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

I now hand over the call to Mr. Hardik Sangani. Thank you, and over to you, sir.

Okay. Hi, everyone. Thank you, Malika. Good evening, everyone, and welcome to the Q4 FY '21 results of Newgen Software Technologies Limited. I hope everyone is keeping safe and are well. Connecting with me today from the management side is Mr. Diwakar Nigam, Chairman and Managing Director; Mr. Varadarajan, Whole-Time Director; Mr. Virender Jeet, Senior VP, Sales and Marketing and Product; Mr. Arun Gupta, Chief Financial Officer; and Ms. Deepti Mehra Chugh, Head, Investor Relationships. I now hand over the call to Ms. Deepti for further proceedings. Thank you, and over to Deepti.

Thank you, Hardik. Good evening all, and welcome you to the Q4 and full year results of FY '21. I hope all of you are keeping safe in these difficult times and following the COVID protocols. Connecting with me virtually is the Newgen management. Hardik has already introduced them to you. Before we move on to the discussions, let me highlight that this call may contain certain forward-looking statements concerning Newgen's future business prospects and profitability, which are subject to a number of risks and uncertainties, and actual numbers could materially vary. 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 these statements made from time to time by or on behalf of the company. I would now hand over to Mr. Nigam for presentation of the results. Thank you.

