Temenos shares dropped on 15th February after Hindenburg Research published a report with damning allegations which claimed the company had major accounting irregularities and failed products.
Temenos has refuted the allegations made in the report, stating that the claims are inaccurate and false.
Here is a recap on the players involved in this story, what happened, and how Temenos has responded.
Who are Hindenberg Research?
Hindenburg Research is an activist short-selling investment research firm. Theyclaim to support investment decision-making, stating that they look for companies with a combination of accounting irregularities, bad actors in management or key service provider
roles, undisclosed related-party transactions, illegal/unethical business or financial reporting practices, and undisclosed regulatory, product, or financial issues.
As short sellers they are betting against Temenos, meaning they will have already profited from the company’s share dropping.
This is not the first time a report from Hindenburg research has had this effect on the fintech sector.In
early 2023 they published a report about Block which caused a 20% drop in shares due to Hindenburg’s claims of fraud.
What does Temenos do?
Temenos is based in Switzerland and was founded in 1993. It is a creator of banking software. They work across a number of banking sectors including retail, corporate, universal, private, treasury, fund administration, and community banks.
They aim to be “everyone’s banking platform”. On their website they report that their open platform enables over 1.2 billion people to carry out their daily banking, which they say is 30% of the world’s banking population.
What happened to Temenos?
Hindenburg Research
published a report which made allegations that Temenos had heavily manipulated earnings, faked deals, pulled renewals forward , backdated contracts, and failed implementations.
The company claimed that compiling this report took them four months of investigation, and they spoke with 25 former Temenos employees including senior leadership.
The conclusion of the report said: “The company will eventually run out of accounting tricks, new unwitting customers who believe its glossy sales pitches and new investors willing to buy as executives keep on selling to them.
“As these factors converge, we expect Temenos’ results and guidance will eventually fall off a cliff and lead to a substantial rerating.”
The report caused a 25% drop in the vendor’s share price on the morning of release.
Temenos responded shortly afterwards
stating that the report contains “factual inaccuracies and analytical errors” and “false and misleading allegations”, which they claim are intended to impact the company’s share price.
Petrus Advisers, one of Temenos’s biggest shareholders,
published an open letter which stated that most of the allegations in the report “are based on hearsay talk from former disgruntled Temenos executives.” However, they also called for Andreas Andreades to step down as CEO, the
letter stated: “We concluded that Andreas Andreades had created a culture that favoured short-term gains over long-term value creation. Poorly executed M&A added to the problems. Investment in technology, client satisfaction and own staff had been neglected.”
Temenos then announced it would be conducting an
independent review of the report. On 26th February Temenos announced the formation of a
Special Committee to oversee this review, headed by non-executive Chairman, Thibault de Tersant.
Additionally, the board stated it will be retaining the law firm Alvarez & Marsal, with Schellenberg Wittmer as Swiss counsel and Sullivan & Cromwell as US counsel.
How has Temenos responded?
The report finished with a list of 36 questions for Temenos. Hindenberg Research have
stated that Temenos have not answered their questions, however, Temenos has refuted some of these allegations.
Finextra was given a transcript of comments from de Tersant, non-executive chairman of the board, for the Temenos Q4-24 results call. He refuted a number of the specific allegations.
For failed implementation, he said: “Occasionally, they go wrong for a myriad of complex reasons, which are very far from being all attributable to Temenos, and more often due to change requests.
“In 2023 we had 391 go-lives of our software which is clear evidence to demonstrate our successful products and implementations.
“Unhappy customers generally use two levers: litigation or threat of litigation, and we have had a very small number of them in past years, and only one open at the present, and refusal to pay or lengthening of payments, which is not our case with a bad
debt overdue for more than 90 days of only US$19.1 million at the end of 2023. DSOs increased in 2023 as a result of our success in transitioning to a subscription model.”
The paper alleges that “Temenos had obfuscated its funding of and license sale to Mbanq in a revenue roundtripping scheme.”
In response de Tersant said: “In June 2021 we entered into an agreement to purchase a series of defined convertible instruments. In our Interim report we disclosed our initial investment for USD19.9m. In total we have made a total of USD59.9m investment
in Mbanq and booked total revenues representing 22% of the value of the convertibles, since the date of investment.”
He further added: “We also confirm we have not made any other investments in businesses that subsequently bought software from Temenos.”
In regard to allegations of pulling forward contracts, he said that negotiations can be time consuming and purchases are not made off the back of brochures. “Implementing a new system could take potentially years so it is normal that discussions on renewals
are engaged early. This makes good business sense for Temenos and for our clients. Sometimes it is a compliance requirement for our clients that they conclude renewals with their existing core vendor well before expiration of the current license agreement
so that they would have the option, if they wanted to change providers, which we need to respect.”
With regards to allegations of backdating contracts, de Tersant explained that they have used DocuSign for four years in contracting and added: “We have a well-controlled approval process for contract execution, governed by signature policies, internal audit
review and Board oversight. In addition, in order to recognize license revenue in accordance with IFRS, all performance obligation must be fulfilled. This includes the provision and delivery of software in the respective quarter.”
The paper included allegations that Temenos’s Infinity has been a failure with many incomplete launches. There were a number of specific allegations around the acquisition of Kony. In response de Tersant stated: “We have integrated the Kony acquisition,
who’s R&D was based in India, as a great addition to our India development factory. The market segment and the enhanced value proposition are now better aligned. We did see client attrition following the Kony acquisition but these were residual issues not
of our making and we successfully managed the transition. We integrated the product organization into the Temenos product organization as would have been expected of us to allow us to integrate capabilities on our platform and achieve synergies. Our Infinity
offering today is winning accolades and other large and prominent bank customers, we have hundreds of customers using it and we continue to sell it.”
Hindenberg Research alleged that much of the R&D which Temenos claims to do is inflated, and much of this is actually customer-specific implementation costs. In response de Tersant said: “In our Q4 results presentation you will see the full impact of net
capitalisation to our profits. In FY22 we had a $23m positive impact to the profit whereas it reduces to $18m in FY23. Which means we are in fact on a decreasing trend of capitalization in 2023, and had less expense relief year to year. We capitalize efforts
that result in functionality and technology that goes into our products and not customization efforts.”
The report included a number of allegations surrounding Temenos partnerships, including those with Mbanq and DXC. Responding to this de Tersant said: “Partners are key to our business across the full ecosystem including delivery, sales and distribution and
Temenos Exchange partners and you will see more about how strategic partners are to our business in the presentations today and tomorrow. A large majority of our 2023 go-lives were managed by our partners. The vast majority of our sales are direct sales. And
in 2023, only c.4% of our total software licensing revenue was derived from sales to partners.”