Newgen Software Technologies Limited (NEWGEN) Q2 FY23 Earnings Concall Transcript

Newgen Software Technologies Limited (NSE:NEWGEN) Q2 FY23 Earnings Concall dated Oct. 18, 2022

Corporate Participants:

Deepti Mehra Chugh — Head, Investor Relations

Diwakar Nigam — Chairman and Managing Director

Analysts:

Aniket Pande — ICICI Securities — Analyst

Virender Jeet — Chief Executive Officer

Akshat Agarwal — Jefferies — Analyst

Mihir Manohar — Carnelian Asset Management — Analyst

Deepak Poddar — Sapphire Capital — Analyst

Harsh Shah — Dimensional Securities — Analyst

Utkarsh Katkoria — PGIM India Mutual Fund — Analyst

Saurabh Sadhwani — Sahasrar Capital — Analyst

Jitendra Chawla — Individual Investor — Analyst

V. P. Rajesh — Banyan Capital Advisors — Analyst

Ankush Agrawal — Surge Capital — Analyst

Sameer Dosani — ICICI Prudential AMC — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Newgen Software Technologies Limited Q2 FY23 Earnings Conference Call, hosted by ICICI Securities Limited. From ICICI Securities, we have lead technology analyst, Mr. Aniket Pande, welcoming the management and investor on this earnings call.

[Operator Instructions]

I now hand the conference over to the management of Newgen Software Technologies Limited for their opening remarks. Thank you and over to you.

Deepti Mehra Chugh — Head, Investor Relations

Thank you Inba. Good evening everyone. I’m Deepti Mehra Chugh, Investor Relations, Newgen Software Technologies Limited. And I welcome you all to the Q2 FY23 Results of the company. I have with me from the management, Mr. Diwakar Nigam, Chairman and Managing Director; Mr. Varadarajan, Whole-time Director; Mr. Virender Jeet, CEO; and Mr. Arun Gupta, CFO.

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. Nigam for the presentation of the results, which will be followed by a Q&A by Mr. Virender Jeet. Thank you.

Diwakar Nigam — Chairman and Managing Director

Good afternoon everyone, and thank you for joining us today for our Q2 financial results call. In the second quarter, driven by robust demand, especially across our traditional markets, our revenue witnessed a growth of 22% Y-o-Y to reach INR226 crores. We believe cloud and subscription revenue is a good indicator of our business momentum. The subscription revenue had been growing steadily at the healthy pace of 30% Y-o-Y. They now comprise 35% of our total revenues.

The annuity revenues for the quarters were INR143 crores, witnessing a growth of 24% Y-o-Y. The annuity revenues comprise 63% of our total revenue in Q2. While the global environment is uncertain, our traditional market continues to remain strong, we strongly believe that our products have significant leverage across both sides of the market opportunity, revenue enhancement and cost optimization and efficiency, and we can pitch accordingly.

India witnessed a strong growth momentum during the last two quarters, with exciting businesses from both existing and new customers. In Q2, Indian market grew by 27%. EMEA and APAC geographies have also been performing well for us, growing at 24% and 39% respectively. Our U.S. geography, however, has not been performing well. As we mentioned in the last quarter, in the U.S. region we have been working on altering our sales methodology, moving towards larger-sized accounts with higher mining ability, than the current smaller and medium-sized banks and credit unions.

We have also done some reorganization and team changes in the region we are in. The quarter was marked by totally 14 new logos wins spread across geographies. We had significant deals in existing and new accounts during the quarter. We are happy to share that we have been the successful bidder for a leading bank, public sector bank for providing solutions and services for the end-to-end digital lending platform. The total size — the total order size is INR49 crores, spread over five years.

We are also executing a mid-sized project for U.S. based banks, operating in a network of banking centers throughout Colorado, Kansas, Missouri and Texas. We also received additional mining business from UAE’s largest bank, a cloud deal with a private sector bank in India and a mid-sized project for a leading Indian private sector bank. We have also entered into the cloud deal for a multinational automobile manufacturer in U.S.A through a system integrator.

Moving to the update on our offerings and opportunity. We recently launched our comprehensive configurable and future-ready trade finance platform for banking. The platform is built on low-code framework that lends the flexibility to allow seamless bank-specific configurations and management of the complete life-cycle. It helps bank go paperless and streamline their end-to-end trade process, while ensuring compliance with domestic and international regulations. The platform involves advanced level of content management and enables bank to process trade finance business efficiently and cost-effectively, while reducing the turnaround time significantly.

Keeping in mind the evolving needs of business and customers, it can be configured easily to launch any new structured trade finance product. It provides cloud-native architecture and low-code integration engine. Designed by bankers and experts in trade finance and technology, the trade finance platform is a revolutionary concept. We are excited about this launch and confident that this will play a pivotal role in accelerating our company’s growth. We also launched the all new integrated Robotic Process Automation, RPA, offering strengthening the low-code process automation portfolio. We continue to work on our long-term platform in cloud roadmap.

On the operational front, we see normalization in the workplace with in-person meetings in collaboration and regular customer meetings, business travel have now normalized. Attrition level seems to have stabilized across the sector. We have been investing in all spheres of talent acquisition, including campus recruitment and lateral hire, as well as retention and development. In the sales and marketing front, we continue working on both of our sales engines, direct sales channels and partner network to expand our market footprint.

We recently held our in-person customer meet, NewgenConnect 2022 in Mumbai, which received tremendous response and participation from our large Indian customers, system integrators, consulting firms and many prospects. It was a good platform where we highlighted our roadmap, customer success stories, as well as enabled customers, system integrators and consultant network to provide their inputs, understanding the product capabilities, collaborate and exchange thoughts. We would be hosting such events in other markets as well in the next few months.

