Earnings Call: Q3 2018

Oct 17, 2018

Afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Thermo's Q3 2018 Results Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Wednesday, 17th October, 2018. I 2018. I would like to hand the call over to your speaker today, David Arnott. Please go ahead. Thank you, operator. Good afternoon, everybody, and thank you very much for taking the time to join today's call. We hope you've been able to access the results presentation on our website. And Max and I are going to be using this results presentation as a backdrop to our discussion of the quarter. So assuming you will found it, I'm going to start with some comments on our Q3 performance, then I'll hand over to Max for an overview of the financials, and then I'll take it back for some concluding remarks before we take any questions you'd like to ask. Starting on Slide 7, the Q3 was an outstanding quarter across all our KPIs. We grew total software licensing by 20% and total revenues by 16%, which reflects both the underlying market growth as well as the strength of our leadership position. We've signed a large number of deals this quarter across all geographies and this has enabled us to convincingly lap tough comparatives without the contribution of a single very large transformational Tier 1 deal in the quarterly revenue. We consistently highlighted that IT spend is now strategic and not discretionary. And we think that our performance both in the Q3 and of course the previous few quarters leading up to today is very strong evidence for this. Pressure on banks to provide real time fulfillment for their customers are only increasing with the move to open banking and banks are limited in their ability to address these demands, if they're sitting on legacy software. Also very pleased that once again we were named as a leader in the Forrester Wave global digital banking platform, which speaks to the strength of our product offering and our ability to support our clients as they're undergoing their digital transformation. Given that our outstanding Q3 results come on the back of a very strong first half, today we are increasing our full year guidance. And this reflects both our sales momentum as well as our increased revenue visibility at this point of the year. If you move now to Slide 8, I'd like to dig a little bit more into the underlying sales performance for the Q3, where once again the demand across the quarter was broad based across all of our geographies and all peers and all clients. We signed 17 new customers in the quarter, including 3 challenger banks, one each from the U. S, Europe and Asia. The fact that new innovative start up banks that we're seeing today selecting us is a testament to the strength of our product as well as our investment in innovation. If you look at the individual regions, there's very strong performance in the Americas and I'll come back to that in a second with our strongest ever quarter in the U. S. We have growth based growth in Europe across our client peers and tiers and Australia continues to perform very well in Asia Pacific, including the signing of a new Tier 1 venue in the country. Given our success on the back of the RUVIC acquisition last year, we're also planning to establish an office in New Zealand where we see similar growth opportunities. Lastly, we continue to invest in sales and marketing as well as continued product investments of course to capture the market opportunity ahead of us. Turning to Slide 9 now, I'd like to briefly focus on the U. S. As I said, this is our strongest ever quarter and demonstrates the momentum that we continue to build. We had multiple signings across our suites including our core digital suites and our unmanagement suites in the quarter, winning against the incumbent U. S. Competition. The NeoBank that we mentioned at the time of our Q2 results, we can now name as Varo Money, which is the 1st national mobile only bank in U. S. History and very high profile. They're implementing in the cloud which will significantly de risk the implementation process and allow the management team to focus on their business and go to market strategy as soon as we arrive. Our ongoing implementations with Commerce Bank and State Street are progressing well and we continue to strengthen the U. S. Organization with a total of 350 employees now based in the U. S. And the pipeline continues to build as we gain traction in the market. Moving to Slide 10 now, a little bit on services. We had 21 implementation go lives in the 3rd quarter, which brings the total implementation go lives year to date to 70. It's very important for our clients and prospects that we could demonstrate that we can get them live successfully on time and on budget. And the Forrester Wave highlighted that our ability to support testing and delivery both on premise and in the cloud, so testing and delivery as a service are second to none and this is something that we pride ourselves on. We've seen a steady increase in the number of banks implementing in the cloud, which brings a number of advantages in terms of speed and reducing complexity. This includes both incumbent banks such as Bank Itau for their private banking, Continental Building Society for their savings and mortgages as we announced earlier in the year as well typically native neobanks that we've been talking about such as Judo in Australia and Barrow Money in the U. S. The key part of our implementation strategy is working with our strategic partners and the involvement of these partners continues to increase. This has helped drive our services margin to 11.5% over the last 12 months and we continue to invest heavily in the Temenos Learning community to drive growth in partner consulting numbers. Turning to Slide 11 now, I'd just like to give you our view on the market outlook looking forward. External pressures on banks as they face new digitally native competition both from neo banks as well as new entrants to the market such as telecoms companies, retailers and technologists. These new competitors are able to offer a truly digital experience defined by the real time