Ladies and gentlemen, welcome to the Temenos acquisition of Kony conference call and live webcast. I'm Andrei, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Adam Snyder. Please go ahead.
Good afternoon, everyone. This is Adam Snyder, Head of Investor Relations for Temenos. Thank you very much for joining today's call. Before I hand over to Max, I would just like to highlight that our speakers on the call are in various locations around the world, including the U.S. and Switzerland. Please do bear with us when it comes to Q&A if we need a bit of time to allocate questions among us. With that, I will hand over to Max.
Thank you, Adam. Good afternoon, and thank you for joining this call at such a short notice. Today, we've announced the acquisition of Kony, the number one player in U.S. SaaS digital banking. This is hugely exciting for both Temenos and Kony, as I'm delighted to be joined on the call by Tom Hogan, the chairman and CEO of Kony, as well as Takis, our CFO. I hope you've been able to access the presentation on our website, which we will walk through on this call. Starting with slide five. Temenos is acquiring Kony for an enterprise value of $559 million and an earn-out of $21 million. Kony is a leading vendor of digital banking software in the U.S., one of our key strategic markets.
This acquisition significantly accelerates Temenos Infinity, our award-winning digital front office product, by combining Infinity with Kony's digital banking and multi-experience development platform to create the most advanced digital banking product in the market. Kony has a global team of 1,500 people with very strong digital and cloud expertise. These are both areas where banks are investing significantly, and it is a massive advantage for Temenos to have this expertise. It is also a transformation for our business in the U.S. as we are gaining additional scale, digital banking expertise, credibility, clients in that market specifically. Finally, we expect the acquisition to close early Q4, subject to regulatory approvals. Turning to slide six. This is the largest and most strategic acquisition in the history of Temenos, and let me tell you why. The acquisition will enable us to create the richest and most technology-advanced digital banking product globally.
We will combine Kony's digital banking experience and multi-experience development platform with the best components of Temenos Infinity and Avoka to build the leading digital banking product in the market. This is hugely exciting as this opportunity to accelerate our growth in the digital front office, both in the U.S. but as well globally. Kony is transformational for Temenos in the U.S., in particular, as they have a proven digital front office platform that can integrate with any core. They have a significant U.S. client base, the majority of which are large banks and credit unions, as well as a broad sales coverage of the U.S. market. This gives us the opportunity to cross-sell Temenos products, including T24 Transact, into the Kony client base.
Kony has a very strong management team, and Tom, who you will hear from shortly, will be joining the Temenos Executive Committee as President of Temenos North America. Tom brings significant expertise to the Temenos management team, with an extensive career in the U.S. software industry. Thomas held executive positions at HP, at Siebel, and sat on three public company boards. Globally, Kony has 1,500 employees that are experts in digital banking and will help drive our growth in this space. They have a large development center in India that will complement our existing R&D centers and will become the Temenos hub for our digital banking R&D. Finally, Kony's business model is also highly attractive, with recurring revenues making up over 60% of total revenues. The majority of these are SaaS, and there is also significant contribution from maintenance and recurring license.
On slide seven, I'd like to give an overview of the digital banking opportunity that we are addressing through the combination of Temenos Infinity and Kony. The addressable market for digital front office banking software is estimated to be circa $23 billion globally. The acquisition of Kony brings us market-leading products, sales expertise, scale, and client in the digital front office, and is a very significant step in our journey to capture this market. The digital banking competitive landscape is highly fragmented with a range of different players, none of which will be able to compete against our combined offering. The incumbent banking software vendors typically lack digital banking expertise, and the specialist front office vendors tend to lack the scale and deep domain knowledge that banks need from front to back to be truly digital.
Banks are increasingly seeing the benefits of using third-party package software that they can customize and build application on. Banks can lower the maintenance and development costs, manage content and products, as well as security more easily through a single platform. Banks want to differentiate in the digital front office, and they can do this through designing superb customer experiences, understanding the customer journey, and applying design-led thinking. Kony addresses these areas through its multi-experience development platform and out-of-the-box digital banking experience platforms that banks can customize to their individual requirements. Open APIs are enabling banks to explore new business models, innovation, and collaboration, and this is an area that Temenos has been investing very heavily and will continue to do so.