Profits and margins, our profit after-tax for the quarter was INR30 crores. On the cost front, there has been a continued impact of elevated employee costs, driven by the industry-wide supply-side challenges, which are now gradually normalizing. There has been pressure on cost on account of increased go-to-market initiatives, return to in-person events and gradually normalizing several expenses. We continue to invest heavily in our global initiatives, our products, and in our people. During the year R&D expenses comprise about 11% of the revenue, and sales and marketing expenses comprise 24% of the revenue.

In the first-half of the year, our total revenues are INR414 crores, witnessing a growth of 20% Y-o-Y. Our profit-after-tax is INR49 crores. However, I would like to highlight that given the seasonal nature of our business and linear costs during the year, usually profits in the second-half of the year are higher than the first.

On the cash flow and balance sheet. Our net cash generated from operation activities was at INR57 crore in Q2. Our net trade receivables were INR258 crores at the end of September, which resulted in net DSO of 111 days. The DSO has been higher in the current quarter, but we expect the number to stabilize in the future quarters. We are taking prudent steps to tap newer opportunity and combat uncertain environment as we continue our growth momentum. We believe that we have a solid product in-place that is highly appreciated by our customers and adds significant value.

We have a loyal customer-base in-place. Our cloud and subscription revenues have been growing at a fast pace, providing healthy visibility of long-term revenues. We continue to invest cautiously in improving our product and marketing strength and transforming business for growth and operational efficiency.

We are now open for question-and-answer. Thank you.

Questions and Answers:

Operator

Thank you very much, sir. [Operator Instructions] Our first question is from the line of Aniket Pande from ICICI Securities. Please go-ahead.

Aniket Pande — ICICI Securities — Analyst

Hi, thank you for the opportunity to host you and wishing all the members of Newgen Software a happy festive season ahead. I had a couple of questions. Your revenue growth looks quite impressive at around 22% Y-o-Y in this quarter. Earlier you have mentioned our guidance of 20% Y-o-Y revenue growth for FY23, which implies around 20% Y-o-Y growth in your second-half of this year. It seems like you can easily exceed this guidance based on your historical trend. Any comment on that?

Virender Jeet — Chief Executive Officer

Thanks Aniket. And good evening and wishing you the Happy Diwali. And you’re right, generally our Q3 and Q4 are higher revenues, but so have been also the past year revenues are higher, so it is a seasonality. So to do 20% growth in those quarters is on a much higher base than on a Q1, Q2 base. So we will do — these quarters will be significantly larger than Q1 and Q2 per quarter. Thus, they will have a higher degree of margins. Right now we are looking at accelerating growth and finding ways to accelerate that, what percentage will hit I think it’s an outcome very, very difficult to comment on that.

Aniket Pande — ICICI Securities — Analyst

Okay, and sir, how are your conversations going on in U.S. and European markets actually? Are you seeing any impact because of macro headwinds? Has the deal closure cycled further, elongated as compared to last quarter or still as of now you aren’t seeing any incremental pain coming?

Virender Jeet — Chief Executive Officer

Yes, so fortunately right now our growth is driven from the markets which are beyond U.S. and Europe, that’s our traditional markets, like India, Middle-East and Asia-Pacific. U.S. and Europe, we have as last quarter we said there is clearly a much more pain in those markets than we see in the traditional markets. And the profile of customers which are very larger, we are seeing — hearing conversations of uncertainty. Does it really affect our business growth this — next quarter? It’s very difficult to say, but right now we have large number of opportunities, where clients are confident that in this environment also they can go ahead and do those deals. But this is a — nobody can comment on completely this, because as the situation is unfolding, all businesses are redefining their plans. And unless we are completely in a more stable environment, we don’t know what’s going to happen. So there is an uncertainty in deals, but surely the interest is right now quite high in what we’re doing.

Aniket Pande — ICICI Securities — Analyst

One last question, your annuity-based revenue share has improved quite a lot, at around 70% as of last quarter, but it has dropped a bit in this quarter, so how should we look at annuity-based revenue going-forward from here on?

Virender Jeet — Chief Executive Officer

As we grow, the annuity will keep on growing, because that’s what — you will see those streams are growing at much higher-rate than the company, so SaaS, ATS, as well as support, these — all three are growing at a much higher-rate than that overall growth rate of the company. Looking at on quarter-on-quarter basis may not be fair, because what happens is, this license component, higher or lower will determine that percentage of annuity. But on a yearly basis, I think last year we were sub 60%, this year already for the first-half we are much higher than 60%. So at the end-of-the year we’ll do substantially better than last year.

Aniket Pande — ICICI Securities — Analyst

Thank you. That’s it from my side.

Virender Jeet — Chief Executive Officer

Thank you, Aniket.

Operator

Thank you. Our next question is from the line of Akshat Agarwal with Jefferies. Please go-ahead.

Akshat Agarwal — Jefferies — Analyst

Hi, thank you for the opportunity and I wish you a very Happy Diwali to all of you from the Newgen management team. Sir, I have a few questions, firstly, congratulations on a good set of numbers, particularly on the growth side. This year — this quarter the growth has currently been led by the India and the Middle-East markets besides the growth in — the step-up in APAC. Could you please help us understand what sort of growth can we expect from India and Middle-East over a two to three year period? I was under the impression that we have a very-high market-share in these markets, so structurally these markets are expected to grow slower compared to U.S. or the newer geographies that we are looking to expand, particularly Australia. That’s the first question, I’ll ask my follow-ups after this.

Virender Jeet — Chief Executive Officer

Yes, good evening Akshat, and wishing you the Diwali season. You’re right, this quarter the growth has been — and in the last quarter the growth has been predominantly led by India, APAC and Middle-East and they’ve grown at a substantial rate. If you look at next three years, though we have a strong penetration of our presence in India, it’s not exactly true in Middle-East and Asia-Pacific. I think our penetration out there is quite thin, yes, because the number of companies is very large and the kind of markets we operate is still very few out there.