fulfillment of customer demands at any time and to any channel. And frankly, incumbent banks are struggling to keep up there, facing added pressure from the regulator and rapidly evolving payments landscape as well. And these pressures taken together are forcing banks to invest in IT with budgets and spend on third party software increasing year after year. Temenos is well positioned to take advantage of these trends both for on premise as well as SaaS and cloud. Our SaaS and cloud bookings have increased 4 times in 2008 year to date and the significant traction will materialize in the P and L from 2019. I expect it to comfortably achieve our target of 35% per annum growth in SaaS and SaaS revenue per annum over the medium term. This is incremental business as it opens up banks who previously would have probably done nothing and should accelerate conversion of the in house market which remains 80% to 90% of the addressable spend today. So clearly this is very exciting over the medium term. We're also demonstrating the momentum that we're building in the U. S. And these factors taken together medium term outlook is has never been stronger in particular given the level of committed spend from Tier 1 and Tier 2 institutions which underpin our progressive renovation revenues and the strength of our pipeline. In the medium term, we expect to grow total software licensing by at least 15%, total revenue by 10% to 15% and EPS by at least 15% per annum. So with that, I'd like to hand you over to Max to update you on the financials. Thank you, David. Starting with Slide 13, I'll walk you through the financial highlights for the quarter. We had an outstanding quarter across KPIs from revenue growth through to margin expansion and cash generation. We've increased our guidance for the full year on the back of our strong sales momentum and increased revenue visibility. I'll talk you through that in a moment. We signed a large number of deals across all geographies and clientele in the quarter. I was particularly pleased with our performance in the U. S. And with multiple deals signed across a range of products. We drove total software licensing growth of 20%. Our maintenance also grew 12 percent as it continues to accelerate on the back of our strong license growth over the past year. Total revenue grew 16% in the quarter and EBIT was up 20%, with our LTM EBIT margin reaching 30.8%. We also delivered very strong EPS growth of 18%. We generated $53,000,000 of operating cash flow in the quarter, an increase of 31% year on year, and our DSOs continued to decline, reaching 1 in 14 days at the end of Q3. Lastly, we continue to benefit from the positive impact of our pricing strategy on our services margin, which reached 11.5% over the last 12 months, underpinned by our strong delivery model. On Slide 14, I will highlight some of the most important numbers for the quarter. Our total software licensing grew 20% in constant currency in the quarter and 24% over the last 12 months. And total revenue grew 16% both in the quarter and over the last 12 months. Our market leading position was again recognized this quarter when Forrester named us as a leader in the Forrester wave. We've seen continued momentum in SaaS and cloud adoption, with booking growing by 4x in 2018 year to date. We expect this growth to be visible in our 2019 numbers, giving the lag between bookings and revenues of these products. We continue to benefit from strong operational leverage in the business. We said it's up 20% in constant currency this quarter and 22% over the last 12 months. Our EBIT margin expanded by 1 basis points in the quarter and reached 30.8% in the LTM. Lastly, we continue to improve our services margin, which reached 11.5% in the LTM. We are able to do this through the strength of our delivery model, working closely with our partners, as well as benefiting from working with more Tier 1 and Tier 2 clients. On Slide 15, we show like for like revenues and costs, adjusting for the impact of M and A and FX. There was no impact from M and A this quarter as we closed the last acquisition of Rubik in Australia in Q2 2017. In terms of FX, the weaker euro was a headwind on revenues, while our cost base benefited from an order of currency weakening against the dollar. Taking into account currency movement and hedging, FX was a small headwind on EBITDA this quarter. We delivered very strong organic growth this quarter with total software licensing up 20% and maintenance up 12% as we continue to pull ahead in the growing market. Total like for like cost increased 14% in the quarter, driven by our ongoing investment in sales and marketing as well as products. On Slide 16, we had a very strong growth in net profit as well, which was up 18% in the quarter and 20% over the last 12 months. The increase in tax was mainly driven by the stronger earnings this quarter with some impact from the increase of our group tax rate year on year as it continues to approach our medium term normalized rate of 17% to 18%. EPS was up 18% in the quarter and 21% in the last 12 months to reach $2.84 On Slide 17, our cash conversion continues to be very strong. This quarter it was at 100 and 16%, well above our target of 1% of IFRS to EBITDA. Our DSOs decreased another 10 days year on year to end the quarter at 140 days. As a reminder, we expect DSOs to continue, declining at around 5 to 10 days per year to reach one day in the medium term. On Slide 18, we highlight the key changes to the Group liquidity in the quarter. We generated $53,000,000 of operating cash in the quarter, an increase of 31% year on year. We recorded higher payable outflows in Q3, which is due to outflows linked to variable compensation, and I had mentioned that on the last call in Q2. This was balanced by some maintenance being collected in Q3, which will have typically been collected in Q4. We continued our share buyback, purchasing $44,000,000 of shares in the quarter, and we ended the quarter with $92,000,000 of cash on balance sheet. Our total borrowings at the end of Q3 were at $531,000,000 and our net debt was therefore at $439,000,000 equal