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

Ladies and gentlemen, good day, and welcome to Newgen Software Technologies Limited earnings conference call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Hardik Sangani from ICICI Securities. Thank you. And over to you, sir.

Hi, everyone. Thank you, Ayesha. Good evening, everyone, and welcome to the Q1 FY '22 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, our Whole Time Director; Mr. Virender Jeet, Senior VP, Sales and Marketing and Products; Mr. Arun Kumar Gupta, Chief Financial Officer; and Ms. Deepti Mehra Chugh, Head, Investor Relations. I now hand over the call to Ms. Deepti for further proceeding. Thank you. And over to you, Deepti.

Thank you, Hardik. Good evening, everyone. I am Deepti, Head, IR Investor -- Head, Investor Relations, Newgen Software. And I welcome you to the Q1 FY '22 financial results. I hope everyone is keeping safe. Before we move on to the discussion, let me highlight that this call may contain certain forward-looking statements, which concern Newgen's future business prospects and profitability, which are subject to a number of risks and uncertainties, and the actual results could materially vary from these forward-looking statements that are made. Past performance may not be indicative of the future performance. The company does not undertake to make any announcements in case any of these forward-looking statements become materially incorrect in future or update any forward-looking statements made from time to time on or by behalf of the company. For any 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, post which we will have the Q&A. Mr. Nigam?

Good evening, everyone, and thank you for joining us at our Q1 FY '22 post-results conference call. I hope you and your families are keeping safe. I'll come straight to the results. We are happy to announce a robust growth quarter. We witnessed accelerated and broad-based growth in revenues and in profits in this first quarter. Revenues were at INR 160 crores, witnessing a growth of 21% compared to Q1 last year. Revenues across all geographies witnessed growth. EMEA, which was slow last year, witnessed a growth of 57% during this quarter. APAC witnessed a growth of 45%. U.S. and India grew at 5%. In U.S., many of the cloud digital transformation project are back-ended in nature, and this would take time to reflect in revenues. As an organization, we are staying focused on tapping the growth opportunities across digital transformation in enterprises. We understand the urgent need for expediting digital transformation initiative, and we are here at every step to help organization successfully implement this. We are a reliable and stable partner for these enterprises. We saw continued strength in demand for digital transformation initiative across various segments: banking and financial segment, services, government, PSU and health care, one of the fastest-growing segments during the quarter. We won 11 new customer logos in the quarter, notably in Middle East, APAC and U.K. region. Some of these logos are in the process of being built currently. Some notable success stories this quarter include an inclusion of an agreement with one of the leading banks in the Middle East region for supply of software licenses, ATS implementation and other support-related services. The total size of the project is $5.9 million, spread over 3 years. We are working with another large financial services group in Finland, which is a provider of comprehensive range of banking and insurance services for private and corporate customer. We are also undertaking a project for a federal statutory board body under the purview of Ministry of Finance in Malaysia. As the markets are opening up, we hope to maintain the growth momentum. Our differentiated capability and deep contextual knowledge creates value for our customers as well as our partners. We are continuing our operations in a remote working environment as we prepare towards transforming to a hybrid environment moving forward. We hope an early return to normalcy, bringing employees back to office as vaccination gains pace. We have also been supporting them in every way possible, whether it is medical and financial assistance or any other form of support. Customer success has always been our top priority. Our major focus has been on ensuring uninterrupted and quality services to our customers. We recently concluded our 