SimCorp A/S (OTCPK:SICRF) Q2 2022 Earnings Conference Call August 12, 2022 5:00 AM ET
Company Participants
Christian Kromann – Chief Executive Officer
Michael Rosenvold – Chief Financial Officer
Conference Call Participants
Daniel Djurberg – Handelsbanken Capital Markets
Claus Almer – Nordea
Thomas Poutrieux – Exane BNP Paribas
Poul Jessen – Danske Bank
Operator
Good day and thank you for standing by. Welcome to the SimCorp Q2 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions].
I would now like to hand the conference over to your speaker today, CEO, Christian Kromann. Please go ahead.
Christian Kromann
Thank you very much. And good morning, and welcome to SimCorp Q2 ‘22. Let’s get on with it. And as always, we go to the disclaimer first. I think most of you would have read that a thousand times but it’s still important that it’s there and that we remember to look at it. But let’s get on with the real stuff.
Agenda today is, key highlights presented by me and then we will go into the financial review presented by CFO, Michael Rosenvold. We will then address the outlook and then we will go to Q&A both through the webcast, but also through the direct interaction.
So before I kind of go into the numbers and the introduction, let me just start by saying that there’s kind of two parts to the dynamic and the way we feel about Q2. First and foremost, as you can see, we are maintaining our high RR growth. As we discussed the last couple of quarters, that is the central number. Inside SimCorp, that’s the way we measure our transformation to a SaaS company. And I think generally we are pretty happy with that. It would obviously be difficult to go through Q2 this time without mentioning that, of course, we are super annoyed, and somewhat disappointed with the fact that we haven’t generated any new customers through Q2. And I think reality, it’s about timing and obviously, we will take you through why we are still very confident about the overall guidance on all three numbers, as well through the webcast today.
But also important for me to mention and we mentioned it briefly last time, that we are going a bit more harder to the fact that we are transforming SimCorp to become a SaaS company. Last time we mentioned that we’re doing that through a relatively fundamental review of the operating model.
And you can now see this time that the result of that relatively fundamental walkthrough of the operating model is also that we are upgrading the team to make sure we actually execute on our SaaS ambitions to a substantially different extent than what we’ve done previously. That is both to upgrade the people that are capable of portraying the value proposition, ensuring that the product transformed to a SaaS and cloud-native product but it’s also very much aimed at the people that are responsible for generating margins on the back of the SaaS transformation.
I would say the way I explained this internally, and I might as well explain that externally as well is that once we realized where we were and what it takes to get there, we decided to do a very fundamental review of the upper management and you can use the metaphor that we decided to rip off the band-aid fully, instead of ripping it off slowly. That also means that we can communicate internally, which I think is important that this exercise will be done when we go on Christmas holiday, end of this year.
So relatively a fundamental change but I also have to say, very needed change to get on the track and execute on what is in the end, a massive opportunity for the company. It was important for me to put that into context, because you can also see that we are being specific about that from a from a cost point of view. And I’m sure some of you will have questions about that anyway.
Let’s get back into track. And let’s follow the slideshow and get on with it. So as I said, annual recurring revenue 11.9% year-on-year. It’s – we’re excited about that number. And we keep on pushing all the activities to keep that number as high as we possibly can. We can also see the revenue signed on the contract is record high and is also improving a bit more than €21 million since we talked about it last time. So I would say the forward looking KPIs are certainly indicating that we’re moving on the right track.
But then to wins in Q2, we’re back to what I said in the beginning. We’re obviously disappointed about the order intake as such. And when we compare it to last Q2, it obviously create a number that is negative of 2.3%. I would say that’s to a very large extent timing. There was a couple of very significant deals that for the right reasons, was delayed into Q3, because we – they are so fundamental deals for SimCorp as well as for the customer that if you don’t get them done in the right way, it would us haunt us negatively later than that.
If those deals came to Q2, we would have a different conversation today. But that’s the nature of the quarterly numbers. And we’ve discussed that and we will certainly discuss that, as long as we have a highly license dependent business. And that’s the nature of the game. I hope we can have the opposite conversation in the next couple of quarters.
EBIT is €6.2 million obviously directly impacted by low order intake, but also impacted by the special cost items that we already addressed in my introduction. That gives us a 4% rolling, sorry, 4% rolling software updates growth, which is actually a nice number. Here, we are also trying to review the impact for next year linked to the inflation numbers going up and some of the metrics we have in contracts that can hopefully give us some hope into next year on that, but 4% for now, and that’s, I would say is a good number.
Our professional services is actually growing a bit more than same time last year, there’s a lot going on. And certainly that number is another witness to that. Obviously, a lot of that is driven by the transformative projects we are doing with existing customers. But there’s also a lot of work to be done on customers we’ve signed over the last quarters and years, so a lot of activity going on there.
In the end, very low free cash flow, once again, impacted by the low activity from an order point of view, but also impacted by a few special items. But I know Michael would go through that when we get there.
So all-in-all, that gets us to an H1, which is slightly above the H1 we had in ‘21. But it also obviously means that a lot of activity is going on in Q3 and Q4 to make sure that we hit our guidance. And obviously a lot of proofing has been done on that, going into this announcement today.