to a leverage of 4.4x. And finally, on Slide 19, we have given our revised 2018 guidance. We've raised our full year guidance on the back of our strong sales momentum as well as our increased revenue visibility as we approach the year end. Our guidance is based on IAS 18 and is in constant currencies. We've provided the FX rate in the appendix. We are guiding for full year total software licensing growth of 15% to 20%, up from 13.5% to 18.5%. We are guiding for total revenue growth of 12% to 14%, up from 10% to 13%. Our EBIT guidance is now in the range of $262,000,000 to $264,000,000 up from $255,000,000 to $260,000,000 This implies a full year margin of circa 31%, which presents 100 basis points expansion in constant currencies. We still expect a 2018 tax rate of between 15% to 16%. And finally, we expect to convert over 100% of EBITDA into cash. I am confident that we will deliver strong unit growth and margin expansion for 2018 and in the medium term. With that, I will hand back to David. Thank you, Mac. So in conclusion, we had an outstanding Q3 across all of our KPIs. Fertility and Regulation continue to be very much a focus for banks with open banking and payments in particular driving demand. We had very strong momentum across all geographies, client peers and segments in the quarter, driven by the increasing strategic priority banks are placing on their IT spend and IT strategy. Our position as a market leader was reconfirmed this quarter, and we continue to pull ahead of And Tier 1 and Tier 2 committed spend and the strength of our pipeline give us confidence to And Tier 1 and Tier 2 committed spend and the strength of our pipeline give us confidence beyond that up into the medium term. And of course, Max and I look forward to updating you again in February at the time of the 4th quarter results. So with that, operator, we'd like to open up the call for questions, please. Your first question comes from the line of Takis Pilopoulos from Bank Vontobel. Please ask your question. Yes, thanks. Good evening, David, Max. Well done. Congrats. I think a couple of people have expected something else. Two questions from my side. The one is you talked all about very good regional performance. Maybe specifically on any progress you had with Tier 1 banks, transformational type of deals. We haven't seen anything for a while, maybe across regions, a bit more granularity on this one. That will be question number 1. And number 2, on specifically the SaaS, some very optimistic statements here. What has changed? Has the sales approach changed this year that you had such an increase in bookings? Or is the customer readiness just now such that you can book those deals? Takis, it's Max. If I take the first one, yes, as we said, we've had broad based, very strong regional performance. On the Tier 1 specifically, listen, we do slightly more than 50% of our total software comes from Tier 1. So clearly, Tier 1, Tier 2. So we are very clearly pleased with this situation. I think we're very pleased as well with delivering another Tier 1, new Tier 1 name in Australia in the quarter. And now more specifically around what we call those very large transformational deals, which for us, those are very strategic and highly material from a numbers point of view. And since, as you know, we don't include them in the guidance, clearly, those takes longer to assess. Clearly, there is a very good pipeline on those, but the timing is difficult. So I think we are very pleased that we are able to grow at those rates at 20 percent without the contribution from a transformational deal like that. So I think I was very pleased with that. But clearly, they are in the pipeline and we continue to work on those fronts. Okay, Saket, thanks to your thanks at the beginning. Let me take the SaaS point. The market is moving faster than we thought and frankly the industry thought and I don't want to overplay it yet in terms of its willingness to adopt software and paste it in the public cloud and also to take further services around it because of course they're different. You can buy software, pay for it upfront, take no extra services and install it in somebody else's cloud if you want to give you want as an infrastructure decision. And it's not synonymous with software as a service, which is a rental model. So they're very different things. We've seen the 2 or 3 years now an increasing willingness of larger banks to use the public cloud, which has gained a lot of credibility. It started out more of a small startup microfinance type of initiative, but when you see banks like Bank Airtel in the private wealth space and people like Coventry installing the software in the public cloud. That makes the economics from their point of view much, much more compelling because they can remove the infrastructure costs on a go forward basis, which they couldn't do in the legacy systems. Linked to cloud provisioning of the software, more and more services get provided and you're seeing an acceleration move towards SaaS initially in areas like testing, upgrading, monitoring, moving towards more of a mindset that your software vendor can be left in feet to run the whole IT layer and you can focus on your business. So this is a trend that's just emerging. So the elevator pitch, if you like, is install the software once in the cloud, take it as a service, never need to upgrade again. Really quite compelling messages and the industry itself is starting, I think just starting I would say to find its feet in terms of trusting vendors to provide software in a broader services architecture if you like. And certainly, they're further ahead in trusting cloud storage as a mechanism for their infrastructure to replace them for their own infrastructure. So first of all, the medium term quite exciting, but don't want to overplay it just yet. The line of Chandra Srivaraman from In First Bank is now open. Great. Thanks a lot. So congrats from my side and so on an excellent quarter. I just have a couple of questions. So first thing I noticed an increase in competitive deals. I was just wondering what is driving it? Is the