Newgen Software Technologies Limited (NEWGEN) Q1 FY23 Earnings Concall Transcript

Newgen Software Technologies Limited (NSE:NEWGEN) Q1 FY23 Earnings Concall dated Jul. 20, 2022

Corporate Participants:

Virender Jeet — Chief Executive Officer

Deepti Mehra Chugh — Head Investor Relations

Diwakar Nigam — Chairman & Managing Director

Analysts:

Aniket Pande — ICICI Securities — Analyst

Akshat Agarwal — Jefferies — Analyst

Sachin Jain — Carnelian Asset Management — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Newgen Software Technologies Limited Earnings Conference Call Hosted by ICICI Securities. [Operator Instructions]

I now hand the conference over to Mr. Aniket Pande, Lead Technology Analyst from ICICI Securities. Thank you. And over to you, sir.

Aniket Pande — ICICI Securities — Analyst

Thank you, Peter. Good afternoon, everyone, and welcome to the Q1 FY ’23 results of Newgen Software Limited. Connecting with me today from the management side is Mr. Diwakar Nigam, Chairman and MD; Mr. Varadarajan, Whole Time Director; Mr. Virender Jeet, CEO; Mr. Arun Kumar Gupta, CFO; and Mrs. Deepti Mehra Chugh, Head, Investor Relations.

I now hand over the call to Mrs. Deepti for further proceedings. Thank you. And over to you, Deepti.

Deepti Mehra Chugh — Head Investor Relations

Thank you, Aniket. Good afternoon, everyone. I am Deepti Mehra, Investor Relations, Newgen Software. And I welcome you all to the Q1 FY ’23 results of the company.

Before we move on with 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 or update any forward-looking statements made from time-to-time by or on behalf of the company. For any further details, you may please refer to the Investor Relations section of our website.

I now hand over to Mr. Nigam for presentation of the results which will be followed by a Q&A. Thank you.

Diwakar Nigam — Chairman & Managing Director

Thank you, Deepti. Good afternoon, everyone, and thank you for joining us today for our Q1 results call. We’re starting FY ’23 on a strong note with revenue growing at 18% Y-o-Y. I would like to highlight once again that there is a seasonality in our business due to the license-based model historically. Q1 is a leaner quarter in comparison to the rest of the quarters. Thus, we do not look at the sequential performances in the business. Having said that, we are now increasingly seeing a growth in cloud subscription side of business which grew by 33%. The cloud and subscription revenues put together have now reached 38% of our total revenue. The shift is expected to lower the seasonality in the coming years and lead to more uniformly in revenues across the quarters. The annuity revenue for the quarter was INR131 crores, witnessing a growth of 25% Y-o-Y. The annuity revenues comprise now 70% of our total revenues in Q1.

In terms of geographic growth during the quarter was led by India and EMEA markets. Indian market had been subdued for sometimes now and we are happy to see developments in this market. We have entered into key transformation projects with existing customers, including license agreement with an India-based oil major and a key life insurance player in India. EMEA continues its growth trend since last year. The US market has been lacking traction and we are working across the various initiatives to combat the same. We had new logos win in Q1 ’23, six totally, with two logos in Americas region.

