Aggressive Sales Expansion And AI Competition Will Pressure Margins And Shrink Core Banking Demand

Catalysts

About Temenos

Temenos provides core banking and payments software, delivered on premises and as SaaS, to financial institutions worldwide.

What are the underlying business or industry changes driving this perspective?

• The aggressive 50% ramp up in sales headcount ahead of proven large deal conversion risks a structurally higher fixed cost base if Q4 and 2026 deal closures disappoint. This would compress EBIT margin expansion and limit EPS growth.
• As banks increasingly experiment with AI assisted modernization of legacy systems and selective in house development, particularly in Tier 1 institutions, Temenos may see a shrinking addressable market for full core replacements. This could weigh on mid to long term subscription revenue growth.
• The push into AI powered products such as financial crime agents and Money Movement and Management faces intensifying competition from hyperscalers and niche fintechs. This raises the likelihood of price pressure on these add ons and may cap net margin uplift from new offerings.
• Heavy reliance on premium maintenance uplift and CPI indexation to sustain double digit maintenance growth looks unsustainable as customers scrutinize total IT spend. This could slow maintenance revenue growth and reduce the visibility underpinning ARR and cash flow projections.
• The U.S. expansion strategy is built around Tier 2 and Tier 3 banks and a 12 to 18 month pipeline build. It may take longer than anticipated to monetize in a stable but cautious spending environment, which would limit the expected acceleration in SaaS revenue and delay operating leverage benefits.

Assumptions

This narrative explores a more pessimistic perspective on Temenos compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Temenos's revenue will grow by 3.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 28.8% today to 14.9% in 3 years time.
• The bearish analysts expect earnings to reach $181.9 million (and earnings per share of $2.68) by about December 2028, down from $315.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $246.8 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.5x on those 2028 earnings, up from 20.7x today. This future PE is greater than the current PE for the GB Software industry at 20.7x.
• The bearish analysts expect the number of shares outstanding to decline by 3.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.59%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The continued 10% to 12% growth in subscription and SaaS, together with 11% total revenue growth in Q3 and upgraded guidance for at least 7% subscription and SaaS growth for 2025, suggests Temenos can sustain a healthy top line trajectory rather than the sharp slowdown implied in a bearish view. This supports revenue and earnings resilience over the medium term.
• Rising maintenance revenue, up 14% in Q3 and guided to grow around 11% for the full year, combined with ARR reaching 88% of last 12 months revenue, increases the proportion of predictable, recurring income. This could underpin higher valuation multiples and more stable net profit and free cash flow than expected in a downside scenario.
• The aggressive yet self funded expansion of the sales force by 50% across all regions, alongside a growing U.S. pipeline targeting a large modernization market in Tier 2 and Tier 3 banks, may translate into accelerating deal flow from 2026 onward. This could drive faster revenue growth and operating leverage than assumed in a bearish thesis.
• Temenos ongoing investment in AI powered offerings such as Money Movement and Management and the FCM AI agent, already gaining traction including with Tier 1 banks, positions the company to monetize secular trends in AI enabled banking. This could support premium pricing on add ons, improve mix, and bolster net margins and earnings growth over time.
• The combination of 36% EBIT growth, 41% to 42% EPS growth and 30% free cash flow growth in Q3, alongside a cost savings program of 20 million to 25 million funding investments, demonstrates strong operating leverage and cash generation. This could justify or expand current valuation multiples rather than compress them, supporting earnings and free cash flow per share.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Temenos is CHF53.21, which represents up to two standard deviations below the consensus price target of CHF73.83. This valuation is based on what can be assumed as the expectations of Temenos's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF102.02, and the most bearish reporting a price target of just CHF53.21.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $181.9 million, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 5.6%.
  
• Given the current share price of CHF75.15, the analyst price target of CHF53.21 is 41.2% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.