Ladies and gentlemen, welcome to the Temenos Q3 2023 Results Conference Call and Live Webcast. I'm Moira, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Max Chuard, CEO. Please go ahead, sir.
Thank you, operator. Good afternoon. Thank you for joining today's call to run through our Q3 results. As always, the results presentation is available on our website. I will start with some introductory remarks and an overview of our business performance, and then Takis will run through the financials. Starting with slide seven. I'm clearly disappointed with our performance this quarter, in particular around subscription license revenue. There were two main factors driving lower revenue in Q3. Firstly, our sales cycles are lengthening due to the current macro environment. Some banks are taking longer to assess investments and make buying decisions, and this is impacting some of the larger deals in our pipeline. Secondly, we had some sales execution issues. A number of deals did not close on time as expected.
On the positive side, we saw strong momentum on our SaaS revenue and ARR growing 41% and 16% year-on-year respectively. To address the issues from Q3, we are taking a number of measures. Firstly, we are focusing on sales leadership and execution. We've asked our Chief Revenue Officer and our President of the Americas to leave the business with immediate effect. I have put in place an experienced leadership team with a track record of delivering. I appreciate that our CRO was only with the business for seven months, but I was not happy with the way he was running the sales organization during that time. We already saw some weakness in Q2, but it still was early in his tenure.
He brought a lot of changes and complexities to the sales process in a short space of time, which ultimately did not work with the sales organization. Also, the cultural fit was not as good as we hoped. I acted quickly to resolve these issues ahead of our largest quarter. Going forward, Jean-Pierre Brulard will resume leadership for EMEA and APAC. He's one of our most experienced executives with a strong track record. Two of our senior executives, Colin Giles and Philip Barnett, are now running U.S. operations and sales respectively. Both have direct experience of our U.S. operations and Phil in particular owns some of our most strategic client relationships. I've spent a lot of time with our senior sales leadership, the last three weeks, and we are all aligned and absolutely focused on delivering Q4 and continuing to build the pipeline.
Also, I've reviewed our sales incentive targets to drive sales performance and retain our talented sales team. Lastly, we are also looking at our financial disclosure and communication to simplify this. We've listened to feedback from shareholders and want to make it easier for you to analyze our financial performance. Looking forward, we revised our full year 2022 guidance and will give full year 2023 and medium-term targets in February 2023. Importantly, during the quarter, our pipeline did grow and the deals are delayed are still in the pipeline and expected to close, but with uncertainty over the timing. In fact, in the first 20 days of October, we've already closed around $10 million of deals that slipped from Q3. As you know, our partner strategy aims to help us scale faster.
as part of this, we've been pushing any customized development work for our clients to our partners, so we can focus on strategic R&D. Leading to a decline in our customized development licenses in the last 12 months. Now, if we were to exclude the headwind from customized development licenses, our LTM total software licensing grew 11%, and we expect it to grow at circa 4% for the full year 2022. Looking forward, we are targeting a continued acceleration of ARR growth in 2023 through growth in our SaaS business and the subscription transition. we expect our locked-in SaaS revenue by year-end to contribute 10 percentage points of growth on our full year 2023 total software licensing. We never had this much visibility on growth from recurring revenues. Turning to slide eight.
As I said, some larger banks have become more conscious on the decision-making around IT investments, which means sales cycles have lengthened. We were also impacted by sales execution issues, which we've addressed with sales leadership change and our review of the sales process. On the positive side, we had relatively strong performance in the U.S. despite the macro outlook, with a good level of signings across SaaS and license. Europe in particular was impacted by lower signings as several large banks delayed the decision-making process. Our SaaS ACV was particularly strong in the quarter as there were no visible impact from macro on our SaaS customers. Moving to slide nine. As you know, we introduced the five-year subscription license model this year to replace term licenses, driven by clients demand for subscription pricing.
This delivers a value uplift for Temenos in the range of 30%-60% over the contract. Through the value uplift, our contract and cash breakeven is around three-four years. That subscription model is accelerating our shift to a more recurring cash flow and more predictable model. ARR growth is expected to accelerate next year, driven by SaaS growth and the subscription transition. We expect the subscription transition to be substantially complete by the end of 2023. On slide 10, we delivered $80 million of SaaS ACV in the quarter, and this was, I have to say, across new clients, where we are expanding into new countries and also additional volume consumption from some existing clients.