Both Temenos Infinity and Kony use APIs to enable integration with third-party application as well as with any core banking systems, giving banks full flexibility on how they approach the digital renovation and how they partner with third parties. Turning to slide eight. The acquisition of Kony will significantly enhance our U.S. presence. The U.S. is the largest banking software market globally, with an estimated addressable market of $22 billion annually. Kony will significantly accelerate our growth and market share in the U.S. Kony is headquartered in Austin, Texas, and has 230 employees in the U.S. With the addition of Kony, Temenos will have a total U.S. workforce of over 700 employees with particularly strong digital expertise across the Kony and Avoka teams. We will have offices in seven locations from coast to coast and a total U.S. client base of over 1,300 banks and credit unions.
Our pro forma U.S. revenue for 2019 is expected to be circa $200 million. Lastly, as I said, I'm very pleased that Tom will become our President for North America and join the Temenos Executive Committee. That, I will hand over to Tom to give you further insights on Kony and its products.
Thanks, Max. Let me just start by saying how excited I am about this combination and the opportunity to work with you and the rest of the Temenos leadership team. I've had the chance to get to know Max and his leaders over the past three or four months as we've explored this, and I think we share some fundamental qualities, in terms of culture, people, and more importantly, the vision and the opportunity to grow and lead in this market. I'm thrilled to be here and think it's also a great outcome for all the current stakeholders in Temenos, in Kony, and more importantly, the future customers that I think we'll go bring a lot of value to. Let me start with slide 10, which is a bit of an overview.
Kony was founded roughly a decade ago and have since established ourselves as the global leader in digital banking and low-code development. We have strong development and application capabilities in particular, which have been recognized by a broad range of third-party industry analysts, including IDC, Forrester, Gartner, and others who rank us as a leader in the markets we serve. We have a global client base of over 100 banks spanning across the U.S., Europe, the Middle East, and Asia, with U.S. banks and credit unions making up roughly half of the banking client base. The majority of our U.S. clients are larger financial institutions with assets under management of $10 billion or more.
We also have a strong cross-sector client base both in the U.S. and around the world that will definitely benefit from the continued investment and resources that Temenos will and can make in the Kony solutions. As Max mentioned, we're headquartered in Austin, Texas, with roughly 230 people in the U.S. We have broad sales coverage in the market and a strong understanding of the digital requirements of U.S. financial institutions. Globally, we have roughly 1,500 employees with a strong culture and an understanding of digital and cloud solutions. It's the genesis and the heritage of our business. We have a very similar R&D model to Temenos, with a large center and concentration of our product and services people, which totals around 1,100 in Hyderabad, India, which again complements the presence that Temenos has already in Chennai and Bangalore.
Hyderabad will become the R&D hub for all the digital initiatives and solutions. I think our business model is also fairly compelling with recurring revenues contributing over 60% of our total revenue and high levels of retention among our client base. If we move to slide 11, I'll give you a quick overview of the Kony Quantum platform and the digital banking experience applications and platform as well. Quantum is a low-code, multi-experience development platform that enables the creation of web and mobile applications with exceptional customer experience across multiple devices from one set of tools. This strengthens Temenos Infinity with applications for advanced user experiences across all channels, including personal wearables such as smartwatches, and augmented reality in conversational apps. DBX is a flexible omni-channel banking platform which combines out-of-the-box applications with high levels of customizable experience to drive efficient marketing campaigns and improve customer acquisition and retention.
The DBX platform allows banks to accelerate their time to market, provide exceptional omni-channel experiences for customers, while at the same time reducing their overall costs. By combining Kony with Temenos Infinity, we'll unify the development platform for digital banking journeys across multiple channels and devices and bring rich out-of-the-box applications that banks can use and customize. Go to slide 12. The combination of Temenos and Kony will create the global market leader in the digital banking space. The combined organization will be the leading front-office software provider to banks with unparalleled expertise, scale, and reach. We'll be the only provider with specialist digital banking expertise from front to back, providing a core-agnostic digital front-office product that can be integrated with any core banking engine.
Also offering a vertically integrated stack of front office and core to banks that want to embark on a continuous renovation of their existing systems. Temenos Infinity and Kony have abstracted banking capabilities into their front office, which means it contains rules, workflows, and business logic where needed based on data and products, and ensures the front office is not constrained or limited by a legacy core banking engine. The combined product will be available across all key banking verticals and contain the market-leading customer acquisition and onboarding capabilities from the Avoka platform acquired by Temenos last year. Kony Quantum platform is the leading platform for enabling low-code, code once, deliver anywhere platforms. This is a key competitive advantage as banks' customers increasingly expect a seamless and integrated experience across multiple channels.
Lastly, the combined platform will support a human-to-digital channel through the product called Engage, our highly personalized and sophisticated messaging application that enables banking personnel to interact directly with their customers. I'd now like to hand it over to Takis to take you through the financial details of the acquisition.