Having said that, there is one fundamental difference which is happening in all these three markets, we are getting into larger accounts with larger deal sizes which is making a difference. So, I would state that, the potential of these markets it’s a — if the oil remains stable and overall economic situation remains good in these markets, there is no reason why we will not continue to growing.

So, India has been always growing for us, it’s only that during the COVID era it was really, really in a bad state in terms of spending for many, many sectors, that’s the time, but if you see that last year India did some growth and this year I think, first, it’s been leading the growth, they are almost 30%, 35% H1 growth. Same is true with APAC and I think Middle-East will also do a good growth on a very-high number which was last year. So I don’t see any reason why the next three years, they can’t be the growth drivers up to this percentage in terms of, let’s say, doing around 20% growth.

Having said that, our long-term story of — our higher numbers of growth has to come from mature markets and that’s where we are investing in-building the strategy. Right now we are pivoting out there a bit in terms of redefining what we have been doing in banking as in the earlier call Mr. Nigam has contemplated that in the banking we are trying to shift to slightly larger accounts because of the lifetime value of those accounts is going much better than the businesses we have pursued so-far, and as well as looking at our sales strategy in various ways to how to accelerate that. So I’ll stop there, I hope that answers your question.

Akshat Agarwal — Jefferies — Analyst

No, that’s very helpful, thanks a lot, sir. Just a follow-up on this. Sir, supposing your strong growth in India, Middle-East and APAC to U.S. where on constant currency terms perhaps your revenue growth would have been flattish to slight decline on a year-on year basis. Is it fair to assume that over the next couple of years the traditional markets are going to be the growth drivers while U.S. might take longer-than-expected to again become the growth driver like 2021?

Virender Jeet — Chief Executive Officer

No, so we are not waiting that long, so I think our strategy, we are waiting for a couple of quarters to bring the better growth trajectory, so it will — if you see in the U.S. this quarter would have also grown a bit and it will continue growing over next two quarters. And next year we should again look it as one of the growth engines at least at equal terms to other markets, if not highest. So we are not waiting for two, three years, we are waiting typically for next two quarters to reset the market.

Akshat Agarwal — Jefferies — Analyst

Okay, perfect, perfect, that’s very helpful. A final question from my side and that’s on margins, so this quarter, we’ve seen a very sharp increase in other expenses as a percentage of revenue on a year-on-year basis. Has this entirely being driven by higher marketing and travel costs or is there any one-offs over there?

Virender Jeet — Chief Executive Officer

Yes, so — no, this is predominantly marketing and travel and also in terms of the offices have restated the other costs of running the facilities that has gone up. And there is no one time thing in this.

Akshat Agarwal — Jefferies — Analyst

Okay, perfect. So, in terms of your margin expectations, could you just give us some sort of an outlook of what sort of margins should we be expecting from maybe this year and the year after this? Any sort of guidance would be helpful.

Virender Jeet — Chief Executive Officer

I may not be able to give you exact guidance, but what happens if you look at historically, the Q3, Q4 will have much higher expanded margins if we meet our growth targets on those markets for those quarters. And so from the current H1, around INR50 crores of PAT, we should be able to have a much significantly larger number in H2 PAT. This business generates high gross margins, as you know, it’s around — between 65% and around that gross margin, the rest depends on our top-line growth of that year, as well as investments. So, investments in sales and marketing and R&D are almost sat at 10%, 11% and around 24% this year, they won’t change much, now it completely depends on the top-line we hit and then the margin which unfolds.

Akshat Agarwal — Jefferies — Analyst

All right, perfect. Thanks a lot for this and wish you all the best.

Virender Jeet — Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from the line of Mihir Manohar from Carnelian Capital. Please go-ahead.

Mihir Manohar — Carnelian Asset Management — Analyst

Yes, hi, thanks for giving the opportunity, and congratulations on the good revenue. Largely, I had a question on the GSI side of the business. I just wanted to understand what is the GSI traction now? What are the number of deals that we have won from GSI and what is the traction here? Second question was on the currency impact. I mean, we are having 22% of ROI revenue growth. If you could quantify what is the currency impact, currency depreciation here, that will be really helpful.

And my third question was on the low-code trade finance platform, the launch that we have done. So just wanted to understand the strategy behind this. And what is the market that we’re targeting, what is the market size over there? What kind of strategy are we going to adopt? And what is the internal revenue target that — are we looking for this particular platform over the next three to five years? Yes, so those were the three questions.

Virender Jeet — Chief Executive Officer

Good evening and thank you, Mihir, for asking. So on the GSI front, we are continuing to push that strategy and we are increasing our funnel, the funnel has improved from deals up to almost 90 deals now in the funnel we have. We are pursuing — also spreading across going into other GSIs which has shown more interest beyond the traditional ones where we had already done the leads. This quarter we have closed two deals with GSIs, one in Australia and one in U.S., and we expect that momentum to keep on improving slowly. Of course it’s not at the same rate as we had expected to GSI to fill, that’s why we are trying to look at various strategies of helping that business to grow further. So on the GSI front, I would say that, on terms of investments, enablement and building that structure, I think that there is lot going on, on the funnel orders going on, but on the conversion it’s bit slow, it may take a bit more time for us to accelerate that.

On the currency impact, yes, there has been — in terms of currency gains, in terms of on a constant-currency we have roughly around 16% of growth if that was your question. And there is also — in terms there will be some amount of losses on cases of — in terms of some amount of on the hedging. So we can — Arun can give you more details about that if you want on that.

On the low-code trade finance, I think we are very excited about, we have been always creating product lines based on our low-code platform and we were very lucky to get opportunities of redefining product for some of the most leading financial institutions in India on trade. So we have been able to launch this new product, the market is very right for this product in emerging markets like, Southeast Asia, India, and some part of Middle-East and — but Europe, Europe is a very large buyer. Trade is on — our understanding is, trade is also on the verge of being transformed, all the current solutions are of seven, eight years old. We have a new generation product, which solves the current trade problems which businesses are looking at. And right now we are pursuing at least 30 different opportunities in our funnel across various geos, and we do expect that even this year we will close another three, four paid opportunities.

