance underlying. We have the normal bonus accruals for staff in there. So no, we won't -- from that perspective, we won't have any specific headwind from next year.

[Operator]

The next question is from Adam Wood with Morgan Stanley.

[Adam Wood, analyst]

I've got 2, please. Just coming back on to the ACV number, that's obviously been running weak for, I think, quarters, it's been down. Is the suggestion here that this is just very significant lumpiness and these are bigger deals and they kind of come in when they come in? Or is there something that's changed either in your kind of go-to-market approach or in the market? I think in the past, you've talked a little bit about the fintech exposure in that space that's maybe hurt you. Is that recovering? Can you just give us a little bit more insight into what's been going on there and what's changed to drive that expectation of a much better fourth quarter, that would be helpful.

And then maybe just coming out of bigger picture, the IBS league table obviously suggests there's not a competition issue here. But growth, I imagine has not been where you would have liked it to have been over the last few years. Is the issue -- where would you say the biggest change is that you can make? I mean, is it getting the message out sort of target banks that core banking is the right way to transform the business? Is it expanding the available market, whether it's North America or Tier 1s or whatever. Is there one particular area that you think you can address that kind of issue of the disconnect between a product that seems to be leading in this field. The growth, I imagine, not where you would want it to be.

[Panagiotis Spiliopoulos, executive]

Let me take ACV -- Adam, let me take the ACV question and then hand over to Jean-Pierre. So yes, fifth quarter in a row which we have -- we're not getting where we wanted to be. However, there were various impacts over the last, let's say, 12 or 18 months. One, as you currently pointed out, the funding environment for fintechs, neobanks, clearly, it was quite difficult second half last year. It continued this year. It's looking to stabilize. So that's clearly helpful.

If I look at the deals signed and also the deal pipeline is improving from the fintech perspective, but I would look all those business models more established. And I think this is where you still get funding if you have a sustainable business plan, yes. So some of those deals now we're seeing coming in, in Q4 are all from fintechs. I would still not say something fundamentally has changed. Clearly, we understand a lot better the requirements from a client's perspective, DORA, especially in Europe is better understood going live in January 2025. So I think we have reached the trough level in terms of SaaS ACV. Larger deals, yes, there are larger deals in there. One of them, as I said, expected to sign shortly, but I would not take this one as a harbinger of something fundamentally changed. But clearly, I would say, neutral to positive in terms of the fintech world.

[Jean-Pierre Brulard, executive]

And let me add 1 thing, Adam, on that as well that the level of confidence, both externally and internally, but our SaaS foundation is increasing. As you may remember, we have announced SaaS foundation in last TCF as well. And we have -- for instance, we have signed our first SaaS foundation client in North America, and this project took only 6 months from signature to go live. And anyway, we went go live early October. And within 5 days, they opened over 17,000 accounts and captured over $15 million in deposit in less than 5 days.

So in a way, that make me optimistic as well about the fact that we can really, I mean, invest on SaaS foundation. The market demand is there, as you know, mostly in the U.S. and western Europe market like in U.K. And the progress we have made in the architecture and the Entreprise services on top of that made me confident. And once again, this example of a U.S. customer, which has go live in 6 months is encouraging me but not only me, the internal team as well and our partner to invest on SaaS Foundation and enterprise services.

So we are optimistic for Q4 as Takis mentioned, but even more importantly for the next year as well to continue to be bold in SaaS and to capture the market demand. On the second part of your question about what we can do differently, in a way, it's really basic. It's the reason why we hired a new VP of Sales Operations, I've done that for more than 20 years in the software industry is to put in place the right basics, about pipeline forecast, larger deal review, to engage our value engineers as well to deliver value to our customers, to engage partners to make sure that we have the right implementation services project as well in place.

And structurally speaking, to have better sales coverage, territory segmentation. In a way, as I mentioned earlier, we have 20-90 between quota Carrier and the rest of the sales team. So we need to increase significantly our quota carrier. When I say that, in the range of 30%, 50% of sales capacity, and in a way to reduce the rest of the helper. If we are doing that right it would attract a couple of talent. We have launched a search in Middle East Africa to replace our leaders. We have just appointed a new leader early July in America as well.

So if we are doing only basic things, I'm not worried about the market demand, our win rate is pretty spectacular. I will, in a way, highlight a couple of win rate in the Capital Market Day for the publicly one deal of the last 18 months as well. We continue to have a very good competitive position as well, mostly on the best of street for corporate banking software. It's just a matter of sales execution for the short term. For the midterm, again, we are working on product and technology to have the right pool of investment to sustain our growth for the next 3 years.

[Operator]

The next question is from Knut Woller with Baader Bank.

[Knut Woller, analyst]

Two questions. First, on Europe, which seems to have been down quite noticeably in terms of total software licensing in the third quarter. Can you provide some color here what's happening and when you expect Europe to recover? And then lastly, on press reports regarding a large project, I think you announced with Julius Baer in 2015. Can you just provide an update here is Julius Baer, the project here, harmonizing all software components on the back of Temenos software in all regions. So has the press reports been wrong with that regard?