Moving to update on our offerings and opportunities. Just as the cloud eased the scalability and distribution access at an infrastructure level in the past decade, low code platforms are now equipping organizations equipping organizations with the ability to develop their businesses — business applications faster through digital technologies and abstract it for ease and functional reaches. The next phase of our product journey will be led by artificial intelligence and data sciences-led digital automation. Organizations are now looking to leverage data to take informed decisions. NewgenONE along with Number Theory has now become a unified platform for meeting all data sciences need of the customers. We continue to work on our long-term platform and cloud roadmap. We have announced NewgenONE with cloud-native multi-persona artificial intelligence and data sciences platform. The platform is further enriched with intelligent document classification and extraction, integrated processes and RPA capabilities. Also we have strengthened our DevOps for easy application requirements. We have recently commissioned Forrester Consulting to conduct the total economic impact study and examine the potential return on investment to the enterprise. Enterprises employing our solution may realize Newgen solutions are giving very good ROI. We are happy to share that key findings in terms of the ROI and payback period have been very encouraging. On the operational front, we are increasingly seeing the employees back to the workplace. In-person meetings, team collaboration and customer meetings are now increasing. Business travel is starting to normalize. We have started hosting in participation in face-to-face events and doing in-person customer meetings. At the same time, we continue to offer the required flexibility to our employees. We have been investing in all the spheres of talent acquisition, retention development and incentivization to mitigate the impact of elevated attrition cost across the industry. On the sales and marketing front, we are continuously working on building our direct sales channel along with focused alliances with our partner, especially the system integrators, to expand our markets. Through the partnership with system integrators, we are driving joint sales and marketing activities and campaigns as well as joint solution development. During the quarter, we entered into a strategic alliance with companies like India-based Coforge and Indonesia-based Anabatic Digital as a part of our strategy to accelerate digital for the organizations across the globe. We are also exploring partnership with large consulting firms. Profits and margin. Q1 has historically been low profit quarter for us given the non-linear revenue across the quarter. Our profit after-tax for the quarter was at INR19 crores. We are increasingly witnessing normalization of the cost base. Employee costs have increased on account of salary increments and continued supply side challenges leading to additional cost. In addition, there has been normalization of travel expenses. We continue to invest in our global expansion, our product and our people. During the year, R&D expense comprising about 11% of the revenue and sales and marketing expenses comprised 25% of the revenue as usual. As an organization, we remain committed to our medium-term margin targets and working across initiatives to achieve the same. Our net cash generated from the operating activities was at INR73 crores. Our net trade receivables were INR226 crores at the end of the June, which resulted in net DSO of 102 days. To conclude, we believe we have a resilient and growth-oriented business model in place for long-term. Our cloud and subscription revenues have been growing at fast pace, providing healthy visibility of long-term revenues. Our products have significant leverage across both sides of the market opportunity, revenue enhancement as well as cost optimization. We have been continuously investing in improving our strength and solving multiple business goals for organizations. This includes in transforming a business to maximize organization’s growth and market share and become future ready; digitizing — digitalizing the process for enhanced operational efficiency and cost optimization; applying analytics and data sciences to accumulated for process data; generating business intelligent insight for enhanced decision-making; building new machine-learning models and using these to improve a straight through business process; reinventing business model. That’s it. We are now open to Q&A. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of Akshat Agarwal with Jefferies. Please go ahead.

Akshat Agarwal — Jefferies — Analyst

Hi. Good afternoon, sir. Thank you for the opportunity. Akshat here from Jefferies. A couple of questions from my side. Firstly, why is it that we are seeing a steady decline in new logo additions for the company? Over the past several quarters, it used to be about 20 new logos every quarter, it’s currently come down to six. That’s one. Secondly, we were expecting a step up in growth in the US markets, positively driven by our partnerships with GSIs. What’s happening there? And why is it that U.S. markets are not performing the way we expected them to perform? That’s it from my side. Thanks a lot.

Virender Jeet — Chief Executive Officer

Thanks, Akshat, and good evening. On the — first on the new logo front, we have historically been able to generate around 50 to 60 logos a year. And we also moved away from some channel-based sales, which used to generate larger momentum logos. They were smaller ticket items. In last two, three years we have deliberately shifted from them. And as we are progressing in the market, it’s making more and more meaningful us to get after slightly larger deals which fit in our profile of about INR200,000 of annuity or more. This is one of the switches and one of the reasons in fact where we have also suffered in terms of moving away from such accounts both in US and in other markets as well.

While having said that, our expectations even for this year is to do around 50 to 60 new logos. And some of these logos are very large and they will give us multi-year revenue. Q1 we have missed some orders, which have slightly got delayed or deferred. But on a yearly basis, we are still on track to do around number of 50 to 60 new logos. And we are hopeful that that’s going to happen.

