Ladies and gentlemen, welcome to the Q1 2021 Results Conference Call and live webcast. I am Sandra, 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. For 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 Mr. Max Chuard, CEO. Please go ahead, sir.
Thank you, operator. Good afternoon, and thank you for joining today's call. I hope you've been able to access our results presentation on our website. As usual, I will start with some comments on our Q1 performance, and then I will hand over to Takis for an overview of the financials before giving some concluding remarks. Starting on slide seven. It was a great quarter and a strong start to the year. Banks are facing significant pressure in their end markets with new competitors and changing demands from the customers. An increasing number of those banks are pushing ahead with IT transformation projects after the disruption of 2020. We had very strong growth in both our SaaS and licensed businesses in the quarter, and SaaS ACV, in particular, was up 130%. The ACV growth was a combination of new customer signings and volume growth in existing customers.
The SaaS revenue growth reflects the strong ACV we booked in the second half of last year flowing through into the P&L this quarter. Overall, total software licensing was up 26% and our EBIT margin expanded five percentage points, demonstrating the strong operating leverage of our business model. We introduced total bookings as a new KPI this year to reflect the increasing contribution from SaaS in our business and to enable you to track the overall growth in our business. The growth in total bookings this quarter of 105% clearly demonstrate that banks are returning to spend on the IT platforms to address the structural pressures they are facing. In fact, total booking in Q1 2021 exceeded that of Q1 2019, which was our highest quarter ever. Lastly, we had a very strong cash quarter, both operating and free cash, which reflects the strong growth in recurring revenues.
Moving to slide eight. Our SaaS ACV was up 130% this quarter to reach $12 million. This was a combination of new logo wins and volume growth within some of our existing clients. Some of our existing clients have seen incredible growth in demand for the products and services, and the scalable consumption model is one of the key attractions of our SaaS offering, and we clearly benefit from this. From a regional perspective, the U.S. was the largest contributor to SaaS ACV this quarter, followed by Europe. Looking at the SaaS ACV pipeline for the rest of 2021, the majority of this is driven by demand for Transact. However, a significant portion is also coming from Infinity, where we are seeing strong traction among new and existing customers.
On slide nine, you'll see that our clients fall into one of three main groups in terms of size and buying behaviors, which explain why our SaaS growth is largely incremental to our business. Large banks prefer predominantly on-premise license model with some selective use of SaaS and cloud, in particular for peripheral or digital operations. Most large banks will run the software directly themselves, either on-premise or in the cloud. Mid to lower tiers banks are also largely on-premise, renovating by lines of business, and we do see increasing use of cloud and SaaS in this segment. For SaaS, Temenos Cloud operation runs the software. Challenger banks and fintechs are almost entirely SaaS for their operation. These banks would not have bought a license on-premise, so this demand for SaaS is incremental to our growth. Turning to slide 10.
We had a great growth in total bookings, which reflected the strong demand environment in Q1 for both Transact and Infinity. Total bookings reached $120 million, which was up 105% on Q1 2020, and was also ahead, as I said, on Q1 2019. The growth in total bookings was driven in particular by very strong growth in SaaS, as well as strong growth in licenses. We also saw an increase in average tenure this quarter compared to last year. This growth demonstrates the mission-critical nature of our software. We are signing long-term, multi-year contracts, and this growth in backlogs is increasing our revenue visibility over the coming years.
Our backlog was at $1.8 billion at the end of 2020, today it is around three times our annual product revenue. Our total booking underpins our guidance for this year, as well as our target to reach $1 billion of total bookings by 2025. On slide 11, I give an overview of our sales performance in the quarter. The sales environment improved through the quarter, continuing the trend we saw from Q4 2020. We had a very good quarter in the U.S. in particular, which was the largest contributor to total software licensing, driven by growth in our SaaS and licensed business. We also had a strong performance in Europe as the region continued to recover, we see increasing levels of demand for both license and SaaS.
Tier 1 and Tier 2 banks contributed 37% of total software licensing, up from 18% in Q1 2020, as more large banks pushed ahead with the strategic IT renovations. Sales to the install base remained strong, contributing 74% of total software licensing. We had 10 new client wins, and our service teams and implementation partners made very good progress with 28 implementation go live in Q1. Lastly, our pipeline continued to build through the quarter, which underpins our confidence in the outlook for the year. Moving to slide 12, we announced two strategic partnership earlier this year. The first was with Salesforce, where we are combining all of Salesforce CRM capabilities with a broad set of transaction capabilities provided by Temenos Infinity. The second was a strategic agreement with DXC to offer the bank's clients a progressive digital transformation path.