Good evening, everyone, and thank you for joining us at our Q4 2021 post results conference call. These are difficult times as we witnessed the second and the third wave of COVID-19 across the world. I trust you and your family members are safe and hope that you are all following COVID protocols. Such times test the strength of people and enterprise, and we need to collectively work towards overcoming the situation. Safety and well-being of our employees and their families is our first priority. During this last year of COVID, we have had our share of setback, but our COVID volunteer team have done an exemplary work in supporting each and every member of Newgen family from providing medical and financial assistance, arranging doctors, consultants and beds and especially taking care of their family members and loved ones as well. I appreciate and salute their spirit. Further, we are also collaborating with multiple hospitals and other agencies to organize vaccination camps for Newgenites and their families across multiple locations at our cost. We are continuing our operations in a remote working environment since the past 1 year and also designing our organization to become more resilient and agile. We are also working on building an efficient, hybrid organization that will bring forth increased productivity and just provide better work-life balance for the employees. We are transforming complete work culture to a more result-oriented one and HR admin to become touchless but more responsive to Newgenites' needs. Our focus has been on ensuring uninterrupted and quality service to our customers, and we have a comprehensive and fool-proof program in place to ensure this. It includes synchronized cloud-based continuity strategy, product-based implementation framework and development of support zones with direct business in multiple countries. During this COVID time, we have not only supported our customers remotely but also build new solutions for them to fulfill their fresh requirements. We have received encouraging appreciation from our customers across the board for our continued support. Results of FY '21. Coming to the results in FY '21, we have shown a resilient performance and clocked revenue of INR 673 crores. We are supporting about 550 active customers across 72 countries for their mission-critical mode application. We continued to witness business momentum and expanded customer engagement. We are happy to share that U.S. is now our largest revenue contributor and one of the fastest-growing markets at 31%, growing at 16% Y-o-Y. Our subscription revenues witnessed a growth of 19% during the year. Our overall annuity revenues remained consistent, contributing 58% of the revenues. However, our support services revenues have been impacted due to the shift from on-site model, as we have mentioned in the last few quarters as well. But still, margin profile of offshore support is better. The important thing is transitioning to subscription model. I think we have been transitioning from our existing model of new license revenue and ATS to subscription-based revenue with most of our new customers. Even for our existing customer, wherever possible, we are building additional annuity-based revenue model. This model will start revenue optimization plus maximization over next few years. We believe, in time, we would be able to transform most of our existing customers also into cloud/on-premises subscription models. This transformation would lead us to faster growth rates in coming years. In last year, we added 67 new logos under our umbrella. Many of our new logos are based on cloud subscription, and hence, their real effect is expected to be reflecting in the coming years. This year, some of our customers have requested for deferment of annuity payments due to financial difficulties in their countries. We hope that they would come back once the normalcy occurs. Enhanced product platform. I think this year, we worked very hard on our platforms' products. And Newgen enterprise content services, low-code application development and personalized communication management platform, all are achieving better industry recognition from customers, analysts and, most importantly, our GSI channel. Our natively developed product platforms are ideal for digital transformation. They complement each other for building end-to-end digital solutions for enterprises. They continue to be leading in their category. Prominent industry analysts have taken notice of our products and innovation. During the year, company appeared for the first time in Gartner's Magic Quadrant for enterprise low-code application platforms as a niche player. It also has been positioned as visionary in Gartner's Magic Quadrant for content services platforms. While most of competition is -- most of our competition is with companies that have accumulated products bought from different companies at different times on different technologies and refurbished to mix and match. Newgen's brand product platform are built on a unified architecture, ensuring compatibility and seamless integration. Our customers as well as GSI partners are appreciating our offerings because of multiple reasons: homogenized cloud offering of combined solutions as needed; easy integration into our more platforms; flexible and comprehensive support; availability on AWS as well as Azure platform. Newgen makes continuous investment in R&D, has a strong team of about 470 employees, which constantly focuses on various research and product development initiatives and enhancement of product portfolio. We have been granted 3 patents during the year, taking our total patent grants to 18. In the past year, we have made various enhancements on our low-code development platform and with improved user interfaces. We have also worked on our new content services-based ECM platform for cloud deployment this year. As an organization, we have been using a named account approach for enterprise sales. Majority of the sales traditionally have been to our direct sales team comprising of about 300 people supported by large network of channel partners. In terms of verticals, banking and financial services, government and PSUs and insurance were the key drivers throughout the year. We have more than 15 accelerators in these areas that are matured and are being used in many organizations. This year as well, a new accelerator for trade finance system in banking has been added. Over the last 5 years, Newgen has successfully implemented over 500 accelerator-based solutions for our large customers. We have achieved the desired results for our customers and are working in mission-critical mode 24/7 at our client organizations. For the year, we are going to build a powerful Newgen brand and enhancing our marketing and sales organization. We are making aggressive investment in branding initiatives to enhance visibility of our product platform in mature markets. This year, we are planning to substantially increase our marketing budget and spending on digital events, digital presence and analysis -- analyst engagements. As we move deeper in mature market of North America, Europe and APAC, we are targeting Fortune 2000 enterprises through partnership with Global System Integrators. Our initiatives in enterprise markets are bearing fruit. Our products have found traction in these enterprises. We have also built acceptance from some of the largest GSIs. Their large customers have chosen our platform, and GSIs have successfully implemented the solutions using that. We are supporting these GSIs and modernizing solutions and building their rights using low-code applications. We are working extensively with sales and delivery leaders and consulting arms of GSIs. We have also developed world-class portal to educate, train and support our GSI developer companies. We have developed internal GSI and enterprise team and ecosystem. The senior sales leader has been added to orchestrate the enterprise and GSI sales efforts. We are also adding experienced and relevant sales teams in all major geographies. This year, we have won 8 large orders to GSIs, including a large deal win of the world's largest investment management company managing about 6.3 billion -- $6.3 trillion in global assets. We have also won a deal of a global life insurance group focusing on acquisition and managing of portfolios of life insurance policies. We are developing a strong and increasing GSI-based sales funnel. We are currently -- we currently have 40% -- 40-plus cases in different stage of discussion with GSI valued at around INR 140 crores. During the year, the company has also adopted a strategic approach to cost management and cash flow optimization. Our EBITDA was by -- up by 83% Y-o-Y at INR 192 crores. And profit after tax was up 74% Y-o-Y at INR 127 crores. Net cash generated from operating activities was INR 216 crores, driven by our consistent focus on liquidity, cash management and strong collection. We are optimizing our execution capabilities while continuing with long-term investments in R&D and sales. Currently, R&D expense comprises about 10% of the sales. Seeing growth potential in coming times, we will continue to increase our efforts and investments in these directions. As we continue to work on our debtor days, our net trade receivables have been reducing. As of March 31, 2021, it's INR 239 crores, which resulted in net DSO of INR 129 crores. Coming to the Q4 results. In Q4, our revenues witnessed a strong sequential growth, reaching INR 200 crores. EBITDA was up by 28% Y-o-Y at INR 66 crores. Profit after tax went up by 27% Y-o-Y at INR 53 crores. We made 17 new customer logos adding in the last quarter. Some notable successes include: 7 new logos in Americas region, largely in banking and financial services and insurance domain; a strategic project win for license and implementation at one of the leading private universal banks in the Philippines; and a midsized project for a Statutory Board of Government of Singapore. Given our product capabilities, a motivated experienced team, our renewed sales approach and continued investment, we believe we are well poised to capitalize the opportunity in the digital transformation space. With a strong balance sheet and cash position, we are now ready to make deep investments on various fronts across technology, sales and marketing for long-term growth. We will remain agile to address the challenges of the current environment and drive consistent and cash growth over the medium to long term. We are now open for Q&A.

[Operator Instructions] The first question is from the line of Hardik Sangani from ICICI Securities.