Thank you, Tom, and welcome to the Temenos team. On slide 14, I will run you through the details of the transaction. We are acquiring Kony for a total enterprise value of $559 million and an earn-out of $21 million. Kony has $50 million of debt on balance sheet, which will be adjusted in the final consideration. We are funding the acquisition through debt, specifically our existing revolving credit facility and the bridge loan. With our strong cash flow profile, our debt leverage will be below 2.5 times net debt to EBITDA by the end of 2019 and below 1.5 times by the end of 2020. The acquisition is subject to U.S. antitrust approvals, which we expect to take 4 to 6 weeks to complete, which means we expect the acquisition to close in early Q4 this year.
In terms of the financial impact of the acquisition, we expect Kony to generate total revenues of around $115 million in 2020. This represents a growth rate in excess of Temenos' sustainable annual revenue growth target. Looking at the composition of Kony's revenue, over 60% of its total revenue is recurring. The majority of this is SaaS, with the rest of their recurring revenue stemming from maintenance and recurring licenses. The balance to total revenue is from services. We expect the acquisition to be neutral to non-IFRS EPS in 2020, and accretive to non-IFRS EPS in 2021. We expect it to reach group margins within three years. We will incur one-time total integration and restructuring costs of $10 million-$12 million, of which $2 million-$3 million will be expensed in 2019, and the remainder will be booked in 2020.
We will also incur one-time acquisition-related costs of $3 million, which we will rebook in 2019. On slide 15, we expect to drive significant revenue synergies from the combination of Kony and Temenos. Digital banking, as you heard, is a major area of investment for banks globally, and the combination of the Kony platform and Temenos Infinity will put us in a very strong position to capitalize on this trend. The main drivers of revenue synergies we have identified come from three main areas. Firstly, we will cross-sell the Kony DBX and Quantum platforms to Temenos' global client base outside of the U.S., as well as ultimately selling the combined Kony and Temenos Infinity platform to all our clients globally. Secondly, we plan to accelerate the sales of Kony DBX and Quantum in the U.S. by leveraging a larger combined sales force and cross-selling to the Temenos U.S. client base.
Thirdly, we see an excellent opportunity to cross-sell Temenos products into the Kony client base, both in the U.S. and globally, including T24 Transact, our market-leading core banking product. We will drive cost synergies mainly through G&A optimization. Turning to slide 16, we have reconfirmed our sustainable annual growth targets that we announced at our capital markets day in May. These targets are non-IFRS. We expect to deliver long-term total software licensing growth of at least 15%, total revenue growth of 10%-15%, and EPS growth of at least 15% annually. We expect our DSOs to decline to less than 90 days, and our EBIT margin to reach at least 36%. Our long-term tax rate is around 20%, and we expect to convert over 100% of EBITDA into operating cash flow every year.
We are also reconfirming our three- to five-year targets of expanding our EBIT margin by 100 to 150 basis points every year, and a tax rate of 18%-20%. Finally, we plan to update our fiscal year 2019 guidance when we announce our Q3 results on the 16th of October, as we expect the deal to have closed by then. With that, I will hand back to Max to conclude the presentation.
Thank you, Takis. In conclusion, the acquisition of Kony will significantly enhance Temenos Infinity by combining with Kony's leading digital banking products. By combining Infinity and Kony, we will build the leading digital banking product in the market, accelerating our growth in the digital front office space to become the global leader. Kony will transform our market presence and expertise in the U.S. through the addition of a high experienced team, significant sales coverage, and strong client base. It will also enhance our digital expertise globally with the addition of 1,500 employees that are expert in digital banking and have also significant cloud expertise. Kony SaaS-based business model is also highly attractive, with over 60% recurring revenues, which is mostly SaaS.
This is, as I said, very exciting because this acquisition allow us to accelerate our two most strategic initiatives, which is the U.S., and which is digital banking. Very pleased with this and I would like Operator to open up the call for questions.
The first question comes from the line of James Goodman from Barclays. Please go ahead.
Good evening. Yes. Thank you. A couple of questions from me, please. The first one was just if you could give us a little bit more, just to flavor around the history of Kony. Has it been purely organic over that 10 years that you mentioned? Maybe can you help us a little bit just with the growth rate, specifically that the business is seeing at the moment and into that 2020 number that you gave? The other question is, you've articulated very clearly how additive the product will be to your Infinity product, but I'm a little unsure exactly where the overlap is in terms of what existing functionality you have in Infinity.
