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Switzerland Financial & Banking Software Group Temenos Targeted by Short-Seller Hindenburg Research Highlighting Manipulated Earnings, Accounting Irregularities, Sham Partnerships, Roundtripped Revenue, Backdated Contracts & Excessive Spending on Seemingly Non-Existent R&D Investments, Share Price Decreased -31.9% in 2 Days with Market Value of $5.1 Billion

Feb 17, 2024

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Switzerland Financial & Banking Software Group Temenos Targeted by Short-Seller Hindenburg Research Highlighting Manipulated Earnings, Accounting Irregularities, Sham Partnerships, Roundtripped Revenue, Backdated Contracts & Excessive Spending on Seemingly Non-Existent R&D Investments, Share Price Decreased -31.9% in 2 Days with Market Value of $5.1 Billion

17th February 2024 | Hong Kong

Switzerland financial & banking software group Temenos has been targeted by short-seller Hindenburg Research (15/2/24) highlighting manipulated earnings, accounting irregularities, sham partnerships, roundtripped revenue, backdated contracts & excessive spending on seemingly non-existent R&D investments. Temenos share price has decreased -31.9% in 2 days (15th & 16th February 2024) with market value of $5.1 billion (CHF 4.53 billion). Temenos is founded in 1993 and is listed on Swiss stock exchange. Hindenburg Research Initial Disclosure: “After extensive research, we have taken a short position in shares of Temenos AG (SWX:TEMN). This report represents our opinion, and we encourage every reader to do their own due diligence. Please see our full disclaimer at the bottom of the report.” Temenos (15/2/24): “The Board of Directors of Temenos AG (the Company) fundamentally refutes the report published today by Hindenburg Research. The report contains factual inaccuracies and analytical errors, together with false and misleading allegations, which are intended to adversely impact the Company’s share price. The Company was not contacted in advance for any comment on the report. The Company is confident in the strength of its business, financial performance and cash position. On 19 February 2024 after market-close the Company will issue its audited results for the year ended 31 December 2023 and confirms that they are in line with the pre-results announcement made on 19 January 2024.” More info below:

” Switzerland Financial & Banking Software Group Temenos Targeted by Short-Seller Hindenburg Research Highlighting Manipulated Earnings, Accounting Irregularities, Sham Partnerships, Roundtripped Revenue, Backdated Contracts & Excessive Spending on Seemingly Non-Existent R&D Investments, Share Price Decreased -31.9% in 2 Days with Market Value of $5.1 Billion “

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Switzerland Financial & Banking Software Group Temenos Targeted by Short-Seller Hindenburg Research Highlighting Manipulated Earnings, Accounting Irregularities, Sham Partnerships, Roundtripped Revenue, Backdated Contracts & Excessive Spending on Seemingly Non-Existent R&D Investments, Share Price Decreased -31.9% in 2 Days with Market Value of $5.1 Billion

Hindenburg Research (15/2/24):