And there’s a lot of activity going on with existing customers that is still driven very much from cloud transformation, but also from rationalization projects, somewhat driven, also from what is the macroeconomic, is driving on the outside. But there’s also real good pipeline building across the world on generating new customers. So just to put that into perspective, but I’m sure we’re going to come back to that as well.
An order intake of €43 million in H1, revenue growth just below 1% that gives us an EBIT of €21 million, obviously, that is also impacted somewhat by low Q2. We’ve already been through that. An order book that is close to €30 million up compared to June 30 ‘21, which I think is also a kind of a relatively good number to indicate that it’s not all about licenses, they’re actually building a real order book up also from the [indiscernible] service sales that we’re continuing to do.
Good Q2 on professional services, slightly lower than Q1 but gives us a decent run rate into second half. And as with professional services, it’s – right now it’s actually all about building the right run rate into ‘23 already. So I would say we’re coming into that with good momentum, and a €30.2 million in free cash flow, once against the same comment as I just said before.
New clients, I think I already addressed that and say that is modest. I would say I would be remiss not to mention that the Challenger deal that we announced in Q1 is now finally signed. It’s actually the license component that is signed, that allowed us to now launch fully the JV. The JV now has a Board and it’s fully functional and is very actively and aggressively pursuing the value proposition starting out in Australia and the pipeline building there is extremely promising.
There’s yet another component of that deal that we are working on signing in Q3, which are also all the services element that will also be distributed through the JV. So it’s actually it’s really exciting and it’s yet another proof point on our ability to attack different parts of the market through partnerships. So my expectation is that obviously I expect that we continue to win traditional customers in our normal segment but I would also expect an uptick in smaller customers along what we’ve been discussing for quite a while so we can continue to see a longer list generally. Not a lot more comments to new clients in Q2 as it’s relatively modest, as I already said.
Another thing I just quickly want to circle around, because we also talked about that in Q1. We launched the Investment Accounting Services and we actually also launched Investment Operations Services in Q1. We can now happily report that we signed four customers in Q1, and they’re actually all live on SimCorp Dimension now, as we have this webcast. And most people that know, have known SimCorp for a while, and to have customers live in three to four months, is unprecedented. And it’s obviously because we are controlling the implementation so we can drive hardcore standardization.
But the really important thing is that everything we learn through these implementations, we are applying to the overall value proposition, regardless of what customer relationship you have. So the three first customers on the Investment Accounting Services are now live, they’re all in France. They’re all powered by SimCorp Dimension. They’re all run by our staff as a service, which means the end customer is receiving an outcome and are not actually using the application themselves. And that’s just super nice to see.
Obviously, our ambitions are substantially higher. But it’s important for me to link these go live and this kind of client success back to the incremental investment we would do into this segment, when we started out the year. A slighter variation of the same theme is what we now call Operations as a Service.
So well our Investment Accounting Services is predominant towards asset owners, then the Operations as a Service is predominantly towards asset managers where we ultimately go in and help them to put substantially better return on investment into the operation side, allowing them to concentrate on trading. And also here, we now have the first customer StonePine that was announced is going live. And they are actually fully up and running now and is also proving this part of our value proposition.
Then finally, what I also mentioned just before, when we talk of new customer, the strategic partnership with Challenger is going ahead, and it’s really accelerating, super exciting. We signed the license deal, we formed the company, and I think the name will be launched in a couple of weeks. The Board is together, that has now announced a independent Chairman. And we’re basically getting out of the grid flying, I would say, and it’s just a fantastic value opportunity.
Opportunity in the Australian market, we talked about that a few times, the Australian market is amplified by a 10.5% mandatory pension scheme that all people in Australia has. And as you could imagine, that creates a substantial inflow of money into the situation. So all good, all executing according to plan, it also includes an investment that we are preparing to do. And that has a link to our buyback program that I think Michael will address later today.
And then this final slide for me, we have now announced Michael Bjergby as the new CFO. He will start latest by beginning of January. So 1st of January ‘23 and we’re very excited about having him on board. And we’re going to ensure a smooth transition from one Michael to the other. So very happy that we can put this behind us and start executing on that. We will give you a little bit of an information about the Capital Markets Day in the end of this presentation, also linked to the change of CFO.
But with those words, over to you, Michael to go a little deeper on the numbers. Yes?
Michael Rosenvold
Thanks a lot, Christian. And I’m now at Slide #14 and I think I would take Slide #14 and #15 at the same time because it is the same metrics for both Q2 and the combined H1 also those two is impacting H1. So, I will say both for Q2 and for H1, we have seen a quite modest revenue development and it is primarily due to low license sales compared with a relatively strong Q2 2021 where we did gain some quite significant new logos. So low sales this quarter and a relatively strong Q2 last year for new licenses.
And as you all know, license revenue flow straight through to the EBIT and that also means that the EBIT margin is impacted by the timing of deals and thereby we saw a relatively modest EBIT margin both in Q2 and in H1. And also as Christian said, we have had some special costs some exceptional costs and one-off costs that we had for H1, €2.1 million related to supporting our Ukraine colleagues and their families.
