Temenos AG has a $100m war chest for acquisitions as it looks to accelerate its growth rate by devouring smaller companies in what it sees as inevitable consolidation in the banking software market.
While it faltered slightly in its traditionally weak third quarter, recording a loss of $520,000, down from income of $3.63m, on revenue 36.9% higher at $48.8m, it has increased its revenue guidance for the year for the third time to $210m to $215m, a 26% increase.
With Datamonitor forecasting that 50% of European banks are expecting to replace some core systems in the next five years, Geneva, Switzerland-based Temenos expects revenue in 2007 to grow 18% to $250m.
Banking software is at an interesting stage in its evolution, because SAP has dipped its toe into what it sees as a lucrative market while Oracle is paying up to $909m for a 61% stake in Temenos’s closest rival, Mumbia, India-based I-Flex.
CEO Larry Ellison said at the time that banking was a strategic industry for company with nine out of the top 10 banks already running its ERP applications. Oracle’s overall application strategy is to go beyond ERP and offer customers richer industry-specific functionality. I-Flex gets us there in banking, he said.
While I-Flex is a formidable competitor, Temenos sees opportunities with the faltering performance of a major company in the sector, Misys Plc. Though Misys has just appointed a new CEO, he will take time to turn the company around and in the meantime, it can only offer its software in IBM’s System i platform.
Temenos has targeted Misys customers, boasting that customers have a choice of suppliers of hardware, operating system, database, application server, and can take advantage of the latest, low-cost environments such as blade servers, GRID systems, and open platforms such as Linux.
Temenos, which claims a 30% market share for licenses in its target markets, can be confident about growth prospects because while license revenue accounts for around 42% of the total, it is from this that it derives maintenance and services revenue. As software licensing sales have increased 60.3% over the past 12 months, this will feed through to its other operations.
With organic license growth of 53% so far this year against estimated market growth of 6% to 7%, Temenos is increasing market share. From core banking software, it has just moved into the front office with its ARC suite. It said this is potentially as big a market as the back office. All this will put added pressure on the under-performing and smaller players in the market.