Newgen Software Technologies Limited (NEWGEN) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Newgen Software Technologies Limited Q3 FY '20 Financial Results Analyst Conference Call. [Operator Instructions] Please note this conference is being recorded. I now hand the conference over to Ms. Deepti Mehra Chugh of Newgen Software Technologies Limited. Thank you, and over to you, ma'am.

Good evening, everyone. I am Deepti Mehra Chugh, Head IR, Newgen Software Technologies Limited, and I welcome you all to the Q3 FY '20 results of the company. I have along with me today Mr. Diwakar Nigam, Chairman and Managing Director; Mr. Varadarajan, Whole Time Director; Mr. Virender Jeet, Senior VP, Sales and Marketing and Products; and Mr. Arun Gupta, the Chief Financial Officer. Before we move on to the discussion, let me highlight that this call may contain certain forward-looking statements concerning Newgen’s future businesses prospects and profitability, which are subject to a number of risks and uncertainties and the actual results could materially vary from the forward-looking statements. Past performance may not be indicative of future performance. The company does not undertake to make any announcement in case any of these forward-looking statements become materially incorrect in future or update any of these statements made from time to time. For further details, you may please refer to the Investor Relations section of our website. I would now hand over to Mr. Nigam for presentation of the results.

Good evening, everybody, and thank you for joining us at Q3 FY '20 Post Results Conference Call. Our revenue in Q3 witnessed a growth of 15% to reach INR 185 crores. As expected, business is picking up in the second half of the financial year. EMEA region has performed very well during the quarter. For U.S., we have been able to maintain the revenue base in spite of a strong Q3 last year, where we got some big license deals. However, growth in India continued to be muted on account of macro uncertainties and market headwinds. During the quarter, EBITDA was at INR 36 crores, witnessing a growth of 35 -- 34% Y-o-Y. Profit after tax is 25 -- INR 24 crores, witnessing a growth of 33% Y-o-Y. Revenue growth and cost rationalization led to improved -- improvement in margins. EBITDA margins improved to 19.4% from 16.7% in Q3 last year. PAT margins improved to 12.7% from 11% in Q3 last year. As we mentioned last quarter, the organization continues to work on its strong long-term focus of investing in building capabilities in the mature markets, while continuing to strengthen operations in emerging markets. We are happy to share that we are ready with a new version of our product, iBPS, a low-code BPM platform for rapid application development. By adapting low-code development platform, organizations respond faster to the needs of their digital business. With this release, we expect to extend our solutions stack for digital initiatives across all verticals. This would get us deeper and wider market presence. With low-code capabilities of our platform, our customers expect to gain from significant reduction in the deployment cycle, efforts and cost. As a part of our focus on sales and marketing beyond our new territory expansion, we are investing in building the sales channel for global system integrator network. We hope to achieve a significant part of our revenue in next 5 years through this channel. In U.S., we have -- we already have some early wins through this strategy and hope to get inroads in Fortune 1000 clients, which is expected to lead to higher deal sizes. We have rolled our aggressive plan to replicate the GSI strategy across all our mature markets and territories. Our efforts on new logos have resulted in us adding 12 new logos in Q3. Notable deals include cloud deal with full-service commercial bank in Massachusetts; a project with government agency in Caribbean; a large project with East Africa's largest commercial bank; a project with reputed organization for all financial solutions in the Kingdom of Saudi Arabia; selection by a leading energy and environment solution provider from India. In terms of verticals, we see -- we saw robust growth across our banking and financial services and BPO/IT verticals. Last quarter, we had completed our annual increment process across organization, as well continued with the employee hiring program keeping in mind the growth requirements. In the current quarter, we see opportunity of the employee cost optimization by about 2.4% compared to last quarter. Further, our new release of the low-code capabilities of iBPS platform would ensure significant reduction in deployment cycle and thus optimization of effort and cost. We hope to optimize future requirement of implementation workforce, which should help us improving implementation margins further. Overall, our annuity revenues comprised 55% of revenues, total revenues and witnessed a growth of 28% Y-o-Y. Of this, cloud revenue grew by 61% Y-o-Y. In mature markets, we are finding strong traction for our cloud business. The cloud business revenue recognition is back ended, but it brings more predictable revenue streams with better long-term margins. We continue to invest in deepening our product capabilities, talent development and new market expansion and brand initiatives. We are happy to share that Newgen has been positioned a Challenger in Gartner Magic Quadrant for Content Services Platforms 2019. Newgen also received a special recognition at Dun & Bradstreet – RBL Bank SME Business Excellence Award 2019. Trade receivable. Our trade receivable as on December 31, 2019, are INR 215 crores, which resulted in a reduction of net DSO to 116 days compared to 132 days in Q3 FY '19. Now about 9-month FY '20 results. For 9 months FY '20 consolidated position, revenues were at INR 470 crores, 13% higher as compared to similar period last year, but PAT was at INR 31 crores, 21% lower as compared to similar period last year. This is also due to considerable lower other income and reduced PAT in previous quarter. However, we continue to make strong investments in R&D at 9% of the revenue and sales and marketing effort at 19% of the revenue, keeping our long-term plan in mind. Our net cash from operating activities was INR 45 crores in 9 months, witnessing a 24% increase Y-o-Y. We continue to witness a strong improvement in our collections. Totally, we acquired 50 new logos in the first 9 months of financial year. The overall demand environment is stable in the global market and our sales pipeline continues to be strong and we are hopeful that we should be able to close certain large-sized deals and recover our growth rates. We hope that our investments in U.S., Europe and Australia would start yielding results and help build us growth momentum in coming quarters. We are now open for Q&A.