And as Christian also says we have had a one-off cost of, in total €5.7 million related to our operating model restructuring program both to a consultancy payments and redundancy payment. And you can say excluding these one-off costs of €7.8 million, then the EBIT margin would have been 12.8% organic in – no sorry, 12.8% reported in H1. So not 9.5% but 12.8%.
If we go to the next slide, Slide #16, we show the development in order intake over the last six months, and it’s in six quarters. And it’s very, very clear that we normally are back-end loaded. And we also expect to be very back-end loaded this year. So this is what we have seen in prior years as well. The relatively modest order intake in Q2 2022 was, as I explained beforehand, due to low new licenses compared to the strong Q2 2021.
And I will say in the €17 million the most prominent order contribution to the €17 million was the Challenger which Christian explained early on. In that number, there were one conversion, which was also the case in Q2 2021. So we have one conversion this quarter, and one conversion in the same quarter last year.
If we go to the next slide, Slide 17, we see the order book. As Christian said the order book is €30 million higher than one year ago, it’s €9 million higher than when we started the year. And you can then say that in this quarter, it is almost unchanged. So we haven’t added to the order book this quarter but we have not either eaten from the order book. So we have kept the order book constantly in this quarter.
If we look at the different revenue types, on Page 18, then quite clear that all revenue streams are growing. So we are selling more to our existing clients, our software updates order is increasing, professional service is increasing, our hosting & other fees are increasing. So you can say the only revenue stream which is not increasing and that’s a quite significant drop in this quarter, that is the initial licenses but all other revenue streams are increasing.
When we double click on the additional license sales on Page 19, so for this quarter, we do see that the additional regular license sales or upselling to existing clients that increased by €2.2 million. And if we go to the next slide on Slide 20, we see the same pattern in H1 where we have sold €2.9 million more than H1 2021.
Then on the next slide, Slide 21, the cost development, I think here I would like to start with stating what I also stated early on that we have had extra cost of €2.1 million to support our Ukrainian colleagues. And we have had the restructuring costs of €5.7 million. And as Christian said early on, the reason for having the restructuring program, that is to ensure that we have the right structure, we have the right people, as we are becoming a true SaaS company.
So you can say, organically, the cost increased by 7.2% year-on-year in H1. But if you exclude those one-off costs, then the increase was 4.7% and that is actually in line with what our budgets were and what we expected for this period. If we double click on the different lines, and then focus on Q2, then you can see the cost of sales, that’s increasing by almost 10%. And that is due to productivity, but also to the planned investments in new SaaS operations and solutions. And then, as I said, a higher business activity.
Looking at sales and marketing costs, an increase in this quarter of 70%, that is also heavily impacted by, we hosted our International User Committee Meeting or Conference, where we had more than 500 participants, customers and partners, a huge success, very nice to be together with clients physically for the first time in several years. But of course, there’s also some costs related to hosting such an event.
But we certainly believe that that will fuel growth in the future that we have these connections with our clients and show them all we can do for them. Then admin expenses did increase quite a lot in Q2, from €5.3 million to €12 million. And that was mainly due to one-time costs, as mentioned above, and though most of them were classified as admin costs.
Then going to the cash flow development which also were mentioned by Christian. We’ve had for the last two years, quite strong cash flow where we have had negative development in working capital. Of course, you cannot do that on a forever basis. And this year, we have seen up until now, a little – the opposite that there have been some timing of payments where we see payments coming in later. That means we have had higher receivables at the end of Q2, and we have also paid more taxes and we have the expense. So there has been some timing on the cash flow. And then of course also with a lower profit, lower activities that also have an impact on the cash flow.
Then I will say my last slide before I hand over to Christian, so he can end the presentation with a full update on the Capital Markets Day. The full year guidance, so what we are saying about the full year is that due to the pipeline we have in place, we have maintained our expectations, despite you could say a modest H1. So we believe that we have seen orders slipping into the second half but we believe that there is a path to deliver on our full year expectations.
Quite important to note is that, the guideline is excluding exceptional costs related to Ukraine of approximately €3 million to €5 million expected and excluding expected one-off costs of €8 million to €10 million related to the restructuring program, which Christian said which will be completed in 2022.
And you can say of the €3 million to €5 million and the €8 million to €10 million, we have incurred in H1 €2.1 million and €5.7 million. And also, but that is included in the guidance, we will invest in our future including our SaaS operations and our solutions. And that was also communicated in connection with the Annual Report. So there we still expect to make a short term investment of 2% extra.
Then, I will say, despite the fact that we see a positive movement in the sales pipeline, I think it’s fair to say that the full year outlook is more uncertain than normal. And that is not least due to also the current geopolitical and macroeconomic turbulence. And of course, also, the more you have deals being delayed, that also create more uncertainty. And so I think that is important also to notice.
And we will also say that while we are continuing investing in the future, we – should the market deteriorate, then, of course, we will look into potential cost savings, but we prefer actually to invest. But if needed, we will also look into cost savings in the second half if that is needed.
And then finally, I will say on the exchange rate, so everything we do in our guidance is in local currency. So that’s excluding impact from FX. And it seems like this year we will have a tailwind from FX. So that is not included in these numbers. So that will, based on the currency or the exchange rates as of end of July, that would most likely give us a positive impact on revenue of 4.5% and on margin of a positive impact of 1%.
