Morning, everyone. Thank you very much for joining us, for those in the room and those of you on the webcast as well. My name's Adam Snyder, Head of Investor Relations for Temenos. I'd like to briefly take you through the agenda for the day. We've got a slightly shortened agenda, and we're going to run straight through. I promise there is refreshments at the end. We're gonna be covering a range of the usual topics: industry trends, strategy and vision, our product and technology, approach to artificial intelligence, and finally our financial growth plans.
We will be taking Q&A at the end, so I'd ask you to hold your questions until that session. For those of you on the webcast, you can submit questions at any time through the webcast platform. There's the Wi-Fi code for anyone in the room if you need it. Hopefully you've got that. I'll leave that up there just for a second so you can all use your phones. And before we start off with the formal agenda for the day, I'm first gonna hand over to Thibault de Tersant, our Non-Executive Chairman of the Board, who'd like to make some introductory remarks. Over to you, Thibault.
Good morning. I am the surprise on the agenda. So, a few days ago, we received these allegations, and there was a public letter which caught my attention because it said that we actually received them on Valentine's Day. So I looked for some love in the report, and I couldn't find it. So I think they missed a little bit the date for releasing it. More seriously, I'm, of course, the chairman of Temenos, and I also have been the Chair of the Audit Committee for many years at Temenos. And I can assure you that we have never stopped strengthening the control environment of this company. Never. And also that this company is running a very sound business.
So what I would like to do with you today, and I will be short, I promise, is to give you some balance to the allegations that are done and also assure you that the board is going to do an oversight and will be helped by top consultants, third-party, independent consultants, in order to review these allegations. When this is done and the thorough examination has been done, we will come back with, of course, a more detailed answer. I think it's important to put a balance in all of this, and this is what I'm trying to do now. So there is an allegation on client satisfaction and how implementations are done. I think that we have close to 3,000 customers. If we look back, 2023, there were 391 go-lives, which I think tells a lot about the quality of the product.
There is another good indicator, by the way, of customer satisfaction, which is the churn. The churn is close to 3%, between 3% and 4%, in 2023 in dollar terms. There is also the Net Promoter Score that we have released, and I think that 54 is a very good score. Done out of 900 customers, you know, 54 is a very good score, you know, the ones that are ready to recommend Temenos. Also the last indicator, which I think matters, are litigations. You know, when you have truly unhappy customers, you get threatened litigations or litigations. We have only one litigation open at the present. There's also an allegation on Mbanq. Mbanq, I think we said that, this market, banking as a service, is going to be a growing, interesting market. So that's the rationale for doing an investment in convertible bonds into Mbanq.
In total, we invested $59.9 million in Mbanq. And Mbanq is also using Temenos. And the revenue that we booked since the investment over this period is roughly 22% of the investment which was made, just to be clear. Mbanq is not a reseller. You know, they are running their BaaS business. So it's very hard to say that it's a round-tripping of revenue, I think. And I should push the button if I want to see my next chart. There is also an allegation on pulling forward contract and also on discounting that I am sure you have seen in the report. Well, pulling forward, what is happening? It's quite normal. I mean, these negotiations, you know, with banks take a long time. So banks generally want to anticipate the renewal of a license agreement. That's just normal.
They cannot end up, you know, being caught and having the only option to renew, you know, because it's too late to discuss. So it's a normal process. It's also a process that is useful when you want to upsell in a customer. It's normal life of the business. I think that is what truly matters is to see that what is happening with these customers because the allegation is really that when we do that, we pull forward and we give large discounts, you know, and we're going to kill the business. In reality, looking at the figures, the net retention rate for existing customers is 112%. So there is clearly an upsell rather than a steep discount. And the value we generate from customers is also very visible when you look at the growth in ARR. But this Takis, I am sure, will develop further.
Now, there is another allegation about backdating transactions. Well, what I can tell you is that, again, you know, there are very strong controls to avoid it. And the process over contract signing is a process that is today handled as a standard through DocuSign. So in DocuSign, you have in the system the date at which the contract was signed. It's not a very complex thing to verify. Also, the only reason why someone would backdate an agreement would be to recognize in advance some revenue, you know, in the former quarter versus the following quarter, you know. That would be the reason. But in IFRS, the software has to be delivered for the revenue to be recognized. And this is absolutely recorded, you know, the date at which the software is delivered in the system.
It's not a salesperson somewhere who can change that. However, of course, this will be also part of the thorough examination that we will do, you know, and will be part of the answers that we will provide. There is also an allegation on Infinity, you know, that Infinity would be a complete failure. I think that Andreas, Prema will give you more color on Infinity, you know. What I can say is that it's a strategic part of our portfolio, Infinity. We call it digital now. I mean, it's how banks interact with customers. It's extremely important. And it is at the portfolio. We continue to sign good transactions on Infinity. We did so also in fourth quarter. And we do many go-lives of Infinity each year, you know, including in 2023.
So, I don't know where this accusation is coming from, but Infinity is actually a good product that is being sold. R&D capitalization. So there is an allegation that we are playing games here in order to improve probably our EBIT, you know, through this activity. In reality, when you look at the net capitalization, it was reduced in 2023 compared to former years. So, in terms of year-to-year expense, there was actually $5 million more to take in the P&L in 2023 because I think there was an allegation that we were actually changing the length of times, etc. Well, in reality, the net result is that in 2023, you know, year-to-year, we took more expenses. And finally, partners. Partners are a very important element in the Temenos strategy because they do most of the implementations for our customers, most of them.
But our sales are direct. We are selling directly the software. And banks, they want to deal with Temenos. And that's very normal, for a very important, software infrastructure, software application for them. So we looked at what partners represent, you know, in our revenue. And the licenses sold to our partners were around 4% in 2023. And this figure, if you look backward, doesn't vary much. So it's very minor what we do in terms of sales to partners. And the allegation here is probably, you know, that we are forcing them to buy licenses. And of course, it is not the case. And anyway, it's a very small amount. So this is really what I wanted to say, you know, to put some balance in the report that you probably have seen and all these allegations.
And like I said at the beginning, we'll come back to you once the thorough examination helped by independent third parties in accounting, legal in Switzerland and a law firm in the U.S. will be done. With that, I think I will not abuse your patience. And I think it's important now to see that we have a very good market, a growing market. Nothing is better than a growing market, and how we are going to develop continue to develop our strategy in this market and which products we are going to continue to put on this market and what it means also in terms of our midterm plan. With that, Kanika will give you a presentation on the market trends. Thank you. Thank you.
Thank you, Thibault. So I will cover the banking industry trends, which is really about our market opportunity. I will also talk about our proprietary Temenos Value Benchmark program and how we leverage it to inform our product and sales strategy. As you know, the banking industry has been remarkably resilient since the COVID-19 pandemic and its aftermath. Even in 2023, with the shocks triggered by the banking collapses on both sides of the Atlantic, the market recovered the industry recovered and is tracking the market. However, banks face and continue to face significant performance, competitive, and ever-increasing regulatory challenges today. In an analysis that we do every year, we find that 58% of 3,000 banks globally are earning returns below their cost of equity. This is across the world. It varies a little bit by region, North America being a little bit better, Europe being a little bit worse.
Then we come to attracting and retaining customers and how it continues to be a challenge in the face of very strong competition from fintechs, from platform players, from technology giants, from challenger banks. This, however, has been a little muted in 2023. Banks have strengthened. Incumbent banks have seen a strengthening of their position versus the fintechs because of the drastic drop in fintech funding and investor scrutiny, which has led to a short-term effect, but we expect them to rebound in the future. Embedded finance continues to its inexorable rise across the industry. Banking as a service, embedded finance is a trend that we've been tracking for a number of years. We published our first report in May 2021. We see it everywhere.
We see Apple Wallet, for instance, in late 2023 launching its real-time balances and spend analysis functionality on its wallet, which is a game changer for the payments and PFM space. This was an initiative in the U.K., the first one that Apple has ever launched outside the U.S. Banks are also following a clear open ecosystem strategy. Larger banks want to orchestrate their own ecosystems. Smaller banks want to participate in ecosystems in order to expand and grow. The reality is that incumbent banks, the vast majority, still continue to run on complex, fragmented, legacy-based architectures that predate the digital era, that are expensive to run and very difficult to change. These systems inhibit banks from competing effectively today. It is this business need that is driving the structural demand for Core Banking modernization, for the adoption to cloud and SaaS.
So it is no surprise that technology spend is predicted to rise across all tiers and regions in 2024, up to 5% in retail and 6% in corporate. This expense is divided across nondiscretionary regulatory, revenue initiatives, and operational efficiency endeavors. What are banks spending on? In retail, it's embedded finance and SaaS, not surprising. It's also digital account opening, onboarding, and origination, so digital the front end. This is very much true of all geographies. Then you've got BNPL, which is more strong in Europe. You've got a new trend on customer product bundles, which is more in Latin America. When you come to corporate, corporate digital channels is the top priority across all regions. We all know about manual processes in corporate onboarding, silos digital channels, clunky processes that corporate banks face.
So this is a very, very important trend. This is a new trend this year: trade and supply chain finance, again, across the world, and then digital channels aimed at small businesses. So this is an area which is a top priority for banks. And they are facing tough competition from the disruptive players, players like challenger banks focused on SMEs like Tide and Revolut in the U.K. and platforms like Shopify, QuickBooks, Amazon. When we come to wealth, the top trend is data analytics and insights in AI. This is true for wealth managers across the globe. Generative AI is seeing the earliest use cases in wealth. So DBS Bank is an example in Singapore where they are using generative AI for their relationship managers to create curated investment portfolios and personalize the offering for their clients.
In technology across all three segments, artificial intelligence is the top investment priority, followed by migration to public cloud and open finance capabilities, which is all about openAIs, open APIs and digital e-signatures. In a survey that we commission every year with Economist Impact, 51% of the respondents said that there will no longer be any data centers in five years because everything would have moved to the cloud. That's quite a significant statement. But what we are seeing is banks increasing comfort with the cloud in terms of resilience, security, in the scope for innovation, transformation, ecosystem orchestration. There are obvious benefits. And we are seeing this in terms of mission-critical workloads and the appetite for them to move to the cloud, starting with digital channels.
In Core Banking, definitely, it's the overseas subsidiaries and the non-core business lines first, not so much domestic, but that is also coming. The appetite for public cloud obviously paves the way for software as a service. In mid to small banks, it makes a lot of sense because they are able to use this as a path to public cloud. SaaS is a path to public cloud, especially in markets where there's a shortage of cloud skills. And it's obviously easier to move to SaaS when you have less customization and a simpler business. Even in larger banks, we are seeing much more openness to SaaS in recent months. And they're getting more and more confident about SaaS as Core Banking vendors mature in their SaaS offering and are able to provide the necessary trust and security.
When it comes to non-incumbents, the challengers, SaaS makes imminent sense because it is all about a quick time to value. It's about elasticity. It's about pay as you grow. So what we are seeing is that across the board, the appetite for SaaS is definitely building up. Now, when we come to a regional view, I would say that North America is high demand, and it's a market where managed services are mature. In Europe, there is uncertainty because of DORA and regulations. In the emerging markets of Asia, Middle East, and Asia-Pacific, and Latin America, it varies from country to country. There are countries which are really encouraging cloud and where the regulator is mature. Then there are countries where it is yet to come. Now, let's come to our addressable market. We see robust growth in our addressable market this year.