Sir, I have a couple of questions. So in terms of first, primarily as the U.S. economy has opened and the travel is in place right now, so how do we see in terms of our offerings or in terms of revenues going forward in FY '22? And secondly, as Mr. Nigam earlier mentioned about revamping or [indiscernible] making the GSI initiative, so incrementally, what are we changing in terms of our approach by partnering with GSI? And thirdly is in terms of the investments needed. So will it be more of an inorganic approach as we have a strong balance sheet in place? And what area specifically will we need to invest in next year to get towards the growth which we had for mid-teens or 20% earlier? Yes, that's it from me.

Yes, Hardik, thank you. This is Jeet. So you have about 3 questions. I think that to the U.S. and the rest of the -- at commercial market, things seem to be much better, and the markets seem to have opened up. And you can see that as part of our results also. Even last year, the U.S. for us has performed well. It has grown at 16% with a lot of cases. One of the issues which Mr. Nigam mentioned that most of the orders in mature markets are in subscription basis, so revenue is slightly back ended. So we think that the momentum of that growth, both in our banking and the enterprise space, both will continue. We'll keep on investing in our digital channels, keep on investing into our direct sales effort out there as well as the GSI effort. So we do expect that for the coming year, U.S. will be one of the primary growth drivers for us. On the GSI initiative, I think what is -- predominantly, what we have seen traditionally, as we explained in the call, traditionally, we are focused on typically the top-tier accounts in emerging markets, which is India, Middle East and APAC. And in U.S., we used to primarily focus on the mid-tier banks and which are typically in the, what you'd call, a range of [indiscernible] banks. Now with the GSI initiative, we have gone aggressively, and we're focusing on globally the Fortune 2000 companies. The Fortune 2000 companies, the sales cycles, if we go direct sales, is going to be much longer and more complicated. While on the other hand, GSIs, all the GSIs, major GSIs have got great success stories with the Newgen platform. Over the last 5, 7 years, we have implemented -- we have gone jointly to customers, but they have been more tactical. Now I think there's a strategic push to create that as one of the top growth drivers and -- as the sales drivers. And last year, we got our success stories. We've got 8 wins. And coming this year also, we expect this to be a big part of our growth this year. On the investment front, I think our predominant investments are still on the areas which we are concentrating on. That's about getting the brand up in front of Fortune 2000, getting the investment with digital channels, ramping up sales structures for GSI as well as the product portfolio. So investments are still in the organic shape. We are not still -- whenever we consider inorganic, we'll let you know. But right now, there is enough leeway and enough scope on our -- what is on the table. So we can come back quickly to over 20% growth. And even then, the idea is to push it further to more than 30% growth. Does that answer your question, Hardik?

Yes, yes, that's actually answered. So -- and secondly, in terms of India-centric business, so as we are seeing COVID second wave, so are we seeing any additional stress in terms of our receivables or in terms of conducting our businesses, especially within government and PSU side?

Yes. So I think we are -- I think last 3 years, we were very conservative on the order quality and when we're pursuing the government businesses, as the kind of we don't take undue risks. But the overall market you see in India, we have not witnessed any growth. Most of the growth, we have a small single-digit growth, has come from our existing accounts. And on the new logo acquisition, things have started moving up. But again, we are in this middle of kind of a very big crisis in the second wave. As the year unfolds, I think over the next, what we call, third and fourth quarter, the India should start picking up because, inherently, there's a huge demand for our kind of products in the digital area. So the opportunity is there on the table, but I think we need to have the market still to realize. On -- in terms of any risks on the collections and other things, I think we are taking care of that by the better business practices. And you will see in spite of the territories like Middle East slowing down and India slowing down, we have still done much better on receivables and brought down the DSO significantly as committed.

[Operator Instructions] The next question is from the line of [ Agam Shah ] from [ Raj Trading ].

Two questions, sir. I think as you just said to previous participant's question, sir, that the India has relatively not grown that much, and you're seeing much of demand. So can we say that now going ahead, India might outperform vis-a-vis this year?

Sorry. If I get your question right, I think we don't see still -- we still see the mature markets outperforming as part of our overall growth strategy because that's where the larger market space is available. But we do expect that India to revive back and come to its traditional growth rates. It may take a few quarters. As soon as things start improving, I do think that India will improve. But broadly for us, as a company, you will see higher growth rates coming from more mature markets.

Okay. And yes, margins will be sustainable vis-a-vis?

I think this year, there is a -- because there were 2 large heads. So there was a kind of an optimization in SG&A because of most of the operational activities, and there's a huge optimization on travel. Travel is sculpt by kind of our sales and marketing and service element in travel. I think some of that optimization will carry forward and will remain as the business model has transformed. But the margin -- the EBITDA margins and the PAT margins, EBITDA of 28% is not sustainable for this year because we'll have to invest in growth, we have to increase the manpower salaries. There are cost pressures that...