And you could say, the reason for the positive impact on the margin is because we have more costs and revenue in our Danish currency. And opposite, we have more revenues and cost in primarily US related currencies.
So by this, I will end my part of the presentation and then – or maybe, Christian, you said we should – share buyback, I don’t have a slide for share buybacks. But I think it’s worth notice that as a subsequent event, we finalized our €20 million share buyback program at the end of July. And as we always say, we distribute all surplus cash to investors.
But it is surplus cash and if we think that we have a better means for the cash, so for instance, investing into acquisitions or organic growth, then we do that. And we feel that a small investment in, among other things, the Challenger joint venture is a really good opportunity for the company, and for the investors. So we have decided to do that and not carry out a second share buyback program.
And by this, I hand over to Christian.
Christian Kromann
Good, Michael, thanks a lot. So maybe just also to, so on the cost items you highlighted and the investment we do, so a couple of other things that actually have happened after the close of Q2 is we actually took the biggest SaaS customer live ever, which is by far the biggest. So it’s really a good testament to our strong backbone of our SaaS business has now come.
And we actually released the first three-tier version of the software as well. Some of you would have heard about that concept for quite a while and now it’s actually on the street. And that’s also a really good milestone that builds up confidence internally and hopefully also externally about our SaaS transformation.
With those words, let me just quickly put a few words around the Capital Markets Day in London on October 6. So a lot of you had already signed up, which is really cool. So as you will now understand there is a change on the CFO role in the end of the year. And because of that, we want to clarify what you should expect from the Capital Markets Day on October 6.
It’s going to be a – and based on what we’re preparing, quite a detailed walkthrough of what are we actually doing inside the building, when it comes to both in terms of how we attack the markets from a geographical point of view, who is doing it? But certainly also about what’s the product transformation? What’s the value proposition transformation? And then finally, what is going on in the operational part of SimCorp? And how do we kind of work strategically around automating a lot of these processes.
So in the end, we can get an interesting margin out of the transformation we’re doing as well. So ultimately, a very rich deep dive of the consequences of the strategic choices we’re doing. We are not going to give you updated financial guidance in that meeting, even though I know that that is normally how you associate a Capital Markets Day. It will be wrong for all parties to have the outgoing CFO giving that guidance and the incoming CFO coming a few months after and then have to live with that for a while.
Not that I don’t trust both, but it will just be wrong, process wise. And the plan therefore is to break the two. And I apologize if that’s annoying, but that’s the way it’s going to be. So we’re going to have a deep dive, where you’re going to meet a very large part of the upper management in London on October 6, and I still really hope that we’re going to be a lot of people. And then we will come out with financial kind of plans associated with what you hear on the 6th as part of the Q1 discussions that we normally would have, where we obviously also give guidance for ‘23.
So we would have that separation. But I think, in order to understand the numbers that you will get, at some point better, we really, really hope that you will spend the time with us on October 6, anyway. But it will be bad if you come and then you call me afterwards and say that was a complete waste of time, because I didn’t get what I wanted. So now you have it.
And that was the last slide, so let’s go to Q&A and get some good questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We will now take the first question. Please stand by. It comes from the line of Daniel Djurberg from Handelsbanken. Please go ahead, your line is open.
Daniel Djurberg
Thank you so much operator and hi, Christian and Michael. My question would first be on the delay that you saw in a couple of deals especially you also mentioned a quite large one that was postponed. And did I catch you right that you have signed some of these already?
Christian Kromann
No. Yeah, not yet.
Daniel Djurberg
And if so, if it’s possible – not yet? Okay. And also if I can get some kind of ballpark number on the potential value for especially the larger one?
Christian Kromann
Yeah. So I think that the movement was really, as I said, large strategic contract that typically requires a lot of scope discussions to make sure that you don’t sit in a year from now and have different opinions. But it happens and I would say one of the good things about the types of deal we do these days is that are bigger. And one of the drawbacks of that is that they are more complex to get over. And since, you know, maybe we would have pushed even harder if we were end of Q4. But this time, we actually believe that it was better to have a kind of summer holiday to kind of think it through.
I’m not going to say exactly what it is because negotiating with the counterpart, but it’s enough to have moved the growth into the positive arena. And then but otherwise, let’s not go too much into details on that. But I would say that that’s the nature of the game. And that’s to then also the risk in the pipeline for Q3 and Q4 is that it’s large deals to a very large extent. But they also take time to get through. So I think it’s not as in the older years, where it was just a very large portfolio, really small deals. But and we kind of believe we have enough of them. So we also have a hedge if some of them actually don’t materialize to get it into perspective.
Daniel Djurberg
Thank you so much. Another question, if I may, on the Challenger signing. You talked about the service element that is up for them and that is up for grab here. Is it impossible to comment anything on the potential analyzed revenue that it could be the scope of it just forward part again?
Christian Kromann
I would say we’re still negotiating with Challenger. So once it’s signed, I’m happy to go through kind of how that roughly look, a bit like the deal we shared a couple of quarters ago. But it’s ultimately what we’re talking about here that’s the exciting part is that the JV has agreed to distribute all the business process services that SimCorp are launching. So it’s both the cloud services, but it’s also further up the stack including the Investment Accounting Service. So it’s basically going to amplify the access to the market for those services in the region. So it’s a sizable deal that we will be happy to take this through once it’s signed.