It's growing at a healthy 10%, which is just a little lower than the 11% we showed last year. And this is split in terms of product almost equally between Core and Digital, between on-premise, SaaS vendor run, and public cloud bank run and by incumbents and non-incumbents. When we look at the first one, we see that digital and core is roughly equal. And this is borne out by our Temenos Value Benchmark data as well, where the application spend is split halfway between front office and back office. And it tilts a little bit in favor of core by 2027. When we look at the second graph, that 30%, which is the cloud and SaaS split, the public cloud bank run is growing at 32% and contributes to our subscription revenues. And the SaaS vendor run is growing at 28% and contributes to our SaaS revenues.
When we look at the incumbents, we've done a downward adjustment for the reasons I stated earlier, the fintech, fundings, constraints, etc. So the mix and the growth rates have slightly reduced from last year. The last point I wanna make is that incumbents are poised to spend 3.5 x the non-incumbents in terms of SaaS spend. This is, again, because of the mix. But also, while incumbents do consume more SaaS, as I said earlier, it is also true that there are many markets where SaaS and public cloud are not mature, but they are a healthy ground for non-incumbents. We must say that we continue to have a very vibrant business with non-incumbents because we focus on the larger and the more specialized ones. I'll now come to the Temenos Value Benchmark.
With 150 banks and 70,000 data points, we are now able to fully leverage this in how we decide on product investments and also in sales execution. We get some powerful insights from this benchmark. One example is the drivers of banking performance. Now, this is something that we share with all the participants in our program. And what we are able to do is we are able to say, how do better-performing banks differ from their peers? And they differ in terms of these 15 metrics that you see that positively correlate with either cost-income ratio or return on equity. And for each bank, we are able to show where they are against precise values in our database on the average and the best-in-class. We do this globally. We do this for tailored peer groups.
What it allows us to do is that we are able to track it year on year. So we've done this for five years. And every year, we, we run this analysis. And most of these 15 metrics have stayed stable. But I wanna talk about two of them, digital sales and products digitally originated and transacted, that have improved over the years. And that is exactly what we see in the market where digitization is taking off. And it helps us to understand the areas of business value to banks. If you look at customer experience in terms of customer growth, cross-sell rates, and churn, we find from the benchmark that there are certain critical capabilities that enable these metrics, which again positively correlate with these metrics, things like graphical product builder, omnichannel experience, 360-degree view of the customer.
And what it helps us do is it informs our product decisions. So later on, Prema is gonna talk about how some of our XAI models are going to focus on these critical capabilities. Now, a very quick look at how we can use the TVB, the Temenos Value Benchmark in helping clients build robust business cases. So what we are able to do is we are able to build ROI models with paybacks and NPV, through the metrics that we have in the Benchmark. So we compare the bank's values with our best-in-class and average to come up with the potential for improvement. And very often, banks are unable to do this in this way because they lack the external data, the precise data. Now, in this example, the bank used just three of these metrics in their own internal business c ase.
We were able to add all these other metrics in a very sort of data-driven way. We were able to make their case much more robust, much more complete. Finally, from the 200 best practices and capabilities that we have in our database, we are able to analyze the bank's maturity and our own assessment of the relative maturity of those capabilities to help us decide on product investments where we are less mature and to help us to focus our sales and go-to-market campaigns on areas where we are more mature.
So let's take an example of AI-enabled Conversational Banking. That's an area where we know that banks are not that mature. It's important to them. So it's an area where we wanna invest. And we want to move it from left to right so that it becomes a sales opportunity. So all in all, we follow a very structured, data-driven approach to product and R&D investment. And on that note, I'll hand over to Andreas.
Good morning to everybody. Welcome to Temenos Capital Markets Day 2024. Kanika, thank you for introducing the market and also what we do in terms of the Value Benchmark. I have to say that the Value Benchmark we started the Value Benchmar k probably five years ago. I thought it was six. It has really transformed the way we sell. We've progressed from being a vendor of software to being a thought leader. When we first presented this, Capital Markets Day 2019 or whenever, 2020, I had one investor come to me and say, "You know something? When this reaches 100 banks, you will become the thought leader of the banking industry." Well, we've reached 150.
The thought leadership we output is very important. It's very important for our clients. It's also very important for us internally because it forms the basis not only of the R&D focus and priorities but also of the value-based selling that we've migrated the business towards. So it is about selling value. It's not about selling software features. It's close to my heart. This is why I'm gonna start with this and demonstrate some examples of how we create value for our clients. You'll see over on the left, the node on faster onboarding getting a little bit of static behind me. I don't know. There's on faster onboarding, 52% faster onboarding achieved by the banks that are actually using our digital or Infinity, if you like, to be topical, than legacy or other solutions.
That's quite a significant—it's not statistically important. It's a significant advantage we provide to our clients. You can see 68% higher cross-sell rate for banks that are using both our digital and our core solutions. And over on the right, 33% more IT spend on growth and innovation for our core participants, higher NPS scores from using our digital and core solutions, and 24% faster time to market. So this is the essence of what we do. And this is the essence of what we've been doing for 30 years. And this is why Temenos is successful today because the value you bring to your clients is what propels you to the next deal, to the next bank, to the next client. Yep. So that as an introduction. And we are growing the Value Benchmark , of course, every year. Banks appreciate it.
They like it. They want to be part of it. And they open their businesses to us. It's the single largest global survey of banks, data-based scientific survey of banks. And we can do it because we are a globally organized company and because we look at banking across different verticals, different segments, different sizes. So, I'll spend a little bit of time on giving you a snapshot of how busy we were in 2023. These are, if you like, case studies of what our clients have achieved during the year. From the top left, you have a BNPL embedded finance provider that has been a client for quite a few years, is processing tens of millions of loans on our platform. And their strategy evolved and required securitization of the loan book to release cash for their balance sheet.
Well, they didn't have to go very far. On the platform they were using, they could securitize the portfolio. Within something like a week, they moved 5 million loans, securitized without having to move them off the platform, without having to do complex handover arrangements. The securitization partner receives information on the performance of the loans in a very seamless way. That's quite a unique achievement. The top middle, that's a bank, is actually our Infinity, our digital solution in corporate payments across 20 countries. And you can see the time to process a corporate payment, which in the past was spreadsheets and all sorts of approvals, manual, from 48 hours down to six minutes. This is what Infinity can do. And very little platforms can actually achieve that. Yeah? Over on the right, a very different business case.
That's a thrift bank in the Philippines, one of the largest in the Philippines. So that demonstrates the scale that we can bring. Over on the lower left, a bank in the Americas, that's a digital bank, an upstart, if you like, growing something like 250,000 accounts in something like more than a year, 14 months. And the middle case study at the bottom, a universal bank in Benelux that is actually big in correspondent payments and processing 25 million payments on the platform. And another example of a digital bank achieving success in the UAE with our platform. In terms of new client relationships, expanded relationships, we talked about a global tier-one bank that has selected us for their global wealth business. This bank was a client before.
We had another global tier-one bank that has been using us in their corporate international banking business for many, many years. And during 2023, extended our contract to move the business on the cloud-native release of the platform. They will run it themselves on cloud. It's not a SaaS, it's not a SaaS example. So, a leading Swiss Private Bank has committed with us. Again, used to be a client but has committed for a global rollout now of their wealth business. The top, the bottom left, is a case study that we've referred to before. You know, you know which one it is. We announced it at the beginning of the year in March. And the middle one, again, in the Americas region at the left, then BanCoppel, top, bottom middle.
The one bottom right we actually also announced, it's the largest B2B cross-border payments provider, non-bank payments provider in the world. And they've committed to go onto our SaaS platform for cross-border international payments. So, quite a successful year, a very successful year, I'd say. And again, I'll come back to the why this is happening. It is because banks that are using our software are happy to recommend us to other banks. Banking is a, bankers talk to bankers. And bankers talk to bankers. And success selection of software and selection of strategic providers comes also through introduction by banks. And our NPS score is an indicator of the propensity of our clients to recommend us to other banks. A large client base. I've used this slide before. Approximately 3,000 clients in more than 150 countries. A truly global business. This is banking.
It's not Capital Markets which is in five cities in the world. More than 700 SaaS clients across the platform. And both challenger and more traditional. And also a large spread between the smallest to the largest. I'll talk a little bit about the value proposition for our SaaS business. We've been working on SaaS for quite a few years now. And when you look at, there is some material in the appendix to my slides. When you look at the share of SaaS in our revenues compared to SaaS in the addressable market, we are pioneers in SaaS. And I've said this quite a few times. We create SaaS for banking. I would almost venture to say we create SaaS for banking. Banks have traditionally been very conservative. It's compliance. It's regulation. It's data residency.
It's business continuity. It's security. These are serious considerations for a bank, to reflect on and to get comfortable before they would put the master customer data on somebody else's data center, whether it is public cloud, private cloud, Temenos SaaS running on public cloud, Microsoft Azure, AWS, IBM. It doesn't matter. So the SaaS for banks is also different in many ways to SaaS for the rest of the industry. Also, technically, you need to make sure you've got segregation of the data and so on and so forth. So a lot has to go there. And it is different. Looking at this, we've been sharpening our value prop for quite some time now. We are now able to confirm automated updates of the SaaS instances for our clients.
That's probably takes away the largest cost item in the P&L for running enterprise core systems and digital systems for banks. It's a big thing. Probably 60% or 70% of the cost of running, let's say, Core Banking software over a 10-year period comes from the need to upgrade. I'm taking that away. Yeah? On top of it, we are turning, if you like, a perceived challenge to a strength, business continuity, security. When you are working with partners like Microsoft on Azure or AWS, you are able to provide a proposition which is much better invested than, let's say, most banks of the world can afford. Microsoft is spending more on security than any other bank in the world. So you are leveraging that. Yeah? And that's, over time, it's a big thing. Over time, it's a big thing.
And we'll overcome the challenge of compliance imposing limitations. And then, you have things like AI capabilities. AI capabilities are better run from a SaaS instance because of compute capacity, because of the way you are gonna run the models. It lends itself much more to that. And Hani can probably explain it later on today. And carbon footprint, we've measured the reduction that a bank would typically have out of migrating to Microsoft Azure. And it's an up to 95% reduction in carbon emissions. This is for our clients. That's quite important for the boards of these institutions. And then from our side, we've been working on the solution. So we've launched Enterprise Services which are end-to-end. So they are across the platform. So they span Core Banking and Digital and Financial Crime, and Analytics.
We are able to deploy them in 24 hours prepackaged with something like 120 products, if I'm not mistaken, and model banking processes, 700 APIs coming out of the box. This accelerates the time to value for banks deploying on SaaS. Back in 2020, Kanika and Mark Gunning at the time, who was running our solutions group, for quite a few years, 25 years, we ran a critical piece of research with the top banks of the world which told us, "If you guys can get your cost of running Core Banking down to 10% of what it is today, you will force our hand, and we will have to change Core Banking software because big banks typically are quite reluctant to move with complex modernizations." That's the strategy we are following, to decimate the cost of running Core Banking software.
And we've been consistently bringing it down year -on -year, making simpler the adoption, faster the adoption. And that's what it's all about, to unlock the market. Competitively, we've made, let's say, very significant progress in 2023. And that's a snapshot of the IBS leadership table. We continue to be the very majority, the significant majority of the opportunities that we compete with. And that allows us to have a sales cost, if you like, which is sustainable. But it also allows us to grow sustainably. Some of the competitors on the left, the traditional competitors, they have service-based models. So if you were to look at the product revenues, the license revenues, you know, in the same kind of comparison, the difference would even be more accentuated. Some of them have something like 20% of our product revenues.