I'm pleased to say that both of these partnerships are making good progress. With Salesforce, the teams are working on integration of the two platforms with a plan to launch in Q3 this year, we've seen strong interest from Salesforce clients in participating in early adopters program. With DXC, there are early-stage discussion and workshops ongoing with a number of potential targets. DXC has a very large customer base of U.S. and international banks running legacy core banking systems, there is a lot of potential here. Now turning to slide 13, I'd like to give an update on our U.S. business. The U.S. was our largest contributor to total software licensing in Q1 and had strong growth in both license and SaaS. We signed several new U.S. logos as we continue to increase our brand awareness and footprint in the market.
As we mentioned in February, a Tier 1 U.S. bank went live in Q1 with Temenos Transact, which is a great domestic reference for us. We also expanded our SaaS reference customer base in the quarter, for example, Varo, the first consumer fintech making history for having received a banking license in the U.S., and PayPal, who are running the buy now, pay later product across multiple geographies, including the U.S. on Transact. The U.S. continues to be the largest contributor to our global ACV pipeline for 2021. We are investing our sales and marketing to ensure we can capture future demand and drive growth in our business going forward. Finally, turning to slide 14. As we highlighted at our Capital Markets Day, we are operating in a huge market, a $63 billion market.
With well over 70% of the spend still done in-house, this give us a very large runway for growth in the medium and long term. Banks are continuing to face significant structural pressures across digital, regulatory cost, and competition. The growth in demand for digital services through the pandemic was massive and is forcing banks to reconsider how they service the customers and whether the IT system are fit for purpose. Demand for our products and technology is clearly accelerating, in particular for SaaS, this is driving our pipeline growth. The acceleration in SaaS is largely incremental to our future growth. We are very focused on maintaining our market leadership position. We do this through our commitment to innovation and R&D investment, which is the highest in the industry, and the breadth of functionality and localization we can offer.
I am particularly pleased with the growth in total bookings this quarter, which is driving growth in backlog and increasing our visibility, not just for 2021, but in the medium term as well. The next two slides are from our February Capital Markets Day and give additional color on the structural pressure banks are facing and our competitive positioning. I will now hand over to Takis to talk through the numbers for the quarter.
Thank you, Max. On slide 18, I'd like to give you an overview of the financial performance in Q1 2021. All figures are in constant currency unless otherwise stated. We had a great quarter across all our main KPIs, reflecting the sustained improvement in our end market, continuing from Q4 2020, also into the first month of 2021. Looking at the P&L first, SaaS revenues were up 22%, driven by the strong ACV bookings in the second half of last year, and total software licensing had strong growth of 26% as an increasing number of banks continued to pursue strategic transformations. These growth numbers were achieved despite considerable headwinds from HCL, as we had communicated in February. I will talk in more detail about the HCL headwinds on growth rates in a minute.
As we had expected, maintenance returned to growth of 3% in the quarter, and total revenue was up 7%. Our EBIT grew 31% in Q1 2021, and our reported EBIT margin reached 27.2%, up 430 basis points and even up 500 basis points on a constant currency basis. I am particularly pleased that we delivered another strong cash performance and continued the trend from previous quarters. Operating cash flow was up 25% and free cash flow grew 28%. We ended the quarter with DSOs at 107 days, down four days sequentially, which also helped to drive cash performance. Our net debt at the end of Q1 2021 was EUR 864 million, and leverage remained flat at 2.1 x, despite having executed EUR 89 million of the share buyback program, thanks to our strong free cash flow generation and some tailwinds from the U.S. dollar appreciation versus year-end.
We will resume the share buyback as of tomorrow. Moving to slide 19, I will run you through some key figures for the quarter. As I mentioned, the strong ACV bookings, in particular in Q3 2020, drove SaaS revenue growth of 22%. Licenses also returned to growth of 28% in the quarter. Maintenance recovered as expected, having reached a trough in Q4 2020, growing 3% in the quarter, in line with previous indications. For Q2 2021, we still expect maintenance to grow 2%-3%, with subsequent acceleration in H2 2021 towards the 4%-5% growth rate envisioned for the full year, so unchanged versus previous communication. I'm very pleased with the level of growth achieved in Q1 2021, despite considerable headwinds from HCL on our SaaS and total software licensing growth rates.