What will be the sustainable number?

I think we have been always projecting that we should be able to come to a sustainable number of between 23% to 25% EBITDA margins and somewhere between 18% to 19% PAT margin. And that's what have been our projections before the last 2 years of COVID, and I think we will attempt to be around that number.

And on top line on the business front, we should be able to grow by 15% to 20% at least this year, right?

Yes. So we are -- so I think it may be very difficult to predict an exact number, but I think this year, we are projecting for a growth year. We are not -- it's not going to be like last year. We were looking at more about managing business and preserving cash. I think this year, we are investing in growth. And the early signs are we should be able to show growth in coming quarters.

Okay. And as a percentage of revenue, SaaS is already, let's say, around 7%. So where do you see it going in the next 2 to 3 years?

Yes, yes. I think substantial, yes. I think we should look at -- rather than the SaaS, I think we should look at the subscription because that's the nature. It's that kind of annuity, whether it's increased annuity or in a cloud annuity. So we have roughly around INR 200 crores of what you call subscription revenue. And we think that this will start growing that at a higher -- at least about 20%, while the SaaS may grow at more than 30%, 40%. But overall, subscription will grow above 20% year-after-year and even can accelerate.

So maybe -- can it become 50% of the revenue by the next 3 years, the subscription?

I think yes. That -- see, that's what we are trying for. I think the next 3 years, we would expect that subscription revenue should become -- today, I think if you look at our annuity revenues are at 50%. But those annuity revenues do also have a component which is called support, which is support services, which has got what we call the service margins profile, but while annuity revenues have got product margins. So together, we are at 58%. But the idea is the subscription part should reach 50% in next 2 to 3 years.

So when this happens, the margins will also expand?

Yes, so -- but I think margins also means higher investments in sales and marketing, higher investments in product and R&D. So we should target around 25% EBITDA margins, and beyond that, we should keep on investing in growth. That's the idea.

Okay. And any new hirings, or all done?

New hirings?

Any new hirings, which I believe you did 2 new hirings last quarter?

At the senior management -- at the senior management level.

No. See, I think it's not an end of it. So continuously, as we are growing, we'll keep on looking at that. But they're not substantial. They are part of the organic budget which can be incorporated there. There's nothing drastic, but we'll keep on hiring some more senior people as the year goes by.

[Operator Instructions] The next question is from the line of [ Jitendra Chawla ], an individual investor.

A couple of questions. First is that we've been generating very strong cash flows last few years. As a result, our -- including our financial investments, our cash pile is almost like INR 400 crores, if I'm not mistaken. And our business doesn't require a lot of investments to grow, but yet we are very -- paying very small dividends. And I'm not sure whether you've considered any buybacks. But if you're not doing any acquisitions, is there any plans of doing buybacks or increasing the dividend payout? That's number one. Number -- second is on your U.S. business. Last year, we benefited because of this Paycheck Protection Program, and I'm sure we acquired a lot of customers through that. What has been the engagement after that with these customers? Are we seeing new opportunities with these clients?

Yes. Thanks, [ Jitendra ]. I think first on the cash flow, I think we are not at INR 400 crores. We are more at around INR 250 crores, INR 280 crores. See, I think we have given the interaction that overall, for our kind of a company, we should build a reserve roughly around 6 months of our costs. So we are almost near that now. And I think in this uncertain time, which was like this year, I think we didn't consider getting that -- we did increase the dividend payout ratios but not -- but going further, you are right, if we don't have any plans for inorganic, we'll be considering looking at ways of getting the money back to the shareholders. So that's for the first question. For the second, you're right, on the PPP side, most of the logos on PPP side, we have already started generating opportunities. In fact, we are in the process of closing a few of them. All these banks are showing further potential which is giving us opportunities. So the business we got last year on the PP account was predominantly on acquisition. It was not a large number. It was less than $1 million -- $1.5 million, which would have been the total business value on these accounts. But their potential over this year can be a few more million.

Okay. Great. If I may ask one small question again, in your earnings release, you mentioned about a large transformation deal with the PSU bank. Can you give some more color on this?

Large transformation deal with the PSU bank?

No, it is not PSU bank. It is a U.S. investment house.

U.S. -- okay. So basically, these are -- when we are talking of these clients, these are typically Fortune 2000 clients which were outside our purview of direct sales. It was very difficult to get in that. Now with the GSIs, we have been able to take into those accounts. And the idea is that once you break into that, the per account potential realization over next 3, 4 years can be much higher than our traditional account base. So I'm sorry, I can only delve on that much because these all banks' names and the -- what we do for them is quite under confidentiality.