Over on the right, we have the top neo- vendors. Now, why are we competitive? We are competitive because we provide a fully packaged, upgradable proposition, whether it is in SaaS or it is on-premise. We provide open software. We bundle, on the platform, much more business logic and functionality than our competitors, can achieve. We leverage all banking segments, which means that our R&D spend is leveraged quite nicely, in a very large addressable market. We also win, because we've got 30 years of credibility and experience of running mission-critical systems for banks. When we compete with the neo- vendors on the right, people tell us, "We want to work with you because you know how to get things done." We've got credibility in migrating, data from one system to another successfully, 391 go-lives in 2023. That's quite a scale.
Yeah? And banks want the experience and the credibility that this gives us. They also appreciate our ability to scale the platform. You know, it might sound easy to have 10 or 20 or 30 million customers or 100 million customers on a platform. But let me tell you, this is one of the most challenging items that a bank has to deal with, the scalability of it and that. So, I'd say a position that myself and the rest of the management team are very comfortable with, that it can continue to support our growth for the years to come. And of course, the accolades are there, whether it's the league table of sales but also the industry analysts. And some of them, you know, some of Gartner is about Retail Banking.
Forrester is both about digital, i.e., our Infinity platform and core. IDC, the same. There is one which is the IDC MarketScape for North America. We're positioned as a leader in Digital Banking for North America. So, quite a lot there. Across the solution, there's accolades also for Islamic banking, which is a key growth area in emerging markets and one that we are very busy in Middle East, Africa, and also in Asia-Pacific. Finally, on the operations sales, if you like, from a revenue model, we've done four key things in 2023. I've talked about them during the investor calls during the year. But I wanted to summarize them. The first one is that we've aligned the sales model, the sales organization, to the ARR model. So our sales organization is now ARR incentivized.
When you run an ARR incentivized organization, the quotas and the commission plan for sales, in order for the way they are structured, in order for sales to earn commission and deliver on their quotas, they need to increase ARR. Okay? This means three things fundamentally. Firstly, cross-selling. You have to go to your client. The model brings you closer to the client. You have to go to your client and cross-sell whatever you have. So for a core customer, you cross-sell Infinity, or you cross-sell payments, or financial crime. Or for a retail customer, you sell wealth. Or for a retail, you go and sell corporate. Yeah? The second way is for clients to be successfully renewing their agreements. And when they do, there is a strong value uplift.
If you think about it, there is no ARR increment if a customer renews an agreement and we discount. There's zero. In fact, there is negative, if you think about it, if you have an ARR model. Under an ILF model, it's a different discussion. But under an ARR model, the discounting results in zero commissions to sales. And that's a beautiful thing. And the third way, of course, is to sell new logos. And this is why yesterday on the call, I spent most of my time talking about the ARR bridge that we had on slide 15 of the presentation where we are showing a strong value uplift, strong NRR, if you like. I wouldn't call it best-in-class. But I'm sure you guys, as tracking this, the software industry, would judge for yourselves whether 112% is best-in-class NRR.
That's for you to figure it out. The second thing we've done is we've enhanced the value-based selling. The insights that Kanika and her team give us, the ability to, when we're working with our prospects to go in and say, "Here is Value Benchmark. Share with us what you do. We'll help you structure your business case. We'll help you also target what business improvements you'd be making out of adopting the platform." That work is invaluable. And that work, I dare say, we are unique in the industry to do it. The third thing, we've strengthened the sales organization, and that we have also announced before in Q3. I talked to you about what we've done in North America.
And finally, we've done a major adoption of AI in our systems that support our sales process to improve predictability of the business, productivity, sales productivity, and so on and so forth, and value capture, of course. And anybody who's interested in that, I can talk about it a lot. Now, moving on to our key strategic initiatives, the same four initiatives we believe are working. I'm not gonna cover all four of them here. I'm gonna cover two as material in the presentation for all four. And what I wanted to say about SaaS is that Takis is also going to give you a lot of information. I've already explained the value proposition and the Enterprise Services and where we're going. And Kanika gave you a market update.
I will spend, in terms of larger banks, you'll see that our mix in larger banks has, if you like, corrected to what it was pre-pandemic. And it's in the range of where we wanted to be between 40%-50% of the business. We've got a number of targeted initiatives to increase penetration. For example, in Corporate Banking, we do a lot. But of course, we can answer any questions you may have. I'll talk a little bit about North America where we have now a complete strategy. For quite a few years, we were niche. There were segments of the markets where we said we didn't want to play. Now, we are quite broad-based. We've strengthened the product clearly, given the customer base we have and the references.
It's only this morning we announced, Commerzbank has actually gone live with our Infinity product to do complex loan originations for their business. We've got the top-tier banks like Regions, I guess. We've got the non-incumbent segment that we've been leading with our embedded finance attempts and neo banking efforts. We have credit unions and smaller banks, and we've got targeted programs for that. And of course, continuing what we have been doing in international subsidiaries in the United States. On partners, the partner program, as Thibault said, partners are important in the software business. They're important for selling together with partners. When we are in front of a prospect, we need to demonstrate their capability in the country, in the region, for the bank to leverage expertise, competence, implementation methodologies, implementation process locally from the partner of their choice.
We've been asking a select group of partners to develop country models, localization for us, which allows us to provide a more complete solution to the end customer. Of course, we have a resellers and distributors program which is quite new and is very, very small today, but which can grow over the years, an important part for software companies. We've got quite an extensive delivery channel. And of course, lastly, Temenos Exchange, which is our ecosystem marketplace, if you like. We do not sell that software. But these are fintechs and other software providers that they sell on Temenos Exchange. And they connect their products with the platform. And together, we present a more complete solution. We continue to rank very highly in ESG.
In 2023, actually, the second box, top second box from the left, we've been ranked top in the software industry globally in our ESG rankings. And we've also received the highest rating in the MSCI AAA rating index, just to name a couple of these. We feel very proud. We are doing this the right way. And we are committing we are doing this in a business way also. And we commit to continue to be, to be following as a sustainability. Finally, I'll talk a little bit about culture. We've been building the Temenos culture for 30 years. And we believe that culture is a vital component of business success. And it is culture that has propelled Temenos to what it is today. It's also culture that has allowed Temenos to deal with challenges before. We've been through events like Lehman Brothers.
We've been through events like dot-com collapse 2001. We've been through events like euro crisis 2013. And it is the Temenos culture of collaborating, caring for our clients, caring for our business, committing to our clients and delivering to our clients, and challenging each other in a better way. And when the market challenges us, like it does, I guess, also today, we rise to that challenge. And it is culture which is going to help Temenos manage its way forward. So to conclude, four or five things, it's the continued investment in the platform that puts us in a strong competitive position both against traditional and neo- vendors. It is the global client base which is diverse and which we've been building over 30 years.
It is the recent expansion in the SaaS client base that gives us the critical mass to continue leading the market. With that transition from term to subscription substantially complete, we are in a position to now leverage the strong customer base to generate increasing recurring revenues and cash flows in the years to come. We did three thing I talked about three things yesterday. We changed the model in 2023. We delivered increasing cash flows in 2023 as well as other KPIs. And we are confident looking forward to another successful year in 2024. Therefore, we are in a position to reconfirm the strategic priorities and programs that we have talked about today and, I guess, also consistent with last year. And with that, I'd like to thank you for your patience. And I hope it's not been too tiring. Prema.
Hello, everyone. It's my absolute pleasure to be presenting the product and technology update along with a few other operational updates. First and foremost, a little bit on our journey. I think some of you will be familiar with this slide. We have presented it regularly to talk about our journey, our evolution in products, technology, and platform. When no one in the industry in our industry was doing packaging, we were the first ones to do package software, upgradable software, allowing giving clients a confirmed path to taking the latest and greatest of the investments that we put on our platform and products. When the industry didn't hear about or didn't think about 24/7 banking, we were the first ones to provide that support. We were open because we were always supporting multiple stacks even on-prem.
When Microsoft introduced the very first version of cloud, we were the first vendors to put our software on cloud with live clients. The period between being cloud-ready and becoming cloud-first and then fully cloud-native gave us the opportunity to truly refactor our architecture and future-proof our architecture for cloud and SaaS. That's why we were, in that period, able to also consolidate and acquire and serve a number of large banks because they were understanding our technology, our architecture choices we were making. When we started as well making available a lot of deployment options, which is both public, private, and hybrid cloud, we were able to regain our leadership position. We also moved to cloud all of our products onto cloud-native architectures and then introduced the composable architecture, Composable Banking.
This year, we have launched the Enterprise Services which will go through which I will go through a little more in detail. I'm very proud to be announcing the AI embedded platform. I'll briefly introduce. Hani will also take you through a lot more in detail. This slide, again, is something that some of you may have seen before. There is no better slide, better way to represent everything that we offer to our clients and partner ecosystem than this one. It shows the different types of services that we have launched on the Temenos Banking Platform. Let me draw your attention to the top left and top right. We see two sets of services there. When we became SaaS-first, we were very clear on the types of services we wanted to launch in the market.
One set of services on the left you see are the more point solutions, specific banking capabilities, Banking Solutions, packaged for a specific market. Therefore, they are point solutions. Banks choose to take those. And they can also compose the rest of it in their ecosystem as they need. But more and more banks are now looking for what you see on the right-hand side, which is the Enterprise Services , which is why we invested and we are launching that, in a big way this year across multiple segments. So these are the more preconfigured Banking Solutions bringing together the Core, Digital, Financial Crime, Data, Analytics, and what Hani will present to you with AI as well. So all of the end-to-end journeys put together in an easy-to-consume and easy-to-derive the value out. That's the Enterprise Service .
No matter what these services are, they are comprised of the same things, which is the Temenos Banking Capabilities. We have always, always maintained a single code base, single configuration base. We do not branch code for customers. We do not branch code for technology choices we make. We do not branch codes for deployment choices we make. It's the single platform, single product, single business set of business logic and data models that we continue to invest, enhance every single customer. Even if they have been on the oldest release, when they upgrade, they take the same software that we maintain for all of our customers. And that is the, the Temenos Banking Capabilities. Underpinning the Temenos Banking Capabilities are two sets of foundational elements.
One that takes care of all of the common banking capabilities, the multi, as we call in the banking industry, everything goes into that banking foundation, which is why we are able to host in a single instance hundreds of legal entities for a bank. Or a bank may choose, like a private-built bank, may choose to have multiple instances or multiple hubs hosted on a single platform. There is also the technology foundation. I spoke about how the period when we became cloud-ready to cloud-first and cloud-native, that was the period when we discovered the perfect recipe to future-proof our solution for cloud and SaaS. This is to bring the full abstraction that was needed from the technology layer for the business logic and data.
Therefore, as we started adding on multiple cloud platforms, cloud services, the services that the cloud vendors were actually updating on a regular basis, we were able to consume that without having to invasively rewrite our business logic. That is the secret as to why we are able to add more of the cloud services and certify our software on a in a cloud-native way and yet continue to invest and grow our business capabilities. We offer two sets of deployment choices. We run the software ourselves on our SaaS. We use AWS and Microsoft for that. We also allow banks to run it on, run it themselves on the private cloud. So the banks who take the cloud options themselves, host it themselves, they take exactly the same pipeline, same blueprints, same way of deploying the software as we do on our SaaS.