The difference is that, these opportunities are pretty large, unlike our traditional deals, the deal sizes out here and the long-tail is very — pretty large. So we have not really gone how much of revenue on its own will come from this product line, but we are in the process of studying their business plan. Maybe in next few quarters we’ll have more clarity about how independently it can be a growth driver for the company.

Mihir Manohar — Carnelian Asset Management — Analyst

Sure, and that’s really helpful. And I have just one more question on the margins. We had anticipated 20% to 25% kind of margin for the full-year. When I do ask for the second half of the year, that comes to around 30% plus. So, just wanted to understand how confident are we of having 30% plus margin, given the fact that now non-COVID costs are coming back, our travel cost is coming back, R&D cost is coming back, so how should we see the margins for the balance part of the year and consequently the guidance that we have for the full year?

Virender Jeet — Chief Executive Officer

So on our guidance, we only have a number which is of 10% historically and we have clearly said that, last year margins are not the reflection of business, because lot of elements of our business, which we are pursuing, have not — the costs were factored in. We had a history of having roughly around 9% of our revenue as travel, which was 0 last year. And similarly SG&A expenses were much muted and the manpower which is this one-time correction in the market which has — let’s around 25% of growth in the manpower cost.

Having said that, our cost basis in Q1, Q2 generally tend to be the highest cost base. From here the cost for the remaining part of the year is slightly lower, it’s not substantially lower, it is slightly lower in Q2 and Q3. Now in terms of doing higher-level of revenues compared to Q1, Q2 and stable or lower-cost base in Q3, do expand margins. Now, whether they will be significantly higher as high as 30%, 31% or more like 27%, 28%, we’ll have to see.

Mihir Manohar — Carnelian Asset Management — Analyst

Sure. That’s really helpful. Best of luck for the end of year.

Virender Jeet — Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from the line of Chirag Kachhadiya from Ashika Institutional Equities. Please go-ahead. Mr. Chirag Kachhadiya, could you please unmute your audio and proceed with your question. Mr. Chirag Kachhadiya? There seems to be no response from this line, we will therefore move to our next question that’s from the line of Deepak Poddar from Sapphire Capital. Please go-ahead.

Deepak Poddar — Sapphire Capital — Analyst

Hello.

Virender Jeet — Chief Executive Officer

Hello, hi Deepak.

Deepak Poddar — Sapphire Capital — Analyst

Yes, hi, good afternoon sir, and thank you very much, sir, for the opportunity. Sir, I just wanted to understand now, number one, I was reading in article in PTI, so there it was mentioned that we expect to double our revenue to $200 million by FY24, on the back of this recently launched trade finance platform. So just wanted to understand your perspective on it?

Virender Jeet — Chief Executive Officer

See, we are in that range of $100 million and we have an ambition target of going — taking this company to the next step of $500 million over the next five, six years. Those — there are multiple drivers for that and the paid initiative is just one of the drivers on that. On its own, it will — I think it will play a significant part in pushing the growth up, but I think the exact date of doubling it by ’24 is a press freedom. And they take that — they take our freedom to a next level, but yeah, I think we are looking at accelerating growths beyond. Now if you can see, we are doing a significant growth without the U.S. engine firing right now. With U.S. and GSI giving us some momentum, I think we should be able to accelerate the growth and meet those aspirational goals.

Deepak Poddar — Sapphire Capital — Analyst

So our stance remains that we looking to accelerate growth on the back of this new game-changing platform that you kind of indicated, right?

Virender Jeet — Chief Executive Officer

Exactly.

Deepak Poddar — Sapphire Capital — Analyst

And at a higher operating leverage, I mean the revenue piece, what is the sustainable EBITDA margin that our kind of business can see on an annual basis, after factoring in the seasonality that we have in our business, right. So, is it in the range of 25%, 30%, would that be a fair — also assuming now the travel cost has come back, right. So that 25%, 30% range is that a fair kind of EBITDA margin level that one can see in our business?

Virender Jeet — Chief Executive Officer

See, we are a product-based business with high — very-high gross margins. So, in case you stop investing like in a very bad year, you end-up expanding margins, because finally the gross margin starts reflecting in the net margin position, but our aim is to invest for growth, invest in-product development, go and spend on travel, go and spend on selling and marketing. So, what we have said that on a way we want to maintain it around kind of a 18% to 20% net margin with around 23% to 25% EBITDA and margin. Whether we reach that in this year, next year, those depends on how the top-line and the cost unfold. But you are right, product companies can generate much higher EBITDA margins anytime their growth rates slow down for some time. Because overall the business is generating a lot of margins.

Deepak Poddar — Sapphire Capital — Analyst

Absolutely, absolutely. But it’s not one either, right. I mean we can do both, continue to invest as well as per optimum requirement and as well as continue to generate healthy margins for us as a company.

Virender Jeet — Chief Executive Officer

I hope so. I think that happens more at bigger sizes. I think right now with this kind of turmoil in the system in terms of cost basis, higher attrition, uncertainty, you will have to sometimes pre-invest for the growth to return or sometimes also wait for just the returns and not invest in growth, like we had last two years. So you can’t balance it every time, but on a long-term, yes, I think the business will keep on expanding margins as this percentage of subscription revenue grows as a percentage of volume of business grows, because cost basis are fixed.

Deepak Poddar — Sapphire Capital — Analyst

Fair enough. That’s interesting. And my last query is the — interesting that you mentioned about $500 million revenue in next five to six years, right, so that factor in your growth that you might see from trade finance platform and even this robotic process automation that kind of you have recently launched as well, and more product into the pipeline, right?