3-day virtual customer events, NewgenConnect 2021, where we interacted and engaged with the customers across multiple locations, including India, Singapore, Australia, Dubai, London, Africa and in the United States. We had sessions from the management, industry analysts, our customers and partners where they shared their experience with Newgen and views on digital transformation. And we are excited about that. We also unveiled our digital transformation platform, NewgenONE, a comprehensive low-code platform that is recognized by the industry. It automates processes using content services and communication management capability. NewgenONE simplifies complex enterprise wide business processes and information for superior employee and customer experience. We continue to invest for growth and work together, strengthening our industry recognition and position, especially in the mature markets. Our efforts transitioning to subscription model. Even in the last conference, I've been talking about this. Our efforts continue towards transformation to more stable subscription-based revenues. Our overall annuity revenue witnessed a growth of 20% during the quarter, reaching INR 105 crores and contributing 66% of the revenues. Our subscription revenue witnessed a growth of 14% and reached INR 54 crores during this quarter. SaaS revenues witnessed growth of 29% Y-o-Y, contributing 9% to the revenues of the organization. As I have mentioned last quarter, this model is expected to start doing the revenue optimization over the next few years. We believe that in time, we would be able to transform most of our existing customer also into cloud or on-premise subscription model. This transformation would lead to enhanced visibility and growth in longer term. Enhancement of product platforms. Globally successful enterprises are relying on NewgenONE to rapidly develop and deploy complex, content-driven and customer-engaging business application on the cloud. NewgenONE is natively built, unified low-code platform for complex, content-driven business applications, delivering modern customer experience. These proven industry products have been built over time and cover that wide areas of content services, process automation and customer engagement. We continue to make our products more intuitive, robust and comprehensive. We received 2 additional patent grants during the quarter, taking our total patent grants to 20 in India and in the U.S. We were granted patent for invention entitled "Online Collaborative Signing of Documents" and "Methods and Systems for Managing and Archiving Electronic Messages." These patents are part of our core areas of content management, enhancing our product capability. We have been consistently recognized by leading industry analysts over the years. We are happy to share that during the quarter, we have been positioned as a "Strong Performer" in Forrester Wave for Content Platforms, Q2 2021. Building powerful Newgen brand and enhancing marketing and sales organization. This has been our continuous endeavor. We are targeting to invest across growth opportunities this year, including strengthening the team, enhancement of our branding and digital presence. During the quarter, R&D expenses comprised about 11% of sales, and sales and marketing expenses comprised 20%. We have enhanced our system integrator relationship through exemplary cases and successful stories along with our partners in target markets of North America, Europe and APAC. We are targeting Fortune 2000 employees -- enterprises through these partnerships with system integrator. We continue to build acceptance from some of the largest players and their largest customers have chosen our platforms. And these system integrators have implemented the solution successfully. Profit and margin. Our EBITDA was up by 46% Y-o-Y at INR 22.8 crores, and profit after tax was up 137% Y-o-Y at INR 21.6 crores. Net cash generation from operating activities was INR 52 crores. As we continue to work on our debtor days, our net trade receivables have been reducing and were INR 192 crores at the end of the quarter, which resulted in a DSO of 100 days on the back of robust sales and collections. We continue to strengthen our balance sheet and cash position and 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 current environment and drive consistent and cash with growth over the medium to long term. That's all for me. We are now open for Q&A.