Beyond 2021, the strong license growth forecast for this year will again lead to maintenance growth acceleration in 2022 and beyond. Service revenues in Q1 2021 were slightly up sequentially, declined 9% year-on-year, reflecting the delayed impact from lower license signings in 2020. I expect service revenues to be broadly flat in Q2 2021, with subsequent acceleration to drive services growth of about 4% for the full year. Looking at the cost base, our operating costs were flat year-on-year. We do expect costs to grow over the coming quarters as we continue to hire in R&D and sales and see some increase in travel and accrue greater variable costs. Moving to slide 20, we have provided the impact in Q2 2021 of the Kony non-banking clients moving off from the Temenos P&L to HCL in the quarter.
As a reminder, we signed a deal with HCL in Q2 2020, where they bought a license and maintenance contract and the right to sell the Kony multi-experience development platform for non-banking services globally. As part of this, non-banking customers from Kony are migrating to HCL, with the largest impact in the first couple of quarters of this year. This created a substantial nine percentage point headwind on SaaS revenue growth this quarter, eight percentage points headwind on total software licensing, two percentage points headwind on revenues, and 16 percentage points headwind on EBIT growth. Overall, we expect the impact from HCL to be stronger in H1 2021 than in H2 2021. Therefore, SaaS growth in Q2 2021 will be similar to Q1 2021. The strong ACV performance in recent quarters will then become more visible in the SaaS growth acceleration in Q3 and Q4 to deliver the unchanged 2021 growth target of 30%.
On slide 21, we show like-for-like revenues and costs, adjusting for the impact of M&A and FX. As a reminder, we closed the acquisition of Kony at the end of Q3 2019, so Q1 2021 figures are all organic and therefore in line with our constant currency growth rates. No reason to repeat them at this point. In terms of FX, the stronger euro had a positive impact on revenues, but the stronger Swissy and GBP had a negative impact on costs. Taking into account all currency movements and hedging, FX had a small negative impact of about $1 million in the quarter. Turning to slide 22, net profit grew 28% in the quarter and in line with EBIT, while EPS grew 29%. Our tax rate was 15.6% for the quarter, and we continue to guide for 2021 tax rate at 16%-18%. Moving to slide 23.
Our DSOs reached 107 days at the end of Q1 2021, down four days sequentially and two days lower versus one year ago. With improving balance sheet quality at banks, we still see no issues in our clients' ability to pay and also see no requests for revised payment terms. We still expect DSOs to be below 105 days by year-end. Beyond 2021, we expect DSOs to continue on their downward slope towards 85 days by 2025. Driven by continued improvement in DSOs linked to licenses and services, and an increasing contribution from SaaS in the P&L, which typically has DSOs more in line with maintenance. On slide 24, our Q1 2021 LTM cash conversion was 110%, well above our target of converting at least 100% of IFRS EBITDA into operating cash. We expect our cash conversion to be at least 100% for 2021, driven by strong growth in recurring revenue.
We have already seen strong growth in ARR this quarter, and expect this to continue going forward. On slide 25, we show the key changes to the group liquidity since the end of the year. We generated CHF 75 million of operating cash flow in Q1 2021. The other main movement was the share buyback of CHF 89 million. Our cash position on balance sheet at the end of the quarter was CHF 66 million, with our net leverage reaching 2.1 x. We expect our net leverage to remain at comparable levels at year-end 2021, accounting for the share buyback and the free cash flow generation. Turning to slide 26. We had strong growth in ARR of 7%, with limited attrition on maintenance and SaaS linked to our core business of Transact and Infinity.
HCL remains a considerable headwind as we have the Kony non-banking customers moving to HCL from Temenos, in particular in the first half of this year. I'm pleased with our ARR growth in the face of this headwind. We also had strong growth in deferred revenue, up 28%, which reflects good levels of collection on maintenance, as well as the increase in contribution from SaaS in our P&L mix. This drove strong free cash flow generation of $46 million, up 28% year-on-year. We remain disciplined around our CapEx spend. I would note that our net capitalized development cost for the quarter was $5.4 million, down from $6.2 million in Q4 2020. We expect net capitalized development for 2021 to be at or below the prior year level, assuming no further M&A. Moving to slide 27.
I wanted to quickly remind you of the KPIs that we introduced in February with our Q4 results and the Capital Markets Day. We introduced two new KPIs to help you monitor the progress we are making. These are first, a target for total bookings, which includes the fair value of license, committed maintenance, and SaaS. This will give you an indication of how the total new business generated is growing and should make the acceleration of our business through SaaS visible. We are now also guiding on annual recurring revenues, ARR, which we consider best practice to demonstrate the growth trajectory of our recurring revenue streams. ARR is defined as all committed revenue across SaaS and maintenance and will include new customers, cross and upsell, and any attrition.
