Earnings Call: Q1 2021

Apr 20, 2021

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 and A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Max Schwart, 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 7. It was a great quarter and a strong start to the year. Banks are facing significant pressure in the 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 license 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 volume growth reflects the strong ACV we booked in the second half of last year flowing through into the P and L this quarter. Overall, total software licensing was up 26%, And our EBIT margin expanded 5 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 100 And 5% 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 8. Our SaaS ACV was up 130% this quarter to reach $12,000,000 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 their product and services. And the scalable consumption model is one of the key attraction 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 9, you will see that our clients fall into 1 of 3 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, we saw 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, For SaaS, Temu's cloud operation runs the software. Unchallenger banks and fintechs are almost Entirely SaaS for the operation. These banks will not have bought a license on premise, and 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 TransX and Infinity. Total bookings reached $120,000,000 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 multiyear contracts, And this growth in backlog is increasing our revenue visibility over the coming years. Our backlog was at $1,800,000,000 at the end of 2020. And today, it is around 3 times Our total booking underpins our guidance for this year as well as our target to reach $1,000,000,000 The sales environment improved through the quarter, continuing the trend we saw From Q4 2020. And 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 license business. We also had a strong performance in Europe As the regions continue to recover and 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 19% from 18% in Q1 2020, As more large banks pushed ahead with the strategic IT renovations. And sales to the installed base remained strong, Contributing 74% of total software licensing. We had 10 new clients 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 2 strategic partnerships earlier this year. The first was with Salesforce, where we are combining all of Salesforce Centimeters capabilities with a broad set of transaction capabilities Provided by Tenros Infinity. The second was 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 2 platforms With a plan to launch in Q3 this year, and we've seen strong interest from sales force clients in participating in early adopters program. And with DXC, we have 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, and so 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 TRANZACT, which is a great domestic reference for us. We also expanded our SaaS reference customer base in the quarter. For example, Varo, the 1st consumer fintech making history For having received the 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 Transactor. The U. S. Continues to be the largest contributor to our global ACV pipeline for 2021, And 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 Market Day, We are operating in a huge market, a $63,000,000,000 market, with well over 70% of this 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 it's forcing banks to reconsider how the service, the customers and whether the IT system are fit for purpose. Demand for our products and technology is clearly accelerating, in particular for Salsa, and this is driving our pipeline growth. And the acceleration in SaaS is largely incremental to our future growth. We are very focused on maintaining our market leadership We do this through our commitment to innovation and R and D investment, which is the highest in the industry And the breadth of functionality and localization we can offer. I'm 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 Market 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 1st month of 2021. Looking at the P and 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 continue 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 4 30 basis points and even up 500 basis points on a constant currency basis. I'm 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 4 days sequentially, which also helped to drive cash performance. Our net debt at the end of Q1 2021 It was €864,000,000 and leverage remained flat at 2.1 times despite having executed €89,000,000 of the share buyback program, thanks to our strong free cash flow generation and some tailwind 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% to 3% With subsequent acceleration in H2 21 towards the 4% to 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, but declined 9% year on year, reflecting the delayed impact from lower license 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. However, we do expect costs To grow over the coming quarters as we continue to hire in R and D and sales and see some increase in travel and accrue greater variable costs. Moving to Slide 20. We have provided the impact in Q21 of the Kony non banking clients moving off from the Temenos P and 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 KONI multi experience development platform for non banking services globally. As part of this, non banking customers from KONI are migrating to HCL with the largest impact in the 1st couple of quarters of this year. This created a substantial 9 percentage point headwind on SaaS revenue growth this quarter, 8 percentage Points headwind on total software licensing, 2 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 We'll 