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

So a couple of questions, particularly within U.S. geography. So just wanted to know, have the spends been normalized towards software implementation and deployment, especially across medium -- small to medium bank and credit union? And how are they approaching low-code software platforms now? Has there been any particular change in their approach towards implementing your system? Secondly, last year in FY '21, travel expenses would have been hardly 1% to 2%, which in normal course is around 8% to 10%. So as developed economies open, how do we see this expense line item going forward? Mr. Nigam earlier alluded to hybrid growth environment. If you can throw some more light on it? And in the earlier quarters, you would have mentioned that particularly your India business would recover from second half onwards in this year. So is there any material update on the same? I have further questions, and I will come back in the follow up.

Hardik, thank you for asking these questions. So I'll just try to cover and if I understood right, you can tell me if I got it right. So about the U.S. banking and our credit unions out there, I think as you understand, we are pursuing direct go-to-market out there, where we are targeting this roughly around 1,200 green shoots, which is banking with our banks and credit unions. We are going solution-focused out there, and our -- one of our differentiator is the platform-based sales out there, where we use our domain knowledge and the low-code capabilities to the platform to deliver these products quickly to those customers. That has been one of the differentiating, and we are still going strong with that. Our implementation cycles out there have reduced from -- 2 years back, what used to take around 8 months, we've come to a few months now, 3 to 4 months, depending on kind of situation. So that has surely helped our cycles and our -- more and more customers are getting live, and they are becoming referenceable. So that's what I understood from the first question. I'll cover the rest. On the travel expenses, you are right. So travel expenses last year were a small part of -- they had come substantially down. So far, for the first 2 quarters of this year, we expect the travel momentum to remain as the same as last year, we don't see any substantial increase. But we do expect in Q3 and Q4, there's going to be incremental travel happening. Having said that, I don't think any time in future, in next 2, 3 years, we will be able to reach the travel volumes which we used to do because fundamentally, the behavior of this business also has changed. And a lot of things which we have to do on site now is happening easily remotely, right from sales cycles to education cycles to integration. So that amount of operating advantage will anyway be always in the business now, and that will reflect in some amount of gain in margins, which you have seen also previously. On the growth, as Mr. Nigam says, is that the growth is broad based. We are finding -- in spite of still the, what you call, restriction due to COVID on travel, we're still finding a lot of interest in cases. EMEA has recovered and has come back strongly. APAC has continued its growth momentum in spite of the COVID situation not being great out there. U.S., we have a strong funnel, but we did have some amount of slowdown in some amount of deal conversion. So we expect that momentum to keep on happening and we close more deals. So our growth in U.S. and India were more muted right now around 5%. But I think India is -- generally, we have said India, in the first quarter, we have been able to hardly do any business on the new logo side. But on the U.S. side, it is more to do with deferment of the revenue, which is slightly back-ended because of the cloud-based sales and cloud-based implementations. And on the India side, you're right. I think we had earlier said that India, we are not still feeling that it can come to a 20% growth. We are hopeful that over next few quarters, as things of COVID stabilize in India, we should be able to push the growth rates higher than the current rate, but it is still a story which is unfolding. Hardik, does it answer your question? Because there were many and...

Yes, you absolutely did answer my questions.

[Operator Instructions] The next question is from the line of Mr. Ronak Vora from AUM Advisors.

The first question was, and I think you answered it in the past. So what is specific about the company's business, which causes such a large seasonal change for the first quarter relative to the last quarter? Doesn't look like you have that many government kind of contracts, et cetera. If you just don't mind explaining why there's such a big variation where normally the technology services industry, we don't see such a large variation.

Thank you for asking that. You are absolutely right. And so the only difference what you ought to see, we are a company still where a large part of the revenue is license sales-driven revenue. And if you look at any company, which is doing the license sales revenue, there is a natural lopsided business, which gets aligned to the financial year, either of your customer financial years or your own financial years. That makes Q4 and Q3 slightly larger quarters for us. And it has been historic, has been for the last 10 years. In fact, Q1 has been -- hardly ever, we have been able to deliver any margins in Q1 where all the margins are unfolded in Q3 and Q4. As we have started shifting to subscription, cloud and more sales in mature markets, going from the traditional markets, we have seen this lopsidedness reducing. And with more and more subscription business and annuity business becoming a larger part of that. Today, the subscription and annuity, overall, becomes roughly around what -- around -- yes, so the 33% subscription and then with more ATS added -- so around 60% of our business is more what we call recurring business. So as this business move to 75% to 80%, you will see that lopsidedness further reducing. And we are also doing aggressive shift in more and more markets. We are going only for subscription sale rather than the jerky license sales. And we have made an internal plan. In the next couple of years, we should be able to smoothen out further. But this is the history of this company, this is the business model. And if you look at historical sales, we have -- the smallest quarter has been the Q1 because we have very few licenses out there in Q1 compared to the Q3 and Q4 licensing. I hope that answers your question.

It does. I think we'll just look at the numbers and maybe follow up if there's something. The second question was more in this context of this market. This light-code or low-code environment where it doesn't require that much detailed codification of the kind of solution. So can you give us some sense as to which is the sort of target size of the market that you are looking at with your solutions? So how large is the market? What is your current kind of share over there? How do you see that scaling up? And I know you mentioned your partner who's helping you kind of access that market. So how do you see working with them and in terms of growth as well as economics? How you will be sharing the revenues, et cetera?

So if you look at the area of low code is very wide. So enterprises globally are looking at -- when they are looking at their digital transformation cases, they are evaluating the low-code products and platforms to make sure that they follow very agile and a quick way of getting their solutions out to the market. So the horizontal market space for the low code is very, very wide. Traditionally, we start from the business process management market and content management market, which is roughly around a $28 billion industry. With digital and low code, they've not been very accurately estimated, but people estimate it could be a very, very wide market. So the market for us is we are dealing in the market wherever customers are looking at complex processes with complex content needs because these are our 2 very, very strong areas. We have traditionally been very strong in doing very complex business processes, and we are one of the leading companies in the world on content management. So wherever customers' digital projects or transformation projects need these 2 technologies, we end up being very, very strong. So this is across all industries, across all markets. And with the Global System Integrator, the initiatives which we have done, they have seen that these -- our products and technologies provide a great differentiation or great value to the customers when they take it. So it may be difficult to estimate the market size. Right now, I think we are not in also the shape of calling that we have a significant percentage of that share. This is a growing market. More and more customers globally are seeking to get low code. So maybe in 1 or 2 years, we'll have more accurate sizes and estimates of the market. Does that answer your question?