Temenos (SWX:TEMN) is a ~$7.5B market cap Swiss-listed banking software developer and services company that serves 3,000 customers globally and reported $1 billion in preliminary 2023 revenue.
Our 4-month investigation into Temenos, involving interviews with 25 former employees, including senior leaders at the company, uncovered hallmarks of manipulated earnings and major accounting irregularities. This includes evidence of roundtripped revenue, sham partnerships, rampant pulling forward of contract renewals, backdated contracts, excessive capitalization of seemingly non-existent R&D investments, and other classic accounting red flags.
These aggressive accounting practices seemed to be an open secret among many of the former employees we spoke with. Several indicated that CEO Andreas Andreades encourages the practices, which help gloss over significant customer product dissatisfaction and attrition.
In October 2021, Temenos announced a strategic partnership with fintech Mbanq to “accelerate banking-as-a-service adoption across the US,” its key strategic market. According to a former Temenos executive, the deal involved Mbanq purchasing $20 million in software and services from Temenos.
Litigation records, financial statements, and former Temenos executives evidence that Temenos secretly funded the purchase of its own software- effectively engaging in a roundtripping scheme by making an undisclosed ~$20 million investment into Mbanq around the same time as the software purchase.
A former Temenos executive told us, “The convertible note was signed the same day, the same hour as the deal was signed for Mbanq … because they [Mbanq] couldn’t have signed it if they didn’t have the money.” They added, “If that was in the US and that was with the SEC, everyone would be out.”
In February 2021, Temenos announced a partnership with US-based banking software company DXC Technology, which a former DXC executive told us entailed DXC buying approximately $8-10 million in software licenses from Temenos.
While Temenos repeatedly assured shareholders that the DXC partnership was “game-changing” and would “accelerate our penetration” with large banks in North America, a former DXC executive told us the deal was “rushed through” on the last day of the year to “help Temenos make their yearly number”. They said of the deal: “This isn’t a partnership. You used us for a license sale.”
According to the executive, the deal was subsequently terminated due to inaction on Temenos’ part, leading to an eventual ~$8 million write-off for DXC, saying “they [Temenos] left us at the altar … we gave them a bunch of money and then they literally walked away.”
A former Temenos executive confirmed that the partnership failed, saying, “[DXC] had to write that off [their] books…” and told us the deal was “typical Temenos” and all about “selling and quick hits.”
Throughout our research, 4 different former Temenos employees corroborated the practice of pulling forward license renewals, often at discounts, to boost short-term earnings while cannibalizing future renewal revenue. One former executive told us, “If there’s a renewal that they can pull forward, they’re going to go and be very aggressive about doing that, and that’s what happened.”
Another executive described the effect of aggressive pull forwards by citing Temenos’ record-breaking revenue in 2019, saying, “When outside investors were looking at this, they thought ah, the licensing is growing and we’re getting new customers. The reality is the new customer sales were coming down…”
When asked about pulling forward renewals, a former salesperson simply told us, “I just thought, you know what… there’s going to be some accounting scandal at some point…”
A former Temenos executive told us that the company also regularly backdated contracts to shift earnings to earlier quarters, saying, “… the standard practice, which was known completely and condoned by Andreas and Max [current and former CEOs], but denied in public, was that the legal teams would give power of attorney to the sales teams to backdate a deal that had come in, you know, after the end of the quarter.”
A former sales leader from Temenos corroborated the practice of backdating, saying, “Don’t trust any of the public information … including the analyst call, okay? … I’ve seen deals closed in January that they were pulled back to the previous quarter, okay? They do that.”
Temenos states that it invests 20% of its revenue back into R&D, “more than twice the level” of its closest competitors. Former senior Temenos executives told us the advertised R&D spend was “non-existent” and a “mystery.”
One former Temenos executive told us the majority of Temenos reported R&D investments were actually customer-specific implementation costs: “All you’re doing is just taking something that was custom for a customer and saying it’s R&D. It’s not. That’s the majority of it.”
In 2022, Temenos’ R&D capitalization rate was 62% higher than peers, resulting in an estimated $86 million of already questionable R&D costs being shifted to the balance sheet. Compared with the peer average capitalization rate, Temenos’ capitalization led to an estimated 29.5% artificial boost to its 2022 pre-tax profits.
In 2023, Temenos extended its allowable amortization period for “internally generated software development costs” from 5 years to 7 years, allowing it to recognize these capitalized costs even more slowly than before, with zero disclosure about its impact on its financials. We estimate the change will allow Temenos to artificially boost 2023 profits by up to 8.7%.
Temenos also has almost double the Days Sales Outstanding (DSO) of its closest peers at 124 days, a classic sign of aggressive revenue recognition policies and difficulty collecting on reported revenue.
Despite the Mbanq and DXC partnerships seemingly failing to yield new business in North America, Temenos continues to highlight the region as its key strategic market and driver of growth, projecting it will soon account for 45-50% of software licensing revenue due to Temenos’ “leadership vision” and “superior technology.”
Our research uncovered a series of failed implementations and frustrated customers in North America. One former Temenos executive said, “Clients were falling out the bottom of the funnel, so to speak, as fast as we could fill it at the top” due to CEO Andreades refusing to look at “deficiencies in the product…”
Another former Temenos employee said Andreades would often pitch non-existent products to prospective customers, telling us “Andreas or (former CEO) Max would be going into a meeting and they didn’t have a brochure for the feature that didn’t exist… and it had to be on their desk by the time they got to the client. For a feature that hasn’t been thought of, not run by product, not run by anybody sensible…”