competitive landscape changing or you're going after some new customers? So that's my first question. Second one for Max specifically, in terms of your last 12 months move in margins, you're tracking slightly below your medium term guidance. Guess a bit of FX impact, but any thoughts on how you see that moving over the next couple of years would be quite helpful. Thanks. Thanks, Andrew. Let me take the I guess you're referring to Slide 27, if everybody's benefit, there's a little table of pie charts on Slide 27 that show that in the last in the Q3 competitive deals accounted for 30% compared to 23% in the quarter. Listen, it's very difficult on a quarterly basis to pick up trends from this. If you look at the bottom half of that table, you see in the last 12 months 45% has come from competitive deals and 31% from in the expiry. Broadly though across the timeline, if you look at the last 2 or 3 years, we've been doing 2 things very well. First of all, we've been winning the lion's share as new deals have come to market. As we become established as the player that is winning the biggest deals, more and more if you defend your position as new banks come to come, new banks make a decision, they want to buy the same as the rest are buying frankly for a number of reasons. So the competitive deals as a percentage of our revenue, which clearly means we won, is increasing. But at the same time, the foundations for Temenos and this is why the model has become so good in the last few years is once you get a foot in the door, you fix one of their problems, maybe it's a tactical problem or you solve a line of business. It's progressive renovation story by which they come back and they slowly, slowly change it, but without consuming all the bank's capital for 10 years in one massive firm and project like occasionally Tier 1 is doing, we carve those out at the time. But it's not very each one is very important. It's very important to win the lion's share of the new business coming to market. We can't afford to continue competitor coming in and we're not. But it also is important that as banks start their progressive renovation with it, we impress them enough to continue. The last thing we need is a long sales process, get a foot in the door and do something and they for whatever reason they don't come back. So both have their own merits, both are very important for the business model going forward. But increasingly, as the market itself gains momentum, you see the new name wins, the competitive wins are gaining. So that if you take the mathematics of the two parts of the pie chart means that the market itself in total is accelerating. Chandra, it's Max. On the margin, as we said quite a few times, we are confident of improving margin between 100 to 150 basis points per year. And clearly, we've been very successful in doing so over the last 4 years. And as you know, the visibility we've got on that is quite high. This is coming mainly from the incremental and cumulative recurring revenues that we have in our business, which we protect and goes down to the bottom line. So I'm confident, as you've seen with great data, we've increased the guidance. And again, we expect 1 basis points improvement. I continue to expect this for the medium term. Okay, perfect. Maybe a quick follow-up in terms of something that you alluded to in your comments. So you've done exceedingly well without any single large deal announcement. So I'm just trying to get a sense of your sensitivity in terms of signing these large deals. Would you be able to grow at these rates without signing these large deals, say, in 2019 or 2020? Listen, what we said, and in fact, David, even in she's now on the call, made the point is medium term, we believe we can grow sustainably at 15% more on top of our software licensing. Now clearly, the last 4 years, we've been growing faster than that. We've been growing towards more than 20% and so on. So clearly, we believe that we can grow more than 15% in the medium term without the contribution of those mega transformational deals because this is our business as business usual for us. Now clearly, as I said, we expect to continue to be winning all those launches, and we've done that in the past. As you know, the last 4 transformational deals that came to market, we won them, and we expect to continue to won the majority of them. And since we are very confident in the medium term. Great. Thanks and congrats again. The line of Josh Levin from Citigroup is now open. I have two questions. The first, in the past, you said that the U. S. Penetration story is a slow and steady story as you need to build reference clients. This quarter, you're talking about building momentum and key wins in the U. S. And of course, you don't want to overstate the U. S. Story, but would it be fair to say that the U. S. Story is accelerating or approaching an inflection point of sorts? And then the second question is, some of the large IT consulting firms, I think Accenture among them, have said that their European Financial Services practices were weak in the 3rd quarter as some large projects rolled off. I've been they said that they expect projects to pick up in the second half of twenty nineteen. It seems like you didn't see any of this weakness in Europe and I guess what would be your outlook? Okay, Josh. Let me take both of those. Okay, we don't want to overplay the U. S. It's a long term. It's a long game. It's a huge market. It's far more important that we get our records in line as soon as possible and we win the deals that are coming to market. So obviously, we had a fantastic quarter. It's a great data point, but I wouldn't accept personally, I wouldn't accelerate anything in your model. It's great that the momentum seems to be building. Okay. So the expenditure point. Listen, we're not pressed to speak on behalf of any one systems integrator and certainly I wouldn't want to try and justify whatever statements they're making. But if you're adding value to banks and you're delivering value by putting in modern software that allows them to compete, grow revenues then we continue to see