I have a couple of maybe follow-ups or clarifications if you could help us. So this market that you're targeting low code, how is it sold? Is it more sold as a SaaS or is it like a license? Or how do you put your selling model over there?

So it's typically all these local platforms are sold now in subscription model, whether it's an interim subscription or a cloud-based sales, both models exist. So lesser of license sale, but more of subscription sale or cloud sale.

Okay. And so this GSI, this Global System Integrator, that you have partnered with, is it sold by them and they do the other kind of integration services of your license? Or is it something that is sold on the strength of your product and they are actually more like a sales agent? So if the customer is paying INR 100 for a combined kind of solution, what part of that accrues to you and how much accrues to the GSI?

Yes. So generally, this initiative which we are doing with Global System Integrators, we are doing with multiple of 3 and 4 of them. So we are approaching Fortune 2000 as our target base because these GSIs have inroads on those customers. The idea is for us -- we still, as a product principle, have to do the platform sales. So we go along with the GSI and sell it to the customers. And GSI becomes our implementation partner because of the fact that they have seen successes over the last 5, 7 years with us using our platforms. For them, the revenue can be multiple times because the revenue comes from all the services along with the product as well as global rollouts. While our product licenses can be anywhere between $500,000 to $1 million to $2 million, they could have a multimillion dollar service team build over years around that. So they are just not reseller. They are the ones who provide the solution. They are the ones who will implement this product. We are the ones who will able to sell the license and sell our product out.

[ There’s so much ] you would do for these clients. Is it like you have a standard code and you just provide the interface to the customer who then access this based on a cloud? Or is there a reasonable amount of customization that you provide?

So what happens, these are platforms which have got all the ways of building systems over there. People can customize, configure these products, integrate these again in the ecosystem. What do you -- what a Global System Integrator would do, add services and then roll them out. So these are single software platforms, which same platform is sold to everybody. So the platform does not change, but the platform provides you framework to configure, customize, integrate that within the customer's ecosystem. Does that answer your question?

We would request the current participant to please come back in the question queue for any follow-up questions as we have several participants waiting for their turn. The next question is from the line of Deepak Poddar from Sapphire Capital.

So just wanted to understand if you kind of given any kind of guidance for this year in terms of growth and margins? Yes, that's it from my side.

Deepak, we don't provide any guidances. And the only thing we are saying that we have been maintaining a historical growth rate of around 20% for nearly -- apart from this COVID last 5 quarters, which have changed that. And our first aim is right now to come back quickly to that as soon as the market starts reviving or even in the current state if it became stable. So those are the plans. Q1, we have delivered more than 20% growth. In fact, on constant currency, they are more like 23% growth, which gives us quite confidence that we can carry some momentum for the whole year. Now -- but I think it's too early days right now to give a guidance on that. We expect this year to be a growth. That's the whole idea. This has to be a growth year for us. Then we should be able to come back to our growth momentum.

And in terms of margin?

Yes. So we -- I think we have discussed this margin issue many times if you're following. So last year, margins are unsustainable because there were a lot of costs which could not be incurred in terms of optimization, travel, manpower, SG&A cost. But going forward, we have always said that we should be expecting this to be having around 23% to 25% EBITDA margins and roughly around 19% to 20% margins. And we should be able to reach them in short period of time and sustain them.

[Operator Instructions] The next question is from the line of Rajesh Kothari from AlfAccurate.

Sir, is it possible for you to give a little bit more color in terms of the new clients wins? For example, last quarter, you won one of the largest fund globally. That is question number one. Second question is over a period of, say, 2 years, 3 years, how should we see the breakup between annuity revenue and subscription revenue? And the third question is, if it is possible for you to briefly highlight how the subscription model works?