If I may get a clarification on this front, yes, Mr. Nigam mentioned, I think we have some INR 140 crores of orders under discussion under the GSI route. What would be this number last year? If you can share that?

I don't have the number, but I can get in touch with Deepti, and she can share that number.

The next question is from the line of Palak (sic) [ Shalabh ] Agarwal from Newgen (sic) [ Snowball ] Capital.

This is Shalabh from Snowball Capital. Sir, I have a question on the GSI sales that we are trying to achieve. I would believe that these GSIs are not exclusive, and they would be carrying products from our competitors as well. So what makes these GSIs put forward our products compared to our competitors and we are putting to our clients? How does that work? If you can give some color on that.

Yes. Shalabh, thank you for asking that. So Shalabh, it's true. So the GSIs are traditionally -- they have been carrying products, the ones we have, like they have products from Appian, Pega, OpenText, and they've been carrying to these global customers. What has changed over a period of, first of all, with organically over the last 5, 7 years, we have generated a lot of success stories with the GSIs on different accounts across the globe. So their confidence in our product and platform has really grown. We have excellent success cases. Finally, the GSIs also are looking at a great piece of technology. But beyond that, they're also looking at the customer success because they have a surety that the use cases will get fulfilled. So what has happened that as a part of that, our relationships have really grown. So we are concentrating on a city of 4 to 5 GSIs, where we are having more strategic tie-ups, where they're taking our products to their practice areas, having the kind of sales targets on our products and really looking. And now why should they take our product in with their product? Because there is -- as Mr. Nigam clarified in this call, it's a great value prop. We have -- we are one of the few players who have multiple products from the same stable build on a same platform and technology, which are used in a single digital transformation case. So what happened to complexity for the end customer and the GSI drastically reduced and, thus, reduce their cost of ownership. Very, very compelling value prop. And some of the cases that we have done that is around ECM modernization, implementing low code for new application and digital solutions, customer communication, transformation of those projects. So we've got good stories. And it's not an easy journey to say why GSI would take our product, but I think the hard work has been done over 5, 6 years. Now we are showing -- seeing the green shoots of that what we have invested over 5, 6 years with these GSIs, building the credibility. So we are one of the few companies who are consistently in Gartner and Forrester Magic Quadrants. That gives the comfort both to the customer and the GSI. And then with our assurance and a strong relationship in India, which is a back-end tie-up we have, I think that is what is helping. I hope that answers your question.

Yes, that answered. Sir, a related question to that is, so if you can also provide us some color in terms of how does the revenue they've shared or what are the chances that GSI -- we end up paying to GSI when we go through that route? How does that work?

So I think very small. I see it's typically many multiple reseller models or reference models. So predominantly, GSI's interest is not on the sale of licenses or the revenue over sales of licenses. So GSI's interest is around the services around that because in a global company, if they roll out licenses for $2 million, they may have a $50 million service around that. So their predominant business is around their larger ecosystem of supporting infrastructure services, global rollouts, while our interest is around subscription and licenses. So there's a clear cut win-win. And finally, we don't have any -- finally, our billing is to the GSI or to the end customer in certain cases. So we realize our part of the revenue.

Okay, okay. And sir, lastly, on the -- if you can give an estimate how much of our sales currently to last year would be coming through GSI in terms of percentage?

I think right now, it's very small. I think just last year, we have 8 orders coming from this bucket, which is a very small part of the business. But coming in few -- next 3 years, this can be a substantial part of our business. In terms of values, you can write to Deepti or investor relations. They can provide you more information.

The next question is from the line of [ Ashok Kumar ], an individual investor.

Yes. This is [ Ashok ]. Sir, I have a couple of questions, actually. The first question is on the number of active customers. So when I look at the trend of the number of active customers from FY '19, so FY '19, we have active customers of 540. In FY '20, we have 560. In FY '21, we have 550. So if I see the trend actually, in spite of adding the new logos of 81, 71 and 67 during the last 3 years, still we see the number of active customers as on date, we are more or less there where we have started in FY '19. So isn't it reflecting that the customer attrition rate is going out of control instead of adding the significant amount of new logos every year?