Michael Rosenvold
And just so to make sure that you understand that part. So all these services is, of course the new SaaS model, so that will be revenue recognized over time. So it will not be something, you know, up front recognition but be recognized as it –
Christian Kromann
Will generate AR but –
Michael Rosenvold
Exactly as we do it.
Daniel Djurberg
Yeah, yeah, I got that. And finally, my final question would be on the growth catalyst that you had started couple years back, but still working on to build, the ESG alternatives and so forth. Can you comment a little bit on the outcome and the interest for this? Obviously, we have had the COVID hitting the fan and so on but how important are these now in building – we’re building a tunnel? Thanks.
Christian Kromann
I would say ESG is extremely important. So we sold a massive amount of ESG competencies to our existing customers. It’s, I guess from a from an overall revenue generation point of view, it’s just another asset class. What we’re selling is the compliance capabilities and stuff like that, which is exciting, but it doesn’t kind of make the bank explode, unfortunately, but it’s a testament to the value proposition as such. I’d say Alternatives, we more or less have sold to all the existing customers that have a serious alternative portfolio. That’s still growing. So there’s still opportunity for that space. I would say the exciting things is that the solution is so mature, that we’re dying to see the first kind of real embryos where people are considering buying SimCorp just for Alternatives.
And that’s new. I wouldn’t put a value on it yet but it’s just a testament to how solid that foundation is. I think there’s a macro question outstanding, which is that let’s not forget that the reason for Alternatives grew massively was because of a very low interest yield environment where you were forced to create new investment vehicles to actually be able to generate any [outcome]. It’s yet to be seen how the current macro environment is going to impact us but the ESG continues unchanged, I would say. But there’s some indication that there’s more volumes coming back to both kind of traditional liquid instruments.
But I would say, in our mind, it only underpins the fact that with a very volatile macro environment, the multi-assets capabilities of SimCorp becomes even more valuable. So a little bit of a wobbly answer, but I have to say this particular impact on macro is still somewhat up in the air. But we are continuing to maintain the multi-asset approach. And let’s see where that takes us. But ESG is starting to sell.
Daniel Djurberg
Thank you so much. That’s great. Good luck here in Q3 as well. Thank you.
Christian Kromann
Thank you.
Daniel Djurberg
And see you soon, bye.
Operator
Thank you. We will now take the next question. Please stand by. The next question comes from the line of Claus Almer from Nordea. Please go ahead, your line is open.
Claus Almer
Thank you. Yeah, the first question goes to your restructuring program, which I think you really didn’t talk a lot about during your presentation. So with these €8 million to €10 million, can you please give some more details on what are you actually going to do creating a more set oriented organization? That will be the first one.
Christian Kromann
That’s – hi, Claus. So yeah, let’s do that. So I think if we go a little bit back in time, and I’m going try to keep this within relatively short timeframe. SimCorp has been built around the fundamental assumption that we are building software, we’re releasing software, implementing software, then we go into a traditional maintenance relationship. And then you ultimately go on to the next one. That requires a – and basically, you can live with a relatively siloed approach, because each of the functions was ultimately doing their own part of that value chain, if you will. And I would say up until recently, that has still been the one the way that SimCorp was running. That was the way our scorecard was built, and many other good things in that. If you want to build a SaaS company, you cannot do that because there’s basically a direct link between people building the software, people implementing the software and people running it afterwards.
And if you don’t have that link, and you don’t carefully assess how you do that, then there’s a high likelihood that you’re never going to be standardizing anything and there’s a high likelihood that you’re going to end up basically doing something that you can’t really earn money on. But that Claus, as we somehow have been pushed in front of us until now, where I said that that’s ultimately going to break, put a brake on our transformation, both in terms of an execution point of view, but also reduce our ability to actually create a good contribution margin on that. That’s kind of the core of it.
Once you realize that, then you have to start working in a different way. You also start to realize that you need people with special skills in generating a kind of high automation, high operational efficiency. You need different people to create the value proposition, you probably also need different people that can accelerate the cloud migration. And to a certain extent, we kind of funneled through the entire organization from myself to my direct reports, and then further through the next levels of management, by both saying this is how we’re going to work. And that’s a relatively large investment, because you need to change the way we work.
Once you did that, we then started to ultimately slot all the positions from a – what’s your job description? What do we need you to do? What competencies do you need to do? And once we did that, it became clear that we didn’t have the right lineup. And once we realized that, we had a relatively deep and fundamental conversation about how do we deal with that. And the conclusion was that, the longer it takes to deal with that, the longer we’ll push our SaaS transformation in front of us.
So part of it is, as Michael said, an investment into getting help for actually getting the structure. The other half is redundancy packages basically, so without going any further.
Claus Almer
These are part of the €8 million to €10 million redundancy packages?
Michael Rosenvold
Yeah.
Christian Kromann
Yeah, yeah.
Claus Almer
And that sounds good, not firing people obviously.
Michael Rosenvold
It is not bad.
Claus Almer
But creating a more SaaS oriented company. But can you put some numbers? Are we talking about 20%, 30%, 40%, 10% of your employees that you need to replace?