So the investment that we do on our SaaS is actually benefiting and making sure all of the cheaper, faster, smarter way of doing things, deploying solutions on our cloud is benefiting those cloud customers as well. Very important point here to notice. Some of the large banks do prefer to have a deployment choice of having hybrid cloud options. Not all banks would be very comfortable putting everything on the public cloud as they go through the progressive modernization journey. These things may eventually happen where they move everything onto the public cloud. But till the point they get to that, they need some of the workloads to be mixed between on-prem or private cloud or public cloud and a mix of whatever they choose to do. And we provide that choice.
And this is something neo- vendors do not do, which is, again, one of the reasons why we are able to still penetrate further and further into the large client base. Temenos Banking Capabilities. So I drew your attention to the key Temenos Banking Capabilities in the middle that make up our solutions and the services. This is the breadth and depth of our functionality. It covers pretty much everything that you will see in a buy-and-build banking domain landscape. And that's how we map our solutions. This is also across multiple segments, retail, corporate, wealth, and business or commercial. I'll draw your attention to the top two rows, the channels and the customer engagement, which is where all of our digital capabilities are. Even before we acquired the digital companies that we did in 2019, we were always, always digital-first. I would like to address two points here.
One, to address the questions about the R&D investment on digital. We don't do any feature building on our platform without the end-to-end journey complete, which means if we build something on core, we always complete the capabilities on digital. If we build something on digital, there will be something that we will integrate and verify and release on the core or the full end-to-end journey. That's the R&D part of it. The second part of it is the implementations and go-lives. There was a question to Andreas and Takis yesterday on the results presentation on the number of Infinity go-lives and the digital go-lives. So let me give you that information now. Out of the 391 go-lives that we had last year, I'm giving you the minimum number, 160 go-lives were digital go-lives as well, yeah?
This is a very important number because it constitutes upgrades of the digital solutions from older releases. This includes new feature rollouts, big feature rollouts. We are not talking about just a button change or screen change. That's not what I'm counting at all here. These are new segments. A retail digital app may probably have a commercial rollout or a corporate app. Our customer who had a corporate app would have extended to launch a commercial brand. There could be new digital brands across as well. This is what we count as incremental or significant go-lives on Infinity. And that's the number I wanted to share. There are some challenges, obviously, that digital or neo banks would face because of funding and other issues because, obviously, there are pressures.
They can't continue to invest as much on both digital and core and keep the existing, you know, complex legacy landscape also funded and up-to-date. So those digital banks of large banks may see the pressure. But most banks that have gone through the pandemic and brought a lot more of the self-assisted and digital capabilities, they continue to invest and deliver. And the go-lives, the number of go-lives, hopefully, will give you some color as to how far ahead are we in terms of digital go-lives as well. Right. So another question I wanted to address was also in the R&D priorities.
When you have the breadth and depth of functionality and you are a market leader in various segments, it becomes a little bit of a difficult decision as to how and how you choose to invest in the right areas in your products and platform, yeah? We use the Value Benchmark thoroughly and extensively. And this is a scientific approach because after a point, it's about how much value can you start giving to your customers and where you should be differentiating your solution, where you should be leading the market, where the investment on the innovation should be higher than the business as usual or the regulatory, you know, catch-up or whatever it is. And we use the Value Benchmark for this. So the performance drivers are the pillars. The indicators. Kanika showed a lot more metrics. I'm just highlighting a few per performance driver.
So whatever investments we do, whatever features we want to build out of our backlog, we make sure we measure the value output from that to one of these metrics. Is it going to help us differentiate and improve the percentage of false positive or the digital sales for our customers or introduce another channel in digital for banks to be able to offer their products and sell the products, digitally? This is how the product investments are being made. I just wanted to give a little bit of color to that. The strategic priorities a little bit. There are four initiatives that we have mentioned, the Enterprise Services, Temenos Leap as a modernization program for banks who, for whatever reasons, may have remained on older releases, older technologies.
How do we modernize and bring them to the latest and greatest and make them ready to go cloud-native or to be on SaaS itself in the future? Lean Core, our impressive large bank, Tier 1 and Tier 2 base, continue to help us modernize our capabilities to tool to improve the tooling, to improve the services packages, or honestly to, to perhaps make further, investments in slimming down or making our platform greener, faster, cheaper. It could be any number of those things. I'll touch upon a few things that we are doing there.
Last but absolutely not the least, AI has been the center of a lot of our innovation investments that we have been doing. We have been differentiating our capabilities using AI, explainable AI, the last four to five years. With the evolution in the AI industry or with the generative AI capabilities, it's even more important for us to make sure it is more responsible, more explainable when we embed these capabilities onto our solution. So I'll touch upon briefly that as well. Enterprise services. Andreas explained this beautifully already.
It's about the standardized SaaS services, which are preconfigured with the products, with the APIs, with the usage journeys, with the business processes, with the documentation, with the country packages, the regulatory packages, data extracts, everything put together, what we have done brilliantly before, but to do it differently on SaaS, which is to make sure customers are able to do a lot of this themselves in a low-touch, self-guided manner, right from the day we deploy the software to the day when they are able to leverage the value out of the service to be done in a low-touch and also, a frictionless manner. Another point that Andreas mentioned was around the continuous updates or the automated continuous updates. Banks take months or sometimes even years in this industry to go through complex upgrade programs.
For many, many years, we have invested in getting our upgrades, upgrade tooling right. But on SaaS, we needed high, high levels of automation, which is what we have achieved. So when we upgrade these Enterprise Services , it's a matter of weeks. The software, the service entire service is upgraded. It is tested and delivered to the customers with the test cases, which they can use if they wanted to, to qualify the service and take it into production in a low-touch manner again. Security is by design embedded into the service. We also have invested heavily on the automated monitoring and automated operations as well. With the increase in the SaaS client base, it gives us unique perspective, again data-driven and to some degree the predictive AI-driven as well.
We are able to understand where the bottlenecks on infrastructures are, where the specifications have to be improved, where the NFRs will have to be improved. And that's what goes into the continuous loop within the, getting the service, much better, faster. Elastic scaling and embedded user journeys are part of a default characteristic, rather I would say, of these services. What do our customers get from the Enterprise Services ? What is different? Prospects, when they buy the Enterprise Services , can try before they buy the service itself. Okay. This has been around sandboxes. People do it. No, that's not what we mean by that. What we mean by truly try before you buy is you get access to the Enterprise Service as you would get in a developer or test environment.
Whatever test or configuration that you as a prospect do, we will be in a position to package and move it into a proper dev and live environment within 24 hours of deployment. So we suck the configurations and packages that banks are, you know, trying, playing with. And we are able to deliver that in the real environment for banks to start implementing readily. The focus is also on value delivery. We spoke a lot about Value Benchmark we do, how we sell value, how we use the value insights to make the R&D decisions. But it's also about value delivery. The 391 go-lives for us is also about the value that we deliver to our customers. Every single one of them improve a number of value metrics for our banks. And that's what we track.
So when it comes to Enterprise Services , it's also about how quickly can we deliver the first value and demonstrate the power of this Enterprise Service to our customers. Obviously, within the 90-day implementation plan, we don't want banks to be complex doing complex integrations of 50 different systems and, you know, complex migration strategies and all of that. But they can make a start. They can start doing all of those activities. But we also focus in making sure the first value delivery is demonstrated within the 90 days. Obviously, with all of this combined, it brings the operational cost down, the cost of running the service down for us. And it importantly offers choice and flexibility. Not all of these capabilities have to be taken by all of our customers.
But more and more, we are seeing more banks want to take the end-to-end capabilities, less so on the smaller or granular ones. Temenos Leap, as I mentioned, it is a modernization program for older customers who are on older technologies. But we leverage the capabilities that we have on our platform. These customers tend to have a lot of customization. That's one of the big, big pain points. But this is where AI comes in. This is where the smart features, smart capabilities of how do we minimize the cut customization and how do we map the business processes that banks may have already implemented with very little documentation?
How do we use AI in order to extract all of it, turn it into the latest business process that we have got on our platform, and project the deltas that then they can manually review and either decide to extend still or to just get rid of those and then to be able to modernize and come onto the latest and the new technologies? So there will be some of the functional modules or older capabilities that they may have, which again, using AI and some of the smarter product mapping and migration features, we intend to bring those products and the older technologies like web services onto the newer products and the APIs, RESTful APIs, which is what you would need to be cloud-native. What does that give to our customers? It's faster time to value.
Again, it's the productized solutions to the newer product capabilities with the updated regulatory features. That's very important. Again, the digital capabilities, the more modern digital customer engagement capabilities and AI capabilities are on offer as well as part of it. This is going to expand the banks' markets onto the banks' business onto the newer markets that they have never been able to penetrate. That's the easy access to the newer markets and newer segments, obviously with total cost of ownership at the lowest possible. A little bit more on AI. But Hani is going to deep dive into all of this. The AI journey. For a very long time, we have had our emphasis on data analytics. When we say data, it's about data quality. It's about data traceability.
It's about data, okay, sovereignty and residency as well, metadata management. We have had such data capabilities for a very long time. So we did predictive prescriptive analytics. We also acquired the explainable AI platform, which allowed us to build 25-30 explainable AI models covering predictive, predictions, optimization, classification, segmentation, etc. But with generative AI, with the ability to generate new content, we are able to take the next step on our AI journey, which is what the embedded AI platform is all about. Now, it's very easy to get carried away when it comes to AI. AI is all always often spoken about or in, you know, text to image, image to text, and, you know, you know, all sorts of interactive cool intelligent stuff. That's all well and good.
We do infuse AI onto our front office, back office use cases for both the bank users and the customers themselves. But the biggest use case is also emerging on the internal use cases. Internal means how do we use generative AI and the predictive AI stuff in order to differentiate and improve operational efficiency for banks and the implementation, so complex integrations that banks do across the systems? How do we use AI to generate test cases that covers the full landscape? How do we use AI to minimize the quality issues that crop up during data migration activities? Data migration activities are some of the most complex activities. People are thrown at it. Money gets thrown at it. And it's usually trial and error kind of capabilities, area. This is where we believe some of the strong use cases for AI is emerging.
So when I spoke about Leap, one of the areas where we invest heavily is also to differentiate our solution with AI capabilities for migration and testing. Documentation. Anything, you know, generative AI can generate documents as well. So just imagine the power of generative AI that can produce documentation of some of the complex integrations or business process that sit in a bank. And we are able to come in not only providing the AI-generated documentation for what we implement but also to provide that capability and extend it to for, for banks to use in their own landscape, yeah? And then last but not the least, for the internal bank, our own operations, rather Temenos operations, we have already launched the conversational assistant-based chatbot for support portal and operations. But we are extending it further with the generative AI capabilities.
We are also using AI heavily in the learning community. Obviously, it's a perfect use case for AI. Again, a little bit on how do we decide how do we go about deciding where AI can differentiate the solutions that we have? We again go back to our value metrics and the Value Benchmark that we do. All of our solutions are mapped to some of the insight and the performance drivers and the metrics. By infusing AI in some of these solutions, for example, when a customer goes through an onboarding journey, by embedding generative AI, you can, in a very simple, non-technical, easy-to-understand format, you explain the product terms and conditions. Just imagine a mortgage documentation, a customer going through a mortgage documentation to read through the 50 pages or whatever that is to understand, you know, what am I signing up to?