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 and A and FX. As a reminder, we closed the acquisition of Koolin at the end of Q3 2019, So Q1 2021 figures are all organic and therefore in line with our constant currency growth rates, So no reason to repeat them at this point. In terms of FX, the stronger euro had a positive impact on revenues, But the stronger Swiss and British pound had a negative impact on costs. Taking into account all currency movements and hedging, FX had a small negative impact of about EUR 1,000,000 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% to 18%. Moving to Slide 23. Our DSOs reached 107 days at the end of Q1 2021, down 4 days sequentially and 2 days lower versus 1 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 increase in contribution from SAUs in the P and 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 EUR 75,000,000 of operating cash The other main movement was the share buyback of €89,000,000 Our cash position on balance sheet at the end of the quarter was €6,000,000 with our net leverage reaching 2.1 times. 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. Now 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 TRANZACT 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 and maintenance As well as the increase in contribution from SAU in our P and L mix. This drove strong free cash flow generation of EUR 46,000,000, 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 €5,400,000 down from €6,200,000 in Q4 2020. We expect net capitalized development for 2021 to be at or below the prior year level, assuming no further M and A. Now 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 2 new KPIs to help you monitor the progress we are making. These are first targets for total bookings, which includes the fair value of license, committed maintenance and sales. This will give you an indication of how the total new business generated is growing and should make the acceleration of our business through sales 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 end upsell and any attrition. Please note that we have put slides in the appendix with tables showing South 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% to 50%, which is largely incremental. For ARR, we guide for 10% to 15% growth, Driven by committed SaaS revenue from the ACV we have booked and the reacceleration in our maintenance growth rates during the year. We expect to grow total software licensing by 14% to 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% to 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 2021 for reconciliation purposes. We are guiding for EBIT growth of 12% to 14% to US3.62 dollars to US369 million dollars implying an EBIT margin expansion of 130 basis points from 35.9% to 37.2%. We have maintained our target of converting over 100 percent of EBITDA into operating cash and expect DSOs to be below 105 We expect the tax rate of 16% to 18% for 2021 and our net leverage 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% to 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% -plus And licenses are expected to grow up 10% plus per annum. This will drive total revenue growth of 10% to 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 and D and G and A. I would note we still expect to grow R and D on an absolute basis by around 7% to 8% per annum to enable us to invest in our SaaS and cloud capabilities, AI and technology in particular. With demand clearly returning post 2020, we expect total bookings to grow 17% to 20 2% 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 EUR 600,000,000 by 2025. Now 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 and 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 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 I'd like to give you a quick update on the share buyback. As a reminder, we launched a share buyback of up to EUR 200,000,000 in February. So far, we have completed EUR 89,000,000 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 26th 27th May. 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. And 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 the volume growth in existing clients. And 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. And this growth was growth 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 of SaaS Enable us to grow revenues and expand our EBIT margin as well as we saw in Q1. And our strong cash collection and increasing SaaS contribution is driving our operating and free cash flow this quarter. And 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 and D and sales, to drive our future growth. With that, operator, I'd like to open the call for Q and A. We will now begin the question and answer The first question comes from James Grudman 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? Or maybe who are you up against regularly in the deal? So 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? Now 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 this SaaS revenue sequentially more than year on year, it was up a couple of 1,000,000 just under. But I was more expecting a full quarter of The Q3 bumper signings that we saw, so 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 wouldn't shouldn't expect, I guess, a decent sequential increase Into Q2 given the run rate of ACV. And secondly on SaaS, on the ARR. If I just look at the run rate of the quarter, I guess times 4. It's a bit ahead perhaps of the reported ARR that you've given. Again, with the ACV that you've signed, I might The reported ARR to be higher. So can you just help with that sort of FX or phasing or KONI, just to understand that metric? Thank you. Hi, James. Let me start with the U. S. And let me start with the pipeline, which, Yes, Q1 was very strong in the U. S, but I have to say also the activity that was developed during the quarter It has been