Christian Kromann
I think there’s two parts to that Claus. So what we decided to say is that the focus in the beginning is on the putting the right leadership kind of team into play, right. And that’s obviously typically where you see it’s expensive to do the changes. We’re not suggesting that we’re going to do kind of extraordinary cost for changing the entire company, because then it’s kind of something we need to figure ourselves. What we’re talking about here is senior leadership positions that have either been removed, and then a new structure is in place or we have changed the people that was in that box. So that’s what we’re talking about.
Once we are done, I would say it’s because as part of this, you’re also growing the company. So it’s not like I’m going to say, alright, these 20% of staff, we take out and then we hire another 20%, it’s more going to be the mix of competences, both in terms of what they do. But as you’ve probably also seen where they sit. And I think that’s also a very important part of our cost efficiency mindset that we need to push through the organization. But the €8 million to €10 million is to set the right management team.
Claus Almer
Okay, so in essence, numbers is a huge number of FTEs that you need to change, so to speak?
Christian Kromann
Oh, it’s probably are somewhere between 10 and 15 people that has been affected directly in this.
Claus Almer
And that is done, so no more changes from an FTE point of view?
Christian Kromann
Yeah, Claus, if you look at the numbers, you can realize that there’s still work to be done before the end of the year. So –
Claus Almer
Okay, so what I’m trying to figure out is when you did the changes in the sales organization a few years back, then that had a significant negative impact short-term, at least. So how do you make sure that, first of all, these changes and uncertainty do not put a pause to the organization so to speak? And secondly, what we’ve seen also for the last couple of years, it has been relatively difficult to hire new employees. There’s been a lot of vacant position for quite a while. That will be just a follow up.
Christian Kromann
The first one is, in the end why it is that we decided to do it fast, right? Because otherwise you would have to live with that uncertainty for quite a while. That is, people in SimCorp now realize that SaaS transformation is not something we do on the site. It’s some – that’s the central –that’s the center of the company. So we are changing the tone. Marlene who is Chief HR officer is working a lot with culture and it’s kind of the full shebang. But there is, of course, it creates uncertainty. But that’s also why we say it’s a spike that we want to get done now, and also, my personal approach to these things is, the only thing you can do is to make it clear to people what you expect. And then you can either help them to get in the right direction, or you can agree to depart, if there’s no match. And that’s what we were currently doing. But we’re doing well from the top and down.
Because only by having the right leadership, you would actually be able to drive the organization in the right place. And if you do that, to your second point, you’re actually able to attract talent. And I would say the people we have now got in are either from the outside or have promoted into these roles are really talents that we’re going to build the future on. And I would say the other more kind of broad based responses that I would say our investments into alternative locations, actually has paid off. So we’ve been able to hire much better now, the last quarter than then before because we’ve done a lot of work with both our internal recruiting teams are also building more locations in the spectrum.
So I would say so far so good. But I think the world outside is still volatile, and there’s probably going to be yet another push on the salary base if inflation stays high. So but otherwise, I actually, it’s funny with these things, once you get your head around that you need to be open and transparent about the magnitude of changes, then suddenly, the dynamic also changes. But it’s good question.
Michael Rosenvold
And I think Claus, just a side remark regarding this about our ability to attract new talent. And I know that you have been, I think, pointing that out for a while, which I think is super fair. But I hope you’re also on the announcement that our FTE was actually increasing by 9%. So it is actually possible for us to also attract talent. It’s not about how the – without hard work and so on, but we do see that our workforce is increasing.
Claus Almer
Yeah, I noticed that. Okay. Let me jump to my second topic and that is the guidance. Have you changed your assumptions as to the impact from client conversions and that mentioned renewals as part of 2022 guidance?
Christian Kromann
No, I don’t – no, I don’t think we have. I think we –
Claus Almer
That’s just a question.
Christian Kromann
I think we think we are quite open about the fact that that the cloud transformations are thriving conversions but I would say is a relatively healthy mix between ILF deals or sorry, for using internal abbreviations, new customers upselling existing customers conversions and renewals. So I don’t think it’s necessarily changed, no.
Claus Almer
How much do you expect this to, let’s call the revenue streams will contribute this year?
Christian Kromann
Now, I think that – I, and that’s also part of the risk assessment is that we’re going to continue to see a very healthy growth on what we do with existing customers. But I’m pretty confident we also are going to start to see some real interesting new names dropping in. But it’s clear in our risk assessment towards the keeping the guidance is we see an overweight from existing customers. And that – I think that environment is I think is also an important statement.
Claus Almer
The reason why I’m asking is in the past, you have been giving some color on the magnitude of the impacts on client conversions and renewals. And I didn’t find any comments in the report, at least about this. So I was just curious, to what extent how much we should expect in the full year.
Michael Rosenvold
Yeah. And what we do now is that we do it when we announced the actual numbers and then you will see the full impact on conversions. And I will say we do also have some substantial conversions included in our guidance, but that has been the case from the beginning. So as part of our guidance, we do expect conversions because that is what we see, that is especially with the clients wanting to go from an on-premise solution to a cloud solution, then it’s a very natural step as this is on a – and a sale agreement that they then convert that perpetual agreement to an [sale] agreement at the same time. So in the guidance, there are significant conversions included and that has been the case all year.