[Operator Instructions] We have our first question from the line of Harit Shah from IndiaNivesh.

Congratulations on a good set of numbers and improvement after the last quarter where we saw fairly significant slowdown. So if you could give some indication of the main drivers for what were the reasons why you saw such an improvement and whether this is sustainable? And if you can give some perspective on a geographic basis because I noticed that in the U.S. and India, the -- your growth headwinds are still a little -- apparently prevalent out there. So some color on that also would be quite helpful.

Jeet, will you take it up?

Yes. Thank you very much. This is Jeet. As you remember, last quarter, we had a kind of slowdown and it was on account of both one thing that the Q2 previous year was on a very high base number and that too also we had a slowdown in India where we saw there was not -- a lot of deal momentum was not there. Other reason was that in fact our deal closure rate was similar, but our average deal sizes were not as good. So in terms of the large deal slipped out of India, that was the significant reason. Having said that, the overall environment or our funnel or the demand, we didn't see any challenges. So it was natural that we would not have repeated that performance in the next quarter. So most of the territory, we have been able to win orders, including EMEA, APAC, India. Regarding EMEA, we have got significantly some large wins and that's why the numbers look good. But apart from EMEA, even on the U.S. front, we are finding good pipeline. What has happened in the U.S., there are 2 things. Last year, the same quarter, we had a large license deal of around INR 13 crores. If you take that out, in U.S. also, we have grown roughly around 30%, 34%, if you just take out that onetime license deal. Having said that, what is happening in -- as you know, remember, we have said that most of the U.S. market, our deals are cloud-based deals. So even the wins of this year are not resulting in any significant revenue out there, though the bookings are there. So they will start accumulating revenue in last quarter and the next year. So that's why the top line does not look as a growth over the last quarter. But we don't see any challenges on the momentum of our business. So looking at -- in terms of, as Mr. Nigam said in this call, I think Q4 and next year, we still find there is a huge demand for our kind of products. There is a lot of markets where we are finding a lot of good traction. So as soon as India starts recovering a bit and we start gaining more foothold, we should be able to build on that momentum and continue the growth trajectory, which we are seeing previously.

