Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Temenos 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. At which time, if you wish to ask a question, you will need to press dot one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Wednesday, seventeenth of October 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. Max and I are going to be using this results presentation as a backdrop to our discussion of the quarter. Assuming you all found it, I'm going to start with some comments on our third quarter performance. 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 seven. The third quarter was an outstanding quarter across all our KPIs. We grew total software licensing by 20% and total revenues by 16%, which reflect both the underlying market growth as well as the strength of our leadership position.
We've signed the largest number of deals this quarter across all geographies. 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've consistently highlighted that IT spend is now strategic and not discretionary. We think that our performance both in the third quarter and of course, the previous few quarters leading up to today is very strong evidence for this. The pressures on banks to provide real-time fulfillment to their customers are only increasing with the move to open banking. 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 platforms, 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. This reflects both our sales momentum as well as our increased revenue visibility at this point of the year. If we move now to slide eight, I'd like to dig a little bit more into the underlying sales performance for the third quarter, where once again, the demand across the quarter was broad-based across all of our geographies and all tiers and all clients. We signed 17 new customers in the quarter, including three challenger banks, one each from the U.S., Europe, and Asia.
The fact that new innovative startup banks that we're seeing today are 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, we had 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 had broad-based growth in Europe across our client tiers, and Australia continues to perform very well in Asia-Pacific, including the signing of a new tier 1 name in the country. Given our success on the back of the Rubik 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 investment, of course, to capture the market opportunity ahead of us.
If you turn to slide nine now, I'd like to briefly focus on the U.S. As I said, this was 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 fund management suites in the quarter, winning against the incumbent U.S. competition. The neobank that we mentioned at the time of our last Q2 results, we can now name as Varo Money, which is the first 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 Commerzbank and State Street are progressing well. 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 third quarter, which brings the total implementation go lives year to date to 70. It's very important for our clients and prospects, of course, that we could demonstrate that we can get them live successfully on time and on budget. The Forrester Wave highlighted our ability to support testing and delivery both on-premise and in the cloud. 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 Banca Ifigest for their private banking, Coventry Building Society for their savings and mortgages, as we announced earlier in the year as well, the digitally native neobanks that we've been talking about, such as Judo in Australia and Varo 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 are increasing as they face new digitally native competition, both from neobanks 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 through any channel. Frankly, incumbent banks are struggling to keep up. They're facing added pressure from the regulator and rapidly evolving payments landscape as well. 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 four times in 2018 year to date, the significant traction will materialize in the P&L in 2019. I expect us to comfortably achieve our target of 35% per annum growth in SaaS and cloud 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%-90% of the addressable spend today. Clearly this is very exciting over the medium term. We're also demonstrating the momentum that we're building in the U.S., these factors taken together mean that the medium-term outlook has actually never been stronger, in particular given the level of committed spend from Tier I and Tier II 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%-15%, and EPS by at least 15% per annum. 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 the eyes, 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 client tiers in the quarter. I was particularly pleased with our performance in the U.S., with multiple deals signed across a range of products. This drove total software licensing growth of 20%. Our maintenance also grew 12% as it continues to accelerate on the back of our strong license growth over the past years. Total revenue grew 16% in the quarter, EBIT was up 20%, with our LTM EBIT margin reaching 30.8%.
We also delivered very strong EPS growth of 18%. We generated $53 million of operating cash flow in the quarter, an increase of 31% year-on-year, our DSOs continue to decline, reaching 114 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, 24% over the last 12 months, 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 bookings growing by four times in 2018 year-to-date. We expect this growth to be visible in our 2019 numbers, given the lag between bookings and revenues of these products. We continue to benefit from strong operational leverage in the business. We set it up 20% in constant currency this quarter and 22% over the last 12 months. Our EBIT margin expanded by 100 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 on costs, adjusting for the impact of M&A and FX.