Claus Almer
And it is more than last year? As I recall, the communication after Q1 was that conversion will be more this year than last year. Is that correct?
Michael Rosenvold
I agree. I agree.
Claus Almer
Okay. And then the final one, I’m sorry about these three questions. But SimCorp’s ambition is to grow the revenue by more than 10% per year. If you look at your professional service, and also your software update revenue streams, both are growing organically, not a lot, which obviously will put more pressure on the other revenue lines to more than compensate, obviously. So how should we actually think about professional service growing nearly 3%, organically and software updates, not more than that?
Christian Kromann
I think software update is a function of the license base, if you will. Hopefully, at least to compensate some of the cost pressure we get from inflation, you can start to see an uptick in that. Then we need to see that net of customers leaving which is growing at a very low point. Professional services is a very interesting and this is right in the center of some of the conversations we want to have at the Capital Markets Day, because now of the one-off professional services, we want to decline. However, what we want to see substituting and more than substituting there is what we would call the recurring services, as you can see, they’re also growing are quite healthy at the moment.
And here, we are still in a situation where what we have signed of these kinds of transformations, you can’t see anywhere because it doesn’t go into the order book and it doesn’t go into anything until it gets into the revenue and hits the last 12 months AR. And I think that that component that we want to be a bit more specific on how that’s going to look in the future and how we’re going to track it in the future. And then once we have that clear, we can allow new Michael to come in and have a think about how do we portray that in terms of what we guide on. But nevertheless, you’re not going to get through the right number anyway without having software components as part of the sales and that kind of need to cater for the rest, is the way I look at it. But once you start to move these things around, you would have to see what’s kind of the end result from a long term point of view. And that’s really the work we do at the moment.
Michael Rosenvold
Then also just remember that when we do conversions, yes, we do take license upfront, but that all is also offset by a reduction in the software updates and support. So whenever we do conversions, it actually has a negative impact, typically, on the software updates and support revenue.
Claus Almer
Yeah, you are front loading revenue, but sure. Okay, that was all from me. Thanks.
Michael Rosenvold
Thank you.
Operator
Thank you. We will now take the next question. One moment, please. And it comes from the line of Thomas Poutrieux, Exane BNP Paribas. Please go ahead. Your line is open.
Thomas Poutrieux
Good morning. Thank you very much for taking the question. I’ve got a couple actually. So starting with the order book, so it like the order book for subscription service fee are basically declines slightly Q-on-Q. Can you comment on the dynamics here? I mean, is it just perhaps a short-term respect from the restructuring plan. And can we expect a return to growth sequentially in Q3, and Q4, even if we exclude what may come from Challenger in that [indiscernible] metric?
Michael Rosenvold
Can I just – just so I’m making sure that I’m answering the question correctly. So, is your question that you have seen subscription services in the order book going down from Q1 2022 to Q2 2022?
Thomas Poutrieux
Yeah, a little bit. Yeah.
Michael Rosenvold
Slightly, yeah, I can certainly explain that. So as we sign new subscription agreement, then they are included in the order book. And as we are then you can say delivering our services then the revenue recognizes and thereby reducing the order book. So you can say if there is a small decline in subscription service from one quarter to another, it means that we have revenue recognized more than we have gained in order intake. And you’re absolutely right. That in Q2 that is also the reason why the order intake is relatively modest with €70 million, we didn’t sign any significant subscription service agreements, and therefore, it’s a natural consequence that as we are then revenue recognizing, we’re taking it from the order book. But if you look at the order book, quarter-to-quarter, it’s almost unchanged. So it’s not like that we have taking a big piece of our order book in this quarter. It’s almost at the same level. In general, not only on subscription services.
Thomas Poutrieux
Yes, okay. And second question perhaps only the US competitive landscape, in Q2, we have Clearwater Analytics that that has announced the first action from clients in the US and just we –SimCorp has been quite successful with this segment of the market in that specific geography. And at the same time BlackRock in Q2 said they are getting traction with a new adding of accounting product. And so could you perhaps update is on, yeah, this competitive environment in US specifically, affinities and strengthening on that front as a result of the evolution just I mentioned?
Christian Kromann
Yeah, I certainly can. And that’s right back at why we are investing in creating those types of services to be competitive in that space. The way we are going around to it geographically, is that we started in Europe, that’s where we have a lot of kind of brand recognition. We have a lot of customers that are willing to take these things, that’s also why the first three customers in the services are close to home, if you will. And to get that going, I would say, so far, and I think even Clearwater mentioned that in their earnings call is that they have more headwind in Europe than they expected. And I think that’s because we are launching our services in Europe.
Step number two has been to get those services to APAC. Not necessarily because it was a priority, but the challenge, opportunity kind of materialized. And it was a relatively easy decision to say let’s double down on that. But that also means that now the time is coming to North America and getting those services launched full scale, hire the team and all of that. So we can absolutely both take part in the party. But also make sure that we offer our current customer base, that opportunity. And that’s something we are literally just embarking on.