well. So maybe there's maybe the model of having large teams of externals to run the bank has different fundamentals to the business model that we're adopting for Financial Services. So we don't see it, but to be very clear, we're very happy. The line of Mohammed Moala from Goldman Sachs is now open. Great. Thank you very much. I'm just curious, firstly, in terms of the opportunity set and the pipeline you have, are you seeing sort of significantly more growth in some of these digital first banks or some of these sort of alternative sort of players entering the kind of financial market? And those sales cycles and sales processes clearly proceeding much faster. And then as you sort of take that into the U. S. Market, that's where that sort of acceleration momentum is? And then in the U. S. Specifically, where are you on some of those regional bank opportunities? And if you can update us where you are on sort of Commerzbank just to sort of get a sense of is there sort of a dual track momentum here, particularly in the U. S? Okay. Let me take the second one. I'm going to have to ask you to repeat the first one because we want to make sure we answer it correctly. So the U. S. Is performing very well and one point I should have made earlier is that it's across our different suites. We have a broad range of offerings from retail to private wealth to fund management and we've seen increased action in pipeline activity on a broader scale than we have seen in the past. For example, one of the names we're allowed to talk about is Northern Trust. We signed a deal with Northern Trust in the Q3. The I won't comment specifically on a segment of the market and what our sales activity is, but obviously above about a certain asset size maybe GBP 3,000,000 to GBP 5,000,000 it's smaller than that kind of doesn't make sense frankly to buy a shopper like ours and lead to the traditional delivery model. But the larger banks have the same challenges as everybody else does. They need to compete against digital newcomers, they need to be agile, they need real time systems and they see that as something absent from the players and that applies to the regional banks where a lot of consolidation is going on and let you restore profitability very quickly and grow your revenues, you've got a real strategic challenge. It's down by about 30 percent, the number of those regional and sub regional banks in the last 4 or 5 years. So there's a lot of consolidation, a lot of strategic challenges those banks face. And we are one of the solutions that can get them out of that problem. So and then above that, you get into the Tier 1 Tier 2 space and it's the State Streets and the Commerce and the Northern Trusts, where clearly our value proposition as we demonstrate referenceability is absolutely fantastic and very compelling. And in that context on Commerce Bank, I would just like to say that we're hitting all of our milestones. They're very pleased with this to talk publicly adapting. They're pleased with this. We're very happy to be using them as a launching pattern as a reference in the U. S. Market. So progressing very well. And my first question, David, was more around as you look at sort of the opportunity side to explore across the board, are with some of the banks that you've worked with, whether even the Tier 1 and Tier 2s, many of them are launching some of the digital only offerings. Do you feel that sort of the opportunity set and the pace at which you can go there is much faster versus on the more kind of existing side where it's perhaps progressive renovation and that momentum is maybe still relatively slower? That's a very interesting question. We're seeing a lot more of this actually. If you look at Santander, Santander's Open Bank initiative is exactly that spinning off a new digital bank separate from the existing bank with its own branding. We didn't call it Santander Digital, they call it Open targeting a different demographic and so forth. Equitable the same was the spin off of TD in Canada, Pepper Bank Saloomi. So there is an increasing trend to banks wanting to stand up a brand new digital bank, Vonstrasse. As you know, it's one of the 3 models that we support. You can stand up a new digital bank. You don't have to put on the critical part, the documentation of the legacy system. You're up and running quickly. And for banks to see more get back in the market as the strategic priority as opposed to cost cuts, to be able to go to market quickly with a new very nimble bank is something obviously we support. It plays perfectly to Peneloft's strength, which is why we're seeing that across all the tiers. But on the other hand, there are banks who want to do progressive renovation and there's banks who want to follow various different models. But in particular, this trend towards banks standing up a new digital separate offering and then moving the books and records across later once you're up and running and out in the market with your new digital bank is something that plays exactly to Feminost's strength. Okay. And that's essentially then drives much more sort of consistent repeatable growth essentially rather than these big lumpy deals that happen sort of every couple of years. Is that a fair comment? Well, the revenue opportunity comes out at the time, 3 years you build these things, but progressive renovation is also very good. You hack away at the line of business 1 year and you do payments and then you come back and you do deposits, so more sort of the Phase 3 commerce type of model that we've seen. So those give revenue visibility. I think that's the point. We've come a long way from the big bang approach of doing nothing or doing everything. I suppose for those who, for whatever reason, progressive renovation or big bang was unpalatable, the fact that you can dip a toe in the water and launch a new digital bank quite quickly using Kmart's technology, probably if anything opens up and accelerates to market for banks who previously would have done nothing. So as the first of these banks like Equitable, like Santander, like Umi, have launched new digital banks and