Virender Jeet — Chief Executive Officer

So, our long-term goal of being a first billion-dollar company or doing $500 million over the next five years, these goals — all the initiatives are towards those goals, so there is not a single entity, even the current product line have enough capacity to take us there and we’ll keep on doing these new initiatives. So we are — so the idea what we are trying to communicate is we will always be interested in growth, spending aggressively for that growth and pursuing all avenues to make sure we grow at much higher speeds than traditional growth rate.

Deepak Poddar — Sapphire Capital — Analyst

Okay. Understood, understood. Yes, that’s it from my side, all the very best. Thank you so much.

Virender Jeet — Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from the line of Harsh Shah from Dimensional Securities. Please go-ahead.

Harsh Shah — Dimensional Securities — Analyst

Hi, good afternoon, sir.

Virender Jeet — Chief Executive Officer

Good afternoon, Harsh.

Harsh Shah — Dimensional Securities — Analyst

Just want to understand —

Operator

Sorry to interrupt, Mr. Shah, if you could just use your handset and speak, sir, we can’t hear you that well.

Harsh Shah — Dimensional Securities — Analyst

Sure. Is this better now?

Virender Jeet — Chief Executive Officer

Much better.

Harsh Shah — Dimensional Securities — Analyst

All right. Sir, just wanted to understand that in one of your slide you mentioned that your subscription revenue is at around INR79 crore. And then when you give the revenue breakup below that, you have mentioned that SaaS revenue is 10%, which comes to around INR22 crores. So just wanted to understand this difference between INR22 crore on SaaS and INR79 crore on subscription revenue?

Virender Jeet — Chief Executive Officer

Yes, so I think you’re — the SaaS is typically the revenues as we have changed the licensing from perpetual licenses to cloud-based or SaaS based licenses, this is the licensing part of annuity business license we are generating, that has reached around 10% of the business. On the other hand, on the traditional license sale, we are charging an annuity which is called — traditionally called the ATS. That is remaining part of our around INR55 crores for the quarter. So, collectively between subscription revenue, which is a combination of our SaaS subscription and the traditional license subscription, which is called ATS, which is roughly around now INR79 crores, INR80 crores for this quarter.

Harsh Shah — Dimensional Securities — Analyst

Of this, which is this — sorry, sorry.

Virender Jeet — Chief Executive Officer

Now please go ahead, Harsh.

Harsh Shah — Dimensional Securities — Analyst

Yes, so the INR22 crore, which is the 10% of our revenue, which you qualify as SaaS, this is typically based on volume basis, right? This is the revenue which is based on per transaction or per item basis?

Virender Jeet — Chief Executive Officer

Yes, this is typically per user per month, sold as per user per month or sold as an annual license charge. So on this license fee, there is no perpetual rights to license. This is kind of a consumption-based license or a UPM based license on that.

Harsh Shah — Dimensional Securities — Analyst

Okay and the remaining INR55 crore is fixed in nature? Regardless of volume?

Virender Jeet — Chief Executive Officer

No, it is not — it’s also varies, but for that to vary you have to sell additional licenses to the customer, on which we’ll generate 20%, 22% of the ATS.

Harsh Shah — Dimensional Securities — Analyst

Okay and then —

Virender Jeet — Chief Executive Officer

So, the first one is equally divided, the second one is the majorities upfront loaded, which you already realized previously and only are getting — only 32%.

Harsh Shah — Dimensional Securities — Analyst

Understood, understood. And other question pertains to, do we have any plans to get into the transaction side of the business, because globally the payment side kind of — the payment business, not typically transaction, but payment business which is expected to grow phenomenally well, so are we already present there or do we want to be there, any thoughts on that?

Virender Jeet — Chief Executive Officer

So we would continue to be a software product company and providing software products in various spaces. And in Financial Services, we keep on expanding into different verticals. But we don’t — we are not a payments business or a transaction-based payments business, we don’t have any plans to go into that business as of now.

Harsh Shah — Dimensional Securities — Analyst

No, I mean — so I’ll reframe it. Not getting into business what Paytm does, but would you be an enabler for them, the backend which someone like Paytm or many FinTechs which are into BNPL, all that kind of stuff. Would you be into Software Services which enables them or helps them in doing that things?

Virender Jeet — Chief Executive Officer

We have software products which help those businesses and there are some customers who are using our software products in-part of their payments businesses. But it’s one of the spaces in many spaces the operate. But in terms of looking at as a focused area on which we want to build growth, we have not paid too much of attention to that right now.

Harsh Shah — Dimensional Securities — Analyst

Okay, okay, understood. And on the annuity part, so when we say our annuity revenue is around INR142 crore for this quarter, so do we mean that if we stop investing, this is the revenue which we’ll continue to get?

Virender Jeet — Chief Executive Officer

Yes, this is — so what we call annuity is generally the contracts which are renewed year-after-year. So while — there is two-part of this, one is the subscription, which is typically on a licensed profile, where the gross margins are in the range of 90% or higher. The second part is about higher degree of support, which is a custom support which people contract for year-after-year. Obviously the revenue profile is more like service revenue profile. But both these things are contracted year-after-year as a renewal contracts. That’s why we call them in part of the annuity revenue, so.

Harsh Shah — Dimensional Securities — Analyst

Sir, subscription revenue is subset of annuity revenue, is that correct?

Virender Jeet — Chief Executive Officer

Yes, exactly, subscription is a subset of annuity revenue. The difference between —

Harsh Shah — Dimensional Securities — Analyst

Okay. That INR142 crores includes INR79 crores?

Virender Jeet — Chief Executive Officer

Includes INR79 crores. The difference is the INR79 crores is a high gross margin revenue, it has got a licensed gross margin kind of thing, no cost. While as the remaining part of INR63 crores has got a — the margin profile as a service margin profiles.

Harsh Shah — Dimensional Securities — Analyst

Okay, sure. Thank you. Thank you so much for your answers and best wishes for festivals. Thank you so much.

