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

Ladies and gentlemen, good day and welcome to Newgen Software Technologies Limited Q2 FY '27 earnings conference call, hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Ruchi from ICICI Securities Limited. Thank you, and over to you, ma'am.

Thank you [ Amal ]. Good evening, ladies and gentlemen. Thank you for joining us today on Q2 FY '27 Earnings Call of Newgen Software Technologies. It is my pleasure to introduce the senior management team of Newgen. Today we have with us Mr. Varadrajan, Co-founder and Executive Vice Chairman, Mr. Tarun Nandwani, Chief Executive Officer, Mr. Arun Kumar Gupta, Chief Financial Officer, Mr. Pramod Kumar, Chief Growth Officer, and Ms. Deepti Mehra Chugh, Head Investor Relations. I will turn it over to Deepti to take the proceedings forward. Thank you, and over to you, Deepti.

Thank you, Ruchi. Good afternoon, everyone. Before we move on to the discussion, 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 the actual results could materially vary from the forward-looking statements. Past performance may not be indicative of future performance. The company does not undertake to make any announcement in case any of these forward-looking statements become materially incorrect in future or update any forward-looking statements made from time to time by or on behalf of the company. For further details, you may please refer to the Investor Relations section of our website. I would now hand over to Mr. Varadrajan for presentation of the results, which will be followed by a Q&A by Tarun and Arun. Thank you.

Thank you. Good afternoon, everyone, and season's greetings. Thank you for joining us for the Q2 FY '27 results discussion. During the quarter, we continued earnings growth momentum while strengthening the quality of our revenue base. In Q2, revenues grew by 5.4% to reach INR 422 crores. For the first half of the year, we achieved a growth rate of 8% to reach INR 779 crores. Growth during the quarter was led by our international markets. EMEA region recovered and recorded a growth of 19.4% with normalization of travel in the region and supported by demand for the enterprise automation and our industry-focused offerings. U.S. region continued its growth momentum on the back of improvement in its subscription sales and market penetration. It witnessed a growth of 17.1%. India region continued to be subdued and declined by 12.6%, and APAC region declined by about 6.4%, reflecting timing and execution variability in these markets. We expect the [ market ] closures to pick up during the course of the year in these regions. Overall, Newgen made 9 new logo additions during the quarter. Our recurring revenue streams continue to progress well. SaaS revenue grew by 36.4%, support by 10.3%, and ATS by 7.9%. Overall, our annuity revenues grew at a healthy rate of 15%, reflecting continued customer engagement. During the quarter, the subscription revenue surpassed the license revenue, enhancing the predictability of our business. License revenue declined by 19.2% year-on-year against a strong Q2 FY '26 base. Implementation revenues have recovered sequentially. The key wins during the quarter include agreement with a health insurance company in U.S. for NewgenONE complaints, appeals, and grievances solution with a value of USD 5.5 million over 3 years. Working with the government body in Qatar for Newgen platform license, implementation, maintenance, and support for international regulatory reporting and compliance platform for USD 1.8 million. Project for upgradation of commercial loan and retail loan origination system for a leading bank in EMEA with a booking value of INR 11.4 crores. Providing loan management solution to a leading life insurance company in India. Let me now share how the customer environment is evolving over the past few months, because it shapes our customer conversations and business. Customers are increasingly moving from AI experimentation to production, and they are asking for explainability, traceability, and control. That is where our governed orchestration platform fits. Newgen, with 34 years of regulated industry trust, a governed AI platform, a vertical solution, and measurable customer value, fits in perfectly with the customer's requirement. The NewgenONE platform continues to unify content, processes, and communication in an orchestration layer where intelligence is embedded into how enterprises operate with the trust, governance, and control built. This is particularly relevant for regulated industries that require audit tracking, explainability, compliance controls, and human oversight. At its core, Newgen brings together AI agent, enterprise applications, human decisioning into a single execution layer. During the quarter, we released our AI component, NewgenONE AI Studio of Agent Studio 1.0 and Agent Flow 2.0.2. From a use case perspective, the platform can support industry-trained models for government, banking, insurance, and health care. Newgen has built vertical solutions. For example, in banking, persona-specific AI solutions have been delivered across lending, onboarding, and transaction banking. In insurance, AI solutions have been created for every insurance persona across life, health, motor, and general with agentic workspaces. Operational efficiencies have also been built-in for the customers through these solutions. During the quarter, Newgen received recognition for Excellence in Low-Code & AI-Led Enterprise Innovation at the ET Business Excellence and Leadership Summit 2026. For the first half of the year, we had 10 AI-based deal bookings across banking and financial services and government. On the profit and margin front, the business has successfully maintained margins with operational efficiencies and cost control. EBITDA increased by 6.5% to INR 109 crores, and profit after tax grew by 6.3% to INR 87 crores for the first -- for the quarter. Importantly, profitability remained resilient. EBITDA margin improved to 25.8%, while PAT margin was 20.6%. This demonstrates our continued focus on operating discipline, even as we continue to invest in our platform, market reach, and AI-led innovations. Net receivable at the end of the September quarter was INR 642 crore, and net DSO was 144 days. To summarize Q2 FY '27, was a quarter of balanced earning growth, resilient margins, and stronger recurring revenue mix. We are continuing to invest in NewgenONE and its AI-led orchestration capabilities to help enterprises move from fragmented automation to governed and intelligent execution. As we enter the second half of FY '27, our priorities are clear: first, sustain the momentum in EMEA and the U.S.; second, improve deal conversion and execution in India and APAC; third, continue scaling SaaS and annuity revenues to strengthen predictability; fourth, maintain cost discipline while investing selectively in sales capacity, product innovation, and AI. Finally, improve collections and working capital efficiency. We remain encouraged by the long-term opportunity for intelligent enterprise orchestration. At the same time, quarterly performance can be influenced by the timing of large license transactions, implementation milestones, regional conversion cycles, currency movements, and collections. We will continue to manage these variables with a focus on profitability and sustainable growth. We remain focused on disciplined execution, customer outcome, and product innovation. Thank you very much for your time. We are now open for questions and answers.