But I would say right now obviously they have a stronger footprint we have, purely by the fact that they are coming out of North America. So we have real work to do. But we got a good customer base and we are most likely going to take the same approach as we’ve done in APAC. So that there are more update on that later in the year.
Thomas Poutrieux
All right, all right. Those were my questions and thank you. Thank you very much.
Christian Kromann
Welcome.
Operator
Thank you. There are no more questions on the phones. Please continue.
Unidentified Company Representative
Yeah, I think we have some questions here on the live chat. Although I do believe that we have answered a lot of it. But nevertheless, a question comes from [Manas Deva] from Investor AM regarding the operating model restructuring program. So how much will the total cost be? And what is the eventual goal of this program? SimCorp is already partly a SaaS company as AR is around 59% of total sales. So why is the program now?
Christian Kromann
I think so last one, I hope I explained a little bit earlier, but I think, yes, a big part of our company is already SaaS but I’m also I think, hitting the nail on the head, linked to many questions I’ve had for the past years. You know, it’s all good that you’re taking these SaaS transformation, but how you’re going to kind of make money on it at the end. I guess it’s not – it’s only interesting to take on that work if you’re going actually make money on it. So I think that that’s a very important element to it. I would say the total cost of transforming SimCorp I think, is quite, quite massive. What we’re singling out is to get the management layers intact and the number is what we say it will be and it will be done in ‘22. The rest of the cost I expect to cover through normal changes in the organization.
Unidentified Company Representative
Yeah, good. And then the second question also from [Manas], what is the difference in the capabilities you need as a SaaS company versus the company SimCorp is now? Does this mean that you have to hire a lot of new outside talent?
Christian Kromann
Yeah, so I think there’s many, but if we double down on the one we just talked about is that you need to have the mindset and the experience of driving a high level of automation. You also need to have the experience of running a global, always on team because we are still talking about some of the large financial institution of the world. They do expect a premium service. They are, in most cases prepared to pay for premium service. And that’s kind of the mindset you need to put in place. And I think a lot of the talent we have, that we’re going to continue to keep our experts in SimCorp. But since only very few people have tried to do this elsewhere, we need to kind of map that up was that the experience base. So you have both the SimCorp skills but you also have the skills of running a global operational unit to the extent that we do here. And as I said, we only have 50 out of 300 customers. Just imagine what the company looks like, when you’re starting to take a bigger share of the remainder 250. Unless you get that right from the get go, you will you will fail very badly and that’s ultimately the deal we’re taking up.
Unidentified Company Representative
There’s actually just a follow up question, but on a completely different topic in terms of currency impact. The currency effect, will have a positive on top on the current guidance, did I understand that correct?
Michael Rosenvold
Yeah, I will say, we guide on local currency because then we don’t have to explain why we don’t – why we miss a guidance due to currency or why we overthrew the guidance due to currency. So we always guide in local currency, so same, so with no impact from currency. But the reported numbers are of course, the reported number is based on the currency in place. So that means that you will say, you will have a positive impact on the reported numbers on top of our guidance.
Unidentified Company Representative
Great. I think that was all for the webcast but I think there was another hand raised from the audio, right?
Operator
Yes, one moment, please. It comes from the line of Poul Jessen from Danske Bank. Please go ahead, your line is open.
Poul Jessen
Yes, thank you. I have two questions. One is on the strategy that you’re doing. You have earlier talked about also reviewing your US setup and the go-to-market over there. Is it just adding more people or are you in a position to update eventual fundamental changes on how you handle the US market?
Christian Kromann
Yes. But that has to be a massive cliffhanger for our October 6 because that is part of the agenda. And I would say a bit of both Poul. There’s certainly many good things that we’ve done over the years and continue to do. But I also believe there’s a different tech required.
Poul Jessen
Okay, so it’s on October?
Christian Kromann
Yeah.
Poul Jessen
Okay. And the second question is on your AR, you said that you are growing healthy on the AR with your 12% or a little below 10% in fixed currencies. But if you’re compare it to other companies, which actually report AR which you are competing, then you are growing at the lowest rate.
Christian Kromann
Yeah.
Poul Jessen
At least among those five companies. So what level would you be satisfied with your AR?
Christian Kromann
Yeah, but I think there’s many, many elements to that. And that’s certainly part of the number that we need to be much more comfortable with before we communicate, but that is the key number Poul. So I didn’t mean to say – I didn’t mean healthy, Poul.
Poul Jessen
Are looking at the churn of Charles River or are you looking at the churn of Aladdin?
Christian Kromann
Probably somewhere in between, I would say, but I think healthy for me means that is within the guidance clearly for this year. I would say once you get the AR defined correctly, and you get the full cloud impact in, then I think we’re going start to look at some interesting numbers, but we want to do the math before we kind of become external about that.
Poul Jessen
Okay, thank you.
Operator
Thank you. There are no more questions on the phone. So I would like to hand back over to the speakers for final remarks.
Christian Kromann
I’ll be short. Thanks for joining and I wish you a wonderful weekend. Yeah, I really hope that you can find the time for October 6. And despite the clarification we gave today because I think a lot of people questions that you continuously have, we would hopefully give more insight to at that event.
But take care everybody and see you somewhere.
Operator
That does conclude the conference. You may all disconnect.
Be the first to comment