Yes. So [ Ashok ], I think it's a good point you made. So I think you can understand there are 2 things. One is when we are talking of active customers, we are talking of customers who provided us any kind of a revenue in last 12 months. So some of these customers which are typically -- I think what has happened, in fact, this year and some part of last year is that the customers who have -- who are smaller customers with smaller ATS renewal [ driver ]. So ATS could be anywhere from INR 2 lakhs to INR 10 lakhs, to INR 5 lakhs. There has been a higher churn this year, as Mr. Nigam also put up in his call, that there's been kind of a change where a lot of these ATS renewals could not happen. So there's still the drastic drop in the -- at customers where revenues are like in the INR 20 lakh or less than INR 20 lakh range. But if you look at customers who are above INR 50 lakh, and we have hardly any churn out there. We have almost a customer retention rate of 90%, 95%, around anywhere between INR 50 lakh. And when it comes to customers about INR 2 crores, then there is almost 97% retention rate. So on the business side, it has not hurt us. But on the net customer churn, you are right that there are smaller customers who have not been able to renew their ATS. And some of these have been very -- customers have been very partner-driven in territories like Africa or Middle East, where we have not been able to access and even push for renewals of these kinds, is our inability to do that. So we are looking at -- when we look at it as a company, as the churn rate, we look at customers above INR 50 lakhs and what are the churn rates out there. And out there, the churn rates are very negligible for us.

Okay. So if I understand it correctly, it's basically on the number of customers that we may feel that the customer attrition is there. But if you look at the value, then actually, there is no real churn in terms of the customer.

Exactly, exactly. On the revenue side, there's hardly any concern.

Okay. Sir, my second question is on the debtors or the trade receivables, which Mr. Nigam has mentioned at the introduction of the call. Actually, there is a note that some of the customers have requested for the payment delay or -- so can you give some color, basically? Is it just a payment delay? Or -- and in terms of the percentage of the total trade receivables, how much it would contribute something around that?

See, I'm saying is -- so none of those amounts are any material amounts right now to be bothered about. So if you look at our -- in spite of delays, these delays have been all in case of these minor customers of ATS renewals, which I was just talking about, where the churn rate has happened. For our major customers, we don't have any concerns about either ATS or renewals or payments because these are typically larger enterprises, banks, insurance companies. I don't think those are issues about. Of course, do -- some customers have requested for adjustments, reinstating, making -- breaking a single payment into 2 payments or 3 payments or taking a discount of 3%, 2%. So nothing of a value which is material which I can share with you.

Yes. Actually, this, we have got a sense by looking at the DSO, but just wanted to know in specific if there is anything to know on that one.

No, nothing. [indiscernible]. Yes.

Yes. And then the last part of my question is basically on the revenue growth. And of course, when we talk about the revenue growth, obviously, it usually depends on our sales efforts and also our relationships with the GSIs. And as of now, we do understand, based on your previous statement, that as of now, the GSI contribution towards the total sales of the reported numbers of FY '21 is very small, right? So going forward, can we say our sales effort can brought a similar kind of revenue, and whatever the revenue we expect from the GSIs will be incremental to over and above the existing sales supports?

Absolutely. So that's the idea. So we have our own direct sales channels on which we have been able to sustainably deliver a 20% growth. So our plan is quickly to come back both in India, Middle East, Africa and APAC and the mid-tier enterprise bank in U.S. still over 20% or slightly more than that growth rate. And all other channels should keep on adding to that growth. So the issue is we are still slightly on an uncertain time for next 1 or 2 quarters, but I think as somebody else mentioned in the call, the other markets are opening up, we should be seeing progress out there. And we should see as an -- GSI channel as an additive channel to the overall traditional revenue model growth.

Yes. So if I understand correctly, the direct channels -- the direct sales channels target itself, and we are keeping it at around 20%, in line with our historical efforts. And over and above that, the GSI channels would add to that number. And I understand the tougher times, but fortunately, the mature markets are really out of the -- already out of or maybe they are mostly coming out of the crisis, so I think that should work.

Yes, I think that's fair. The only one driver you have to understand, most of the revenue in these cases is slightly back ended because of the subscription. So actual effect on the revenue side may take at least 1.5 years to 2.5 years, 3 years to start reflecting because even if you book a $10 million order book, your revenue for that year may be only $1 million or $1.5 million.

Okay, okay. But on an overall basis, we are confident that the current year, we should be coming back to the growth trajectory of Newgen where we are initially.

See, right now, it's very difficult to comment with. I think the only thing that I would like to say is that this is going to be planned -- this is planned for a growth year or planned to be -- allow to see how close can we reach over 20% or near around that. But I think right now, this is going to be more of a growth year plan.

[Operator Instructions] The next question is from the line of Sachit Motwani from Param Capital.

Yes. I just wanted to understand a little more on your GSI like strategy, which others have also been asking on. Sir, you've mentioned the GSI-based sales funnel of INR 140 crores and 40 cases. So that works out to be just like $0.5 million, like let's say, per account. So is this more because of the subscription revenue? Or like these are only the subscription amount you've mentioned here, and the actual deal size could be much higher than $0.5 million?

