Temenos, a banking software company, has announced the acquisition of Kony Inc, a US digital banking SaaS company, for an amount close to $580M in order to accelerate its growth in the US and boost Temenos Infinity, its revolutionary cloud-native and cloud-independent front office product. An acquisition that gives a new valuation to the company and that we analyse below in this post.
Corporate finance continues to run its course in banking. Temenos is a Swiss company founded in 1993 specialising in the development of software for banks and financial services companies.. Its products offer solutions in areas as important for the banking sector as fraud control, compliance, risk management, front office or digital banking, among others.
Its clients include 40 of the top 50 global banks, achieving a cost-to-income ratio of 25.2% and a return on equity of 25%, 2 times higher than the industry average.
Its competitive advantage is based on revolutionary, cloud-native and cloud-agnostic technology, where its customers can grow elastically in real time with the flexibility and resilience to operate in any cloud, customisation to the needs and regulatory environments of each bank and the ability to offer the most complete platform in the market thanks to the constant investment for more than 25 years of 20% of its revenues in the continuous improvement of its software.
Its products, offered in more than 150 countries, have the broadest end-to-end functionality for banking and have helped more than 3,000 customers accelerate their digital transformation by offering proven implementation strategies. Its products include:
Currently and for the last 14 years, Temenos has been considered the world's best-selling core banking software with a cumulative R&D investment since 1990 of more than $1,990M.
In an attempt to maintain this leading position, Temenos has made its latest acquisition, which we analyse below.
Kony Inc. is a cloud-based provider of migration, omni-channel and internet of things systems and services. founded in 2007 and headquartered in Austin, Texas. It has offices in the UK, Germany, the Netherlands, Brazil, Mexico, India, Singapore and Australia, employing more than 1,600 people. It also has agreements with important players in the sector such as SoftBank, Accenture, AT&T and TrueTech. In its last financing round in 2014 it raised $50M.
The acquisition, closed at around $$580M, has been considered by Temenos as a highly strategic decision. In the words of its CEO, it will allow the Swiss company to enhance the growth of its front office product and its overall business in the US.
In this sense, the purchase can be seen as an opportunity to leverage the company's three strategic growth areas. First, it increases Temenos' presence in the large US market, from where Kony is expected to generate most of its $115M in 2020 sales. On the other hand, about 60% of those sales are expected to be generated in 2020. sales is recurring, largely attributable to the SaaS business which continues to grow at a rate of over 25% per annum, which will complement the progression in Temenos' own SaaS business. Finally, Kony's user-friendly platform could be integrated with Temenos Infinity to generate a more complete and cohesive product in the highly competitive and fast-growing market for front office products.
Taking into account this latest acquisition, as well as the strong growth Temenos has been experiencing in recent years, we proceed to analyse and assess the company's financial statements and its future projections.
As can be seen, Temenos' sales are growing strongly, largely due to the arrival of new customers, the cross-selling of products with its existing customers, the development of new products, international expansion and the trend towards digital transformation in the banking sector. They are also expected to continue to grow at a rate of 10-15% in the medium term thanks to the trend of banks towards digitalisation and the company's strong position in this area.
All these trends will help Temenos to maintain and reach an operating margin close to 30% partly by leveraging economies of scale and thus approaching the industry average. This is reflected in EBITDA, EBITDA/Sales and EBIT which continue to grow and show no significant deterioration in the projections.
ROE is also in line with the industry average and other comparable companies, which is high due to the nature of the business.
On the balance sheet, there is a strong increase in customers and cash, which seems to be in line with the increase in sales. In terms of the capital structure, it has increased external funding following the share buyback it carried out in 2018. However, given the company's strong cash flow generation, this should not be a problem.
While the acquisition of Kony, as discussed above, makes perfect sense and continues the path Temenos wants to follow, it does not seem to fully address the front office and cloud solution that its customers may require, which seems to indicate that the company will be open to further acquisitions. acquisitions in the future in order to complement this product, as Bloomberg Intelligence analyst Tamlin Bason points out. Moreover, the value of the acquisition is almost equivalent to the 2013-2018 procurement budget, which seems to indicate that Temenos will continue its aggressive strategy in this segment of its business.
Multiples seem to indicate an increase in Temenos' valuation, which is currently above its historical average. Moreover, it is well above the sector average and the current premium is well above the historical premium. This seems to indicate that investors are valuing the good future prospects of the company as well as the good work carried out in recent years.
Temenos' share price reflects precisely this increase in valuation, with a year-to-date increase of close to 50%. Everything seems to suggest that Temenos is being well valued by investors and they have confidence in the company's projections and the strategic vision it is trying to implement.