US-based Unify Financial Credit Union signed on with Temenos in September 2018. It sued Temenos for fraudulent inducement and negligent misrepresentation by December 2021, claiming that Temenos oversold its cloud capabilities and that its software was so unstable that Unify had to revert to its old system 2 months after going live.
US-based First Fidelity Bank signed on with Temenos in December 2019. It sued Temenos for breach of contract and fraudulent misrepresentation in 2022, saying it was “fed up with Temenos’ excuses and delays.”
US-based Grasshopper Bank went live with Temenos’ core software in 2019, only to abandon it 4 years later after numerous implementation issues. A former executive from Grasshopper told us that its entire new bank launch was put on hold “largely because of Temenos’ implementation strategy”, which they described as “excruciating”.
US-based Varo Bank went live with Temenos’ core banking software in September 2020, and is currently highlighted as a “success story” on Temenos’ website. Former Varo employees described the implementation as a “horrible experience” that left them “forever scarred.”
One former Varo executive told us, “Nothing was out of the box, even though everything was sold as out of the box” and that “literally nothing worked.” The executive claimed that Varo took millions in losses due to issues with the Temenos implementation.
In 2019, Temenos formally announced “Temenos Infinity,” an attempt to diversify beyond core banking software by rolling $840 million of acquisitions into a new division focused on “digital banking” products. As recently as its 2023 Capital Markets Day presentation, Temenos has continued to tout Infinity as a successful entry into digital banking that represents an addressable market as large as core banking.
Former Temenos executives, partners, and customers confirmed dozens of failed Infinity implementations, with one former Temenos executive calling the entire division “a huge destruction in value”, saying that “a whole Infinity team of 20 or 30 salespeople” got “canned.” A second former employee confirmed that Temenos “axed pretty much everybody in Infinity” over the last year. A third said “the top talent that supported that product [Infinity] left.”
A former Temenos executive told us that the great majority of North American Infinity implementations simply failed, saying, “Let’s see, in 2021, we had 19 clients in North America… that were supposed to go live [on Infinity], and 2 of those 19 went live… tons of client cancellations, frustrated, angry clients.”
We also found evidence of failed Infinity projects in the Middle East, Asia, and Australia. We spoke with a former manager from NDC Tech (now Systems Limited), one of Temenos’ implementation partners in the MENA region. They also confirmed widespread Infinity failure, saying, “… around 20+ banks in 3 years onboarded with Infinity … but honestly, out of those 20+ banks, only 2 or 3 banks were able to go live.”
Finally, we were told by a former senior Temenos executive that CEO Andreades admitted in a closed door meeting that Infinity had failed. The executive said, “He [Andreades] literally said… we’ve gotten nowhere with Infinity in 3 years, we need to just, you know, toss it overboard [and] be done with it.”
Many of Temenos’ most highlighted deals in Europe and Australia have been plagued with delays, cost overruns, and regulatory issues, despite Temenos’ posturing to the market that the deals have been major successes.
In 2015, Nordea signed on for what was supposed to be a 5-year core banking transformation with Temenos, representing the largest deal in Temenos history to that point. Today, the deal is touted as a success story by Temenos.
However, Nordea reportedly experienced cost overruns, delays, and its Chief Banking Officer resigned in May 2021 amidst reports that the bank’s core banking transformation had slowed. A former Temenos executive called the implementation “absolutely terrible” and confirmed that the Nordea transformation was still ongoing nearly 9-years after kick-off.
In 2016, the Bank of Ireland selected Temenos to be “at the heart” of its €500 million technological transformation. The project budget reportedly tripled over 5 years, led to wide-ranging IT failures and a $139 million impairment for the bank.
A former IT manager from the Bank of Ireland told us Temenos over-promised and under-delivered, saying Temenos’ software “couldn’t handle” the bank’s needs. The former manager said that the Temenos team was sometimes more focused on “just trying to sell more software…”
In May 2018, Australia-based BNK Banking announced it had gone live with Temenos’ cloud banking software, but in July 2023, BNK was hit with 18 infringement notices from Australia’s banking regulator due to flaws in Temenos’ software, per a BNK spokesperson to the media.
BNK is now leaving Temenos mid-contract according to an Australian banking consultant familiar with the company who told us, “Honestly, an Excel sheet would work better than Temenos, and that’s being gentle. It is horrendous … they have cost [BNK] what we believe to be over $100 million worth of lost opportunity.”
An Australian banking consultant that worked on Temenos implementations summed up his view of Temenos as a “just a fantastic sales company and just a sales machine, but honestly can’t back it up with anything… the most difficult vendor I’ve ever come across. They promised us the world. It was all vaporware, basically…”
While institutions like Baillie Gifford, Fidelity and Fundsmith, have accumulated significant positions, Temenos executives have dumped $1.1 billion in stock over the last 10 years, per Bloomberg.
Temenos trades at a fundamental premium to its peers, representing significant downside even if one were to ignore all the findings of our report. Consensus estimates show it trades at a 76% earnings premium, a 41% EV/revenue premium, and a 59% EV/EBITDA premium.
In its quest to seemingly do just about anything to prop up its earnings and boost its stock price, Temenos finds itself on the classic accelerating accounting treadmill. We expect it will soon run out of accounting tricks, new unwitting customers who believe its glossy sales pitches, and new investors willing to buy as executives continue to sell.
Temenos says it “takes every step to be as open and forthcoming as possible with data” and that it will fully investigate claims of “concerns or improper conduct.” With this commitment to transparency in mind, we have included 36 questions at the end of this report.