Thank you very much. We will now begin the question and answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Rahul from Dolat Capital. Please go ahead.

Just a couple of questions from my side. Firstly, if I look at the sale of product in the quarter, this looked weak even if I compared to the data in the previous fiscal beyond, even in FY '25. So is there a trend that we are seeing that we are seeing more incremental demand on the SaaS and cloud side, and that is why the pure license signing data looks weaker? That is question number one. Question number two is on the implementation side. What we are seeing is that Q2 there was a massive jump, almost doubling of revenue. Is it led by some milestone events that could have led to this increase? Or there was a short-term execution deal that led to this kind of a jump?

See, license revenue grew from quarter 1 to quarter 2, but year-over-year, it was a decline. You are right. This is not because of the weaker demand. This is mostly because of the closure cycle, or -- that happens in the quarters. And India and EMEA are -- and some part of APAC are strong growth drivers on the license for Newgen. EMEA performed well. There was some closure delays which happened in India, which we are expecting in coming quarters, which led to this decline. And the base of license last year was higher, but I think that the demand has not weakened, what we are seeing in the pipeline. In the implementation, there was a special focus quarter-on-quarter on closure of the milestones for the revenue recognition and billing, which has led to the improvement from quarter 1 to quarter 2. Also, there was some milestone slippages in Q1, which we could complete in Q2, which has led to this good growth in Q2.

Got it. Just one follow-up on the remark you made. One aspect of it is what you probably missed answering, which I was saying. So are you saying that there are enough on-premise deal, it is just that the closure did not happen? Or -- and the separate question is that, is it -- is this a trend that we are seeing more SaaS or you think, no, there are a good number of deal both on the on-prem side as well as on the subscription side?

Rahul, the pipeline is strong both on the subscription side in mature market and on the license side in India, and EMEA, and APAC. It is related to the closure, which has led to lesser numbers Y-o-Y. The license pipeline is healthy.

Got it. Thanks for that color. One more question on the employee cost side. We are seeing that this cost has been pretty stable. I understand we have seen a relatively weaker performance in the last couple of quarters. So is it like currently we are well-invested into this? Or do you think with now growth prospect improving, we are -- we might invest into other resources from this point?

From the cost point of view, we have sufficient staff strength and with the AI engineering operational efficiencies getting added on to the whole engineering process, we feel that we can deliver growth with similar kind of manpower. And we are not seeing a demand for increased manpower growth.