Is there much overlap there, and will there be an element of running separate offerings, or are you immediately going to combine that product set so you still have one sort of go-to-market approach in that front office? Thank you.
Thank you. Maybe I'll take the second, and I'll leave you to the first one. Clearly, the goal is to combine the offering. I think this is very exciting. What is also very exciting, in fact, if you look at Kony and if you look at Temenos, our front offices are quite complementary. If you look at where we are very strong, for instance, on both sides, this is probably where Kony is less strong. When you look at the digital multi-experience platform, which is extremely strong on native apps, this is probably where Temenos is less. The combination of the two works extremely well. In addition, Temenos on Infinity, I would say, is much a broader spectrum of banking expertise as well.
We will be able to take the best from Kony, which complements very nicely our Infinity and offer the best product in the market by far. Clearly, we will go with a combined offering. As you heard, both of us are working extensively through API, so the integration will be relatively straightforward. That's really the plan, is to integrate and to combine the different products into one single product.
Hi, James. What we can say is definitely two things. Number one, Kony's growth is definitely accretive to both our long-term guidance for total software license growth, but also accretive to total revenue growth. As it is right now, forecast for 2020, it's accretive to our growth rate. If you look at more specifically the individual lines, we're not going to disclose this, but SaaS growth, one of the main drivers for the acquisition is growing even faster than that. Let's say 25% plus on the SaaS.
That's very clear. Thank you. Just has Kony been purely organic over the years, or has it sort of made some acquisitions as well?
Yeah. This is Tom, I'll take that. Excuse me. The company's been around for a little over 10 years. The overwhelming majority of the P&L is purely organic. We did our first real acquisition about 10 months ago in the fall. Even that would be considered a tuck-in by our standards. It's been almost exclusively organic. The one acquisition we did was to purchase the solution I referenced for sort of making banking personal again and linking the human and digital world through a product called Engage that was incubated by a regional bank in the Northwest called Umpqua, that we partnered with and acquired. Again, that was extremely modest relative to the revenues.
Yeah, that's great. Thank you.
The next question comes from the line of Adam Wood from Morgan Stanley. Please go ahead.
Hi, good evening, and thanks for taking the question. I've also got a few, if I could. Maybe just first of all, on the current margin profile of Kony, could you give us an idea of how much gap there is to close between the two businesses? Then maybe could we just go into a little bit more detail around the integration of the products? Can we think about this from two points of view? Firstly, maybe how long you think it would take to come and bring these offerings that you have on the front end and around the more digital side to market. Then maybe more importantly, given the cross-sell opportunities, could you give us a little bit of a feel for what the bases of the two install bases are using today?
Particularly on the Kony side, are there any Temenos customers in there on the middle and back office side? How much do you think banks are looking to integrate these today versus that being more a kind of three, five, seven-year view where it would be a nice to have, but at the minute, the development work and the thought processes of how they run the two sides are relatively different. Maybe just finally, could you just remind us and confirm that the targets you've given for the mid and long term, they're organic and obviously wouldn't include the accretive growth from deals like this? Thank you.
Thank you. Do you want to take the first and the last one, and I'll take the second and third one?
I'll take that. Hi, Adam. We have not disclosed the historic margin profile of Kony, but what we can say is profitability has been going up over the last years, and we expect that to continue. We have given some hints in terms of the EPS impact. Obviously, there's going to take a while to reach the group margins, i.e., where Temenos is right now. Within three years. I think that's what we can say right now. In terms of the acceleration, we have given total software license growth of 15% plus, which is basically everything between, let's say, 15%-17%, 18%. There is an accretive impact. Same goes for total revenues. Given the relative size of Kony and Temenos, I think that's what we can say. Definitely improving the growth profile for Temenos, both on total software revenues, but also total revenue.
Adam, yeah. Clearly accretive to grow this transaction. Maybe I start with the third question, which links to the growth. Kony is mainly a U.S. player, not just U.S., but it's mainly a U.S. player. Hence, I would say it's complementary to what we do. There is little overlap, I would say, on the customer base. Yes, we do have some large customer in common, for instance, HSBC, that we can name. The fact that there are much more, I would say, they've got many more customers at the high end of the market than we have, it's very complementary in that sense.
For us, really the opportunity and specifically in the U.S., if you look at the top five U.S. banks have investment so much in digital front, so that there is such an opportunity right now we see for banks to take a package, to be able to compete against the investment that have been made by the largest banks in the U.S. This is what the opportunity that Kony is going after, and we'll be able to capture even more that opportunity together. Ultimately, what is also very exciting is we believe that a true transformation, digital transformation only happens when you really go back to front. Over time, we are convinced that those customers will also want to renovate the back-end.