we're taking them live extremely quickly, then you'd expect if that trend to continue with the Temenos, we'll be able to write that. The line of Jacob Kruse from Autonomous is now open. Hi, thank you. I guess just two questions. Firstly, could you talk at all about what level of revenue contribution you get from some of the suites, especially things like payments, I guess, Open Banking, just in relation to what you're making from the core banking business or alternative just in terms of new sales? Just to sort of get a sense of the relative importance there. And secondly, just on the discussion on transformational deals. Are we talking here about when you talk about the pipeline, are you talking about the kind pushbacks? What are the And in that, what are the kind of pushbacks? What are the stumbling blocks that you're seeing to get those to move from being in the pipeline to being live or being in progress? Okay, Jacob. Thanks for this question. So we don't split out revenue by product. It's extremely fungible. The bank may have a problem somewhere else that wants to test well to test Temenos at low volume, relatively low, low profile. But what they're really after, like in Nordea's case with understanding whether ThermoNos is a value partner for the retail business later. So it's very, very tangible and splitting it out we don't use it internally, it makes no sense to us. Far more important is to identify an entry point into the bank, which quite often is tactical and expand on that in the way that you turn that tactical opportunity into a strategic opportunity, you build a dialogue at the top level and you agree this sort of progressive vendorization roadmap and you turn the initial thing they thought they wanted into a test case for that. And that's been exactly the model. So breaking it up isn't frankly that helpful. It would probably confuse the story. Far more important is the KPI that we track at the back of our deck, which should be percentage of revenue. Therefore, you can turn into dollars for growth in our revenue from installed business. So 50% roughly of our business comes from Tier 1, Tier 2s about the same percentage comes from continued selling to existing banks, where the order in which they spend is very difficult to predict. It's very dependent on what their own imperatives are. And that links into your second question, which is around these mega deals. So let's be clear on how we define these mega deals. This is a potentially a flagship bank, I could say 1 bank in a country, but maybe not. All this is, is a different way of getting to the same journey that other people are getting to. We're signing Tier 1 banks every single day and I even talk about one that we've signed in Australia this quarter. But most quarters we start some journey with a Tier 1 bank and the intention of that journey from both parties is to progressively renovate everything. And they do that in a way that doesn't consume all the capital unless you renovation, it gives money further things like business agility on the front end, a bit of shareholder value creation or margin expansion. But they clearly know where they're going. They just want to take their time to do it. However, occasionally a bank comes along and see the IT challenges as such a burning platform that they just want to get on with the whole thing in one go. Examples being Nordea, Bank of Ireland and Tantan there of course starting with the digital journey. It's very difficult to predict whether you whether at some point in a sales process, somebody will say, look, just let us get the Southern Dublin, buy everything to a massive project and let's be done with this in 3 years. Ultimately, many conversations start like that. But ultimately, they say, well, let's test with the module and let's start with the line of business. So frankly, it doesn't matter. Far more important is from an operational point of view, it doesn't matter. As long as we win the deal, we impress them, we continue to replace their IT legacy landscape and we build plans out there that recommend us to other banks so we can start the journey somewhere else. The only complication is the financial metric because if someone chooses to buy everything from the upfront, the financials become extremely lumpy as opposed to buying them over 5 years. But let's be very clear, we have a very significant number of Tier 1 banks today already spending comparable amounts to the revenue that we're seeing from the Tier 1 banks that we've named. Often they're natural natural like chips, but often they're larger Tier 2 banks as well or even global banks like Standard Chartered, which is more of a global opportunity. The line of Gerard Dussos from Barclays is now open. Max. Hi, David. Just two questions for me as well. Just going back on the kind of deals you signed with the NeoBank, could you help me understand a bit around kind of average deal sizes? Is that comparable with kind of your more kind of traditional business? And how long will it take for implementation on the public cloud there? And then secondly, on the guidance, it looks that it implies a very rapid slowdown of the revenues in kind of Q4. Perhaps this is just kind of conservatism, but I just want to kind of check what was on the line there? Thank you. Hi, Gerard. I'll leave a little bit crystal on these ones. So we can't comment on the deal size for these neobanks. Yes, I can't say really, but at the time, hopefully, as they grow, the one message I'd like to give it out, they grow because obviously they represent revenue opportunities, but they're small size often relatively small. Implementation times are slightly quicker because it's actually a Model Bank implementation. You don't need to spend 6 months documenting that migration from the legacy code to the new code and doing a sort of operating model target definition. So clean sheet of paper and our model bank approach where we preconfigure a bank in a box if you like for Aecon 2, we've got this robust library of model banks you can just drop in and then customize it. But kind of their own consumption means they're shorter. So