Right. And just last one from my side. If you could say, last year, the H2 was not that great period for us. So the base has kind of normalized after very strong FY '25, 26. Do you think we might see acceleration in the second half? Are there enough sign both in terms of pipeline and our progress into those pipeline where we can think that the Y-o-Y performance in H2 could be sharper than what we have delivered in H1?

Yes, Rahul. I think we are targeting our double-digit growth that we have projected for this year. The better part of the business is that the SaaS large deals that we have closed in H1 will give us confidence in the subscription revenues going forward into Q3 and Q2, and the pipeline closures for the license and other lines of business will help us accelerate Q3 and Q4 total revenue.

Sure. Basically, you are saying the macros are relatively better versus what we were witnessing in the past and you are more confident for second half?

Yeah. We are confident of meeting our double-digit growth.

The next question is from the line of Ms. Ruchi from ICICI Securities Limited. Please go ahead.

A few questions. First, on AI, the deals we have announced, [ 10 ] deals in H1. There is a skew [ from India ]. We are [ much more converting ] AI deals outside India. Could you help us understand, do you see this as a client behavior that India clients are more conservative, taking more time for AI deals while the acceptance to work on AI project is much higher outside India?

Ruchi, outside India, we are coming out with RFPs which have -- more RFPs with AI embedded in all four sectors. The government we are seeing, in banking we are seeing, in insurance. In India also, we have closed few deals. Like Annapurna is one deal. We have one more -- two more deals which are coming. So AI offerings embedded as part of the journey built on Newgen's NewgenONE AI governed platform is the pitch which is getting resonated with the customers as a complete offering. So the new RFPs and demand which is coming is from both the refresh cycle as well as from the existing customers. For example, our trade implementations in India, what -- the Aura AI which we sold in Middle East market, the pipeline has cases in India market also. It's a matter of closure and timing. But the interest is there.

RBI also there?

RBI was a last year deal, which was onboarding an AI.

Okay. Noted. With AI deal, do we see some economics around the deals being different than what we used to do traditionally or in the non-AI deals? Be it on the size, execution, and revenue flow through in P&L, will there be any difference compared to non-AI deals?

The deal size have grown by 20% to 40% on the AI, which have AI components in it. And the program implementation cycles are part of the operational efficiency where from your time to live, we are targeting efficiencies for our customers.

Okay. So AI deal sizes are progressively increasing, if I paraphrase what you said. Is that correct?

Yes.

I was asking, is there any noticeable difference between an AI deal and a non-AI deal, when it comes to the size and execution timeline?

The sizes have -- will grow. See, for us, the AI offerings are again available as perpetual licenses or subscription licenses. The token costs and other costs are on -- directly on customer. So we are not bundling that operational cost into our deal sizes. So we will sell our products and solutions both in subscription and perpetual license model. That is why I said the deal sizes will grow depending on the AI components in the offering from [ 20, 40 ] and that kind of upsides. And on the time, as we said, the time will get optimized by 15% to 20%.

Ruchi, we are adding on components on the AI side into the deals. Definitely the deal size would increase. That is what Tarun is also referring to.

Okay. Moving on. On margin side, we see remarkable cost management. Our employee costs has been fairly resilient. Now, going forward as you have to make choices between investments, especially on the R&D and into -- investing AI in the product versus efficiencies that you would derive from using AI for execution. So how should we think about the margin trajectory as you balance between the two? Should we think that we have upside to the margin profile? Or you would want to deploy the efficiency back in the business with a higher either sales intensity or increase spend on technology?

Ruchi, Newgen has been spending on product innovation consistently through the years. We have redeployed our capital, our people, upskilled our people on AI both for platform as well as vertical offerings. So around 15%, 20% of the total revenue goes into the product development as you will be knowing. Around 10%, 11% goes into product and development and around 22% goes into sales and marketing. Yes. I think that just to extend that point, I think this is something we are -- optimization of the cost through the AI initiatives and other things. And I think we are slightly also careful about the discretionary cost where we are surely doing investments wherever required, but at the same time, we are slightly more careful with the current things we are. So I think if you see, I think our financials are -- basically, costs are stabilized for last 4 to 6 quarters, even with the single-digit or double-digit slightly -- that kind of growth also, we have managed the cost in a very efficient way. It is both efficiency as well as being slightly more careful about the investments we have to make, because that is very important. And that's where I think we believe that even in coming quarters also, we will surely maintain the margin and possibly expand the margin also.