Yes. So Rajesh, thanks for the question. On the new clients wins, roughly around 11 wins, and they were spread across places. And some of them, we also have -- we have very, very large deal from a financial institute in Middle East. We have some interesting wins in banking and insurance in APAC. And we have also some interesting win coming out of India. So we had a very interesting win coming in Europe through a Global System Integrator, a large group of banks in Finland. It was Finland. So these are broad-based wins. And these wins do reflect the kind of -- it is predominantly businesses in banking, insurance, financial services, government and some enterprises on the 2- to 3-year kind of horizon. So what happens is we are strongly focusing on growing the subscription and the cloud revenue part of it. In fact, most of the mature markets, 90% of our sales will be pushed through a subscription-based model. So we expect that the percentage of this revenue will considerably grow in the next 2 to 3 years because they -- this has been compounding revenue. It will be difficult to project exactly the numbers, but maybe we can -- if you contact Deepti, then she can give you more details over what's going to happen. All cloud and subscription sales are sold predominantly in a consumption-based model. So for us the most obvious consumption is PUPM, per user per month. So customers end up buying this platform and depending on their usage, they end up contracting for 100 users or 500 users or 1,000 users. And we charge somewhere -- anywhere between $50, $60 per user per month to $180 depending on the kind of components they are consuming. Does that answer your question, Rajesh?

So basically, as you move from annuity to cloud, your margins basically would improve?

Yes. So I think what happens is cloud -- so basically, we are trying to move from license to subscription. So both are mechanisms of license sales, so their margin profiles are same. But the revenue realization is very different. The revenue realization in license is upfront, so it is jerky. But on subscription, it is more smoothen out as customers start using and consuming. It's more like a rental, so he starts paying. So -- but on the -- what you call the margin profile, they are the same. In cloud, customer is using the same subscription license and cloud, then our costs are roughly around 10%, 15%. So the margin profile is slightly lesser than the license, but it's still a very high gross margin business.

Understood. So basically, just trying to understand your business model. In your annuity business, basically, so what is your license, whatever number of license you sell, there is one revenue? Secondly, is the maintenance, AMC kind of revenue and that gets featured into annuity, am I right?

Yes, you're right.

So once you have the subscription revenue, whether that part also would have AMC and that will also reflect part of the annuity revenue?

Exactly. So subscription, cloud, AMC, all reflect in the annuity part of the revenue.

Okay. Subscription also reflects in annuity? Understood. Understood. So basically, license revenue will reduce and subscription revenue will increase?

Exactly. So the license revenue may become stable or reduced, but we'll start pushing and making sure that all those things start coming more and more in subscription.

The next question is from the line of [ NG Puranik ] from Enam Securities.

I have a question on the low-code software. By definition, low-code software is built on an agile factory model. So we will have this large number of apps that are built, the APIs that are built. And the idea is to reduce complexity and simplify the whole process of software development. And it expands market and user base. And it also creates still economies. So in the process, what happens is you're expanding market in a big way plus the process of software development expands faster because you tend to create software in much lesser time, maybe 1:5, 1:10. So how does that get reflected in your P&L, balance sheet? In your P&L particularly? And also the TAM, the total addressable market, will it expand by 5x, 10x the big market expansion? So these are a couple of questions. Also, I want to understand what kind of complexity you face in the enterprise integration?

Okay. Yes. So I'll just try to answer and let me know if it's -- so I'll come to market side first. As we said, low code is very horizontal. So it's opening up the market. So the market is opening up -- is all digital initiative happening in enterprises do seek low-code intervention. Now the digital landscape could be a $200 billion market, and this could be a part of it. It could be 10% or 50%, we don't know right now. I think -- but you are right, our addressable market, which has been typically around content management, process management, becomes very, very wide rather than those areas, we end up entering the digital transformation market of portals, channels, mobility, everywhere. So that does open our market size considerably on that. On the other question about what the platform does and how it fits. So low code is a new terminology. But if you look at traditionally, most of us in this industry, as a product play, we have been looking at various technologies which typically make whole engineering cycles very participating where business can participate, very visual. So you have already technologies which are about modeling, which are about quick integrations, which are about more WYSIWYG, what you see is what you get, in terms of UI interfaces. So low code is a combination of many, many technologies. Of course, integration is very important in low code. So most of us are -- all low-code platforms are very, very strong on the integration side, whether they’re in-built, ready-made adopters or they provide frameworks to integrate. So these are established area. I think I would recommend that probably if you can look at Gartner's and Forrester's reports on LCAP and low code, you will get much more detail about the overall market size, the Newgen play, our strength vis-à-vis competition and where we can play and also about how integration plays in that. So [ NG ], did I leave any part of your question?