Just make it in a simple, bullet-based, readable format or answer questions that a customer is asking about what am I signing up to in that document. Just imagine the power of that capability, AI capability. That's how we decide where to embed AI in our solutions. Lean Core, another massive initiative, which is an ongoing activity, it has now become a business as usual for us because we work with a number of large Tier 1 s and Tier 2s. They continue to take us through in the modernization journey. So it's also about, for us, the componentization, the microservices architectures, and everything that we have already done. I've just given a few capabilities that we have been working with a number of our clients right now. On the retail side, we have party as an enterprise capability, a bank that is implementing core but as a completely standalone enterprise capability.
They are bringing together all of their customer data sources and bringing it in a digital-ready application outside of the core to be plugged into our own digital channels or any third-party digital channels that they have in an ecosystem. That's what enterprise capabilities are meant to do. And that's what progressive modernization is all about, to be able to take any standalone capability without having to take the whole platform or to upgrade the whole platform itself and then to be able to modernize, as well. Corporate, we have been heavily investing on corporate as well as you know. Some of the capabilities that we make standalone and in to be consumed in this fashion is also listed there. The example that Andreas gave on the digital- corporate solution that went live last year in Africa, that's the digital capability. It's a standalone corporate capability.
They don't have the core from us, actually. It's only digital Infinity standalone. And they were able to integrate to multiple cores. And that's the metric that you saw from 48 hours of doing manual processes to doing it in six minutes, all self-service, complete digital end-to-end journey just on an app. That's the power of standalone, independent capabilities. Last but not least, I would like to touch upon the Temenos Exchange ecosystem. We are extremely proud of this ecosystem, not just because of the quantity. It's because of the quality that we are able to bring. They complement our solutions. They complete our solutions. If you look at the list, we have expanded some of these domains further and further because there are lots of niche vendors.
When we go through different geographies, newer markets, there will be established players in those regional, local markets. We make it a habit to go through those partners as well, do our due diligence. Importantly, we do the integration with these partners. So when we qualify our software, when those partners qualify their solution as well, they qualify with the integrations. And they continue to upgrade and update using the sandboxes that we provide and the wider community as well.
So we are always testing them on security, on performance, and also on the compliance as well and the readiness to onboard them onto our own SaaS platform. So we are extremely proud of this community. And this continues to grow. Finally, it's the winning combination. We have the leading functionality. We have the leading technology a nd that's why we win consistently all of these segments and all of the markets. With that, I hand over to Hani to talk about AI.
Okay. So good afternoon, everyone. The requirements of artificial intelligence in the banking sectors is really unique. You are dealing with a unique sector which is heavily regulated. Therefore, the artificial intelligence models that are produced by AI should be easily understood, analyzed, and maybe sometimes augmented by the business users or the regulators. Also, as artificial intelligence touches many decision-making processes within the banking sectors, the output of the AI models needs also to be easily understood, easily analyzed by the business stakeholders within the bank as well as by the banking and customers. This is very important for the wide deployment for artificial intelligence in banking. This causes big problems for other black box models or traditional artificial intelligence where basically the implications of decision-making within banking sector is becoming a very important thing.
We can see this in the media coming via various regulators who emphasize the need for explainability and trust in the banking decision and any kind of decision-making processes specifically within the banking sector. Regulators are stepping into this kind of market. In the past, there was wait-and-see approach by different kind of regulators. This is completely changing. And now there are different kind of regulations, different kind of important mechanisms coming into the AI sectors in general. The other important thing which is extremely important for the banking sector is that they don't want the data, which any data will always be biased, data will always be patchy and so on. They don't want only to rely on data-driven knowledge. Data-driven knowledge means that whatever you see in the data will be reflected in your model.
We have seen different kind of situations where big corporates ended up developing financial products which basically were biased against a certain sector of the demography. So it's very important when AI is going to be deployed that it is unbiased, safe, and fair when it's going to be used. Huge problems which are caused by the opaque box models is that the outputs of the given model cannot be easily traced. So this is what's called data traceability. If you take a decision, you cannot just basically trace it back to the different kind of input. And this is causing huge problems for different kind of regulations as you are going to see. At the end of the day, banks include a lot of human stakeholders. And it includes human users. Humans always understand what they can trust always what they can understand.
Therefore, explainability and interpretability and trust is a very important concept for banking in general. There are huge regulatory pressures. So, for example, the European Banking Agency mentioned that there is a need to provide trust in artificial intelligence via explainability and interpretability, fairness, and avoidance and bias, and most importantly, traceability and auditability. Here in the U.K., the House of Lords have got the AI Select Committee. And they mentioned that if AI is going to be used as a trusted partner in our society for decision-making, it has to be completely explainable. They even went and mentioned that if deep learning is existing for some decision-making processes, it should not be used till proper XAI or artificial intelligence interpretability is put in action.
In Temenos, we always wanted to align with the different kinds of visions which can be seen by different types of leading regulatory bodies which are responsible for artificial intelligence. Responsible artificial intelligence is built on two pillars. The first one is that the model that is generated is not going to be an opaque box. It is a model that can be easily understood, analyzed, and sometimes augmented with human knowledge if needed. The output of the models which basically touches the lives of millions of people all over the world should also be completely understandable, completely transparent. This is a very important factor if artificial intelligence is going to be used with complete trust for the whole banking sector.
The EU did move forward with the EU AI Act, which is coming into action in 2025, which basically is the EU wants to go for a safe, transparent, traceable, non-discriminatory, and environmentally friendly AI. They even go and impose hefty fines for the non-compliance of AI applications which is not following their kind of framework. Temenos, we were always at the forefront of explainable artificial intelligence in the banking industry. And when we speak about explainable artificial intelligence, we generate models which are totally transparent, easily interpreted by human beings within the banks. And they are the only models which enable us to fuse two sources of knowledge, data-driven knowledge, and human knowledge at the same time.
The output of this kind of models are fully transparent, fully understandable to the human stakeholders while they are the banking stakeholders or the end users. We do this without sacrificing the accuracy of the models. So our AI models are highly accurate at the same time, which has always been a problem which people have been tackling in this kind of area. We solved this. We have got our unique AI models in this area. In 2019, we introduced our explainable AI platform for the banking industry which enables our customers to procure Temenos explainable models for banking automation efficiency and meaningful customer engagement. Customers can create and run self-developed AI models with explainability feature on the Temenos XAI Platform. They can; we can also add and develop models on demand for new and evolving use cases.
As Prema has mentioned, we provide different kind of explainable AI models which serve different areas of the banking sector from retail and SME scoring, retail and SME manage, customer management, transaction management, smart money management, financial crime, wealth, and mortgage advisor. But now we are, as Prema has mentioned, we are moving towards embedding XAI rather than just basically selling standalone models of embedding XAI in the Temenos platform. We are also moving. We are going to expand more in the area of generative AI to basically fulfill our responsible AI mission. So in this case, we are going to go into the area of generative AI.
We are going to apply it in different kind of areas like automating and hyper-personalizing manual processes, improving responses to specific use a customer user need, summarizing complex information into coherent narrative, and simplifying the process of creating content in a particular style. Our approach to GenAI has been articulated by Prema. We have already different kind of different levels. We started with internal operations. We have got different examples for customer support operations, pre-sales operations, and as well as Temenos Learning Community. We are moving to enabling banks to deploy and implement the Temenos software faster and better. Examples of this will be applying generative AI for testing, migration, and documentation. Then the most appealing one from my personal point of view, which is infusing AI in our Temenos Banking Platform.
This will enable us to have unique generative AI applications and functionality for the front and the back office. We started doing this already. We launched our generative AI solution for the transaction classification. This has resulted in fast and accurate automatic classification of transaction events which are very important for different applications like next best product, cash flow prediction, customer budget advice, peer grouping, and sentiment analysis. Let's now move and see a demo of explainable AI embedded in the Temenos Banking Platform. What we can see here is the front end of Tony. He owns a plumbing company as an SME sole trader. What you can see to the left is what appears in non-XAI app: balances of Tony, money in, money out. On the surface, things look good.
But on the right, you can see the explainable AI part which predicts that Tony is going to have negative net cash flow for the next month. It explains why this is happening with positive drivers. But the most important one and worrying one are the negative drivers which explain that the company current ratio, which means the company equity ratio, is going to extremely low. Company profits are low. And the net disposable income is basically dwindling. This, of course, will cause now Tony understands where things are coming from. He needs to begin finding what is the next action to do. But the bank actually, through the use of explainable AI, has anticipated this. And if there is a notification there up there which shows that the bank is actually going to propose a new product for Tony.
And in this case, it will be an action that helps him in order to mitigate this kind of issue of going beyond this kind of financial difficulty and trying to find what will be the next best product for his own action. Of course, what we can see on the top is that we have seen here this kind of notification which should allow us to go to the next best product. And the next best product here will be a business loan which Tony has been scanned based on his relationship with the company for this kind of next best product as a business loan. And now everything is taken care of. So basically, he just needs to go ahead, apply for the loan. Of course, he has been pre-approved of what we know about him.
But of course, this is pending the final risk and compliance step of credit checking. So in this case, he will start the process. He will choose $10,000. He might actually want to increase this to $13,000 to cover any kind of financial problems. He would choose to come to his current account. He would go ahead and apply to the loan automatically. And then he has been only given $5,000. Of course, he will begin wondering why this is happening. Again, this is the risk and compliance part. Now the Know W hy will enable the bank to tell him what the bank is allowed to tell him according to the bank and the regulation in the given country. There are good things about him, that the company has been stable for the last 12 months. And the company has good cash and equivalent.
But the worrying signs is the health score, which is the credit. The financial well-being is low. The company total asset to liability ratios are going too low. The company has not been there for long. Basically, he can accept this. He can go for, the next way, pay and applying for the loan to resolve his current short-term issue. So let's take a look what was happening from the banking side, what the banks was seeing from their kind of side in order to manage this kind of process. What we can see here is the banker screen. It shows everything about Tony. It shows us the net disposable income that Tony was able to see. Everything is explainable in terms of why this is negative cash flow based on what.
We have got also the attrition score showing that Tony has been a loyal customer. He has been a profitable customer in terms of his customer lifetime value. His financial well-being is in the age of 48. And what we have got here is that his next best product was business loan. So in this case, we knew the bank knew ahead of time that we can give a loan to Tony, maybe not to the maximum amount. But based on this, he's somebody with a good financial well-being, a good, decent financial well-being, loyal, attrition. And basically, it is better for the bank now to begin stepping and supporting him. Everything and all the reasons behind this decision has been articulated with the power of explainable AI. Also at the portfolio level, all of this kind of information can go to the portfolio level.
So rather than basically just deal with Tony as an individual customer. We have got all the customer base coming back to analytics. And within analytics, for example, here in attrition, you would be able to know which customers are on the edge of attrition and why, what are the top churn drivers, what are the top retention drivers. You can begin segregating your customers and finding in a certain age group what is the attrition, what is the most risky sector. Here it is between 45 and 54. And you have got how here also, description of your customers by lifetime value. In this case, you'll be able to articulate a proper customer retention scheme, as Prema has mentioned, in order to maximize your retention scheme and so on. The same for next best product.
Rather than basically selling everybody everything, you know for each product what are the top drivers that people would go for. And you are able to know for each product. And, you'll be able to segregate it and see for each, for example, age group what is the best appearing products for all of them. Let's just reflect and see if XAI was not there. In this case, Tony will basically unexpectedly fall into financial difficulty. He will begin to call the bank. He will begin losing a lot of money and time in order to search for what is really good for him. And there might be a problem of him going delinquent. He might actually leave the bank and so on. From the bank side, the bank was able to articulate this beforehand.