Okay. Sure. That was quite helpful. My second question is regarding the comments you had made earlier in the call about building out your SI network. So that is a portion, I think, that could be an interesting growth driver going forward. So if you could give some -- more color on this in terms of, let's say, any specific geographies that we are targeting and maybe any specific names of maybe, let's say, your key 3 or 4 SIs who you feel could help you to expand your network, but I think right now, I think 20% of your sales, I think, are mainly less on the SI channel, if I'm not wrong. So if you could correct me on that? And if that -- do you expect that to increase going forward?

Yes. I think Mr. Nigam mentioned that in this call that as part of our one more focus is that we are investing a lot in building the global channel system, which is a global system integrator ecosystem. I think this is on the basis of 2 things. One is that I think our presence as well as brand in the market is finding some traction with SIs now. And in U.S., luckily, we have had some interesting wins with SIs in terms of getting into larger organizations using one of the system integrator. I think we have traditionally worked with all HPE, Infosys and those are the SIs who are carrying us to these markets also. So this is one area where we have started building and pushing this ecosystem. And the funnel for such cases is also looking very positive. In terms of both, it's a very different kind of organizations where we can enter because SIs inroads to typically Fortune 1000 companies, which could also help our deal sizes in a way. So using that strategy, we have -- we are in the early stages with some initial wins. I think we are looking forward that over next 1 or 2, 3 years, it will unfold to a larger part of the revenue. And over a few years, the share of partner-led revenue will start increasing.

So what would that be as of now, if you can give that? Any...

Right now, it's 20% at the year level, we don't look at it because it could be -- because the numbers are too small on a year level. I think we should be start -- some challenges are also in the wins which we have got through SIs. Again, you won't have any reflection on the revenue part because they are all cloud-based wins because cloud has one core differentiator where SIs are carrying us. And -- so most of the revenue will start accumulated. So this year, we will be similar to 20% number. And next year, it should become slightly higher.

Fair enough. And then one last question on my side. What will be, let's say, approximate investments that you will need to make in order to expand this? And if you could give some sort of indication on that also, that will also be helpful.

So we don't see any -- on a value terms it's material. It's in terms of our -- aligning our focus, sales, marketing and other channels to that. So when you say building of SI ecosystems, it's also looking at realigning some structures within the organization to support that structure much aggressively. So we are already invested. I don't see it materially changing our percentage of sales and marketing investments.

[Operator Instructions] We have a next question from the line of Tanmay Mehta from SBICAP Securities.

One bookkeeping question. If we look at the stand-alone financial statements, we see a loss in the India segment and the consolidated statement shows a profit. So if you could explain the nature of the subsidiary?

Tanmay, so I'll just leave this question because I don't follow it. On a stand-alone, you are saying stand-alone results of India?

Yes. If we look at the segmental reporting, stand-alone India is showing a loss and in the consolidated statement, the India segment shows a profit with the revenue remaining the same.

Just give me a second to check. Yes, so broadly, I think we'll check that number. But broadly, you understand, India, we have not seen any growth rate. In fact, we have seen a decline in the revenue compared to last year. And...

Right. Yes, so the revenues were...

That is also -- on the revenue side, I'll just check the -- just checking the numbers.

Okay. So I just wanted to know the nature of the subsidiary basically?

India, there is no subsidiary. We don't have any...

In India, we don't have any.

India is -- when you say stand-alone, that is India. And when you say consolidation across all subsidiaries, which is the U.S., U.K., Singapore, Canada, Australia. So consolidated revenues is about our global revenue. So our P&L is based on the global revenue. Stand-alone is just when you look at India's revenues.

I think, Tanmay, we can come back on this if it is okay? Let me check.

Yes. Okay.

You can draft this question to us and we can get back to you on that.

[Operator Instructions] We have next question from the line of Dipesh Mehta from SBICAP Securities.