very encouraging. So I'm very pleased with the development that we are seeing in the U. S, both on the SaaS And on the license side, and as I had mentioned in February, we also see some larger, more strategic project coming To marketing in the U. S. So there is really, I would say, increased activity overall in the U. S, Both for the more traditional license side, but as well on the SaaS. And And as you know, it's now a few years we've made significant investments to ensure that we are well positioned in that market. If I look at Salsa, 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 order like Grasshoppers and all that. We've got globally more than 60 challenging banks using our So we are very well placed in that respect. On the more traditional side of the competition, when we are facing The incumbent vendors like FIS and Pfizer, which I would say would be the main tool. I think we've 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 Q1 bank that went live On transaction in Q1, so 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. And 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 2 strategic partnership in the U. S. 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 2 South questions. So clearly, this is why we have been flagging the impact from HCL, Yes, which is quite material, probably around EUR 2,000,000 to EUR 3,000,000 on a quarter. And if you look at the ACV numbers, We should with usually 3 to 4 months delay, the ACV growth We'll then flow into the SARB's revenue line. So clearly, this was the one from Q1 sorry, from Q3 was offset now in Q1. The one from Q4, we will see Largely offset also for Q2. But then the way we see HCL and because we know the expiration dates, you will see then a material Starting in Q3, when you would see the EUR 3,000,000 to EUR 4,000,000 sequential improvement you would expect. So this is just masked by what is growing now from our P and L from the Kony non banking customers. Yes, Substantial impact in H1 and much less in H2. So this is why we give that kind of transparency. So 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 If you exclude the impact of HCL, again, on the full year, it's also it's more about 2% impact on ARR, But this is included in our 10% to 15% ARR guidance we have for the full year. So yes, 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 sales, it's around the usual 3%, 4% per annum. We haven't seen any change on this one. So this is clearly all driven by the HCL impact. Very much appreciated. Thank you. The next question comes from Chandra Sheeraman from Stifel. Please go ahead. Yes. Hi. Thanks for taking my question. Hi, Max. Hi, Takis. Congrats on a strong start to the year. Just a few questions from my side. The implementation go lives are picking up. I was just wondering In terms of feedback for remote implementation, is that becoming the norm? I'm just wondering if the new set of lockdowns have an impact On deal signatures, you have seen. My second question, just coming back to cannibalization. The ACV step up you saw in Q3, that has remained quite strong in Q4 and Q1. Can you just comment on cannibalization? Are you seeing anything? Or You're able to forecast these cloud deals better now. And maybe the last one, would you be able to comment on cloud gross margins? Or is that a more annual thing? Thanks. Hi, Sandra. Let me take the first question. We don't see a few on the fact that there are still Restrictions as a concern to close deals. So 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. So that, I think, we've been able to overcome. Now regarding the future of those implementations, Today, the majority, I mean, most all of it is done remotely. Probably as things Where to normalize and when the lockdowns will be lifted. We probably will see a hybrid model where there'll be Clearly, much more use of remote and cloud technology as well. But I think there will be also a little bit of Of physical presence. Clearly, 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. And I think with COVID, we were able to get A long way. Probably when things will go back to normality, we will see a little bit of an hybrid model. But I think some of the learnings we got during COVID will be there for the long term. Yes. Hi, Sandra. On cannibalization, we have not seen any in this quarter. We have not changed or not see any changes to the pipeline, both on the license and ACV side, I. E, this Flipping over. So I think ultimately, our guidance is based on what we have guided for the long term that you could See 1% to 1.5% of the growth being cannibalized, but clearly nothing seen in Q1 At this point. Also on the SARS ACV growth, yes, there has been a couple of strong quarters. If you keep in mind, there are 2 growth angles for SAAS ACV. 1 is You acquire new clients, so this is the incremental part, new fintechs, new challenger banks coming to us, But you also grew with the success of your existing client base. So this is then more volume driven. And the 3rd element we have seen overall in our ACV business, also some These becoming larger in terms of the size. Now it's clearly going to be still volatile. I think we feel Comfortable with our ECB growth rate for this year. Having had a good start, it's clearly something We take for us. Now on the cloud gross margin, what we have guided for is still value, Hasn't changed in the last 2 months. Clearly, we've put in a lot of effort in the automation part, so that 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, but we will not provide on a quarterly basis what the number is. But for the full year, clearly, as we highlighted, we want to become 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 Dore from Kepler Cheuvreux. Please go ahead. Yes. Thank you. Good evening, gentlemen. I have two questions on my side. Coming back to The comments 