Please note that we have put slides in the appendix with tables showing SaaS ACV, ARR, total bookings, and free cash flow by quarter to help you track these numbers. On slide 28, I'm pleased to reconfirm our guidance for 2021. As always, the guidance is on a non-IFRS basis and in constant currencies. You can find the FX rate assumptions in the appendix. We are guiding for SaaS ACV growth of 40%-50%, which is largely incremental. For ARR, we guide for 10%-15% growth driven by committed SaaS revenue from the ACV we have booked and the re-acceleration in our maintenance growth rates during the year. We expect to grow total software licensing by 14%-18% as licenses return to growth this year and as we have seen in Q1 2021 and driven by the sustained growth in SaaS.
Total revenue growth is forecast at 8%-10% as we digest the somewhat slower growth of maintenance and services in 2021, both of which we expect to accelerate throughout the year and in 2022 and beyond. As a reminder, from 2021, we will be excluding the costs of share-based payments and related social charges from our non-IFRS presented financials, i.e., the IFRS 2 costs. We have provided a full reconciliation for our 2021 EBIT guidance under both the new and old definition, as well as IFRS 2 costs for both 2020 and 2021 for reconciliation purposes. We are guiding for EBIT growth of 12%-14% to $362 million-$369 million, implying an EBIT margin expansion of 130 basis points from 35.9%-37.2%. We have maintained our target of converting over 100% of EBITDA into operating cash and expect DSOs to be below 105 days by year-end 2021.
We expect a tax rate of 16%-18% for 2021 and our net leverage to be at comparable levels by the end of the year. On slide 29, I'd like to reconfirm also our 2025 targets, which we presented at our Capital Markets Day in February. These targets are organic growth rates per annum. We expect total software licensing to grow 15%-20% as we see banks committing to strategic IT spend for digital transformation driven by competitive pressures and structural changes to their end markets. SaaS will clearly grow significantly faster at around 30%+, and licenses are expected to grow at 10%+ per annum. This will drive total revenue growth of 10%-15% per annum. We expect to expand the EBIT margin to around 41% by 2025, driven by strong growth in license and maintenance, improving our SaaS gross margin and leveraging R&D and G&A.
I would note we still expect to grow R&D on an absolute basis by around 7%-8% per annum to enable us to invest in our SaaS and AI and cloud capabilities, and technology in particular. With demand clearly returning post-2020, we expect total bookings to grow 17%-22% per annum, increasing our backlog and providing revenue visibility with ARR to grow at least 15%. ARR in particular, will drive free cash flow growth of at least 15% per annum to reach more than $600 million by 2025. Next on slide 30. This is a slide we showed last quarter, but I wanted to give a quick run-through of our non-IFRS, EBIT and margin expansion in 2021.
Our EBIT growth will be driven in particular by our growth in recurring revenue as well as licenses, whilst continuing to invest in R&D and sales and marketing, and with greater variable cost accrual compared to 2020. As such, we expect to deliver an EBIT margin expansion of around 130 basis points in 2021. As previously mentioned, we are now excluding IFRS 2 costs from our EBIT margin targets. We have also provided the respective bridge under the previous definition in the appendix. Finally, on slide 31, I'd like to give you a quick update on the share buyback. As a reminder, we launched a share buyback of up to $200 million in February. So far, we have completed $89 million of this, and the buyback will resume as of tomorrow. With that, I hand back to Max.
Thanks, Takis. Turning to slide 33, I'd like to invite you all to join us at TCF online on the May 26th and 27th . This is our annual global client forum and a great opportunity to see new product releases, listen to our clients, and engage with our product and management teams. You can register using the link below or on our website. Finally, on slide 34, in conclusion, we had a great start to 2021 across all our KPIs. We had very strong growth in SaaS with signings with new clients and volume growth in existing clients. The growth in ACV from 2020 is now reflecting in our SaaS revenue growth as well. We also had strong license growth in the quarter.
The growth in total booking was outstanding, reflecting the mission-critical nature of our product and the strength of our sales force and our clients' relationships. This growth was broad-based across both new and existing customers and both license and SaaS. It give us great confidence in delivering on our 2021 guidance. Our business model of selling packaged, upgradable software with a single code base on-premise or SaaS enable us to grow revenues and expand our EBIT margin as well, as we saw in Q1. Our strong cash collection and increasing SaaS contribution is driving our operating and free cash flow this quarter. Our growth in deferred revenues give us increased visibility. To maintain our leadership position in our market, we continue to invest in our business, in particular in R&D and sales to drive our 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 the touchtone 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 with a question may press star and one at this time. The first question comes from James Goodman from Barclays. Please go ahead.