A couple of questions. First, about the investment which we have started in Australia market. So if you can provide what kind of market opportunity we foresee? And how one should look at about revenue started from that market and how far we are from that? Second question is about attrition. If you can help us understand what could be the attrition rate right now we are having because earlier, I think, a couple of quarters back, you indicated about spike in attrition. So if you can provide some color about where we are? Third question is about the seasonality. Typically, Q4 is very strong for us, but considering the last couple of years, our geographical diversification and revenue mix change, do you expect similar kind of high seasonality in Q4 to play out? Or you expect it to be moderate compared to the previous years? And last is about the debtors. If you can provide -- we are seeing increasing kind of progress on the receivable days, but if you can provide where we expect it to stabilize considering the mix change as well as our efforts?

Dipesh, thanks for -- so I think let me -- just remind me if I forget one of your questions. So for Australia market, we have started investment in that market predominantly this year. It's in very early stages out there. We have invested in building the sales engine right now, which is predominantly sales and sales -- what you call presales or technical sales support. We have roughly around 4 people in that market right now working for that. That is the kind of seed investment which we do in any market. So right now, the opportunities is typically to focus on the same segment, which we are going, it's our banking and government, insurance. These are the 3 segments largely. And we are again focusing on the system integrators to really carry us and it gives a early break out there. I think it is too early right now to quantify in terms of revenue, but we are hopeful that we should -- if we are lucky, we should be able to crack in and break first some deals in the Q4 of this year or Q1 of the next year. But I think the new markets are slightly unpredictable when they started -- start ramping, but we have seen traditionally in somewhere between 12 to 18 months, we start ramping of the market, we start giving us some revenue out of that. And then from there we have to gradually build it up depending on how the momentum looks. Regarding attrition, manpower, we are still roughly around 20% on that trend. So we are trying to -- doing various things to manage it. We have not seen a very significant optimization out there or reduction. We are still struggling with that issue. But then we had already preplanned hiring and other costs have been taken so that it does not affect us on a business perspective. So that's the number. Your question was about...

Seasonality.

Seasonality of the revenue. I think that we have a bit of seasonality that, as we have said, as a license for -- and we have given that as the annuity component of the revenue starts growing, it will have some impact on the reduction of seasonality. But in terms of new logo wins and the deal wins and the license revenue, there is only some amount of seasonality. So last year, there was a bit of reduction on seasonality, but we still hope that the Q4 is going to be pretty large compared to Q2, Q3, even this year. And the last question was on the debtors. I think we have been tracking that issue for last 6 quarters. We had given an indication that on -- we should be able to come somewhere on an average DSO of around 115 to 120 days. We are very close to that. Since Q3 is anyway an optimized number, Q4 will be lot of billing, so it slightly goes higher. So we have almost reached the target levels where we are. I think now we hope that significantly the changes will not happen in large numbers, but on an incremental. As the mature market revenue increases and the annuity revenue increases, the DSO can further keep on coming down. So our initial target of meeting around 120 days, we are close to that. So I think from here onwards, it may become slightly more gradual to reduce it further.

Sure, sir. Just 2 follow-up to it. First about the receivable. Now when we say 120-odd days, it is net debtor which we refer or gross we are referring to?

Net, this is net.

Net. And second follow-up is about the seasonality when you indicated. Now when we look revenue side, but I think your seasonality on profit side is significantly higher than revenue. Do we expect similar seasonality to play out? Because when we expect some moderation in seasonality, do you expect it is a ripple effect in terms of significant implication happening on profit side and it would be more even kind of profit distribution for us across quarters?

Yes. No, it doesn't work that way because what has happened even if it's slightly seasonal, whatever is the remaining part, we had completely added to the margin because the costs are completely -- between Q3 and Q4, there are very linear costs for us. So anything which is higher revenues in 3Q completely adds to the margin. So on the margin side, we still think there's going to be more, what you call, seasonality than on the top line side because it gets completely added to that. So the margin seasonality may take at least few years to streamline. Unless the subscription or the annuity-based revenues reach around 75%, 80% of our revenue, there is going to be an element of -- lopsidedness in the margin.