The right product was offered to the right customer at the right time. This was enabling us to maximize the customer satisfaction to the highest level. There is huge high personalization for the customer needs. And we are able also to minimize the effort in the banking on the banking staff in order to manage and help Tony and give him the right advice. Everything was happening at the right time without the customer, and with the customer being informed about everything, about the step. If non-explainable AI was going to be used, the bank staff, Tony was not going to have the same kind of trust in the banking decision.
This actually enables us to hit on the five Temenos Value Benchmark that has been mentioned by Prema and Kanika: customer centricity. And through the use of advanced analytics, we are able to increase the growth and innovation within the bank, operational efficiency, and very importantly, effective risk and compliance. So with this, I conclude. And now I just move to next. Thanks.
Hi, everyone. Just me left between you and refreshments. Let me start with a bit of water. My 30 minutes is almost gone. Okay. As you have seen, we have very clear strategy on how to drive sustainable growth across our business, both in 2024 and in the midterm. We have reiterated yesterday and again today our midterm targets for ARR to reach more than $1.3 billion, the EBIT of more than $570 million, and free cash flow of more than $700 million. And as we had said last as we had said last year, midterm was four to six years, down year, down one year. So that's basically meaning we talk about three to five years when we discuss midterm. So in the next 15-20 minutes, I'm going to take you through the main drivers.
We have seen already in the past that, you know, ARR has delivered very consistent growth quite nicely. It's six year CAGR of 13%. We think with the transition to subscription now substantially complete and the growth in SaaS we're seeing, you know, this is actually a very good basis, you know, for the growth as we are projecting. Now with both SaaS and subscription benefiting from, you know, the rising demand for cloud, we are forecasting continued growth in both of these revenue lines, which will drive ARR to more than $1.3 billion. Free cash flow is said to benefit from the growth drivers, as we have said, but also profitability and the rising demand for SaaS. This is a very important one.
As you know, if we grow SaaS, if we grow our SaaS ACV, you know, this will drive deferred revenues and therefore cash to deliver the $700 million in the midterm. Now profitability, same chart. You know, we had clearly a good track record in the past, you know, 2022. We had the issues we discussed, back to the growth track. Now the recurring revenue base we're projecting clearly will give us also visibility on providing the EBIT growth we need. What are the drivers? They're unchanged. SaaS margins will continue to expand. And I'm going to talk, in a few minutes about this. But at the same time, we have a lot of operating leverage embedded in our business model, which should help us get there.
You know, as we had said already last year, you know, there will be plenty of room for the necessary investments to be done along the way to deliver and support our business. Now ARR, and this is the history, as you can see oops. As you can see, you know, SaaS has been, you know, becoming a larger proportion of our, of our ARR, subscription as well. Clearly, as we grow our subscription revenue base, this will make an increasingly large contribution to the ARR mix. It's projected to reach around 25% in the midterm. The effect is obviously more pronounced for SaaS, which should contribute around, you know, 55%. Yeah. This is what we have embedded in, in our medium term. This is what we call our base assumption or our base scenario. So quite, quite strong ACV growth, embedded in there.
Ultimately then, SaaS revenue and SaaS ARR. Now free cash flow should grow faster than ARR. Trough in 2022, and clearly we, sorry for that. So we already saw strong growth in 2023. We had said 2022 would have been the trough. And this was clearly the case. And I think it will substantially accelerate, because 2024 and beyond, there will be no more headwinds, you know, from the term license shift to subscription. And at the same time, if you have SaaS growing and accelerating, this will give us, you know, deferred revenues, which will then again drive free cash flow. Now we have stress-tested, you know, our assumptions. And as you know, it's hard for software companies to exactly predict the precise point in time when customers will ultimately move to SaaS. Yeah.
So we have built and we have put together an alternative scenario, which, you know, has somewhat or quite a bit lower SaaS ACV quarter growth of 20%, which is then, you know, basically replaced by so the lower growth is compensated by the higher subscription growth. So this would mean, okay, a lower, an even lower number of what we expect would shift to SaaS and rather remain with subscription. So now what does it mean for our plan? You know, we would still deliver the EBIT target in the same year as in the base model. Makes sense. Yeah. Subscription still more profitable than SaaS. So, that's pretty straightforward. Now we have done a lot of testing.
If you look then at ARR and free cash flow, which obviously are the ones being driven by strong SaaS growth, there is a slight negative impact or rather a slight delay. So on ARR, we will get to the $1.3 billion target, let's say, three to six months later, so a few quarters. And free cash flow, also a few quarters later. However, it would still be in line with our midterm targets of three to five years. So if you want, this is kind of a de-risked view with a lower SaaS ACV growth than in the base model. Let us briefly look at the drivers. These are the same slides we have provided last year.
But I think it's important to see, and this is also what Andreas mentioned, that we have done quite some progress, you know, in the last years. For Tier 1 and Tier 2, we are now at 43%. This is, you know, returning to 2019 levels. And clearly, if we look also at the next one, you know, very good track record also for North America, now at 33%. And we're getting very close, you know, to and in some individual quarters, as you know, it can be very volatile. In some individual quarters, we have already during 2023, sometimes hit, you know, our targets, which we want to reach in the midterm. This is our guidance. I'm not going to repeat that. We issued that yesterday. And also midterm targets. No change to that.
This is one, which should be familiar to you. It shows basically, again, the buildup for the ARR. This is for the base model, so with a higher growth embedded in there. I think you'll see SaaS and subscription still being the main drivers. So no surprise there. Now if we will go for the alternative model, yeah, we would still get there. You would have a bit of a different mix between SaaS and subscription. On EBIT, the same three drivers, the same three elements, which we showed last year. I think SaaS gross margin, and I'll get to that, we have seen an increase of 300 basis points on a reported basis.
Now if you take into account all efficiency measures and everything we are putting in place, you know, for the future, for the large volume of SaaS we're seeing already, then you will get to an even higher, what we call exit rate, and what we had at the end of 2023. Operating leverage, you know, we still have a very good infrastructure. We're going to get some positive impact from services becoming more profitable again. And finally, this will provide us with more than enough room to do the necessary investment. Now SaaS gross margin, this is what I was just referring to. So we did 300 basis points despite, you know, all the investments we did in the last few years. We still maintained a very good expansion rate.
This is what I mentioned, you know, exit rate being 66% if we account for, you know, all the things we have been putting in place, a follow the sun model in terms of support, and also, you know, becoming more and more automated in what we want to do. We continue to invest a lot in software on automation. And I think that's important with a rising number of SaaS clients. We will increase the level of automation. But also in terms of, you know, the optimization which we do across our, you know, hubs. And ultimately, as you can imagine, there is, you know, efficiencies on the hyperscaler side. So the more volume you buy from the big hyperscalers, the better discounts you get. I think this gives us confidence that we get to 75%-80% in the midterm.
And if you look at, you know, 66 over the next three to five years, getting there, so that's 10-15 percentage points, it's not a very different rate of what we have done in the past. And especially if you look at this, which is locked in, I think this is a reasonable assumption given the SaaS growth we are projecting. Key cost lines, not much to say here. We'll keep investing in R&D, a bit of leverage, but this is important, same for sales and marketing. Clearly services, we have done a big step in 2022, and have seen the benefits in 2023. So profitable. We still follow our partner model. And then ultimately, we still got something on G&A.
So overall, I think there is, you know, a number of percentage points, maybe 6 percentage points, where you see in terms of margin expansion potential into the midterm. Now on free cash flow, this is 2023 to 2024. We've shown this this year. We've shown this yesterday already. The important one is already this year. Last year it was a bit different. But you see what we get from subscription is already offsetting the negative impact from the few remaining term license deals we still had, and still going to have this year. Yeah.
So this is important because now here in the third year, we collect already the third year of cash from the deal signed in 2022, the second year of cash from the deal signed in 2023, and the first year of cash of the deals, which we're going to sign this year. Deferred strong growth flows to free cash. We explained tax yesterday on the call. We had quite a bit of tax outlays last year. Going to be quite a bit less this year. If we look at the long term or midterm, rather, same profitability and deferred revenue. This is not just SaaS, you know. It's maintenance, as well. We have been growing maintenance. And we have been accelerating maintenance, as you have seen, from 3%-7% in last year in the quarters.
I think we're going to see a good growth continuing. There is the uplift from the renewals. You know, there is the CPI linkages, which are embedded in their premium maintenance services. This is what's helping with this as well. Okay. Now this is a new slide. What we have tried to do here, and it's along the lines what Andreas and the team have discussed, if you look at, you know, the ARR bridge, clearly there are, you know, new deal signings. That's an easy one. And then there is the upsell cross-sell part, which you see in the NRR. So either existing SaaS clients, you know, purchasing new SaaS product or buying more volume, that's all in there.
Now we have talked about last year that we see a lot of interest, you know, from Tier 3, Tier 4, Tier 5 banks, to move to SaaS at the point of renewal. Yeah. We saw not that much last year, but clearly if you look at now the pipeline and the discussions, clearly that's going to become a more relevant topic. Yeah. So we're going to see and expect to see, you know, some of those clients to convert to SaaS and therefore drive incremental SaaS ACV growth. Now how does that look like? And, you know, we have, as you can imagine, if you go back to 2015, you know, there was just a term license model, so 10-year standard contract. So basically this tells you or it was actually always a standard 10-year contract, but we saw the big acceleration in licenses in 2015.
So obviously this means there is going to be a lot more, you know, volume, which comes up for relicensing than we had five or 10 years ago. Now how much and this is the important question, yeah, how much of that is really, you know, required, in terms of, you know, moving to SaaS so that we can hit our targets in the base model? Yeah. The SaaS ACV growth and ultimately the SaaS revenue growth acceleration. Now SaaS contracts typically achieve a 2x to 3x value uplift, compared to on-premise license deals.
We have given here a sensitivity analysis, which basically shows, okay, if we have this type of incremental SaaS ACV growth, so going back to this, if we basically have this one growing at 15%, you know, how much of those customers and just Tier 3, Tier 4, Tier 5 coming up for renewal, you know, need to basically convert so we get to deliver our base model? Here you see, at 15%, it's less than half. If we grow faster, it's even less. Yeah. If we get a higher value uplift, it's even less. If we even had some Tier 1 customers, it's even less. So this is why we, you know, have, our confidence level, in such a way that this is really something we believe we can deliver. It doesn't require, you know, all or a majority of them to convert.
It's really depending on, yeah, a smaller, a relative small portion moving to SaaS. Okay. So this is, a bit more on the, how we flow the different revenue lines, through the balance sheet and the P&L. So this is for a SaaS, ACV, five-year, SaaS deal. You can see, you know, basically signed in, in Q1 on one year and how it flows through over the, over the period, how it generates, you know, the different elements. Now more interesting is this one because that's the delta, to a subscription deal. Yeah. And the main difference, if you look here, is actually you see here this is driving more deferred revenues, than a subscription deal. And this is why SaaS is more attractive ultimately for, for us. Now free cash flow is going to be the same. Yeah.