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 Decision to work in house with Google. So any granularity on that would be useful. My second question is more for TAC is 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 An internal solution. And I will say that over the years, this has mainly disappeared, not totally, but I will say We see less and less the bank coming with their own system as a Credible option. I think the bank understand that there is a need to change and understand that putting more money into The legacy will not address the issue. So we see less of although still It happens sometimes. I'm not saying that we don't see at all, but really at a lesser degree compared to what we had in the past. So When we compete, it is against traditional vendors, as we've mentioned, or Against when it's for SaaS, against some cloud new cloud vendors that have emerged the last, let's say, 3 to 5 years. And the way we why we win and why we win most of the cases is because We can compete very effectively with very modern technology, cloud native, but also To reach on angles, we're covering our we've got our customers in 1 in 5 countries. So we understand the localization of In every of those countries. But at the same time, and this is what differentiate, I would say, compared to the mail vendors, is the fact that we've got 27 years Of deep banking expertise. So we combine both 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. So as we had pointed out in Previous discussions. The KONI non banking customers were mostly on 1- to 2 year Contracts. Now we signed the contract in June 2020, which means by Q2 2022, all will be gone. Now 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 licensees and overall total software licenses. So I would say maximum 1% to 2%. And in terms of their payments, what is left to be cashed in from HCL? Yes. As we said, this is a multiyear deal, 7 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. So then we'll have another basically 4 years or 5 years going forward with the annual payment in every Q2 of So going forward, if you already look at 2022, there will be probably a net impact, which is Almost 0. And beyond 2022, so 2023 and beyond, you will have, Let's say, 1, 2 percentage points positive impact on your license Flying from this HCL payment. Okay. This is very clear. Thank you, Thakis. The next question comes from Andreas Muller from Turgeonal Bank. Please go ahead. Yes. Good evening, gentlemen. Thanks for taking my questions. Porges mentioned already that the average deal size went up Also particularly in the competitive deals, do you see that there's a trend going forward as well? And On what fact do you attribute that in general? I think hi, Andreas. I think it's probably premature to call something a trend. Keep in mind, Q1 It's 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 south side. So 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, This trends to move the average deal size up. They buy more volume. They buy more accounts and so on. So I guess that was probably one of the main drivers as we did quite a bit of business with existing customers in Q1. Okay. And 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 the COVID level. Yes. Okay. You attribute this to a very small quarter, but All the competitive deals, nothing has changed. Nothing to integrate. Is that correct? No, we would not call any trend change that neither on the competitive deals No, on the existing deals. I mean, clearly, with more and more product you can sell, there is Hopefully, we can drive our clients to buy more. So this could be a factor in the long But we don't see any change to average steel sizes, which we would need to call out. Okay. Thanks. And as a last question on the share based comp, I mean, that's still guided to €20,000,000 Now you have already made €6,000,000 Can you again explain the assumption between the €20,000,000 That's basically if you If you hit the targets or is that something we should add to that? Yes. There is a number there are a number of assumptions underlying these IFRS 2 charges. Keep in mind, there are Always 3 long term incentive plans running in parallel. So it's not just for 1 year. So this is clearly a factor. This is the estimate at the beginning of the year. We still believe the EUR 20,000,000 is the right number. It's not a linear approach. So I think in terms of modeling, I would take 3 times EUR 4,000,000, EUR 4,500,000 for the next three quarters. So it's still unchanged EUR 20,000,000 for the full year. Okay. Thank you very much. The next question comes from Harmus Leitner from UBS. Please go ahead. Yes. Thank you for letting me on. I have also a couple of questions. Just a brief follow-up on the HCL. Could you help I understand if you get any revenues if the HCL signed with a new customer in that non core business. So is there any potential SaaS revenue stream coming from there? And then you presented the average contract length. Maybe you can comment, it's surprisingly quite a short lived license and maintenance contract going for 3.6 years. We would have thought that that should be slightly longer. And then 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 seems that it is more on the front office compared to core banking. And 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 lot a difficult position to win competitive Stevens, maybe you can comment there what you see there. Thank you. Okay. Let me take those first. So The one you mentioned at the beginning, no, there is no royalty or any revenue Flying to us, if HCL signs new customers Their software or what they have developed, there is no flow through to us, so we don't benefit anything. So the HCL is The HCL partnership, if you want, is just one way when the customers Moving to them at the contract expiry and the one time payment per