Yes. So you're, Sachit, absolutely right. I think this -- typically, the order booking values for every GSI case is much larger than that. So what happens in some early stages of [indiscernible], the numbers are not very accurate about unless we know whether the deals are going to be -- customers are going to sign on a single-year deal, multiyear deal. Generally, on the subscription side, you will have 2- to 3-year deals. So these amounts may be initially the sales best reflection of the first year's revenue which you can get from that.

Okay. And what -- and like what could be the average duration of the deal that one can assume?

So I -- what it matters predominantly in the perception, the planning on the customer side is around 6 to 7 years of when they're looking at investing in this kind of a system, at least to begin with. But the orders are generally released from 2 to 3 years; in some cases, for all 5 to 6 years.

Understood, understood. But like so potential revenue, like could be $4 million, $5 million, but like 1 year of the revenues probably could be $0.5 million, $1 million like that?

Yes. So initially, the initial subscription deal could start roughly around between $300,000 to $700,000 and then can grow to around $1 million of annuity in 1 year's time. That's the kind of potential we are looking at larger GSI deals.

The next question is from the line of Hardik Sangani from ICICI Securities.

Yes. So just 2 questions. Sir, in terms of our employee base, so incrementally, we have not added any major headcount this year. So if you are expecting a growth in terms of back to what we used to earlier, so just wanted to know what would be the typical hiring plan. And secondly, in terms of increasing attrition among -- even among the IT services or technology players. So what first steps or what -- will we need to hire more than what we used to earlier to manage those attrition levels? And secondly, due to the second wave, so is employee absenteeism or not availability of them becoming an issue in servicing our clients? That's it from my side.

Yes. Hardik, a couple of things. So one is that there are a couple of things which have happened. One is the operating model of doing the business has changed. So there has been some amount of inherent efficiency which has -- we have been able to all drive. So for next year, though we will look at the growth rate, but the net addition in manpower may be more flattish or maybe within the range of 100, 150 people, overall addition of people, not beyond that. On the cost of attrition across all -- I think every industry, in fact, the whole IT is facing that challenge right now. There are higher attritions and higher cost pressures. So we have already taken actions about that. We are also looking at -- we have upgraded salaries on November. We have upgraded salaries of some people again in April. We'll go in for another upgrade in sometime in the middle of the year, this year. So we'll keep to make sure that our talent is protected on that. And from the hiring construct, we are focusing a lot on our campus because we have -- we need a specialized skill which is around our products and services. So that's where we are concentrating. We'll be looking at increasing the kinds of hiring intake at the campus level, so that we have a lot of capacity over the year for both as well as growth in managing the business. Sorry, I think you had -- the last part of your question was about the concern about, okay, the COVID. In the month of April, I think there have been a week or 10 days where there was kind of an impact on day-to-day operations of business but especially for the projects which are long-running projects, not in the cases of supporting customers and enhancing. So I think all the customers across the whole globe have been very sympathetic about that. They have asked their teams to take time. They have advised -- tried to help us in many, many ways. I think we have been told those 3 weeks have been difficult for everybody. I think now probably those couple of weeks will be difficult in places like Chennai or Bangalore. But I think beyond a few weeks of impact, which also customers do appreciate, and we have been able to recover most of it over the coming weeks, we don't see that as a lasting issue.

The next question is from the line of [ K. K. Garg ], a shareholder.

This is with regard to the comparative ROE which the company is earning and the other companies like Tata Elxsi and Tanla Platforms. Their ROE is about almost twice and thrice. So what is it that they are doing and what is it that we are doing wherein our ROE is not coming to their level? And we have a cash of about INR 250 crores in hand. So whatever issues you -- your company has, the same issues the other companies must be also having.

Okay. So I think -- I'm sorry, I am really not educated to the ROE question. I will ask Arun to probably answer that.

Yes, sure. So [ Mr. Singh ], so I think as far as return on capital employed is concerned, so I think currently, what I think we have talked about also that, currently, we are conserving cash for next 6 months' expenses, and that is how we look at it. And in coming years, obviously, we can look at different ways to distributing cash.

No, that is all right. What I'm only saying is that those companies that in the -- we are a part of industry. So how is it that they are able to get a better, twice and thrice ROE, whereas we are only able to get only 1/3 or 1/2 of it. That is my question. So I think we need to look at that. Is the company looking at it?