Virender Jeet — Chief Executive Officer

Thanks. Thank you, Harsh.

Operator

Thank you. [Operator Instructions] We’ll take our next question from the line of Utkarsh Katkoria from PGIM India Mutual Fund. Please go-ahead.

Utkarsh Katkoria — PGIM India Mutual Fund — Analyst

Yes, hi sir, thank you for taking my questions. This 21%, this revenue split, if you could please explain, it’s in your presentation, revenue split by segment, so when we talk about annuity plus subscription revenues, what does that include? So when I look at revenue split by segment, it says implementation 16%, support 28%, ATS/AMC 25%, can you help us understand that chart?

Virender Jeet — Chief Executive Officer

Yes. So if you look at the revenue segment and there are three, four. One is the sale of software, which is the license software sale, which is perpetual in nature.

Utkarsh Katkoria — PGIM India Mutual Fund — Analyst

Which is SaaS?

Virender Jeet — Chief Executive Officer

No, so license — so SaaS is a license sale which is sold as subscription, but traditionally since we have still older customers and existing customers who buy in the perpetual license model, where some one-time license sold and only the ATS gets added to the annuity part of the business, so that’s roughly around 15%. Then you have this — sorry not 15%, so here. Yes, so then the second part of the — our — which is called the SaaS revenue or license, SaaS license. And which is more than 10% of our revenue, this is typically software sold as PUPM basis, generally on-cloud or an in-premise, but the licensing model is PUPM.

The third one is the ATS/AMC. ATS/AMC is for the traditional perpetual license, which we have sold for many years. I get it 20% annuity for all that sale, every year. So that is what the 25% — 25% of that is my — the revenue is coming from ATS/AMC. Support is another head which is typically people beyond our standard ATS, contact as per additional support, in which — because they have larger complex implementations, they bought people to have a dedicated support team. So that is —

Utkarsh Katkoria — PGIM India Mutual Fund — Analyst

Is support classified as subscription plus annuity or support is not classified in that category?

Virender Jeet — Chief Executive Officer

Support is — as part of annuity revenue, because the profile of revenue is that it gets renewed every year. But it’s not put in subscription revenue, because the margin profile, that is very different.

Utkarsh Katkoria — PGIM India Mutual Fund — Analyst

Understood, understood. So, can I safely say that support plus ATS/AMC plus SaaS is your subscription plus annuity revenue? That pool includes these three buckets?

Virender Jeet — Chief Executive Officer

Exactly. We call it together annuity revenue.

Utkarsh Katkoria — PGIM India Mutual Fund — Analyst

Okay. And implementation and other services and sale of products is outside the annuity revenues?

Virender Jeet — Chief Executive Officer

Exactly, yes.

Utkarsh Katkoria — PGIM India Mutual Fund — Analyst

Okay. And we expect this annuity revenue stream to keep increasing, which has relatively better margins?

Virender Jeet — Chief Executive Officer

Exactly. So that’s the whole idea, so because that’s more predictable revenue. We are able to remove the jerkiness in our business, we want to be able to smoothen the quarter or the long-sightedness nature of the business by increasing this annuity portion?

Utkarsh Katkoria — PGIM India Mutual Fund — Analyst

Okay. And just a follow-up. If you can explain what is the sale of products?

Virender Jeet — Chief Executive Officer

Sale of products is generally, before we used to sell our software license as PUPM, we used to sell it as perpetual license, and even today we do see in some deals we have perpetual license. And if a government is coming with an RFP and they want to buy software, they would say they would like to have their perpetual license, that means they get right to use it perpetually, but they pay you a recurring support charges or an ATS charges. This is typically for upgrade and maintenance. So that is what —

Utkarsh Katkoria — PGIM India Mutual Fund — Analyst

And implementation is just a one-time thing, right? You implement the software for your client and that is done, that revenue accrues and then there is nothing recurring above that?

Virender Jeet — Chief Executive Officer

Exactly. And it’s also, customers can again contract you for something more, but yes, some of the contract is over, there is no recurring element of the implementation.

Utkarsh Katkoria — PGIM India Mutual Fund — Analyst

Now that’s very clear, sir. Thank you so much.

Virender Jeet — Chief Executive Officer

Thank you.

Operator

Thank you. We’ll take our next question from the line of Saurabh Sadhwani from Sahasrar Capital. Please go-ahead.

Saurabh Sadhwani — Sahasrar Capital — Analyst

Hi, thank you for the opportunity, and congratulations on the good results. I wanted to know some details about the trade finance platform. So, how are you pricing the trade finance platform? Is it based on a per transaction charge or is it based on a per user per month basis? And secondly, what are the — what would be the deal size, average deal size for the trade finance platform?

Virender Jeet — Chief Executive Officer

Yes, so they are different. So, first to understand our trade finance, first of all licensing model remains as same as the underlying platform licensing, the way we sell our low-code platform, the content management platform, which is based on some kind of usage, whether it’s number of users, number of transactions, number of servers, it depends on that. Over and above that, depending on the complexity of trade, there are multiple levels of solutions. So the smallest trade deal on — can be like few crores, it can be roughly around INR3 crores, INR4 crores and the larger one could be like as largest INR15 crores to INR20 crores. So it depends on the usage and number of modules that business is buying.

Saurabh Sadhwani — Sahasrar Capital — Analyst

Okay, okay. So the average deal size would be — for average yearly revenue from a client in trade finance platform would be around?

Virender Jeet — Chief Executive Officer

It can be easily around INR5 crores, INR6 crores.

Saurabh Sadhwani — Sahasrar Capital — Analyst

Okay, okay. And what was the deal size for the logos added in this quarter, the average deal size for the 14 new logos that we’ve added?

Virender Jeet — Chief Executive Officer

I’m sorry, I don’t have that data off-hand, but maybe you can write to Deepti and she will help you.