Good evening. Thank you. Maybe I could start just on the U.S. It sounds like you're very satisfied with the performance there. It's very important, clearly, for the medium-term growth prospects. Maybe you could just talk us through a bit the competitive dynamics in the wins that you had across licensing and SaaS, particularly on the licensing side. Were they displacing competitors? Maybe who are you up against regularly in the deals? How does the U.S. look in the pipeline? Is it as strong relatively as it was this quarter? Then I had a couple of questions just a bit more technically on the SaaS metrics development. Just trying to understand that better, please. The first of those was just looking at the SaaS revenue sequentially more than year-on-year. It was up a couple of million dollars or just under.
I was more expecting a full quarter of the Q3 bumper signings that we saw. Can you just help us with how much of the Q3 or Q4 ACV is yet showing up in the quarter and how much is still to come and why we shouldn't expect, I guess a decent sequential increase into Q2, given the run rate of ACV. Secondly, on SaaS on the ARR. I just look at the run rate of the quarter, I guess times four, it's a bit ahead perhaps of the reported ARR that you've given. With the ACV that you've signed, I should expect the reported ARR to be higher. Can you just help with that sort of FX or phasing or Kony, just to understand that metric? Thank you.
Hi, James. Let me start with the U.S. Let me start with the pipeline, which, yes, Q1 was very strong in the U.S., I have to say also the activity that was developed during the quarter has been very encouraging. I'm very pleased with the development that we're seeing in the U.S., both on the SaaS and on the license side. As I had mentioned in February, we also see some larger, more strategic project coming to market in the U.S. There is really, I would say, increased activity overall in the U.S., both for the more traditional license side, as well on the SaaS. As you know, it's now a few years we've made significant investment to ensure that we are well-positioned in that market..
If I look at SaaS, I would say our technology, our modern cloud-native technology is really making a major difference in that market. As I mentioned, we start to have some amazing references as well in that respect. I mentioned Varo, I mentioned PayPal, but we've got others like SaaS operators and others. We've got globally more than 60 challenger banks using our solution. We're very well placed in that respect. On the more traditional side of the competition when we are facing the incumbent vendors like FIS and Fiserv, which I would say would be the main two. I think over the years we've been able to build more and more references, more size, more credibility in the U.S., which is really starting to play and to resonate very well in the market. We mentioned the Tier 1 bank that went live on Transact in Q1.
There is more and more for us to be successful and really to leverage the main differentiator, which is our technology, the advanced technology, the ability to deliver projects very effectively and very cost effectively. Now that we are slowly overcoming the fact that we are new, the fact that now we've got more and more references, more credibility, I think we are able to position the solution better. At the same time, as you know, we've announced two strategic partnership globally, but clearly there is a U.S. angle with both DXC and Salesforce that also supports the generation of activity in that market.
Hi, James. Let me take the two SaaS questions. Clearly, this is why we have been flagging the impact from HCL, which is quite material, probably around $2 million-$3 million on a quarter. If you look at the ACV numbers, with usually three to four months delay, the ACV growth will then flow into the SaaS revenue line. Clearly this was the one from Q3 that's offset now in Q1. The one from Q4 we will see largely offset also for Q2. The way we see HCL, and because we know the expiration dates, you will see then a material step up starting in Q3, when you would see the $3 million-$4 million sequential improvement you would expect. This is just masked by what is flowing now from our P&L from the Kony non-banking customers. Yeah.
Substantial impact in H1 and much less in H2. This is why we give that kind of transparency. yes, sequentially, I think from Q1 to Q2 you should see a slightly higher SaaS growth, but probably around the same growth rates on a year-on-year basis. On ARR, a similar impact that's much smaller. The 7% we have shown here will probably have been around 8% if we exclude the impact of HCL again. On the full year, it's more about 2% impact on ARR, but this is included in our 10%-15% ARR guidance we have for the full year. yeah, we give the full transparency. On attrition, we have not seen any change. Talking about the attrition on the banking business. Same for maintenance and SaaS. It's around the usual 3%, 4% per annum. We haven't seen any change on this one.
This is clearly all driven by the HCL impact.
Much appreciated. Thank you.
The next question comes from Chandra Sriraman from Stifel. Please go ahead.
A few questions from my side. The implementation go lives are picking up. In terms of feedback for remote implementation, is that becoming the norm? If the new set of lockdowns have an impact on deal signatures you're seeing. My second question, coming back to cannibalization. The ACV step up you saw in Q3, that has remained quite strong in Q4 and Q1. Can you comment on cannibalization? Are you seeing anything or you're able to forecast these cloud deals better now? Maybe the last one, would you be able to comment on cloud gross margins or is that a more annual thing? Thanks.