I would say probably around close to the 12 months and the 18 months. Typically, we say 12 to 18 months. These ones will be definitely at the shorter end of that. And we talked about 1 in the U. S. In fact last year that went was ready to go live within 9 months. So that's around the time frame. Yes. Just on the balance, obviously, we don't debate on a quarterly basis. So myself, we are guiding now for 15% to 20% license because of the licensing growth for the year, which I think on the back of 3 years where we've been growing at more than 20% on average, It's a very strong performance. And remember as well that in our guidance, we don't include any transformational deal as we had for instance in Q4 last year with Open Banking. So I'm very pleased myself with the performance that we expect for the year. The line of Vijay Anand from Jefferies is now open. Yes. Thank you for taking my questions. I have a couple. Firstly, regarding the U. S. Market, I think you mentioned in the previous call, and I suppose you alluded to today as well that you've been pretty much winning all the Tier 1 deals that have been coming to the market. Press reports suggest that during the quarter MUFG Union Bank chose a competitor over T24. I don't know if this is accurate or not, but perhaps you can talk about the competitive environment a bit. Have you seen any change in behavior from the incumbents as they look to defend their market position? That's the first question. The second question is on software development and maintenance cost. It was up only 2% in the quarter, whereas in the first two quarters, it was up around 14% to 15%. Can you say why the growth was slower in Q3? And how should we think about Q4? Thank you. Okay. We were scribbling there. Hopefully, we got. And the one I got was one about MUFG Bank. So obviously, I can't comment on a specific bank. Occasionally, what I can say conceptually is occasionally you try and convince the bank to move off their existing supplier and it doesn't always work often in this case doesn't come together and they stick where they are. So careful how our position moves, but I wouldn't comment specifically on any bank in that context. But the big important banks who've made a decision as far as we're aware, to tenderness. The problem is that not enough of them are making and it's taking a while to build the momentum. So we're very happy with commerce. We're very happy with Space Creek. We're happy that we won now 2 neobanks 05, Versailles, especially Varo. And the challenge is for the market to accelerate because frankly there's more than enough for all of us in that market. It's half the world's banking spend if we have to share with competitors 1 or 2 deals over time. We haven't done yet to our knowledge to be very clear. Far more importantly, the opening up of the market in absolute terms? Okay. Let me take the second one. So the on the iodine side, I think first you need to look at it on the non IFRS. So you need to adjust for the restructuring we had linked to the acquisition Aphubic and some of restructuring we had on the ID side and as well as the acquired intangible. And then the second factor that you need to adjust for is, as I mentioned briefly, around the timing of the buyback, mainly linked to the surcharge charges and stock option between Q2 and Q3. And that is the aging issue on your growth. And if you adjust for that, you will have a normalized total growth rate of around 7% to 8%. Got it. Thanks, guys. The line of Michael Brace from UBS is now open. Good evening. A couple from me too. David, could you give us an update on Julius Baer in terms of where they are on the decision making? I think the Asian rollout has gone successfully. Is there any news yet on Switzerland you can give? And then Max, I think just coming back to your last comment there, there was something about cash flow and variable comp timing. It looks to me like there's about €25,000,000 extra outflow on payables and reduction in deferred income. Is that the order of magnitude of cash effect? And should we therefore assume Q4 cash flow is about €25,000,000 lower than normal? Thanks. Let me get the first one out. Let me get the Bayer question, Michael. So give Max time to think if you can respond on the numbers. Yes, Bayer did go live in Asia Pacific. Fantastic results. We went live on time and it's been extremely well received by not just the Bayer users in Asia, but also obviously in the head office. I'm definitely not going to comment however on the timing of a potential domestic replacement of that core system. That would not be for me to talk about. Okay. On the surcharge, as I mentioned this in Q2, and that was probably around €20,000,000 of impact between Q2 and Q3, but it will not have an impact in Q4. The impact on Q4 is the maintenance going forward and it's probably around 10%. And you can look at our deferred. So if you look at our deferred, which is going around 17%, which is way ahead of our maintenance growth, around 12%, which you normalize for a 12% maintenance growth, which could be the rate of our deferred growth, you'll see that you get more or less a €10,000,000 swing on that. And that will be an impact on Q4. Okay. And then David, I think on 2 school, you said you were more confident of coming in at the upper end of the range. Obviously, you've raised the range today, which is fantastic. But do you still stick with that view? Or to Gerardus' question earlier, the low end of the guidance does seem to point to a big slowdown in Q4? I'll let Max take that. I get in trouble whenever I ask the Gavin's questions. Listen, I think what we've done today is increase the guidance and show confidence. So I would say that compared to where we were last quarter, our level of confidence has increased. It has increased because of the sales momentum that we see and because of the increased visibility having delivered now 3 quarters in the year. Just one point. We've been very clear that all along, we're not a quarterly guiding company. I guess at one point in the year when that catches you out is when you go into your 4th quarter. So it's