Saurabh Sadhwani — Sahasrar Capital — Analyst

Yes, yes, sure, that’s no problem.

Virender Jeet — Chief Executive Officer

So our average deal size has continuously for so many years kept on growing, so it would have grown even this time. We can send you the exact data.

Saurabh Sadhwani — Sahasrar Capital — Analyst

Yes, sure, sure. Yes, and that’s it from my side. Thank you very much. And have a very Happy Diwali.

Virender Jeet — Chief Executive Officer

Thank you, same to you.

Operator

Thank you. Our next question is from the line of Jitendra Chawla [Phonetic], an Individual Investor. Please go-ahead.

Jitendra Chawla — Individual Investor — Analyst

Yes, hi. Am I audible?

Virender Jeet — Chief Executive Officer

Yes, Jitendra. Please go ahead.

Jitendra Chawla — Individual Investor — Analyst

Hi, Virender. I have just one question for you. I mean, our business doesn’t require other than the promotional spends that you do, which we call investment every year and hence we are net cash-flow positive. So — and that cash pile is kind of increasing and it’s affecting our ROCE negatively. So what plans do you have to utilize this cash? Are you looking at any inorganic opportunities? And if not, could there be possibility for a buyback? Because our valuations are very attractive, any buybacks which you do would be very EPS accretive. So, if you can show some light on that?

Virender Jeet — Chief Executive Officer

Thanks Jitendra. So you’re right, so we have accumulated cash and I think we are very happy that as a product company at INR100 million we are generating cash and profits which is rare thing. Having said that, our core focus right now is all on growth and invest whatever we have for growth. So that means also exploring inorganic opportunities in markets which will suit us for really rapidly growing further. We are giving ourselves sometime, maybe a year or so to look at options and beyond that, in the meantime, we’ll still be accumulating and generating more cash and if we’re not able to successfully deploy it, then we’ll look at various options of returning it as higher dividend or a buyback to shareholders.

Jitendra Chawla — Individual Investor — Analyst

All right. That’s it from my side, Happy Diwali to you all.

Operator

Thank you. Our next question is from the line of V.P. Rajesh from Banyan Capital Advisors. Please go-ahead.

V. P. Rajesh — Banyan Capital Advisors — Analyst

Yes, hi, thanks for the opportunity and a Happy Diwali to you all. My question is regarding the growth you said that in five, six years you will be $500 million company, so that’s just a very-high growth rate. So the question is that, are you thinking of inorganic growth during this five-year period or the products that you have will lead to such a wonderful growth outcome?

Virender Jeet — Chief Executive Officer

Well, thanks Rajesh, for the questions. From the onset, let me clarify, so the aspiration of doing $500 million has not been translated directly into a target. Having said that, we are looking at all avenues. As I said, inorganic is not off the table, we are looking at inorganic ways, but right now the kind of product set we have, in terms of the low-code product and the content management product, there is enough market globally for that, the market itself is growing, and we have got excellent customer base who is showing lot of confident in that — confidence in that product.

So we don’t see the product or the product coverage being a challenge in doing that, but obviously the challenge is in terms how fast can we establish ourselves in the mature markets? How fast can we accelerate the GSI ecosystem, selling our products? Those will be some of the challenges we’ll keep on investing on and working on that. The current product, whether it’s trade or an RP or the new version, they will all help in that cause.

V. P. Rajesh — Banyan Capital Advisors — Analyst

So, let’s say, if we think about three years timeframe, and let’s exclude any inorganic growth, what kind of organic growth can we expect from the current and future products in the business?

Virender Jeet — Chief Executive Officer

See, we have grown for a very, very long period of around 20% and with some of these initiatives, we want to accelerate it beyond 20%. So I would say that in next two, three years we should be able to, if everything fires, we should be able to accelerate this 20% much beyond this 20% and that’s where we can reach on that, but it’s very difficult for me to put our number right now on that.

V. P. Rajesh — Banyan Capital Advisors — Analyst

Right, right. So you’re saying the floor is 20% and depending on how the market develops for some of these newer products, it could potentially be in that 25% plus range, is that a fair way to understand your thinking?

Virender Jeet — Chief Executive Officer

Yes, I think we have bare minimum expectation of being 20%, because that’s what historically the minimum company has been delivering. And now all these initiatives and all the investments which we have done in various areas should accelerate the growth further. We are anticipating and having hopes of even higher than 25%.

V. P. Rajesh — Banyan Capital Advisors — Analyst

Okay, all right. Thank you so much and all the best.

Virender Jeet — Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from the line of Ankush Agrawal from Surge Capital. Please go-ahead.

Ankush Agrawal — Surge Capital — Analyst

Hi sir, thank you for taking my questions. So, sir, firstly on the increase in our cost base that we have seen, it’s been a sharp increase Q-on-Q as well, and in Q1 of — in the last quarter, you had mentioned that this year you’re budgeting around 15% to 19% growth in the cost for the year, but if I look at this number and if I assume that you are going to do the same kind of cost number for next two quarters as well, we are broadly going to increase the cost base by more than 25%. So, what’s changing that outlook from 15%, 19% through this very high number, if you can highlight that?

Virender Jeet — Chief Executive Officer

Yes, so I don’t think we had an outlook of 18%, 19% ever, we had a high — we had already an outlook of around more than 20% of growth, so 23%, 24% was already projected as possible. So there is no surprise on the cost front, the only surprise is probably on the manpower side we had higher costs because the market kept on pressurizing and even for the first H1 of this year there were higher attrition, which would increase the cost base and there is an element of growth also which will factor in that cost. So on the cost base, we don’t have too many surprises. We see that, over next two quarters, the cost remaining or even reducing from this level. And with our targeted growth rate, it seems that we can be able to expand margins.

Ankush Agrawal — Surge Capital — Analyst

All right. So, what you’re saying is, cost base for next quarter is going to remain flattish on the absolute terms if your saying?