On the growth in US market, I think we explained that last time also, there are couple of factors. Last year — for last six quarters ending up to last year March, we had a one-time PPP revenue, which was generally between INR5 crores to INR8 crores on every quarter which was not sustainable and recoverable. The second part of this issue is also we have completely shifted from license sales, some of the license deals which we were used to get from Caribbean and other countries, we have completely stopped and gone to subscription. So there is a decline. But the other bigger factor is we have realized that in US some fear of accounts which we were pursuing as part of our direct go-to-market strategy on banking. We don’t see substantial yield coming then as part of repeat business. So we slightly shifted that to a larger account. And we are hopeful in some period of time we are able to build that business and go to a more meaningful year of accounts, because getting even those 25 logos, we were not able to generate a substantial value in the business. So we are doing some amount of pivot out there.

On the GSI front, we have been telling continuously I think the funnel though it’s very positive, but the deal flows are not at the same speed as we expected. We will close some deals with GSI this year also. I think last year also we closed five, six deals. I think we are hoping that this year also we’ll be doing better number than that, but it’s not at the same speed. Having said that, I think we have reached in the US a number which is at the most bottom of our number in terms of — this number is based on almost the regular annuity business which we generate from US.

So any deals which we have got last quarter and this quarter should start adding revenue to the coming quarters. coming quarters. And we are hoping towards the next three quarters, US will show a growth momentum for us because the base has been — the current revenue is at a very [00:28:21]. I hope that answers your question.

Akshat Agarwal — Jefferies — Analyst

Thanks a lot, Jeet. Very helpful. That’s it from my side.

Virender Jeet — Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from the line of Sachin Jain from Carnelian. Please go ahead.

Sachin Jain — Carnelian Asset Management — Analyst

Yes, Jeet. Thank you for the opportunity. My question was largely on US because that is one of the key region for your larger strategy. So can you give more qualitative comment what is happening at the GSI front. Though you covered a bit on a previous question — previous answer, but can you give more quality because I think it’s last one and a half or two years you’re making efforts towards US and we are not seeing meaningful traction yet. So can you give more qualitative input how it’s unfolding for you, one from GSI point of view and second your direct sales point of view?

Virender Jeet — Chief Executive Officer

Yeah, Sachin. Thank you. And I’ll try to further give you some color. See what’s happening in US, as you are rightly saying, we have two businesses. One is our direct sale business which is typically going into Tier 2, Tier 3 banks in US. Out there we have a steady funnel of winning trades. Of course during the COVID period those banks behaved very differently and we didn’t have lot of banks winning. But the other bigger challenge, we didn’t see long-term potential in some of that account base because they were too small to give us repeat businesses. So the cost of sale over lifetime was not recoverable. So we have done a deliberate pivot of leaving a large part of that market and going to slightly larger accounts. So this is one part and I thought of that we will structure the US team if we are working on that and that will happen over a period of time.

The second part of the GSI, as I told, we have done actual work on the GSI ecosystem in terms of how we have strategic partnership [00:30:18] we have ongoing. We are approaching that market. But one of the challenges is our control on the deep has been very less out there in terms of closer cycles and we have seen the — sometimes the deals will take multi-year for us to close for the GSI because his deal is substantial.