Hi, Chandra. Let me take the first question. We don't see if on the fact that there are still restrictions as a concern to close deals. If you want, the fact that we've been able to deliver the last 12 months very successfully, project remotely, 100% remotely. Clearly, that has overcome any concern that some customers had, for instance, potentially in Q2 2020 or even in Q3 2020. That I think we've been able to overcome. Now regarding the future of those implementations, today the majority, most all of it is done remotely. Probably as things were to normalize and when the lockdowns will be lifted, we probably will see an hybrid model where there'll be clearly much more use of remote and cloud technology as well. I think there will be also a little bit of physical presence.
Actually ourselves, we are gearing up to be able to deliver all the projects remotely because that's one thing that we've been pushing and driving for a very long period of time. I think with COVID, we were able to get a long way. Probably once things will go back to normality, we will see a little bit of an hybrid model. I think some of the learnings we got during COVID will be there too for the long term.
Yes. Hi, Chandra. On cannibalization, we have not seen any in this quarter. We have not changed or not seen any changes to the pipeline, both on the license and ACV side, i.e., deals flipping over. I think, ultimately our guidance is based on what we have guided for the long term, that you could see 1%-1.5% of the growth being cannibalized, but clearly, nothing seen in Q1 at this point. Also on the SaaS ACV growth, yes, there has been a couple of strong quarters. Now if you keep in mind, there are two growth angles for SaaS ACV. One is, you acquire new clients, so this is the incremental part, new fintechs, new challenger banks coming to us. You also grow with the success of your existing client base. This is then more volume-driven.
The third element we have seen overall in our ACV business, also some deals becoming larger in terms of the size. It's clearly going to be still volatile. I think we feel comfortable with our ACV growth rate for this year. Having had a good start, it's clearly something we take for us. On the cloud gross margin, what we have guided for is still value, hasn't changed in the last two months. Clearly, we put in a lot of effort in the automation part. That will start to come through in this year. Also the volume-driven operating leverage will come through. Let's say, we feel comfortable with the way the gross margin is evolving throughout the year. Clearly, there has been an improvement in Q1. We will not provide on a quarterly basis what the number is.
For the full year, clearly as we highlighted, we want to take a considerable step forward, i.e., front end load the gross margin improvement we have forecasted until 2025.
Great. Thank you.
The next question comes from Laurent Daure from Kepler Cheuvreux. Please go ahead.
Yes. Thank you. Good evening, gentlemen. I have two questions on my side. Coming back to the comment you made on competition, I was wondering how often in your pipeline do you face in fact, an internal solution? I'm referring, for example, to the SEB, SCB decision to work in-house with Google. Any granularity on that would be useful. My second question is more for Takis. It's back on the HCL headwind. But more for the following years, where will we stand in terms of revenues to be missed, kind of, by the end of the year? Thank you.
Hi, Laurent. Listen, on the how often do we see an internal solution in a process. It used to be the case in the past where most of the times we had an internal solution, and I would say that over the years, this has mainly disappeared. Not totally, I would say we see less and less the bank coming with their own system as a credible option. I think that banks understand that there is a need to change and u nderstand that putting more money into the legacy will not address the issue. We see less of those. Still, it happens sometimes. I'm not saying that we don't see at all, Really at a lesser degree compared to what we had in the past.
When we compete, it is against traditional vendors, as we've mentioned, or against when it's for SaaS, against some new cloud vendors that have emerged in the last, let's say, three to five years. Why we win, and why we win most of the cases is because we can compete very effectively with very modern technology, cloud-native. Also to a regional angle. We've got ourselves customers in 105 countries, so we understand the localization in every of those countries. At the same time, and this is what differentiate, I would say, compared to the main vendors, is the fact that we've got 27 years of deep banking expertise. We combine the best of both worlds, and that's why we are very strong from a competitive point of view.
Hi, Laurent. I'll take the question on HCL. As we had pointed out in previous discussions, the Kony non-banking customers were mostly on one-to-two-year contracts. We signed the contract in June 2020, which means by Q2 2022, all will be gone. There is obviously an overweight in this year, which means for next year you will have, let's say, very limited headwind on SaaS and licenses and overall total software licenses. I would say maximum 1%-2%.
In terms of their payments, what is left to be cashed in from HCL?