Virender Jeet — Chief Executive Officer

Exactly, on the absolute terms, yes. Compared to the Q2 cost of this year, Q3 and Q4 is going to be slightly lower.

Ankush Agrawal — Surge Capital — Analyst

Okay and this would be a recurring phenomena for coming years, that Q1 and Q2 would have the highs in terms of just to be flattish for the recent two quarter?

Virender Jeet — Chief Executive Officer

In fact, this what happens generally in April and our June, this is the largest increment cycles in the company. And that is where — because a lot of fresh people get regularized on that and lot of the people have increment cycles in April, that’s why I think Q1 and Q2 are the higher quarters, and then it gets normalized for Q3, Q4.

Ankush Agrawal — Surge Capital — Analyst

All right. Okay, and another comment that you made, I think last quarter on the cost [Indecipherable], going ahead, we can do 10% kind of revenue growth, and 6%, 7% kind of cost increases. Does that hold true in the going — in the coming years as well or does it change in that outlook as well, given that you are not targeting the $500 million and really high growth?

Virender Jeet — Chief Executive Officer

Yes, so what — I think what I had explained is that, we don’t need proportionate manpower for that revenue growth. So for every 10% of revenue growth we need more like 5% of manpower growth. So because a lot of our revenue streams are disconnected from manpower. But manpower is a part of our cost. What has happened today, the costs are going more in regularization of travel, which is around 5% of the overall cost, revenue. And then also regularization of SG&A expenses, improved marketing, face-to-face events, offices. So those are — for this year, generally we are going to be resetting the cost base and next year onwards then we should be able to track in the efficiency in that.

Ankush Agrawal — Surge Capital — Analyst

Got it. Lastly, again something on the cost front.

Operator

Mr. Agrawal, may we request you to return to the queue, there are several participants waiting for their turn, sir.

Ankush Agrawal — Surge Capital — Analyst

Okay, okay, thanks.

Operator

Thank you. We’ll take the next question from the line of Sameer Dosani from ICICI Prudential Asset Management. Please go ahead.

Sameer Dosani — ICICI Prudential AMC — Analyst

Hi Jeet, thanks for the opportunity. Just — I’m not sure whether you clarified or not, I’ve joined in late, so look at U.S. based SaaS companies have been speaking about a slowdown in decision making and having an impact on their top-line. So, are you seeing similar trends in U.S. and what is the overall outlook if you can just throw some light. Are you seeing — is there some impact of the recession or any slow down you think? Thanks.

Virender Jeet — Chief Executive Officer

Yes, so Sameer, we answered this question a bit ago, I think probably you missed it. I think on the U.S. side there is a much bigger pain than what you can see in India, APAC and Middle-East, because of — and lot of customers are sharing that there is an uncertainty around the corner. So as a result of that, we do see a uncertainty in decision-making. But how much does it translate into business and what numbers do we hit is very difficult to predict. We think that on next two quarters we should still be able to push a bit of growth in U.S., but how fast is a different thing.

Sameer Dosani — ICICI Prudential AMC — Analyst

And UAE, and Middle East and India is not affected by that in that sense?

Virender Jeet — Chief Executive Officer

So far we are not finding it, I hope it remains that way. And Middle-East is priced — the oil price sensitive economy, I think right now it’s holding well, and India I don’t think is getting touched.

Sameer Dosani — ICICI Prudential AMC — Analyst

Great to hear that. And also looking at the current performance, our 22% to 23% margin guidance, does that hold or are we are seeing some risk, obviously medium-term, we would have that, but in a shorter than FY23, do you think that will be a risk, FY23 and FY24?

Virender Jeet — Chief Executive Officer

See, generally in a shorter — in this year, I think as I said, we are — this is a process of resetting the cost base. A lot of costs this year are also unnatural, in terms of some manpower costs are unnatural in terms of number of cycles of increments, number of — the churn because of attrition, so you have add and we’ll lose talent very fast. Those are — but travel is returning and efficiency of that travel and the business development will start reflecting in the turnover in next few quarters. I think this year, we have — as I said last year, the last year margins are unrealistic, because a lot of those things we have not accounted.

Sameer Dosani — ICICI Prudential AMC — Analyst

No, no, I’m just comparing your guidance, because that is what you had spoken about 22%, 23%?

Virender Jeet — Chief Executive Officer

Yes, so we are generally looking at, still have a target of between 17% to 18% of PAT. And we maybe close or we may fall short of that and it depends on how we hit on the top line.

Sameer Dosani — ICICI Prudential AMC — Analyst

Sure, no problem, and thanks for that. And lastly, how is the GSI relationship going, because we have target for that, how are you seeing things — is there some progress, if you can share on that? Thanks.

Virender Jeet — Chief Executive Officer

I think we are extremely happy what’s happening out there. I think more and more GSI’s are finding very interesting to carry our product, the funnel is growing. We are not very happy with the conversion rates out there and the deal flow so far. Having said that, we did close two deals this quarter as well and we expect in the remaining part of the year to have some acceleration in that. But it’s still a long way to go and we are working on it.

Sameer Dosani — ICICI Prudential AMC — Analyst

Are these two deals are U.S. based?

Virender Jeet — Chief Executive Officer

One is U.S., one is Australia.

Sameer Dosani — ICICI Prudential AMC — Analyst

Okay, okay, great to hear that, great to hear that. All the best, good luck for the future, sir, thanks.

Virender Jeet — Chief Executive Officer

Thank you.

Operator

Thank you. Ladies and gentlemen, that was the last question. I now invite the management of Newgen Software Technologies Limited to add a few closing comments. Over to you, sir.

Deepti Mehra Chugh — Head, Investor Relations

Thank you so much everyone for participating in the call. For the pending queries, I would like to connect one-on-one if possible. And for any other questions, you can also go to our website. Thank you.

Operator

[Operator Closing Remarks]