And how quick is the software development process?

Sir, the audio is not clear. Sir, we are finding it a little difficult to listen to you.

It's becoming difficult, but I got the last question. Let me try to answer that. Generally, what happens in low code, the pyramid -- the spectrum, you could -- these enterprises could have an overnight need of launching a particular survey. So you could do something in 24 hours. And you may be trying to reimagine your insurance or claims process, which could take months. But broadly, the idea of low code is that you should be able to condense it substantially. You should be able to respond to customers and markets and competitions at a speed which is acceptable. So most of the things which we do with our customers do span around a few months to, let's say, 6 weeks, 8 weeks to 6 months. That is the kind of area we work on.

And -- but the problem is simplifying complexity. How good is that? Is it -- does it really do that?

I think -- it's very, very effective. That's why customers globally will push for. That and I think I would recommend that if you can go and have a look at the global LCAP market and how the complexity is because it's a very large technical area. This may not be the right forum to talk about that.

Okay. No. I'm trying to understand from is the users, the nontech users, particularly when they are using a software, will they be able to use it with ease? [indiscernible]

Yes. Sure. Sure. It's very participative. So they're able to.

[Operator Instructions] The next question is from the line of [ Mayank Makkar ] from Myras Fincap Private Limited.

Firstly, I want to ask, there is a very high other income this quarter. Why is the reason for that? And secondly, with respect to low-code platform, typically, what are the competitors that you think globally you have? Because primarily most of your sales are to global customers rather than to Indian customers. And whether the technology in itself is very replicable kind of technology that means that any other software company can replicate the platform in whichever manner possible? Or is there something unique that is provided by Newgen?

Okay. So I'll take the low-code issue. The global low code where the competition for us is for the companies that you heard about, companies like Appian, Pega. And then there are companies also like ServiceNow, OutSystems. These are the companies who play strongly in the global low code. Now the entry variant for any new company to enter this is very, very high because if you look at any horizontal product play, you only see companies who have invested in that technology for at least 15, 20 years. So most of the other companies you've seen this competition here are the companies who have started somewhere around 20 years back and are now recognized in this area. So Newgen is one of those companies where we have spent whether we call it BPM, low code or any other name which comes in future, but the core underlying technology stack is what we have built over 20, 25 years. So there's a huge entry level barrier. So it's not -- if a company starts today trying to enter this area, I think it will take 15 years before we see their name being recognized in the market. So product companies have a huge entry barrier. On the higher other income, I think I'll ask Arun to answer that.

Yes. So high other income is on -- majorly on account of the forward cover, which we have taken in the current quarter. And this is basically the mark-to-market gain which we have recognized in the other income. So the increase is on account of that for the future contracts, which we have already contacted through plain vanilla cover.

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

So a couple of questions. First of all, in terms of the relative supply side issues, which are coming up in -- mainly in the software development or IT services market, so how are we seeing those trends? And any major hikes or payouts which we are planning to give in this particular year? And secondly, in terms of the GSI leads that you were talking about. So earlier, you had mentioned we have approximately [ 40 leads ]. So how has been the conversations around closures or any major convergence, which can potentially happen in the next couple of quarters?

Hardik, thanks. So on the supply side, the whole industry, you would have seen the commentary from all the companies, there is a supply side issue in terms of cost of people and there is higher attrition rates. We are also finding other set of challenges out there, and we have taken a series of steps to control them. We have -- we had -- in fact, earlier, we have discovered some challenges earlier. And last November only we had revised and given a substantial increment to our people. We have also done increments for many people in April. And I think we are now also contemplating that there will be some increments happening in this quarter as well for a large part of our people. So there are going to be supply, and we are looking at various strategies to address it. I think we believe that in the next 2 quarters, it will stabilize. But right now, yes, on the supply side of the software, there's an issue. On the GSI funnel, we have given some indicative numbers last time. I think that funnel has grown by another 10%, 15% in the quarter. We do see positive growth and momentum in that funnel. But right now, the funnel sizes are not such large that we can predict -- make exact predictions about that. Last quarter -- [Technical Difficulty] -- sorry, there is an echo. Sorry. Last quarter, we got one very important deal in Europe to one of the larger GSIs. This quarter, we are expecting to close at least more than 3, 4 deals and let's see, in terms of -- because right now, the funnel is not that large that we can do exact prediction. But we do expect this year to close around more than 10, 15 deals on the GSI front.