We work with some of the largest and most successful fintechs and neobanks, some which are experiencing very rapid growth in their business models and have a mandate to invest in the software stack. Q3 SaaS revenue accelerated to 41%, which is due to the strong ACV bookings in prior quarters. Bearing in mind that there is roughly one quarter delay from signing a SaaS contract to revenue flowing into the P&L. Lastly, the US continues to be the largest contributor to ACV this year, and we've got a very strong position in cloud and SaaS in the US. Turning to slide 11. ARR, a key metric, grew 16% this quarter, which was driven by both strong SaaS revenue and ACV, as well as a subscription transition.
We are now forecasting ARR to grow between 17%-18% for the full year and expects further acceleration growth next year, which will drive profit growth as ARR is highly profitable. Total bookings grew 4% this quarter and 13% year to date. This is due to the strong SaaS ACV, which offset the weaker subscription bookings. Moving to slide 12. We had, as I said, a relatively strong performance in the U.S. this quarter across both license and SaaS. In fact, if you look at it over five years, we've doubled our business in North America in terms of total software licensing. It's worth keeping in mind that the range of software that we sell in the U.S. give us several levers of growth, whether that is front office, back office, end-to-end solution payments, funds, or loan origination.
As part of our sales leadership review, we asked our president of the Americas to leave, and I've asked two of our most experienced executives to run the US business. That is Colin Giles, that has been with Temenos since 2016. Most recently as Chief Client Delivery Officer, and he held multiple senior roles in the company, including running cloud operations and product delivery. Phil Barnett, who is one of our most experienced sales and business development executives and is already responsible of many of our strategic client relationships, including in the US market. Moving to slide 13. In Q3, we made a minority investment in Mbanq, a leading fintech in the US, providing embedded finance and BaaS to banks, credit unions, and other sectors that want to rapidly launch their own banking services.
We see massive potential in the BaaS market as financial services are being embedded across so many businesses outside of traditional banking providers. Banking is truly happening everywhere. Mbanq will leverage our scalable core banking capabilities to offer fast-track solution to its clients across industries. Our investment in Mbanq give us direct exposure to the BaaS market, in particular in the U.S., which is the largest market. This means our technology can be sold to and used by a very wide range of fintechs and brands across industries. With that, I will now hand it over to Takis to go through the numbers for the quarter.
Thank you, Max. Moving to slide 15, I'll give you an overview of our financial performance. All figures are in constant currency unless otherwise stated. We signed $17 million of subscription licenses this quarter, significantly below our original expectation of around $50 million. Some of the delayed deals amounting to a total volume of $10 million have now signed in the first three weeks of Q4, reflecting those deals that were impacted by sales execution issues, which we are now addressing, as Max has explained. SaaS revenue was up 41%, continuing its growth trajectory and mitigating the impact on total software licensing, which was down 17% in the quarter. Maintenance grew 4%, roughly in line with our expectations, and total revenue was down 5% year-on-year.
The combined effect of lower subscription licenses and increased costs in services drove our EBIT down 54% and our EBIT margin to 19.2%. We also saw a significant impact on our cash flow, both from the transition to subscription as well as the lower signings in the quarter. Operating cash was $53 million, down 49% year-on-year. We did maintain our cash conversion at 117%. Free cash flow was down 88% year-on-year and 17% in the last twelve months. DSOs ended the quarter at 112 days, up two days sequentially. We ended the quarter with $798 million of net debt and leverage stood at 2x. I expect our leverage to remain at around this level for the full year. Moving to slide 16.
SaaS revenue was a bright spot in this quarter, and we saw no visible impact from macro on decision-making by smaller banks and non-incumbents. Going forward, we expect most of the on-premise license deals in our pipeline to move to subscription. As we move through this transition period, our traditional term license will continue to show negative growth with higher growth rates in our subscription line. Operating costs were up 27% this quarter, mainly driven by higher service costs linked to partner-led implementations, as I have already mentioned. I do expect higher services costs also in the fourth quarter, which we have already reflected in our revised EBIT guidance, which we provided last week. This should then mark the peak negative impact based on current implementation timelines. This cost should start trending down in 2023 as some of these implementations go live in Q4.