So sir, I think, just to add out there, the return on capital employed this year, we had around 27.9%. And we -- I don't know about the other organizations, but each is at a different stage, et cetera. But we internally keep looking at how to improve the return levels both at the capital employed and equity levels for the future years.

Yes, because it's a total financial management, which is the work of the CEO or CFO of the company. And I think the company needs to look at that as to what is happening. And I think that's a point only that I wanted to make.

The next question is from the line of [ Sidan Sinki ] from Lucky Investments.

I'm [ Sidan ] from Lucky Investments. First of all, congrats on the grant of patent for the new image processing system. I think that's interesting because I believe image processing is still a largely unexplored territory with widespread day-to-day applications, and it's got a lot of potential. My question is, which are the type of projects and/or client base and geographies that we will be targeting? More importantly, what is the revenue visibility as far as patent monetization is concerned?

Yes, [ Sidan ], so thank you. So if you look at most of our content management technologies, we'll have a strong image processing components on that. And a lot of our IPR generation activities are around that area. So when you talk about image processing, the current patent around binarization is about how effectively can you extract information about mobile data. So this is one of the patents. And of course, there are many more patents in the same area. Probably, they end up becoming a part of our portfolio stack, where we are able to protect our long-term investment, our interest in technology as well as differentiate the product in front of the customer. There is no direct correlation between patent and monetization of patents. We are not looking at -- that's not a monetization to us. It is typically over a longer piece of time to make our -- able to stand, differentiate in the market and protect our interest against vis-a-vis the competition. So these -- the image processing technology comes in our content management suites. It comes in our mobile capture systems, our scanning systems, which are sold across the globe for almost all of our solutions. I hope that answers your question.

Yes.

The next question is from the line of [ Anirudh ], an individual investor.

Congratulations on a good set of numbers. My question is on the SaaS and subscription. I wanted to know if there is a nonrecurring engineering charge, assuming that there is this low-code platform which still has to be customized for every customer. So how is that accounted for? Is that baked into the cost in terms of the total term of the contract that you have? And in that line, I would also want to know what is the -- like from that angle, I wanted to know, generally, what is the term of the contract and things like that. And second thing, in your Global System Integrator kind of business, so the system integrator takes care of the NRE or you take care of the NRE?

Yes. So thanks for the question. So when we are talking about SaaS or subscription part of the revenue, we are talking of the revenue streams which have got no service components attached to it. These are typically high gross margins. So you're right, for some complex applications, whether they are on low code, they still need to be customized, integrated for the platform. And there may be service orders coming for [ updated share ] of that. But those are streams we treat outside our SaaS and subscription revenue. So contracts could be more complex with a customer that it could have an element of SaaS revenue as well as element of service components or an implementation component. For GSIs, we are predominantly focusing on only the subscription and the license part of that. While as the implementation as well as the long-term support and announcement is handled by the GSI.

Okay. Now in general, the GSI part, so the billing -- you would bill to the GSI or to the end client? And like who would be your customer?

So in this case, see, for any software companies...

I'm not -- I don't want a specific answer, but I want a general answer about that.

No, it doesn't matter. I think the specific answer, if you look at for any product company, I mean the customer acquiring, the end customer is the end customer. So there is direct visibility of Newgen in products and platforms because they're intimated by the customer apart from the GSI. So GSI is also helping the sales cycle, but the decision maker is customer. So the contracting sometimes is through GSI because GSI has got the whole sole outsourcing engagement. But sometimes also the customers see that the product life cycles are even beyond the GSI life cycle. So they end up having direct contracts with the customer. So we have both models today exactly in the market where we are -- eventually GSI is carrying us to the customer, but the customers are finally contracting directly with us, or the contract is getting routed through the GSI.

Okay. And second thing I wanted to know generally on the SaaS business. Now more in terms of how variable to the infrastructure costs, like there is -- in SaaS business, there is that -- the cloud infrastructure cost, right? Now is it directly linked to the contract term? Or are you variable to that particular cost? I mean, maybe you can give an idea about whether you use public cloud or your own cloud infrastructure for...

We are hosting on AWS and -- see, we are hosting on AWS. Broadly, the mechanics is because we want to make sure that the overall underlying interest rate structure cost for -- is less than around 15% of the overall subscription cost.

Okay, okay, okay. So that's still variable then. So if the contract rolls, you can always reduce the cost of that particular individual...

Yes, yes. So there's a variable -- it's a variable cost directly. And then there is an economy of scale as you go more and more...

Absolutely. I understand, yes.

Yes.

Right, right. Yes. And congratulations on good set of numbers.

Thank you.

Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.

Thank you so much, everyone, for joining us for the call. For any further queries, you can visit our website, or you can connect to me. Thank you.

Thank you. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.