For us to solve that we are in pit exploration of the tunnel month of the creating more funding and that’s what we’re focused on and we are hopeful that it may. We will take slightly more time, but all in the next quarters. significant results coming out of that, so what could you add exploration Jeet as far as is concerned, how many deals probably it got 6 last year. If I understand correctly, what do you think you, in your opinion, this year the number could be a ballpark. I mean, I’m sure you also want to complete handle on it, but generally what is an expiration, what kind of traction in terms of possible deals you can from the 2 GSA you think, do you have Chilean that indeed. I mean this year from this channel. So I’m sorry can you repeat again I don’t. 15 deals coming this year from the. One time under understood and how do you see the environment because we keep hearing a lot on the market environment getting deteriorated in US a particularly, so how you are reading from your business perspective environment over the, what has happened on last 2 quarters. On the ground, the activity has started picking up. In fact, we are finding more and more interaction with customers in terms of even physical events roadshows are happening. So this is not to be happening in so with one of the con not is reopening for us. But you’re right on your I don’t think the larger accounts. I think we are in talking lot about one of them happen we don’t quarters 3 quarters, it is a challenge, and I don’t believe we don’t see any concerns, but not see this new kind of events. I don’t think is the 50 nor business, but we it. Our next few quarters you see quarter. I think that agnostic of US and Europe are more about. But in the may keep getting year which is very little impact on okay. And any supposed suppose to for some reason, GSI and all does not like you see at the Newgen level 15%, 20% growth. It’s particularly been would be continue yes, so we said that GSI is going to be an exploration Indian on our own. We have a sustained of generating around 20% of our growth and that will happen. It is typically what happens on the GSI and this year also you should see that’s that. Now we are, we are still planning to hit our target of around 20% and this under strict and Mr and what is the reason for growth in India because we India has shown a very substantial number. And if I come to the last quarter last year. So is there any thing to read in India business not much, I think it is organic. I think one of the things is that the accounting India are quite sizable and they have continued to give us more business and they are using our platform for more and more things. It is accumulated over multiple quarters, and if you see the. It’s not very different from what we did Q4 but Q1 last year was an exception because of you know, everything being the same here huge growth compared to that, but we think it’s in India. Most of this growth is sustainable and it’s, you will see the small jerky revenue see unlike in other times we have lot of on the major developments, the part of the nature, we won’t see that that at all. And most of the deals got in India this year again either more continuous in terms of revenue and support and or on subscription sales. Okay. And then last question, number through the integration, how initial feedback how how would now displayed from is being perceived operating degree into some of that number offering with AI side. So some color on that. See, we are very excited about it. So one of the good biggest advantages we are having our customers use cases, which had requirements of machine learning in data sciences. We are able to service so much and they are quite excited. So as part of the first over we had. We are integrating this product in platforms and solutions. You already integrated in certain lending solutions in our case and we have started taking down the market and we are very happy with the response, but over a period of time, we’ll be doing in integrating this platform in all other aspects of our products and services and that’s where we’ll see much more very much, and goodbye. Which is of technology, which we are very happy about. And we want to leverage even more and more across our product company. Thank you. I’ll. I mean the case for any further questions, please. Thank you. Thank you. Ladies and gentlemen. If you would like to ask a question then please press star and one on your telephone keypad. Our next question is from the line of Gary Shetty from Banyan Tree Advisors. Please go ahead. Hi, sir. Thanks for the opportunity. So, my question was, you mentioned about the fixed logos right sir. What is the average ticket size of the logo, but there could be my first question. Yeah, I know, I think, I don’t have that data but Visa or larger logos for us I think may be around 400, 500 K in average ticket size. Okay, but. And sir, we can provide you, actually sure, sure. And also, sir. I wanted to know what your sales were. So if I see a company like an year or ServiceNow. So these if I see the sales and marketing expenses. It’s quite as constrained 40 to 40 back. I think there is, for us, I believe, is the range of 20%. So how does compare in terms of sales and marketing capabilities, as compared to these companies, especially in US, it is it you’re absolutely right. Some of the US companies in the same area. Similar domain at similar size or spending roughly around 40% on sales and marketing we are able to slightly some amount of efficiency because globally, lot of our cost basis in sales. Also in the India center in terms of all your inside sales, marketing, as well as lot of be since happens out of India. The other thing is also we have been able to successfully generate substantial profits at $100 million side the company is the end of 300 million, they keep on burning up the $43 million so we are lucky that we have built a business model, which is quite healthy as a product company generating roughly around 30% of the margins at $100 million. So with that kind of a model that’s how we would like to proceed. And in terms of, we are not trying away for investing more in sales and marketing but we have taken a conscious call that we have to maintain a balance between growth in profits. And we’ll continue doing that. Okay. And does it make it difficult to sell as then you go there versus and appeared, which has the local sales force selling the product to a local customer does it make a huge difference in conversion. I don’t think the cost of sale mix difference because finally is about your strategy, your value prop to the customer, your ability to reach those are the issues which are sales and marketing is trying to work over them. I