Yeah. As we said, this is a multi-year deal, seven years, which means we collect the annual payment in Q2 of this year, same as we did last year, the initial one in Q2 2020. We'll have another basically four years or five years going forward with the annual payment in every Q2 of the year. Going forward, if you already look at 2022, there will be probably a net impact, which is almost zero. Beyond 2022, so 2023 and beyond, you will have, let's say one, 2 percentage points positive impact on your license line from this HCL payment.
Okay. This is very clear. Thank you, Takis.
The next question comes from Andreas Müller from Zürcher Kantonalbank. Please go ahead.
Yes. Good evening, gentlemen. Thanks for taking my questions. Takis mentioned already that the average deal size went up, also particularly in the competitive deals. Do you see that as a trend going forward as well, and on what fact do you attribute that in general?
Hi, Andreas. I think it's probably premature to call something a trend. Keep in mind, Q1 is still the smallest quarter of the year, so any individual deal can have an impact on the average deal size, be it on the license side or be it on the SaaS side. I would not read anything into that. Clearly, our ambition, as we always had on the license side, to do more with Tier 1 banks. This is the same also on the SaaS side. If you are successful in winning new customers and they're successful, these tend to move the average deal size up. They buy more volume, they buy more accounts and so on. I guess that was probably one of the main drivers as we did quite a bit of business with existing customers in Q1.
Okay. On the competitive deals, the new clients, I mean, they're at least according to my calculation, also on the deal size was even larger in Q1 than pre-COVID level. Is that okay? You attribute this to a very small quarter, but on the competitive deals, nothing has changed there or nothing to interpret is that right?
No, we would not call any trend change that neither on the competitive deals nor on the existing deals. Clearly, with more and more product you can sell, Hopefully, we can drive our clients to buy more. This could be a factor in the long term, but we don't see any change to average deal sizes which we would need to call out.
Okay, thanks. As a last question on the share-based comp, that's still guided to $20 million. Now you have already made $6 million. Can you again explain the assumption between the $20 million? That's basically if you hit the targets or is that something we should adhere to that?
There are a number of assumption underlying these IFRS 2 charges. Keep in mind, there are always three long-term incentive plans running in parallel. It's not just for one year. This is clearly a factor. This is the estimate at the beginning of the year. We still believe the $ 20 million is the right number. It's not a linear approach. I think in terms of modeling, I would take three times four and a half million for the next three quarters. It's still unchanged $ 20 million for the full year.
Okay. Thank you very much.
The next question comes from Hannes Leitner from UBS. Please go ahead.
Yes. Thank you for letting me on. I have also a couple of questions. A brief follow-up on the HCL. Could you help us understand if you get any revenues if the HCL signs with a new customer in that non-core business? Is there any potential SaaS revenue stream coming from there? You presented the average contract length. Maybe you can comment where it is surprisingly quite short-lived license and maintenance contract length of 3.6 years. We would have thought that that should be slightly longer. In terms of your SaaS revenues, could you maybe decompose a little bit where the different buckets are? It seems a little bit with, again, the low average contract length of 3.9 years, it feels that it is more on the front office compared to core banking.
On that note, you mentioned at the Capital Markets Day that the core banking customers you have they are less likely to move. With only 10 customer wins in Q1, it seems you have quite a difficult position to win competitive deals. Maybe you can comment there what you see there. Thank you.
Okay. Let me take those first. The one you mentioned at the beginning, no, there is no royalty or any revenue flying to us if HCL signs new customers on their software or what they have developed there is no flow through to us, so we don't benefit anything. The HCL partnership, if you want, is just one way when the customers are moving to them at the contract expiry and the one-time payment per annum we get there. On the contract length. If you keep in mind, let me explain this in a bit more detail. Our standard contracts on initial signing are for a five-year maintenance commitment if we look at licenses. When an existing client buys more licenses, more modules or more seats, this is usually added to the master agreement, i.e., with incremental maintenance.
If this is within the first five years, the incremental maintenance will have a tenure which is equal to the balance of the five years remaining. Okay, after two years, it's three years left. After three years, it's two years left. This is one driver of the average tenure. Now, after five years, most clients move to one year rolling maintenance contracts, i.e., the incremental license and maintenance would also therefore also have a tenure of one year. If you put this all together, the 3.6 we have shown is the average tenure across all contracts. Yes, if you have more new logos, more new wins, clearly that pushes up the average tenure. On the SaaS contract length, we have seen, it's the same approach there.
On the SaaS, what we always said is, between three and five years clearly Infinity seems to have as a trend usually more towards three to four years, while Transact is four to five years. We have now more Transact in Q1. That's why the average tenure was higher than last year. Again, I would not read into those numbers too much from a first quarter. It has had a positive impact on bookings as we increase the tenure. Clearly, if this is a trend we're going to see for the rest of the year, it's going to be very good. I think we stay conservative in our approach to what we take as a forecast.