Ruchi, to your answer, we are investing in developing our vertical AI offerings for our four key verticals, which is banking, insurance, health care, and the government.

Sorry. We are largely aiming for steady margin while balancing our investments as well as redeploying savings from AI to keep steady margin kind of outlook. Is that paraphrasing or that understanding correct?

Yes. See, the guideline for 20%-22% net margin remains for the year, and efficiencies we bring in innovation. If you see, I think even in this kind of growth also, we are still maintaining or improving only our margin percentage, whether it is the EBITDA as well as the PAT, and we will continue doing that with the kind of optimization and efficiency we are working on. If you see our manpower numbers also, we have kind of reduced and we are still holding. With the growth also we are holding that kind of number only. I think we believe that with the kind of manpower we have and the scaling we have done, we will be able to manage with this kind of manpower, with not much of substantial growth on the manpower. We will be still able to maintain the growth in coming quarters.

Got it. Now reconfirming, you mentioned we are confident of meeting our double-digit growth target for full fiscal. For first half, we have done close to 8% year-by-year growth. That implies in the second half, our growth will accelerate for full year growth to be double-digits. Is that a correct understanding?

I think if you see it this way, I think last year, second quarter the base was very high. We had achieved around 11% growth, and we had a very bumper license growth also of around 70-plus odd crores on the license revenue. As Tarun has rightly said that we have still maintained the license win rate, if you see from the previous quarter. But, obviously, I think with that kind of growth, we are 00 what we are talking about here is basically, if you see currently we are at around [ 7.7%, 7.8% ] growth on H1. But I think because the Q2 was a bigger quarter as a base. So the way we see it, in coming quarters we will again recover. As far as the growth rate is concerned, in coming quarters should be far better, and that is how we will maintain that double-digit growth of the full year.

So Q3 base, especially the license was weak, so we are expecting definitely improvements upon that.

So one is no doubt, I think strong funnel pipeline and deal velocity. Most importantly is, as Deepti said, that because Q3 and Q4 were slightly lesser on the growth rate, even with the reasonable momentum also we will be able to excel as far as the growth is concerned.

The next question is from the line of Vinay Menon from Monarch. Please go ahead.

A couple of questions. On the segmental geographic revenue which you have given, India revenue has declined. Any reason? And this has been the trend for a couple of quarters. Are we seeing any RFPs being delayed in the home country? Any color on that?

Yes, Vinay, you are right. I think we have seen 3 or 4 large RFPs coming out again in Q2, which were running earlier.

Okay. And the size of these deals also look like they are a little smaller versus they used to be. Any updates on that and any sign of recovery [ you're seeing there ]?

As I said, the RFPs are again out, and these are large license deal size RFPs. And the other deals of NBFCs also are under closure which got skipped from Q2, which we are expecting in Q3 any time now. So that is why I think India has seen this impact.

Okay. Okay. In U.S., last two, three quarters, you have done quite well. Any reasons, like what is helping us grow there? Is it the AI proposition which is kind of helping us to win deals over other competitors?

Yes. The health care line of business and product lines, provider life cycle, contract management, complaints, and grievances have seen good traction in the U.S. market. And as it is a subscription-based, cloud-based offering, SaaS offering market, the growth and the closure and the deal sizes are bigger both in U.S. and Europe. We are seeing good traction in the insurance and health care market, other than the banking, which is growing at its(el

Okay. And in these last few weeks, the kind of cybersecurity incidents which are happening, how do we see that playing from our perspective? Do you see banks will shore up or will kind of upgrade to better products which give them like overall, better cover? Is there an opportunity for us within all this? How do you see that playing in our favor?

See, Newgen products are CERT-In compliant, and we are offering perpetual licenses to most of the clients in India. The deployment happens in their infrastructure. We are part of their VAPT security cycles. So I think the -- our enterprise solutions are built for security and reliability, as we have shared earlier also. So I think in the whole ecosystem, when the journey runs on Newgen platform, there are multiple components orchestrated on Newgen. And Newgen platform per se, and Newgen delivery process per se are secure and reliable. From that point of view, I think we see good traction because most of the customers ask for CERT-In compliant products. And we ensure that all our released products get through the CERT-In compliance for India market.