There was no impact from M&A this quarter, as we closed the last acquisition of Rubik in Australia in Q2 2017. In terms of FX, the weaker year 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 EBIT 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 a growing market. Total like-for-like costs increased 14% in the quarter, driven by our ongoing investment in sales and marketing as well as product. 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 for 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%-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 116%, 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 5-10 days per year to reach one days in the medium term. On slide 18, we highlight the key changes to the group liquidity in the quarter.
We generated $53 million 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 would have typically been collected in Q4. We continued our share buyback, purchasing $44 million of shares in the quarter, and we ended the quarter with $92 million of cash on the balance sheet. Our total borrowings at the end of Q3 were at $531 million, and our net debt was therefore at $439 million, equal to a leverage of 1.4 times. 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 IFRS 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%-20%, up from 13.5%-18.5%. We are guiding for total revenue growth of 12%-14%, up from 10%-13%. Our EBIT guidance is now in the range of $262 million-$264 million, up from $255 million-$260 million. This implies a full-year margin of circa 31%, which represents 100 basis point expansion in constant currencies. We still expect a 2018 tax rate of between 15%-16%, and finally expect to convert over 100% of EBITDA into cash.
I am confident that we will deliver strong revenue growth and margin expansion for 2018 and in the medium term. With that, I will hand back to David.
Thank you, Max. In conclusion, we had an outstanding third quarter across all of our KPIs. Digital 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 tiers, 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 the competition. We've raised our full-year guidance on the back of our strong sales momentum and increased revenue visibility at this time of the year, and Tier 1 and Tier 2 committed spend and the strength of our pipeline give us confidence beyond that out into the medium term.
Of course, Max and I look forward to updating you again in February at the time of the fourth quarter results. With that, operator, we'd like to open up the call for questions, please.
Thank you, ladies and gentlemen. As a reminder, to ask a question, please press star one. Your first question comes from the line of Takis Spiliopoulos from Bank Vontobel. Please ask your question.
Thanks. Good evening, David, Max. Well done. Congrats. I think a couple of people expected something else. Two questions from my side. The one is, you talked a lot 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 the regions, a bit more granularity on this one. That would be question number one, and number two 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? Thanks.
Hi, Takis. It's Max. If can I take the first one. Yes, as we said, we've had broad-based, very strong regional performance. On the Tier 1 specifically, 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 now very pleased as well with delivering another new tier 1 name in Australia in the quarter. 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 hence, as you know, we don't include them in the guidance. Clearly, those take longer to assess. Clearly there is a very good pipeline on those, but the timing is difficult.
I think we are very pleased that we are able to grow at those rates at 20% without the contribution from a transformational deal like that. I think, very pleased with that, but clearly they are in the pipeline, and we continue to work on those fronts.
I guess thanks for your comments at the beginning. Let me take the last 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 up front, take no extra services, and install it in somebody else's cloud if you want. That's an infrastructure decision. It's not synonymous with software as a service, which is a rental model. They're very different things. We've seen for two or three years now an increasing willingness of larger banks to use the public cloud, which has gained a lot of credibility.
It started out as more of a small startup microfinance type of initiative, when you see banks like Bankinter 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 scale-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 peace to run the whole IT layer, and you can focus on your business. This is a trend that's just emerging.
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. The industry itself is only 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. Certainly they're further ahead in trusting cloud storage as a mechanism as a replacement for their own infrastructure. Both those are the medium-term, quite exciting, but don't want to overplay it just yet.
The line of Chandra Sriraman from MainFirst Bank is now open.
Great. Thanks a lot. Congrats from my side as well on an excellent quarter. I just have a couple of questions. First thing I noticed an increase in competitive deals. I was just wondering what is driving it. Is the competitive landscape changing, or are you just going after some new customers? 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.
Okay. Thanks, Chandra. You're referring to slide 27. For everybody's benefit, there's a little table of pie charts on slide 27.