And just another last question from my side. So earlier in the opening remarks, Mr. Nigam mentioned increased investments in R&D and product development and sales onshoring in the developed economy. So if you can provide some further comments around exactly if any specific commentary around where exactly we will be making those investments?

Yes. So I think investments, we are -- I think we are always in that board, but I think one of the primary investments we are doing is all around mature market, which is either in the U.S., Europe, Australia. And we have done substantial investments, and we are looking at opportunities in investing in marketing out there, in product management and also expanding the sales teams out there. So this is a continuous one. And over next few quarters, we are even thinking of accelerating it further. So that's the area. And most of the investments on the product and all are already in place. We will continue doing those over the next 2, 3 years. But on the sales and marketing side, we will be slightly more aggressive in coming couple of years and -- but they will be predominantly in mature market. And in that also, predominantly in U.S. and Europe.

The next question is from the line of Ronak Jain from Jeeto Adviser LLP.

Actually, I need to ask you about that future vision and expansion of company further for 5 years exactly?

Yes. Okay. So it's about future vision and expansion, what we are doing?

Yes, sorry. Actually, I need to ask some expansion plan where the vision looks like -- further like.

Yes. So on the expansion side, we have -- as you know that we have built this company from India, Middle East, Africa and APAC. And last 4, 5 years, we have started investing in mature markets. So most of our goals around next 5 years are around expansion in mature markets. And there are 2 strategies we are focusing on. In certain core verticals like banking and financial services, we are going direct and having large presence of direct sales team. But -- the other most important driver also for us being the global partner ecosystem and building. Most of the product companies beyond a size of $100 million to $200 million do grow strongly through a partner ecosystem. And that's what we are investing in. And we hope that in the next 4 to 5 years...

Any acquisition plan, you are planning for the future like...

Yes. So we don't have -- we have not formalized any plans on that. Once we have any plans on that, we'll surely come back to that. But right now, our own market and market opportunity is quite big. We are aggressively focusing on tapping into that. And with the Global System Integrators growing traction as we're trying to position to a larger Fortune 2000 companies, I think our work for the next 4, 5 years is quite chalked out and that's where we are trying to invest. So we hope that in the next 4, 5 years around 70% of our revenue starts coming from mature markets and rest 30% from the emerging market.

[Operator Instructions] The next question is from the line of [ NG Puranik ] from Enam Securities.

You have talked about credit unions as a large market opportunities. What's your go-to-market strategy? What kind of partnerships you have? And how do you make it work since it's a large market? And this -- a small-size credit union may not be very large account, but smaller accounts. But there will be a large number of smaller accounts. So how do you reach them for the partners?

Yes. So as I said, when we are talking about credit unions, we were talking specifically about the U.S. financial services market, which are typically banks and credit unions. We target banks with somewhere around asset sizes of $2 billion to $50 billion. And then credit unions also, which has asset size about -- above $1 billion to all the way up to $50 billion.

Can you give some name of the system integrators who would help you?

So let me first try to explain. So there are roughly around -- if I'm right, around 300 such credit unions who fall in that and roughly around 900 such banks. It is out there, our go-to-market is very direct. We've already 30 to 40 customers of such. Solutions in the areas of commission lending, retail, digital onboarding. We are selling these directly to -- through our direct sales presence out there. Our alliances are the alliance ecosystems. The alliance ecosystems could be the cornerstones of the world, the digital signing players, the core banking guys, the Fiserve and also there are a lot of alliances, 40 ecosystems which we have built. But these alliances are not the sales alliances out there. They are the ecosystem for getting the system ready for that market. Our sales out there is quite direct. Does that answer your question?

No, how do you motivate these guys? Because I've seen a lot of companies build partnerships, but motivating them to do deals because it -- sometimes it's too small a deal for them. But how do you...