Understood. And last is about this India business. Now earlier quarter, you indicated about -- because some of the overseas market costs also sits out of India segmental reporting, but in -- anything which is particular to India market which lead to loss which is recurring in that market? Or it is largely because of the way we have cost structure?

I don't think there's anything specific. The India -- the only change in India market is we have not been able to do the top lines at the rate which we expected. On the cost structure, there is nothing around India which has got some unique cost which can get repeated.

So it is -- if one adjusts for the international market support kind of thing and R&D and all those things, your India market also make money?

Yes. Yes. All markets make. These are about attributed costs.

We have next question from the line of Jagmohan Singh from Master Capital Services.

Sir, my question regarding the other income trend. The other income has fallen by 5% this quarter at INR 40 million and 34% on 9-month basis for -- at INR 18 million (sic) [ INR 118 million ]. So what was this other income line?

So I think other income is attributable to 2 things: one is the interest income or investment income and second part is the currency fluctuations income. So I think last year, we had a very good currency fluctuation income, which currently is because of the dollar being stable, we don't have. So that is the reason of this fall. As far as -- investment income is very much there as far as quarter-wise is concerned.

[Operator Instructions] We have next question from the line of [ Suraj Garg ], individual investor.

Congrats on the results. I just had a couple of questions. My first question is on the EMEA growth. I just wanted to understand the growth of 80% quarter-on-quarter in EMEA, has it been driven by any new logo? Or has it been from our existing customers?

Yes. So I think it is both. But what happens is when you look at quarter-on-quarter, any large deal completely skews these percentages. That's why we keep on advising that Newgen is a better business to be looked at an annual basis rather than on a quarterly fluctuation basis. So in EMEA, we got a very large deal from a new customer as well as there is a good growth from the existing. So there is a growth rate on the both fronts. So -- but if you get a -- on a base of INR 50 crores, INR 60 crores, if you get a INR 5 crore, INR 7 crore deal, it completely changes the percentage behavior.

And what's the visibility on the -- your go-forward business for EMEA and other geographies?

Sorry, I couldn't hear you clearly. Could you just repeat that?

What would be the visibility on EMEA business? Do we expect this growth to continue? Or do we expect it to stabilize at any other run rate?

No. So I think we can't repeat 80% growth. As I said that, on a yearly basis, we expect all markets to grow in a healthy way apart from the India, where we see concerns. So eventually, these things will all even out at a more larger time horizon if you look at across multiple quarters and come to very healthy growth rates, which are -- can be in the range of anywhere between 20% to 40%, 45% which we were seeing previously.

Okay. And so the current quarter growth is not a one-off growth, right?

Yes. So it's not -- so I'm saying our normal growth rates of growing market by around 20%, 25%, 30% is what we look at in a long-term horizon. So in single quarter when you look at quarter-on-quarter comparison or quarter-to-quarter, a single deal or a couple of deals completely change the percentage. So percentage may not be the right way to look at this.

Okay. And if you had to phase out this couple of accounts, one big deal or the couple of deals we are speaking about, what would be the growth of the geography?

Could you just repeat it? I think your line is not well. Could you just repeat the last question?

Yes. On a quarter-on-quarter basis, you had mentioned there will be some big deals which would obscure the percentage in favor or against a favor. So thinking of these deals, what would be the growth percentage of EMEA?

EMEA. So excluding that last deal in EMEA, what would be the growth percentage like? 87%...

So -- yes. It will be still 30%, 35%, which would have grown on that. We don't -- I don't have the exact numbers calculated. If I take out the large deals, we will still grow by 30%, 35%. So we still have healthy growth rates coming out of EMEA. So we should be able to replicate that. But what happens if the quarter, the base number changes, next year on a quarter-to-quarter basis or quarter-on-quarter basis, it may not look at the same number. But on the -- we would have still done very well on the business side.

So on an annual basis, it gives a better view compared to a quarter-on-quarter basis.