Exactly
in the third quarter, 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% in the comparative. Broadly, though, across the timeline, if you look over the last two or three years, we've been doing two things very well. First of all, we've been winning the lion's share of new deals that come to market. As we've become established as a player that is winning the biggest deals, more and more it's easier to defend your position as new banks make a decision. They want to buy the same as the rest are buying, frankly, for a number of reasons.
The competitive deals, the percentage of our revenue, which clearly means we won, is increasing. 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. This progressive renovation story by which they come back, and they slowly change it, but without consuming all the bank's capital for 10 years in one massive project, like occasionally tier 1s do, and we carve those out at the time. 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 see a new competitor coming in and win not.
It also is important that as banks start their progressive renovation with us, we impress them enough to continue. The last thing we need is a long sales process, get a foot in the door, do something, and for whatever reason, they don't come back. Both have their own merits. Both are very important for the business model going forward. Increasingly, as the market itself gains momentum, you see the new name wins, the competitive wins are gaining. That if you take the mathematics of the two parts of the pie chart, means that the market itself in total is accelerating.
Hey, 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. Clearly we've been very successful in doing so over the last four years. As you know, the visibility we've got on that is quite high, as 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. I'm confident, as you've seen, we grade it, we increase the guidance and again, we expect 100 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. You've done exceedingly well without any single large deal announcement. 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 and 2020?
Listen, Chandra, what we said, in fact, David, I think he's now on the call, made the point is medium term, we believe we can grow sustainably at 15% more on top of software licensing. Clearly the last four years we've been growing faster than that. We've been growing towards more than 20% and so on. 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. Clearly, as I said, we expect to continue to be winning all those large deals, and we've done that in the past. As you know, the last four transformational deals that came to market, we won them, and we expect to continue to won the majority of them, and hence we are very confident in the medium term.
Great, thanks, congrats again.
The line of Josh Levin from Citigroup is now open.
Thank you, good evening. 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., 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? 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 third quarter as some large projects rolled off. They said that they expect projects to pick up in the second half of 2019.
It seems like you didn't see any of this weakness in Europe. I guess, what would be your outlook?
Josh, let me take both of those. We don't want to overplay the U.S. It's a long game. It's a huge market. It's far more important that we get our references line as soon as possible, that we win the deals that are coming to market. Obviously we had a fantastic quarter. Personally I wouldn't accelerate anything in your modeling. It's great that the momentum seems to be building. The Accenture point. Listen, it's not for us to speak on behalf of any one systems integrator, certainly I wouldn't want to try and justify whatever statements they're making. If you're adding value to banks and you're delivering value by putting in modern software that allows them to compete, so should grow revenues, then we continue to see.
Maybe the model of having large teams of externals to run the banks has different fundamentals to the business model that we're adopting for financial services. We don't see it, to be very clear. We're very happy.
Thank you.
The line of Mohammed Moawalla 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 significantly more growth in some of these digital-first banks or some of these sort of alternative players entering the financial market, and any of those sales cycles and sales processes clearly proceeding much faster? As you take that into the U.S. market, that's where that acceleration momentum is. In the U.S. specifically, where are you on some of those regional bank opportunities? If you can update us where you are on Commerzbank, just to get a sense of, is there a dual track momentum here, particularly in the U.S.?
Okay. Let me take the second one, I have to ask you to repeat the first one because we want to make sure we answer it correctly. The U.S. is performing very well, 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, we've seen increased action and pipeline activity on a broader scale than we have seen in the past. For example, one of the names that we're allowed to talk about is Northern Trust. We signed a deal with Northern Trust in the third quarter.
I won't comment specifically on a segment of the market and what our sales activity is, obviously above a certain asset size, maybe $3 million-$5 million, it's smaller than that, it doesn't make sense, frankly, to buy software like ours, at least in the traditional delivery model. The larger banks have the same challenge as everybody else does. They need to compete against digital newcomers. They need to be agile. They need real-time systems, they see that as something absent from the players. That applies to the regional banks, where a lot of consolidation is going on, unless you restore profitability very quickly and grow your revenues, you've got a real strategic challenge. It's down by about 30%, the number of those regional and sub-regional banks.