annum we get there. Now On the contract length, if you keep in mind, and let me explain this in a bit more detail, Our standard contracts on initial signing are for a 5 years maintenance commitment if you look at licenses. Now 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 1st 5 years, the incremental maintenance will have a tenure, Which is equal to the balance of the 5 years remaining, okay? So after 2 years, it's 3 years left. After 3 years, it's 2 years left. So this is one driver of the average tenure. Now after 5 years, most clients move to 1 year rolling maintenance contracts, I. E, The incremental license and maintenance would also, therefore, also have a tenure of 1 year. So if you put this all together, the 3.6% we have shown is the average tenure across all contracts. So yes, if you have more new logos, more new wins, clearly, that pushes up the average tenure. On the SaaS contract length, no, we have seen and it's the same approach there. On the SaaS, what we always said is between 3 5 years. Clearly, Infinity seems to have, As a trend, usually more towards 3 to 4 years, while transact is 4 to 5 years. Clearly, we had now more transact in Q1. That's why the average turnover was higher than last year. Now again, I would not read into those numbers too much from our Q1. Clearly, it has had a positive impact on bookings as we increased the tenure. And clearly, this is a trend we're going to see for the rest of the year. It's going to be very good, but I think We stay conservative in our approach to what we take as a forecast. Thank you. And then just a brief one on the housekeeping question. In your annual report, you had share based compensation of EUR 6,000,000 In the cash flow statement, so the date there is some social charges. Can you give us that number because So we consolidated them to the previous year because there you reported the €39,000,000 So just to understand the moving parts here. Thank you. Yes. We'll follow-up on the detailed split. Thank you. The next question comes from Stacy Poland from JPMorgan. 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? And then do you plan to do more strategic partnerships along these lines? 2nd question, just thinking about net leverage, what kind of leverage would you stretch to for M and A? And does the current M and A pipeline basically, what does the current Hi, Stacy. Listen, we just announced the DXC and Salesforce Partnerships, so clearly, no contribution in Q1 from either of them. And as I said, there is significant activity, workshops taking place, But probably the impact on 2021 would be rather limited. However, as I said, there is a lot and it's very exciting. On the sales force side, the plan is to be able to launch it in Q3. So Hopefully, we will see some impact from that, but it's really going to be towards the end of the year. So I will say limited for 2021. Now clearly, the fact that Temeross 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 a lot of opportunities for us to collaborate We saw the companies. And I think that could be we could see more of those partnerships In the future, clearly, we are very focused on making those successful. And 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 I think it's something that we will clearly consider. Hi, Stacy. Let me take the leverage questions. I mean, 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 and A opportunities at very, very high levels In terms of valuations, which did not make sense for us. Now the pipeline is still good on the M and A front. We have not seen anything which would make us jump up and down and execute, let's put it this way. So if nothing happens on the M and 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 KONI, we went above 3 times. 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 Firths from Togo. 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 2 to 3 years ago? And how does it compare with your win rates that you're seeing in Europe? And 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. So is it correct to assume that you're very confident with that 30% gross number for 2021? Thank you. Hi, Michael. On the U. S. Deal win rates, Let me say that what is very exciting in the U. S, clearly, we started in the U. S. Doing a lot with Infinity. I mean, that's Through different acquisitions that we've done. And what has really improved, Kale Infinity continues To progress, but 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, and I would say both on the SaaS and on the license. So I think that's very encouraging. And I think also the U. S. Is really a market where there is really increased activity And transactional is very well placed and had some I mentioned PayPal. What we are doing for them is just amazing. And the volume and the ability to scale And to support them and all of that is on Transacta. And so we've got more and more success stories to tell in the U. S. So I'm very pleased with the increased win rate that we've got in the U. S. On Transactor. Hi, Michael. Let me take the ACV question. So it is correct that we have seen this strong ACV growth, as I And before to change, not yet flowing through. However, we are confident that having the visibility on HCL When the contract expires, this 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, so 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. But also beyond, I think it's worth pointing out, if we deliver the 40% to 50% ECB growth for this year, this will drive 30% plus growth also for 2022 and beyond. Okay. Very clear. Thank you. Thank you, everyone. And as I said, I hope you'll be able to join us On TCF online, and I'm sure we'll be talking to you very soon. Thank you. Bye. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus And thank you for participating in the conference. You may now disconnect your lines. Goodbye.