impossible for anybody to predict absolutely any one quarter including the Q4. What I would do is just say that the fundamentals remain intact. Our pipeline remains extremely strong with pharma and also in all geographies. Our different segment approach, so the retail, private, corporate, etcetera, is working extremely well. So we're very, very positive about the medium term. And we've given some guidance, which we believe is achievable based on looking at our pipeline for the Q4. But I will definitely guide you, especially as we go in towards the end of the year, we need to look beyond that into 2019 2020 on the momentum that we feel is building in the end market beyond the end of the year. So all very good. Thank you. The line of Stephen Goulden from Deutsche Bank is now open. Hi, and congratulations on the quarter. I just wanted to talk about touch on the U. S. Again. I think you said that you'd won a few deals. Could you tell us a bit more about this, who you won? And maybe any kind of color on sort of who you're competing with? And within that, how do you see the U. S. Competition? Because you've talked before about the incumbents that are doing a sort of more back in a box style model. Are you seeing them maybe focus a little bit more on software? Are they upping their game in any way, focusing more on the larger clients that you're aiming at? And I wasn't quite sure before. I think you said that you'd won all the large deals in the U. S. Can you just clarify that point? And then on my second question, I just wanted to talk about the Challenger Bank. You said before that was shorter duration. Does that have any relevance for your margins on those deals, I. E, being able to get them done quicker? Or is that kind of baked into the price? And kind of taking that to the extreme, does a greater focus on cloud delivery mean that you can be a lot quicker to stand up these new banks? It can be more standardized and potentially that in dealing with maybe the longer tail, there's a quicker sales process and a lot of those hurdles and bottlenecks taken away. Okay. Regarding as far as I can, if I can read my writing up, I am be quite crisp on the U. S. We've covered it to an extent. So it was across a number of last week. We competed against usual incumbents of people like FIS. We believe we won over the last deal certainly in the last few years. If you go back Tata won a deal with Zions Bank a long, long time ago that was public. There may be other deals that we've missed. But certainly everything that's being competitive and is competitive today, we feel we've won. That we're including that State Street Commerce Ally Bank, which we're able to name as well. And Barrow and the other bank, which is NYVD, which is going to market under a new name, which is the one that we talked about as our 1st in the year win. So yes, we do feel that we've won most and maybe 1 or 2 we've missed, but certainly the big high profile ones we've won. This point about the Challenger Bank, does that impact the economics is kind of factored in to an extent. I think by far the most interesting part of your question from a value add point of view to everything I've ever said is your observations around what cloud deployment and the task means and every one of them is exactly right. It's faster, you can replicate it easier, fine tune your model bank, you really have to do everything like that under the compliance layer. You can extract more recurring revenues clearly, you can sell more services around it, you can bring in house the value that they say from the infrastructure layer if you go to if you tell them an Azure based solution and you just sell them you get they pay one price for everything. And you internally using your own stacks or your own partner stacks. So it brings shortens the sales cycle. Yes, lots of good things, everything on your list basically. But let's say that till we're ready to have a crisper discussion about what that means for Temenos. But so far, so good. Thanks a lot. The line of Gregory Ramirez from Bryan Garnier is now open. Yes, good evening. Thank you for taking my question. Just to come back on the guidance revision, it looks to be that the revision was more related to what is outside total software licensing. I presume this is maybe related to services and it's true that you posted double digit growth in Q3. Could you elaborate a bit on this topic, the services topic? And is double digit growth in services sustainable given your achievements in license sales despite the presence of the partners who can implement the software? Sure. Again, as I said, very pleased to be in a better position than we were in Q2 and hence the upgrading of the guidance, both at the total software licensing but as well as the total revenue. And I think at the total revenue, you probably have an impact of all the revenue lines, meaning total software licensing, meaning maintenance and meaning services. I think all of them are driving up the total revenue upgrade to the guidance. Now on Services, Laurent, clearly, we've reached now around a ratio of around 20% of our revenues are done comes from services, which is probably where we believe is the right level. We are slightly below now in fact. And hence, I think you will see services growing probably not as fast as the license, but I think growing nicely. Ultimately, we've made that point. We are a product company. Actually, for us, what we track is really the life strength underneath that we generate out of it, so what we call the product revenues, services, even more margin business. Even though now I'm pleased to say that we've improved significantly our margin around 11.5% on a net C and basis. So I'm very pleased with that. And probably as we do more and more with Tier 1 banks, you'll see us playing a more important role on the governance front of you. And hence, the safety will continue to grow as it is now. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect. Thank you everybody for taking the time to join the call. We look forward to speaking to you on the lap of our 4th quarter results, if not earlier. Thank you.