In the last four or five years. There's a lot of consolidation, a lot of strategic challenges those banks face. We are one of the solutions that can get them out of that problem. Above that, you get into the Tier 1, Tier 2 space, and it's the State Street and the Commerces and the Northern Trusts , where clearly our value proposition, as we demonstrate referencability, is absolutely fantastic and very compelling. In that context, on Commerzbank , I would just like to say that we're hitting all of our milestones. They're very pleased with us. They talk publicly about being very pleased with us, and we're very happy to be using them as a launching pad and as a reference in the U.S. market. Progressing very well.
My first question, David, was more around, as you look at the opportunity set across the board, 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 these digital-only offerings. Do you feel that the opportunity set and the pace at which you can go there is much faster versus on the more 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's Openbank initiative is exactly that. It's spinning off a new digital bank separate from the existing bank with its own branding. They didn't call it Santander Digital, they called it Open, targeting a different demographic and so forth. Equitable, the same with the spin-off of TD in Canada. Pepper Bank for Leumi . There is an increasing trend to banks wanting to stand up a brand-new digital bank from scratch. As you know, it's one of the three models that we support. You can stand up a new digital bank. You don't have to put on the critical path the documentation of the legacy system. You're up and running quickly.
For banks that see more the 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 Temenos' strength, which is why we're seeing that across all the tiers. On the other hand, there are banks who want to do progressive renovation, and there's banks who want to follow various different models. 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 cool digital bank, is something that plays exactly to Temenos' strength. It's a good observation.
Okay. That essentially then drives much more consistent repeatable growth, essentially, rather than these big lumpy deals that happen every couple of years. Is that a fair comment?
The revenue opportunity comes out over time, clearly, as you build these things, but progressive renovation is also very good. You know, you hack away at a line of business one year, and you do payment, then you come back, and you do deposits. More sort of a State Street Commerce type of model that we've seen. Both 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 Temenos technology, probably, if anything, opens up and accelerates to market for banks who previously would have done nothing.
As the first of these banks, like Equitable, like Santander, like Leumi , have launched new digital banks, and we're taking them live extremely quickly, then you'd expect if that trend to continue, that Temenos would be able to ride 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? Alternatively, just in terms of new sales, just to sort of get the sense of the relative importance there. 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 of national champion retail bank-type entities, that when you say that there is a pipeline of deals that you're working on. 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, thank you for those questions. We don't split out our revenue by product because it's extremely fungible. A bank may have a problem somewhere else but want to test us tactically in payments. A bank may start in private wealth to test Temenos at low volume, relatively low profile. What they're really after, like in Nordea's case, was understanding whether Temenos is a valued partner for the retail business later. It's very, very fungible, 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 renovation roadmap, and you turn the initial thing they thought they wanted into a test case for that. That's been exactly the model. 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 is the percentage of revenue, therefore, you can turn into dollars, for growth in our revenue from installed business. 50% roughly of our business comes from Tier 1, Tier 2s, and about the same percentage comes from continued selling to existing banks. Where the order in which they spend, very difficult to predict. It's very dependent on what their own imperatives are. That links into your second question, which is around these megadeals.
Let's be clear on how we define these megadeals. This is Potentially a flagship bank, like a Tier 1 bank in a country, but maybe not. All this 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 talked about one that we've signed in Australia this quarter. 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. They do that in a way that doesn't consume all the capital and IT renovation. It gives money for other things like business agility on the front end, a little bit of shareholder value creation or margin expansion. They clearly know where they're going. They just want to take their time to do it.