Lastly, we delivered CHF 41 million of EBIT in the quarter and our EBIT margin declined 20 percentage points in constant currency. On an LTM basis, we have delivered 6% total software licensing growth, largely driven by SaaS growth of 36%. Next on slide 17, we have like-for-like revenues and costs, adjusting for the impact of M&A and FX, although we have not done any M&A since 2019. The figures are all organic and therefore in line with our constant currency growth rates. I have already outlined the main impacts on revenue and cost this quarter. In terms of FX, the significant strength of the dollar had a negative impact on revenues, while the weakening euro and British pound generated some benefit on costs. Overall, we had a small positive impact at EBIT from FX this quarter.
On slide 18, net profit was down 59% in the quarter, with lower financing costs more than offset by FX. EPS was also down 59%, and we continue to guide for a 2022 tax rate of 18%-20%. On slide 19, our Q3 LTM cash conversion was at 117%, still well above our target of converting at least 100% of IFRS EBITDA into operating cash. We also expect our cash conversion to be at least 100% for full year 2022. Next, on slide 20, we show the key changes to the group liquidity over the quarter. We generated total operating cash of CHF 35 million, and ended the quarter with CHF 73 million of cash on balance sheet and net borrowings of CHF 798 million.
Our leverage was at 2x, and I expect it to remain at around this level for the full year. Now on slide 21, we revised our 2022 guidance metrics when we made the pre-announcement last week. These are non-IFRS and in constant currency. We are guiding for ARR growth of 17%-18%, down from 18%-20%. ARR growth is driven by the move to subscription and also from accelerating SaaS and maintenance growth. At this point in the year, most of our SaaS revenue growth is already locked in, given the one-quarter delay between SaaS ACV recognized as SaaS revenue in the P&L. We are guiding for 2022 total software licensing to be flat on 2021 and an EBIT decline of 25%. We still expect cash conversion to remain at over 100% of EBITDA into operating cash.
We expect our free cash flow to decline around 50% due to the lower EBIT, the subscription transition, and increased cash costs. Lastly, we expect a 2022 tax rate of between 18%-20%. Now, looking forward to 2023, we expect locked-in SaaS revenue by year-end to contribute around 10 percentage points of growth in 2023 to total software licensing. We will start the year with a significant majority of ARR locked in through committed SaaS revenue, subscription, and maintenance. I would expect our ARR growth to further accelerate in 2023. This will also help drive our profitability growth in 2023. We will provide 2023 guidance and revised medium term targets in February. On slide 22, I'd like to walk you through the various elements impacting our EBIT in 2022.
SaaS and maintenance profit growth will have a positive impact, offset by the decline in subscription and term licenses, increased costs from post-COVID normalization, including a lot more travel and higher marketing costs. There will also be a headwind from the losses in our services business and an impact from investments we are making in particular in our SaaS and cloud operation, in sales, and also from wage inflation. With that, I will hand back to Max to conclude.
Thank you, Takis. In conclusion, on slide 24, Q3 was clearly a very disappointing quarter. We've addressed the operational issues, and I and my whole team are totally focused on delivering Q4. Taking a step back, the fundamentals of our business and market opportunity have not changed. Yes, there are macro challenges, but banks have to invest in IT. Our market opportunity is massive. We have the best solution in the market to help banks achieve their business objectives. We are mission-critical for them, and we've got a long track record of delivering success. We are well advanced in our transition to a SaaS and subscription model, which will unlock further value. We already have nearly $600 million of ARR at the end of Q3, growing at 16%, and this will accelerate even further next year.
By the end of this year, I expect SaaS to be around 40% of our total software licensing, and this will continue growing. In fact, we expect locked-in SaaS revenue by year-end to add 10 percentage points of growth to full year 2023 total software licensing. Never before have we been in this position. Our recurring revenue have reached a size and scale which give us such long-term visibility on future growth. With that operator, I'd like to open the call for Q&A.
We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question or a comment may press star and one at this time. The first question is from Charles Brennan from Jefferies. Please go ahead.
Great. Thanks for taking my questions. I've got two if I can. The first is just your level of confidence and I guess the way in which you're thinking about planning for 2023. I know you're gonna give more guidance in February, but can you say something about the philosophy and the approach you're taking to 2023? Are you thinking about building back more sustainably with more recurring revenue and a lower margin profile? Or are you thinking of trying to get back to 2021 levels of profitability as fast as you can? And then secondly, you haven't said much about the remedial services work that you've been doing. Can you give us some indication of when it became apparent that you needed to put more cost in?