This is something I wanted to highlight. Now we have discussed that, you know, Q4 ACV was maybe below, you know, some of the expectations, and therefore the full year. Now what does it mean? It means, one, we're going to see still volatility in the quarterly ACV numbers. But it also means that, you know, you don't even if you have flat ACV and I'm going to show the example. So this is, you know, in year one, you got $10 million ACV a quarter, so $40 million. In year two, you also got $10 million of ACV every quarter. So basically, okay, $40 million ACV, $40 million ACV means no growth. No, that's wrong, you know, because as you see, even a flat ACV drives, you know, deferred revenue growth and ultimately derives, you know, free cash flow growth.
Now this is the if you want the conservative example, so same ACV, still you're going to deliver, you know, free cash flow growth. Now this is the similar example. So you start with $10 million ACV in Q1 and do $2 million more in every quarter. Yeah. So ACV grows as we hope and, you know, aim to deliver. You see here what the difference it makes in terms of deferred revenue, you know, instead of $68 million on a $40 million ACV, you know, you almost double it and cash flow, you know, 60% higher.
So this is why, you know, it's so important what the team, you know, Andreas and then Prema and Tony said, SaaS ACV, now while we cannot predict the exact timing and when customers, you know, will convert other than we know when the point of renewal comes, you know, if we can convert to ACV given them the higher uplift, you know, this is going to help us drive our, you know, to our free cash flow target. And as we appreciate, this is, you know, a big delta. If you look at midterm consensus numbers, they're far below the $700 million ambition or the $700 million target we have, but the big delta is really SaaS ACV growth. If we deliver that, we're going to get there. So, capital allocation, I think nothing has changed.
We have made bolt-on acquisitions historically, and this has been value-accretive for us. Still our preferred use of cash. You know, we don't pay a lot on our debt. The leverage has come further down, and we are in the 1.5x to 2x leverage ratio. So starting with a strong balance sheet, if we don't do M&A, you know, you can expect this to go down even further. So we have ample ammunition if required for M&A. Now M&A, atgain, not changing much. We want to do M&A to increase our scale. Strategic priorities is, you know, accelerate the R&D roadmap, which Prema has presented, in key markets and segments. We still don't plan to go into, you know, new segments like Capital Markets. So this is what we still plan to do. No change there.
Conclusion is, you know, as a management team, we're very focused to deliver that. Clearly, you know, SaaS is, is one of the main drivers of SaaS and subscription are the main drivers for this. And this is clearly also depending even more on SaaS. However, we have shown even in the alternative model, the de-risk SaaS model, if you want, with lower growth, we would still get, you know, to all those targets in the midterm. Thank you.
Great. Thanks, Takis. We're going to dive straight into Q&A. So, if Thibault, Prema, Andreas, and Takis could come and take their seats. Just a reminder for anyone on the webcast, you can submit questions through the webcast platform. I will attempt to get, get through to those as well. If you give us a second, there should be a couple of microphones to be passed around.
Do you want to sit here so that you're next?
No, I'll just take my seat. It's okay.
If I could ask, when you ask your question, you just introduce yourself where you're from just so that you and who you'd like to direct your question to, as well. Just give Karen a second. Thank you. Right. Charlie, do you want to go first?
Yeah. Thanks. Is it on? It's Charlie Brennan here from Jefferies. I'll go with two questions. One just on overall process and then one on the business, if I can. If I start with the one on the business, there's a lot of focus on on SaaS, both from a technology point of view, but also in a contributor to the targets. But it was an area of relative underperformance in Q4.
I know you've said it was volatile, but Q3 also wasn't a standout quarter. I think on the call, you suggested that you were confident in SaaS revenues in 2024. Can you give us some sense of confidence on the ACV for 2024? And then just in terms of process, Thibault, can you give us a little bit more granularity on who's actually running the process? Is the process being run by the board with help from third parties, or is it being run by third parties with input into the board? I guess another way of asking the question is who's ultimately writing the conclusion report? Is it the board or is it third parties? Thank you.
Thanks first. Okay. So we start with the last question. It's a board responsibility to oversee this examination. And so, that's very clear. The third parties, which are in the process of being appointed, will be independent, will be top firms in accounting and two law firms, one for Switzerland, one for the U.S. They are going to, I mean, drive to their conclusions, right? So, the board is not going to filter any. The board will take the report, and will, based on this report, will report to you. Well, can I take the business side of the ACV, SaaS, and then I'll hand over to Takis to answer the financial question. We've done a number of initiatives to accelerate ACV and consequently SaaS revenues and cash flows for 2024 specifically.
One we've already talked about, which is Enterprise Service s, which is it, I anticipate that it's a significant bullet in our armory, if you like, because we are approaching the market in a very different way than we have been until now. So that's number one. Number two, we are trying to introduce the market to SaaS, irrespective of whether they ultimately wish to run their production environments onto SaaS. So when we go to market for selling on-premise subscription, if you like, there's a lot that the bank can actually do during the project on public SaaS and on our SaaS environments and services.
They can do their initial system build. They can do their knowledge transfer. They can do their integration. They can do their testing and then move into their own pre-production environments on-prem if they so wish, or they can continue to use SaaS for their production. So there's a lot of initiatives that we've introduced with the sales organization, which are intended to open up the market faster. Takis.
Yeah. So we have seen in the past occasions where we had one or two quarters which were, let's say, below the, if you want, the average of the previous quarters or, you know, indicating some type of negative trend. And obviously, that has, you know, three months down the road, you know, some negative impact on SaaS revenues. However, the SaaS revenues are not just built from ACV and basically what you have from attrition or so.
I mean, don't forget we still have, you know, overages, so which is a sizable part of the revenues. So we get, you know, paid or recharged the customer for overusage on, you know, their commitments. And this is done at a premium. So usually, after a few months or quarters, when they have to pay much more, they come back and, you know, sign for a new commitment on ACV. But you get the revenue. So the customer doesn't get in a position where he can use the platform for free. So overages is an important point. Then you have, you know, CPI linkages as well in there. This is not visible in the ACV. This is in the original contract, but obviously, that builds over time as well.
The third lever, you know, without giving here details, obviously, and, you know, we demonstrated the overall ARR, you know, churn at 3%. You know, clearly, with the type of portfolio we have built, and the platform approach, you would expect also, that your churn would trend down. So needing, again, less ACV to get to the same revenue number. But coming back, so yes, we feel confident to deliver at least 20% growth for SaaS revenues this year.
Great. Thanks. Josh?
Hi. Josh Levin, Autonomous Research. Two questions. In one of your slides, you show that your addressable market is growing at 10% per year. Your guide for this year for revenue growth is 7%-10%. Does that imply you think you're going to lose share this year, or is the math that's not the way the math works? And then the second question, Thibault, you addressed many of the concerns raised by the short report. I'm not sure. I didn't hear you address the R&D issue about whether Temenos is investing 20% of its revenues in R&D. So maybe you could comment a bit on that one. Thank you.
So on the market growth, I think, at least, from what I remember, the market also includes, you know, not just total software licensing. Maintenance as well. Correct. So you would actually, if you add the maintenance, which is in our case, as big as our total software licenses, you would get a comparable number, which is probably more 6%-7% or something, to which you will compare our, you know, 7%-9% growth. Yeah. So no, we, our revenue guidance on, on those metrics doesn't imply we plan to lose market share. And, what we call R&D is R&D.
If I don't know how to answer it differently, you know. The, what is done specifically for customers, like, customizations, you know, is not p art of it, right?
It's. Great. Fred? Oh, sorry. No, Laurent got the microphone already.
Yes. Thank you.
Fred, I'll come back to you.
Good morning. It's Laurent from Kepler Cheuvreux. I have a question on, the 2024 outlook and the comments that you made last night on, investment needed, that lead the margin to be more or less stable plus. If you could elaborate a little bit on this and, maybe the headcount addition you're planning. My second question is on the ARR. The growth is mostly coming from your existing customer. With your new customer, basically offsetting the churn. Are you comfortable with that, or do you expect to do a special effort on grabbing new customer? And my very final one is for you, Thibault. When you read the report, what makes you the less comfortable with? Is there one point on which you say, "Okay, we really need to investigate this," or are you feeling comfortable on everything? Thank you.
So, okay. Maybe we start with the ARR. I think, well, we look at this in the opposite way. And if you remember the pie charts, we always put into the slide deck, in the appendix, it shows that we usually get whatever, 60, two-thirds of the business, you know, from our installed base. So you would expect, you know, to have a similar picture on the recurring part. And actually, for us, it's something which de-risks the outlook, yeah, because you are actually much less dependent on new logos. And if there was, as we have seen as an example in 2022, ARR grew, you know, quite nicely, despite, you know, the challenges in the marketplace.
So do we have the ambition to, you know, also grow new logos? Yes, of course, and we'll continue to that. But for us, it's almost like a safety net that we see this high net retention for with our existing customers. On guidance for 2024, it's a bit unfair, Laurent, because if you take not 8.5 as the midpoint, total software licenses, but take 9%, you already get a 60 basis points EBIT margin improvement. So, you know, we're still confident that we'll increase the EBIT margin as well this year. Last year, we ended up a bit higher than originally, you know, expected, as we have explained some of the investments, you know, were late in the year, or we couldn't do on time. We're not stopping to invest. So nothing exceptional needed, or planned on the cost side.
So when I read this interesting report, you know, based on my knowledge as a Former Chair of the Audit Committee, I didn't see anything that I thought, you know, would be concerning. Again, you know, the thorough examination will be done. So I'm not saying, you know, we're washing our hands of it. We owe you that. And we owe it our customers and our employees as well, you know. But I really didn't see anything that, for me, was concerning, except that, of course, when I remember the title, I feel extremely, extremely, surprised by the strength of it.
Fred, would you like to go next?
Thank you very much. Fred at Bank of America. So I've got two questions on the guidance and maybe one more on the process. So, firstly, to come back on the phasing of your midterm ambition, I think to reach your midterm EBIT guidance, you need about 15%-16% growth per annum. So 2024, we are significantly below. Can you share a little bit with us the moving parts here? Is it because of the phasing of term license, etc., but, you know, what kind of drives this shape to be quite back -end loaded?
Then, second, to come back on the previous question on SaaS, I think CMD last year, you had this growth ambition, which was about 30% growth in the SaaS business. We've been closer to 20% in Q4, and you're saying for next year, you know, more than 20%. So is it a change in trends? I mean, what's driving the kind of more prudent message on SaaS, or is it more a kind of question of phasing? Then, maybe lastly, on digital, I think there were some interesting numbers shared today. If you can just come back on the number of go-lives you've seen this year on the digital side, if you can share any color on how that was last year or how that's trending, etc., that would be very useful. Thank you.
Okay. On EBIT growth first. So last year, we ended up with 12%, so not far away from what we need on a compounded basis. We started, again, this year, also given circumstances, with, you know, a prudent approach. And clearly, a lot of the, you know, investments, especially in SaaS, are rather front-end loaded. Yeah. We still did 300 basis points last year. Probably, if we deliver the 20%+ SaaS revenue growth, we'll, again, have, you know, probably the same margin expansion. So, you know, on the EBIT side, you know, let's see where we end up, but, you know, the CAGR, we feel quite comfortable because we, you know, have taken a lot of the initiatives or put them in place, especially on the SaaS side. Yeah. So there is good visibility on SaaS gross margin.