Thank you. Just a brief one on the housekeeping question. In your annual report, you had share-based compensation of $6 million in the cash flow statement. The delta is some social charges. Can you give us that number? Because to reconcile it then to the previous year, because there you reported the $39 million. Just to understand the moving parts here. Thank you.
Yeah. We'll follow up on the detailed split.
Thank you.
The next question comes from Stacy Pollard from JP Morgan. Please go ahead.
Hi. Thanks very much. Two questions from my side. First of all, partnerships. DXC and Salesforce, can you comment a bit more to their contribution to the group in Q1 or perhaps expectations on a yearly basis? Do you plan to do more strategic partnerships along these lines? Second question, just thinking about net leverage, what kind of leverage would you stretch to for M&A? Well, basically, what does the current M&A pipeline look like for you now?
Hi, Stacy. Listen, we just announced the DXC and Salesforce partnership, clearly, no contribution in Q1 from either of them. As I said, there is significant activity, workshops taking place. Probably the impact on 2021 would be rather limited. As I said, there is a lot, and it's very exciting. On the Salesforce side, the plan is to be able to launch it in Q3. Hopefully we will see some impact from that, but it's really going to be towards the end of the year. I would say limited for 2021. Clearly, the fact that Temenos is open from a technology point of view, works with any partner, and that the fact that we are 100% committed to the banking segment, it brings lots of opportunities for us to collaborate with other companies.
I think that we could see more of those partnerships in the future. Clearly, we are very focused on making those successful. If we can see that there are other partnerships that can leverage, and give us access to the market faster and be a win-win between them and us, I think it's something that we will clearly consider.
Hi, Stacy. Let me take the leverage questions. Clearly, we have ample ammunition left despite the buyback. However, one of the reasons why we did the buyback was clearly seeing our shares as undervalued, but at the same time seeing M&A opportunities at very high levels in terms of valuations, which did not make sense for us. The pipeline is still good on the M&A front. We have not seen anything which would make us jump up and down and execute, let's put it this way. If nothing happens on the M&A front, we'll be towards the same level of leverage by the end of the year. How far or how far above can we go? You have seen with Kony, we went above 3x.
If necessary, clearly, we have covenants in place which allow for that or more, but this has no priority right now or this year.
Okay, useful. Thanks.
The last question for today's call comes from Michael Foeth from Vontobel. Please go ahead.
Yes, good evening, gentlemen. Just two follow-up questions. On the U.S., you mentioned that your investments are starting to resonate. I was wondering if you can comment on how your deal win rate has developed in the U.S. today versus maybe two to three years ago, and how does it compare with your win rates that you're seeing in Europe? The second question would be on SaaS. Somehow looking at your ACV numbers, which are very strong, the SaaS guidance of 30% growth seems sort of conservative. Is it correct to assume that you're very confident with that 30% growth number for 2021? Thank you.
Hi, Michael. On the U.S. deal win rate, let me say that what is very exciting in the U.S., clearly, we started in the U.S. doing a lot with Infinity. That's through different acquisitions that we've done. What has really improved, Scale Infinity continues to progress. If I focus now more on Transact, which was really, I have to say, where we've seen a significant improvement on our win rates would be on the Transact side. I would say both on the SaaS and on the license. I think that's very encouraging. I think also the U.S. is really a market where there is really increased activity, and Transact now is very well-placed and I mentioned PayPal. What we are doing for them is just amazing.
The volume and the ability to scale and to support them and all of that is on Transact. We've got more and more of those success stories to tell in the U.S. I'm very pleased with the increased win rate that we've got in the U.S. on Transact.
Hi, Michael. Let me take the ACV question. It is correct that we have seen this strong ACV growth, as I explained before to James, not yet flowing through. However, we are confident that having the visibility on HCL when the contract expires, that we have seen the worst. If you look at the full year guidance of 30%, it incorporates 5 percentage points of headwind on just from HCL. I think the underlying 35% probably shows the picture in a much better way. Assuming there is no change in attrition or anything, and we keep delivering on the ACV because what you deliver on Q1 and Q2 ACV is then basically locked in for the year. We feel confident with that number.
Also beyond, I think it's worth pointing out if we deliver the 40%-50% ACV growth for this year, this will drive 30%+ growth also for 2022 and beyond.
Okay, very clear. Thank you.
Thank you, everyone. As I said, I hope you'll be able to join us on TCF online. I'm sure we'll be talking very soon. Thank you. Bye.
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