You refer to a number of implementations, does this all relate to a similar problem at the heart of it? Or does it relate to multiple different problems at different clients? Thank you.
Hi, Charlie. Let me start with the first question. Listen, we did an in-depth review of the full pipeline for Q4, and obviously take into account on how the environment has changed, and reflecting this into a more prudent and conservative forecast for the balance of year. On that basis, I feel confident about the delivery of Q4. As I said, the full team and myself are totally focused on that. Maybe Takis you want to complement this, the first question, address the second one.
Yeah. Hi, Charlie. I think on if you look at 2023 and given the investments we have been making, clearly the cost growth on 2023, as you can imagine, will be very low. We have also listened to the investors. We have listened to you know, the investor community that we should you know, try to invest maybe ahead of the growth. This is what we have been doing now, also the last quarter, and we're gonna continue to do this in Q4. We don't know how long this environment will last, but clearly we want to come out in a very strong position in 2023 or and beyond. Will there be some cost growth? Probably, yes.
We still have inflation out there, but I think we have done a lot of the work. What does it mean for EBITDA growth? We're gonna provide details in 2023 for 2023 in February, but we've given some indication on what is happening to the recurring part. If you think about what we have put out as a you know kind of framework that ultimately the ARR growth should drive up to 75% of profit growth in the following year, you know, this is something which we could imagine. However, we refrain from giving precise guidance, given where we have come out just now the last two quarters. We don't wanna make this mistake again.
There is uncertainty out there, and we hope to have better visibility in February. On the services, if you recall, ultimately, we had started to talk about, you know, that we need to support, you know, our partners in our new partner model, as we have mentioned already late last year and earlier this year. What we have done is we expanded our partner ecosystems quite a bit in the last two years. So we have seen an increasing number of projects delivered by partners. This is clearly visible in our service revenue line, which has been, you know, declining over the last quarters and, you know, has been a drag on total revenue growth, but it's still the right thing to do.
However, some of these, you know, projects are called transformation deals, where customers prefer the involvement from Temenos on the one hand, along with partners. So this meant a dilution in the margin percentage from this project compared with those where Temenos only implements. We have gone live or expect to go live with most of these projects in the next few quarters, and this explains a lot of the margin decline. We have now taken substantial costs in Q3 and in Q4. Q3, if you look at the cost miss versus consensus of around $8 million-$9 million, that's to the largest extent is coming from partners. There has been a bit more travel, a bit more marketing, some SaaS investments, but the large part has been from that. The same applies to, you know, Q4.
We want to help partners get those projects, you know, over the finish line, which requires ample external, you know, consultants and also own resources. We basically pay for that without having, you know, the revenues which are with the partner. It's essential to have these projects, you know, go live, to have those reference customers. We decided, you know, kind of phasing, you know, this paying, let's call it this way, we're now accelerating the conclusion of those projects. Next to that, as we have been saying, we're making investments in governance and customer success, enablement, which also overall, you know, has a negative impact on margin. Clearly from 2023 onwards, you know, this will substantially improve. It's not a new problem.
These projects, you know, were known. We have been talking about. We have been taking a project-by-project approach. Now we said, "Okay, it's important to have those live references," and we're doing the acceleration to get these projects live, and take the hit, you know, in Q3 and Q4.
Can you just be more clear? Is this just immaturity on behalf of your partners, where they're not used to implementing Temenos technology? Or is this R&D that's been promised by either you or your partners, and you're having to deliver on a product roadmap to get the projects over the line?
Ladies and gentlemen, please hold the line. The connection with the speakers has been lost. The conference will continue shortly. Thank you.
The strategic roadmap, you know, which we are basically running internally and you know have the cost in our product cost, that has nothing to do. If you bring on a number of new partners and you know given you know the strategic relevance of those projects and you know maybe you can say some of the partners you know were not mature enough, maybe the whole process was not mature enough. These are a lot of things, you know. Maybe scoping was not done the right way, so you need to step in as Temenos, because if those projects were to fail, it would fall back on Temenos, and we cannot afford this.
Okay. Perfect. Thank you.