However, occasionally a bank comes along, and sees 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 Santander, of course, starting with the digital journey. It's very difficult to predict whether at some point in a sales process, somebody will say, "Look, just let us get this over and done with, buy everything, do a massive project, and let's be done with this in three 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." 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 fans 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 you up front, the financials become extremely lumpy as opposed to buying them over five years. 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 national flagships, but often they're the larger Tier 2 banks as well, or even global banks like Standard Chartered, which is more of a global opportunity.
The line of Gerardus Vos from Barclays is now open.
Hi, Max. Hi, David. Just two questions from me as well. Just coming back on the kind of deals you signed with the neobank. Could you help me understand a bit around average deal sizes? Is that comparable with your more traditional business, and how long will it take for implementation on the public cloud there? Then secondly, on the guidance, it looks that it implies a very rapid slowdown on the revenues in Q4. Perhaps this is just conservatism, but I just want to check what was underlying that. Thank you.
Hi, Gerardus . Okay. A little bit crystal on these ones. We can't comment on the deal size for these neobanks. Yeah, can't say, really. Over time, hopefully as they grow, the one message I'd like to give is as they grow, obviously they represent revenue opportunities, but they're small size. Often they're relatively small. Implementation times are slightly quicker because they're pure model bank implementations. You don't need to spend six months documenting the migration from the legacy code to the new code and doing a sort of operating model target definition. It cleansheet the paper in our model bank approach, where we pre-configure a bank-in-a-box, if you like, for a country. We've got this robust library of model banks you can just drop in and then customize it for their own consumption. Means they're shorter.
I would say probably around closer to the 12 months than the 18 months. Typically, we say 12-18 months. These ones would be definitely at the shorter end of that. We talked about one in the U.S., in fact, last year, that was ready to go live within nine months. That's around the timeframe.
Yeah, just on the guidance, obviously, we want to guide on a quarterly basis. Myself, we're guiding now for 15%-20% license production or licensing growth for the year, which I think on the back of three years where we've been growing at more than 20% on average, it's a very strong performance. 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. I'm very pleased myself with the performance that we expect for the year.
Thank you.
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 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. 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%-15%.
Can you say why the growth was slower in Q3? How should we think about Q4? Thank you.
Okay. We were scribbling there. Hopefully we got them. The one I got was one about MUFG Bank. Obviously I can't comment on a specific bank. What I can say conceptually is occasionally you try and convince a bank to move off their existing supplier, and it doesn't always work. Often the business case doesn't come together, and they stick where they are. Careful how others make position moves. I wouldn't comment specifically on any bank in that context. The big important banks who've made a decision, as far as we're aware, have all come to Temenos. The problem is that not enough of them are making it, and it's taking a while to build the momentum. We're very happy with Commerce. We're very happy with Paysafe. We're happy that we've won now two neobanks, both high profile, and especially Varo.
The challenge is for the market to accelerate because frankly, there is more than enough for all of us in that market. It is half the world banking spend that we have to share with competitors one or two deals at a time. We have not done yet, to our knowledge, to be very clear, far more importantly, the opening up of the market in absolute terms.
All right. Okay, let me take the second one. On the aging side, I think first you need to look at it on a normalized basis. You need to adjust for the restructuring we had linked to the acquisition of Rubik and some of the restructuring we had on the AD side, and that as well as the acquired intangible. Then the second factor that you need to adjust for is, as I mentioned briefly around the timing of the variable, mainly linked to the social charges and stock option between Q2 and Q3. That is gating, if you want your growth. If you adjust for that, you will have a normalized probably growth rate of around 7%-8%.
Got it. Thanks, guys.
Yeah.
The line of Michael Briest 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? Max, I think just coming back to your last comment there was something about cash flow and variable comp timing. It looks to me like there's about $25 million 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 million lower than normal? Thanks.
Let me get the first one out. Let me get the Baer question, Michael, so give Max time to think what he can respond on the numbers. Yes, Baer did go live in Asia Pacific. Fantastic results. We went live on time, and it has been extremely well received by not just the Baer 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 their core system. That would not be for me to talk about.