Okay. And my next question is regarding your EBIT margins. So on a YTD basis, last year, our EBIT was about INR 44 crores and in the current year, it has come down to INR 38 crores. Are there any specific drivers for this reduction in EBIT margins?

If you remember, on a Q2 result basis, our top line was flat and our margins -- we had no margin almost. We had very little PAT margins or very little EBIT margins. So we have still not recovered in Q3 -- both Q2 and Q3. We have done well on Q3. We did reasonably well on Q1. But the Q2 gap is still reflecting in this.

Even the cost...

Okay. And do we expect this to normalize by year-end?

Sorry?

Do we expect this to normalize by year-end?

I think if you are asking me, do we -- can we recover Q2 by the year-end, it may not be that easy to recover. But on a quarter basis in which we continue to -- we hope that our Q4 will also be fine and we can. But I think -- I don't think we can recover all the Q2 margins in Q4.

[Operator Instructions] We have next question from the line of Abhijit Mukherjee from Lucky Investment Managers.

Just wanted to know the traction in the U.S., how's the market there and how's the deal traction there?

I think on the U.S. front, I think there are 2 things, we still continue to get our deals in banking, which have been the traditional cloud deals. So the funnel is good. We have also got some good deals around the U.S., which is markets in Caribbean and other places. And so funnel is strong as we had previously. And beyond that, as we explained that we have been able to break into this system-integrated GSI network and we have got some very interesting cases lined up and we also have got our early wins in that. So U.S. is looking pretty good. The only thing is what happened, I keep on repeating, the U.S. looking good does not reflect in the revenue because it's completely cloud and back ended. So from the time we get order, the revenue realization is 6 months delayed because it has to have an implementation cycle and then we had to go live. And then also, it like trickles quarterly. So the margin profile is better in 3 to 4 years' time, but on the initially 2.5 years, it is back-ended revenue.

Would it be possible for you to give us a quarterly order intake data?

We don't publish that, but I think I can talk to finance and see what we can make available.

Because a lot of companies do give this, the IT services companies. And in our case, the need for this kind of data is even more important because we are a product company. So investors really have no idea about how the company is doing because whatever you are booking is the real measure of the sales of the company.

Yes. So you remember, the cloud is a new initiative. So for the cloud business, that visibly -- initially, it was all clearly a license billing, so it was all visible. On the cloud basis, I understand the order booking makes more sense than the billing. So we will try to find out a way which is directly -- we can bring it in our metrics so that we can share that data with you.

And whenever you do this, it would be very helpful for the investors if you could give this data back, running back, say, 12 quarters, so that when we have a sense of what is it trending in terms of this very key important metrics.

So we give you the SaaS margin and SaaS growth rate. So I think SaaS growth rate, we are still at 66%, which is a reflection of compounding of these orders. So we have been able to maintain a higher 50%, 60% and above growth margin for last 4, 5 quarters on that. Just the base is around 6% of the revenue, so it's not very material right now. So as this becomes more like 10%, 12%, then you can -- the growth rate of SaaS is a reflection of our order pipeline in the U.S.

[Operator Instructions] We have next question from the line of Tanmay Mehta from SBICAP Securities.

Sir, just one bookkeeping question. How do we calculate gross and net debtors? What is the main difference between that? Is it due to the provisions or how...

Yes. It is based on the PCL provisions.

Net of provisioning and without provisioning.

Gross debtor is our receivable bill outstanding amount and the net debtor is after the PCL provision whatever net debt is outstanding.

[Operator Instructions] As there are no further questions from the participants, I would now like to hand the conference over to Ms. Deepti Mehra Chugh for closing comments. Ma'am, over to you.

Thank you so much for your time. For any further questions, you can connect to me or can go to our website for further details. Thanks.

Thank you very much. Ladies and gentlemen, on behalf of Newgen Software Technologies Limited, that concludes this conference call. Thank you for joining with us and you may now disconnect your lines.