We've seen many, many cases where when our customers are using our front-end, sometimes using a third-party back office or an in-house back, they see the limitation of what they can do with the software at the front, and hence there is really a benefit to go back to front. I think that's very, very exciting for us. To go back again to the integration of the product, was your second question. As I said, the fact that we are open through API, this clearly facilitates. Immediately there is more product to sell. I think that's very importantly, and some very exciting product like the one that Tom mentioned around Engage, how you can interact on a personal basis, with your banker. That's really super cool as a product. Ultimately the end-to-end combination or integration will take around 12-18 months to be fully completed.
Already we'll be able very, very fast to go to market with a combined offering through APIs, which that we'll be able to sell.
Perfect. Thank you very much.
The next question comes from the line of Michael Foeth from Vontobel. Please go ahead.
Yes. Hi, I have a question or two questions. The first one is in relation to the earn-out. Can you explain why the earn-out seems so small in the total mix of the consideration that you were paying? The second question would be regarding the, you mentioned the addressable market of $9 billion in the U.S., $23 billion overall. How much of that market are you already addressing really? Maybe you can quantify by how much you are really increasing your addressable market, if that's possible at all.
Hi, Michael.
Hey, Michael.
Sorry. Michael, I'll take.
Go ahead.
You can see that we're not in the same location. I'll start with the second one. The $9 billion and the $23 billion, this is the total market as we said. I think what is key about this transaction, it is how it accelerates our ability to capture that market. I think this is the case. This transaction strengthen our ability to capture it, accelerate our ability to capture that opportunity. The opportunity is the same. Clearly, there is some more products or you could say that there's a little bit enhanced, but the opportunity is still so massive. How can we capture it? How can we accelerate and grow faster to capture that market? Takis, I'll leave the first one to you.
Yeah. Hi, Michael. The earn-out of $21 million, this is more or less linked to let's say some targets we have defined over the next, let's say, six to nine months. Keep in mind, there is a lot of recurring business with a very good visibility, so we know what we're buying. Therefore, any potential upside would be basically linked to the earn-out.
Okay, thanks a lot.
The next question comes from the line of Paul Kratz from Jefferies. Please go ahead.
Hi, everyone. Two questions from my side. I think first and foremost, thinking about the three different revenue growth buckets that Takis mentioned earlier, could you give us a rough idea of how these different buckets contribute into future growth? Secondly, thinking more also about the U.S. market and past acquisitions that you guys have done, I think in the past we haven't maybe necessarily seen the kind of cross-sell that some might have hoped for. Could you maybe walk us through what is different with this acquisition and is it in the way that you're approaching the market? Is it maybe that you're approaching it first from a front office standpoint or maybe just timing in its own right? It'd be great to have maybe your insights on that.
Okay. I'll take the first one. On the three areas of basically revenue synergies we have defined, there is clearly we have an internal list for that. Keep in mind what Max said, that there's going to be, from day one, more product to sell for all the salespeople. I think in a second step, we'll going to expand this throughout the regions and with all the products. I think the key element for us is to get the sales teach in quickly done, so that people know and have basically all the demo systems available to be able to sell more product from day one.
I'll take the U.S. question. If you look at the last 2 acquisition now, we've done 3 acquisition, but remember the first one was a very tiny one. If you look at both [Axway] and then if you look at Avoka, all of those were extremely successful transaction in the sense that they gave us a head start in the U.S. They gave us credibility. They allowed us to build a U.S. business. Today, we've got almost 500 people in the U.S., so we've got some amazing customers in the U.S. We've been able to do that through those different acquisitions that were fully integrated and were able to distribute our product in the U.S.
I think now this transaction takes it to a different level, because we've probably done a lot of building our credibility, getting reference in the U.S., getting our different products exposed to the U.S. market. Now this transaction takes it to the next level. It bring much more scale, many more customers. A team as well, a very strong management team that will be able to support and lead this for the future. I would say it's a continuation of what we've done. If you look at what we did with Avoka, that was an amazing acquisition with fantastic onboarding products. This is a continuation, and it's taking to the next level on the front-end side.
I'm very pleased, and I can clearly see the synergies, I can see the benefits, and I think both Tom and myself are super excited of what we are going to do in the U.S. in the future.
Thanks.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Mr. Chuard for any closing remarks.
Well, thank you very much for joining in such a short notice. I will speak very soon on the back of Q3. Thank you very much for joining.