On the set of charges, you know I mentioned this in Q2, that was probably around $20 million of impact between Q2 and Q3, it will not have an impact in Q4. The impact on Q4 is the maintenance brought forward, it's probably around 10%. You can look at our deferred. If you look at our deferred, which is around 17%, which is way ahead of our maintenance growth, around 12%, so if you normalize for 12% maintenance growth, which could be the rate of our deferred growth, you see that you get more or less a $10 million swing on that. That will be an impact on Q4.
Okay. David, I think on Q2's call, 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, do you still stick with that view? 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 answer guidance questions.
Listen, I think what we've done today is increase the guidance and show confidence. 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 three quarters in the year.
Just one point. We've been very clear today 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 fourth quarter. It's impossible for anybody to predict absolutely any one quarter, including the fourth quarter. What I would do is just say that the fundamentals remain intact. Our pipeline remains extremely strong with file and also individual geographies. Our different segment approach to the retail, private, corporate, et cetera, is working extremely well. We're 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 fourth quarter.
I would definitely guide you, especially as we go in towards the end of the year, and we need to look beyond that into 2019 and 2020 on the momentum that we feel is building in the end market beyond the end of the year. All very good, thank you.
The line of Steven Goulden from Deutsche Bank is now open.
Hi there. 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? Within that, how do you see the U.S. competition? Because you've talked before about the incumbents there doing a sort of more bank-in-a-box style model. Are you seeing them maybe focus a little bit more on packaged software? Are they upping their game in any way, focusing more on the larger clients that you're aiming at? I wasn't quite sure before. I think you said that you'd won all the large deals in the U.S. Could you just clarify that point? On my second question, I just wanted to talk about the challenger banks.
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? Kind of taking that to the extreme, does a greater focus on cloud delivery mean that it 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 are taken away.
Okay, Steven , I'm writing as fast as I can. Let's see if I can read my writing. I'll try and be quite crisp on the U.S. because we've covered it to an extent. It was across a number of our suites. We competed against the usual incumbents, so people like FIS. We believe we've won all the large deals, 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 been competitive, and is competitive today, we feel we've won.
I would include in that State Street, Commerce, Allied Bank , which we're able to name as well, and Varo 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 first in the year win. Yeah, we do feel that we've won certainly most, and maybe one or two we've missed, but certainly the big hyper profile ones we've won. This point about the challenger banks, does that impact the economics? It 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 in the past means, and every one of them is exactly right. It's faster, you can replicate it easier, it fine-tunes your model bank.
You really have to do everything right down to 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 save from the infrastructure layer. If you tell them there's zero-based solution, and you sell them, they pay one price for everything. You internally are using your own stacks or your own partner stacks. It shortens the sales cycle. Yeah, lots of good things. Everything on your list, basically. Let's save that till we're ready to have a crisper discussion about what that means for Temenos. 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 it's outside total software licensing. I presume this is maybe related to services, and it's true that you posted a double-digit growth in Q3. Could you elaborate a bit on this topic, the services topic? 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 that we were in Q2 and hence, the upgrading of the guidance, both at the total software licensing, but as well as the total revenue. I think at the total revenue, you probably have an impact of all the revenue lines, meaning total software licensing, and meaning self-maintenance and meaning services. I think all of them are driving up the total revenue upgrade to the guidance. Now on services alone, clearly, we've reached now around a ratio at around 20% of our revenues comes from services, which is probably where we believe is the right level. We are slightly below now, in fact. 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. Clearly for us, what we track is really the license and the maintenance that we generate out of it. What we call the product revenues. Services is more margin business. Even though now, I'm pleased to say that we've improved significantly our margin. It's around 11.5% on a net basis, so I'm very pleased with that. Probably as we do more and more with Tier 1 banks, you'll see us playing a more important role on the governance point of view. Hence, the services 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 back of our fourth quarter results, if not earlier. Thank you.