Initial Disclosure: After extensive research, we have taken a short position in shares of Temenos AG (SWX:TEMN). This report represents our opinion, and we encourage every reader to do their own due diligence. Please see our full disclaimer at the bottom of the report.

Temenos (15/2/24): The Board of Directors of Temenos AG (the Company) fundamentally refutes the report published today by Hindenburg Research. The report contains factual inaccuracies and analytical errors, together with false and misleading allegations, which are intended to adversely impact the Company’s share price. The Company was not contacted in advance for any comment on the report. The Company is confident in the strength of its business, financial performance and cash position. On 19 February 2024 after market-close the Company will issue its audited results for the year ended 31 December 2023 and confirms that they are in line with the pre-results announcement made on 19 January 2024. This highlighted the Company’s strong Q4 and FY23 performance:

Annual Recurring Revenue exceeding guidance and Total Software Licensing and EBIT significantly exceeding minimum guidance
Strong free cash flow growth ahead of guidance in FY23, up 26% to $242.6m – the Board expects free cash flow to continue to grow strongly in the coming years
c. 3,000 customers – industry-leading churn of only c3% p.a. on a dollar basis
The Company’s transition to a recurring revenue business model continues at pace – 391 go-lives on our software in 2023
Significant progress on customer engagement, NPS score of +54 based on survey of over 900 customers

As previously announced, the management of Temenos will hold a Capital Markets Day for investors on 20 February 2024.

Temenos

We were founded in 1993 and set on a mission to revolutionize banking. Since then, our community of customers, partners, influencers, and employees has grown. Back in 2002, we celebrated signing our 300th client, and today we serve 3000 customers. Two-thirds of the world’s top 1,000 banks and 70+ challenger banks in more than 150 countries rely on our technology.

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