Let me again repeat myself. We don't have partners, this market is direct for us. For partners, we are only targeting Fortune 2000 companies. That's a separate segment. This market of 1,200 accounts is through a direct sale because -- the deal sizes out there are varying between -- anywhere between $200,000, $300,000 or around $500,000. So it is not very lucrative for partner ecosystem play. But for our direct ecosystem, once we enter the account, we have more solutions to sell. So it's a direct sales strategy for us.

Okay. So what are the other solutions you will have? Multiple solutions you said?

So we do a lot of things. In lending, we do a lot of things, both in commercial and retail side. We have solutions in cash. We have solutions in digital. Onboarding is a very interesting use case out there, digital origination, opening up accounts.

That can grow the accounts of about $1 million?

The potential of these accounts can grow up to an annuity of $600,000 to $800,000, less than $1 million because they're not really with larger banks. But that's the potential. They don't have a potential to grow up to $2 million kind of an annuity. I think I would say that they have a potential to grow around like $800,000, $900,000 of annuity.

And you said the 30, 40 accounts have come through this channel?

Yes, yes. We already have -- directly, we have already broken into U.S. We have got overall around 75 customers with 30, 40 of these banks and credit unions over the last 3 years.

So every year, a couple of hundred accounts can come into your [ kitty ]?

The potential to get around 60, 70 accounts is there. Today, we are targeting roughly around 15, 20. And over 3 years, we'll have to grow to that number.

And these are all subscription accounts? Cloud, SaaS, subscription model?

These are all cloud-based subscription accounts.

Cloud-based subscription accounts. When you say $600,000 revenue per account, that means over a lifetime of the project or the annual you're talking about?

I'm talking of basically the first order can be around $600,000, which is around $300,000 of annual subscription. Then there is -- once you sell more solutions, then the overall annuity pie can go.

And the annuity can go again back to $300,000?

Yes. It can keep on growing as we have more solutions.

The next question is from the line of Ronak Vora from AUM Advisors.

Question, I think -- I'm sorry, we couldn't hear you too well. The customer -- the competitors that you mentioned, ServiceNow is one name we caught. What was the other name, if you could just speak a little bit slowly?

Appian software.

Abian is it, A-B-I-A-N?

A-P-P-I-A-N.

Appian, okay, A-P-P-I-A-N, yes?

Pega Systems.

Sorry, again please?

P-E-G-A, Pega.

Pega. Okay.

Yes, Pega Systems. And there are also, horizontal, completely low code, which is called Mendix and OutSystems.

Mendix, M-E-N-D-I-X?

Mendix and OutSystems.

Out, O-U-T?

Yes.

Okay. OutSystems. Okay. Okay. So one question maybe for the CFO. The balance sheet we saw, just trying to understand the business, of advance from customers and billings of about INR 104 crores last year. Not sure we understood what it meant and the services model, which has this as a feature?

So could you clarify exactly what are you referring to because it's becoming difficult to understand?

The line item on the balance sheet, it has advance from customers and billings of about INR 104 crores.

Advances from customers and billings...

Yes. It says something which could -- this is what we got from the balance sheet. Just wanted to understand what that meant.

I'm sorry, we are not able to pinpoint on that.

Are you talking about deferred revenue?

Yes, deferred revenue. So how does that work, if you could explain, please?

Okay. So deferred revenue is basically, when we are billing, for example, for annual maintenance contracts. So there, I think, we are billing for a 1-year period. And whatever period falls in the next year or next quarter, accordingly, that revenue is shown as deferred. So there is a good chunk of -- the deferred is basically majorly on account of this annual maintenance contract and some amount of even that billing where it is [indiscernible].

The cash comes to you upfront, is it?

Yes, cash comes to us upfront. As soon as we bill, according to the payment terms, cash comes to us.

Okay. And that's why it showed us. Okay. That was fine. And secondly, I think you had some margin money of INR 30 crores as well. Is this for performance guarantees or something like that for your solutions?

Just a minute. Which line item you're talking about? Can you be specific about, INR 30 crores?

INR 30 crores, yes. Maybe we can take that off-line. I understand. If it's okay, we can...

You can come back with that question, we will explain.

Yes. [indiscernible]

That was the last question. I would now like to hand the conference over to the management for closing comments.

Thank you so much for joining us for the call. For any other questions, you can connect to me or you can look at our website. Thank you.

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