[Panagiotis Spiliopoulos, executive]

Not, let me take those. First on Europe, actually, the Europe performance was broadly in line as budgeted. I would not read too much into the quarterly volatility. And clearly, we have seen a good evolution from the past, expected good performance also in Q4. Yes, through Q3 and Q4 last year were good comparatives for Europe. So it looks maybe that we were losing anything there, but the performance in Europe is as expected.

As you know, we have a new leader there at the start of the year who has executed on these things which Jean-Pierre mentioned. So nothing or special or abnormal in Europe. On your second question, it was rumored or stated in a block. What we can say, and there is -- this is always limited, but clearly, Julius Baer remains a very important client of Temenos and is using software, various software across various geographies. So think the negative part is definitely not true. On the positive, I cannot comment.

[Jean-Pierre Brulard, executive]

I was visiting Julius Baer, I mean, 3 weeks ago, so I can fully confirm what Takis was telling you.

[Operator]

The next question is from Justin Forsythe with UBS.

[Justin Forsythe, analyst]

I've got a couple, if you don't mind. So I guess the first 1 relates to more near term, which is I think we've heard for the last several quarters that there were missed deals in the last few weeks of the quarter that were then signed in the first few weeks of the next quarter. But we kind of continue to seem to guide down on TSL guidance and miss on TSL guidance. Related to it seems like more deals being pushed than are being signed in those first few weeks.

So just kind of trying to square those 2 comments and the moving pieces there? And what's causing that dynamic to exist. I wanted to also ask secondarily about -- how do we think about modeling the subscriptions and licenses line going forward? Because it seems like this is, and it has been driving the majority of the P&L volatility that we've seen over the last several years. Inherently, it's difficult to predict, and we don't have really a KPI such as sales pipeline or conversion rates to go on. So how would you suggest investors and sell-side analysts think about modeling this going forward?

[Panagiotis Spiliopoulos, executive]

Okay. Justin, I think on total software licensing and appreciate your comments. And we have, and Jean-Pierre commenting, we specifically also did not mention any Hindenburg impact or anything or lengthening of sales cycle. So I think you need to differentiate between what happened in Q1, Q2. And clearly, today, what we announced and as Jean-Pierre mentioned, this is nothing about the market, nothing about competition, really basically getting our act together and implementing best practices, which Jean-Pierre is doing so that we don't get into the situation going forward, yes. And we're being transparent. As you know, Middle East and Africa is an important region for us. It's a large region. It's to a large extent, on-prem business, so very little in terms of SaaS revenues. So any deviation there, and this is why we acted very quickly as an impact on total software licensing, and we're trying everything to not have those come up again under the leadership of Jean-Pierre.

The modeling of subscription, I think it's a bit unfair because ultimately, the accounting of subscription is the same as term licenses. As far as I can remember, there was always a volatility even before subscription was introduced in 2022. I think we'll provide some guidance on the next few years and how we see subscription evolving. But clearly, by the end of this year, you will have very little term license left contributing in our P&L.

So we don't sign. Whatever is left in the pipeline is still a bit of term, but new deals coming in, this is subscription. So clearly, subscription will provide market data and subscription, which is going to be a very important driver in the future, whether it's mid, high, whatever digit will share. But I think the -- as long as the account is unchanged, this will remain likely.

Now on the, yes, on the volatility, clearly, there is still a business which is depending on the last few weeks of every quarter. So nothing has changed there. And if you have larger deals in there, which can move around on a 12 longer sales cycle. I think this is unfortunately part of something which we try to mitigate as good as possible by building in enough cushion in our guidance. I think we can do and we'll do better.

[Jean-Pierre Brulard, executive]

Maybe just to complete the answer, Justin, as you know, we have more or less today, 75% of our business, which is predictable through professional services, maintenance and SaaS. So we are still the remaining 25%. And in a way, in some geographies as well, there is more than 25% because they are mostly stuck on-premise as well. And specifically in Middle East Africa, we are highly dependent on new logo and as well, which is a process is more difficult to control as in many times, it's the first time that the sales team is facing the procurement process as well and the level of approval for different people.

And I do think, structurally, is the reason why I mentioned as well the new sales operation, and we need to bring more pipeline because when you have a pipeline, which is limited, you have a tendency to over predict on a lower pipeline as well. And this pipeline sometimes is lacking of self-cycle as well, coming to the last moment. So in way, the root cause are more about pipeline and dependency on larger deal on new logo. So how we can avoid that to have a better, I mean, predictability for a better pipeline, more sales on the street and better control as well. And structurally, over the next 3 years, reduce our dependency to software licensing versus the rest and it is the reason why we are bold on SaaS. We don't have this issue in the U.S., to be honest, because in the U.S., they are mostly SaaS today.

Thank you all for joining us. Of course, we will -- as we did -- as I did last quarter as well, we'll make some 1, 2 few or one-to-one meetings in the next day, and we will be happy to welcome you in Capital Markets Day in London on November 12 for a more long-term view about our business.

[Operator]

Ladies and gentlemen, the conference is over, you may now disconnect your lines. Goodbye.