SaaS revenues, to answer this, we had said back in October 2022, when we had the profit warning, we had said SaaS revenues will grow 25% in 2023. I think we delivered exactly on the spot, which tells you, yes, well, the ACV number will probably lead you to something different. It's, again, overages and so on. Have we changed our view on terms of SaaS ACV growth? No. But given, you know, the last two quarters, and we, again, we expect ACV to be higher in the upcoming quarters, this is where we said, "Okay, does the model also work if we don't grow SaaS by 30%?" Yeah, but quite a bit less. Yeah. And this was today to prove that, it's working as well. Yeah. Maybe you get a bit later there in terms of free cash, but our base scenario still remains unchanged. No mistake there.
Can I just refer back to Kanika's point in the market for SaaS, just to put a little bit of perspective, what is going on in the market, which is driving what Takis is deciding to do with the numbers? You've got two or three different drivers. The first one is clearly the funding situation for fintechs, and the neos, if you like, in the market. And for sure, that has put a dampening effect on the demand for SaaS because if you recall how we started, our SaaS business was by targeting entirely to that. So that's one driver that has taken place in 2023.
The second one is that you have, in Europe in particular, DORA, the legislation around the provision of outsourcing services, material outsources, if you like, which is making bigger banks and smaller banks reflect on what they would need to do, and how the framework would develop, to consume such services. And that is also working on the dampening side. Now, on the other side, you have the availability of public cloud infrastructure in emerging markets, growing quite fast.
You have the ability of regulators, sorry, the position of regulators in emerging markets changing more favorably towards us. And these two are positive. And finally, the traditional banks globally, on an average, they are more willing to consume their Core Banking SaaS. Kanika said that in the midterm, traditional banks will outspend the fintechs, the neos, by a factor of, if I recall correctly, 3.5 x. So the trajectory of adoption by traditional banks is much faster than the equivalent for fintechs. And then finally, just to cap it off, in the U.S., the market has shifted to SaaS. It's moving to SaaS and that's expected to continue.
So I'll take the question on Infinity go-lives. The number that I quoted was last year's numbers. Out of the 391, 160 had Infinity or digital go-lives. And this covers anything from onboarding or origination to digital servicing capabilities. It includes new apps or new channels or new segments or a bank that may have already a digital brand that they copy and create a new brand.
So I'm only counting all the significant value deliveries on digital. For this year, that covers also the Tier 1s , 2, the credit union end of the market. For this year, we are expecting, projecting 180. That is 180-215. The number is a range because digital projects are always agile projects. They are shorter lifecycle projects, and they get planned quite late and also executed fast as well. So it's something slightly evolving. So right now, our projection is projection based on our experience and what we know our clients are planning to do this year. So that's what we are looking for this year. Same segment, same sort of range.
Thanks, Prema. Anthony, do you want to?
Yes. Good morning, everyone. Antonin Baudry from HSBC. Two quick questions about the process. The first one is, in the allegations, you have a lot of client interviews. I appreciate the client satisfaction that you highlighted, but would it be possible at some point to have more contact with your clients, more client testimony, more use cases that support your product in your Capital Markets Day, for example, beyond the audit, beyond the results of the audit to have these clients' testimony from your side? The second point is, do you expect after the results of the audit to change some the way you have to present your accounts on R&D, for example, if we can have the line R&D in the P&L, how we can change that in the future? Thank you.
Well, on the testimonies, I don't think it's my role to answer. But I think, yeah, it is actually a good suggestion to have more customer testimonies in what we release. And I don't think it would be a big problem to do it, by the way, based on their overall satisfaction. Well, the reports have not been done yet, you know, so it's difficult for me to say that we are going to take their conclusion and make changes. From what I know, I don't see a need to change what we report in terms of R&D. But, you know, there will be a thorough examination, and you will be aware. And if there is something to change, we will do it.
Toby?
Y eah. Hi. Toby Ogg from JP Morgan. Two questions from me. Firstly, just on the on-prem licensing business, so the TSL guidance and the SaaS guidance within that implies that the on-prem licensing business isn't really showing any growth after having declined in 2023. So how much of that is prudence for 2024, and how much of that is other factors? And what are those factors, and what have you built into the guidance for those elements? And then just secondly, just on the maintenance growth, clearly, the rate of growth through 2023 has been increasing each quarter and ended Q4 with 7%. You've talked about 5%-6% maintenance growth for 2024 as the right level. What are the reasons why that would slow versus the accelerating momentum we've seen in 2023 and slow versus that 7% exit rate? Thank you.
Okay. So, on the maintenance first, I mean, if you look at H1, you know, clearly, there was an easier or there will be an easier base for maintenance revenue. I think that's one of the reasons. So you should look at it on a full-year basis, and, you know, the comparison base simply becomes a bit higher. There is nothing will change in terms of the momentum or the elements, you know, for either Q1 or Q2 or any of the quarters. Yeah. And as we try to convey, you know, we again, let's be prudent also on maintenance. Now, it's a narrow range because we have the visibility. You would not expect, you know, the attrition or anything to change. Now, on total software licensing, again, my favorite word, being prudent here.
So, you know, if you if you take SaaS growing 20%+, and, you know, term licenses, as we said, which still includes, you know, this, small part of, you know, custom development, which is, again, going to trend down again, you know, you would, you would see let's say if you take term licenses being down 50%+, you know, your subscription would would grow correspondingly. Yeah. There is maybe it's more about the phasing. Clearly, the, the few term deals we have, still in the pipeline will will rather be first half than second half. Yeah. So that's that's as much as we as we see today.
Justin Forsythe.
Thanks a lot. Justin Forsythe from UBS. Appreciate it. So a couple of questions here.
First, I wanted to hit one of the questions around platform compatibility, which is, I think, one of the issues raised in the report around I think one of them was relating to the rollout of Kony in the U.S. and T24. Just wanted to make sure I heard something said correctly during the presentation, was that there are no issues there. I think that was what was either discreetly said or implied. And then, you know, there were some comments around localization or the lack thereof in places like Australia.
Would you say that that's not true, and you're pretty much in line with all the banking regulations and everything in response to that point? And talk us a quick question around SaaS gross margin. So if I go back to last year, I think we had the exit rate at 64% for 2022. Seems like the full-year margin for 2023 came in at 60%, and it looks like the medium-term guide came down from greater than 80% to 75%-80%. So what happened there, and what is the justification for the downward adjustment and assumptions? Thanks.
Yeah. Okay. I'll take the gross margin first. So last year, we said exit rate 64%. That's correct. If you read the footnote, it basically says if you account for, you know, everything implemented, all actions and measures taken, and this is not happening over one year. Yeah. So same here. This exit rate of 66% doesn't mean we're going to have 66% in one year because some of the, you know, things we are implementing, automation and so on, this is not a one-year thing. Yeah.
It's basically over, let's say, more like two years. Now, 75-80 versus, you know, 80%, I think we have seen, you know, what Andreas said. You know, there are some, you know, trends in the SaaS world. We're a bit, let's say, unsure. This is why we're given the alternative scenario in terms of how quickly, how fast this adoption will happen. Still, the ambition is still to get to 80, but, you know, we I mean, to deliver the model, the EBIT, the free cash, we don't need to get to 80%. So this is why we provide a bit more space, just being a bit more prudent.
Got it. G ot it. And real just a real quick follow-up there. So you're saying that was relating to the subscription transition and potential downside in that in terms of the mix of TSL that that might drive that in your downside scenario, or are you saying that that was the mix between on-prem cloud and public cloud that that would be driving the delta?
So no. So we don't call it a downside scenario. It's an alternative scenario. Yeah. From the base. So the only change we have done there or we have provided if SaaS grows slower, yeah, and subscription correspondingly faster, you know, this would be then the impact. So EBIT, no impact the same year, and some delay on ARR and free cash flow. That was the message. And nothing on—I mean, by in the midterm, we won't have much term left anyway, so no impact from that. Okay.
So the first question, if I may answer. So there are no known issues on the Australian market coverage or anything of that sort. We continue to invest and deliver and keep ourselves up to date on the regulatory changes, including the payment regulations and everything, which is modernizing in Australia quite heavily. On the first question first part of your question, there were some red projects that we inherited as part of Kony acquisition. That's what we had to get through painfully one by one, but most of it is already behind us. In fact, some of those customers, we have actually sold many of our existing capabilities or the newer capabilities, like onboarding, because Kony used to do only servicing, that sort of thing. So we continue to take care of that customer base as well.
Thanks, thanks. Adam? Perfect. Thanks, Adam.
It's Adam Wood from Morgan Stanley. I guess these are probably all for Takis, but just first of all, I guess one of the challenges for us is, you know, when we look at the revenue growth of the company versus the ARR growth of the company, there's a reasonably big delta, and the challenge is to work out, you know, what we think is the best indicator of what your midterm growth capacity is. Could you help us with, you know, as we look towards that midterm plan, the phasing of how that gap narrows between revenues and ARR, and how big would you expect the gap to be as you deliver on those midterm targets? That was the first one. Secondly, you gave guidance of, I think, 2-3 times uplift on the SaaS revenues.
Is that versus a support revenue from a license, or is that some other metric? And could you explain how we get that level of uplift? And then finally, a point of clarification. You gave in your little sensitivity chart, the growth of the SaaS business and then how many of those tier three to tier fives would need to convert. Were you assuming, like, an underlying growth of the SaaS business X that conversion? And so obviously, the faster the underlying business does, the less people need to convert. Is that the right way to understand that, please? Thank you.
Okay. Take the last one first. Yeah. It's correct. So basically, you see on the horizontal axis, basically, the 15%, 20%, 25% assumption that there would be the underlying business. Then if 20%, 30%, 40% would then convert, we would get to the 30%+ ACV business. So that's correct. The value uplift is measured on total contract value. Yeah. So basically, on a subscription, it's easy, but on a term, it was basically term license plus the committed maintenance. And now it's basically 5 x the ACV. Yeah. So it's on a five year basis.
The ARR versus revenue. Now, because ARR, you know, is not a straightforward P&L metric, you probably will always have the delta. Now, if we deliver this model, and you will have 55%+ being SaaS and fully recurring and basically dropping through, I would say the gap to revenue growth will shrink quite substantially to low single digit. That's what's in the model.
Great. I think no more questions from the floor. I'm just going to take a couple from the, from the webcast very quickly, and then we'll wrap up because we're quite far over time. Takis, firstly, a question on DSOs. Is it possible to reduce our DSOs going forward?
Yeah. DSOs, okay. If people go back, you know, we had a very good downtrend on DSOs for years. At the end of 2021 or beginning of 2022, we decided to move to subscription. Obviously, yeah, you book the entire license portion upfront, but you only get, you know, the yearly portion in terms of cash. So obviously, your receivables move up. We had shown the plan, and clearly, the original plan we have done now better was for the peak to be in 2024 and then trend down. Now, the peak was in 2023 and will trend down now. So in the midterm, we're going to go back to yeah. Again, depending how fast we can move to SaaS, you know, the faster we can move to SaaS, the quicker, it will come down.
One more for you, Takis, about the bond maturing in April. Do you intend to access the Capital Markets to refinance that?
Okay. So if I look at how our bonds traded on Thursday and Friday, you know, probably this is not the preferred option. It would be too expensive to refinance the, you know, the bond, the April bond, through issuing a new bond. But so most likely, unless something changes over the next four or five weeks to the positive, we would refinance through our credit facility.
Okay. And Thibault, one for you. Will the independent third-party report be published for the investor community?
Well, for sure, the conclusions of the report.
Great. I think that's it for the moment then. So listen, thank you, everyone, for joining us today. There are finally refreshments outside as well. And, yeah, look forward to meeting quite a few over the next few days as well.