Newgen Software Technologies Limited (NEWGEN) Q3 FY23 Earnings Concall Transcript

Newgen Software Technologies Limited (NSE: NEWGEN) Q3 FY23 earnings concall dated Jan. 17, 2023

Corporate Participants:

Deepti Mehra Chugh — Head Investor Relations

Diwakar Nigam — Chairman and Managing Director

Virender Jeet — Chief Executive Officer

Analysts:

Mihir Manohar — Carnelian Asset Management — Analyst

Harsh Shah — Dimensional Securities — Analyst

S. Chatterjee — AS Capital — Analyst

Ankur — Jefferies — Analyst

Devang Bhatt — IDBI Capital — Analyst

Deepak Poddar — Sapphire Capital — Analyst

V.P. Rajesh — Banyan Capital Advisors — Analyst

Chirag Kachhadiya — Ashika Institutional Equities — Analyst

Sarang Sanil — RW Investment Advisors — Analyst

Rohit Balakrishnan — ithought PMS — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Q3 FY ’23 Conference Call of Newgen Software Technologies Limited. [Operator Instructions]

I now hand the conference over to Ms. Deepti Mehra Chugh. Thank you. And over to you, ma’am.

Deepti Mehra Chugh — Head Investor Relations

Thank you. Good evening, everyone. I’m Deepti Mehra Chugh, Investor Relations, Newgen Software Technologies Limited, and I welcome you all to the Q3 FY ’23 results of the company. Wishing you all a very Happy New Year. Joining with me today on our call is our management, Mr. Diwakar Nigam, Chairman and Managing Director, Newgen; Mr. Varadarajan, Whole-Time Director; Mr. Virender Jeet, Chief Executive Officer; and Mr. Arun Gupta, Chief Finance Officer.

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

Diwakar Nigam — Chairman and Managing Director

Good afternoon, everyone, and wishing all of you a very Happy New Year. Thank you for joining us today for our Q3 financial results call.

2022 has been an exciting year for us. We completed 30 years of Newgen. We had a new look with the new logo launch. Most importantly, we were excited to interact, engage and celebrate with our customers and stakeholders in-person through various events, leaving behind the phase of COVID. We are happy to share our progress and performance in the third quarter. This is our first quarter with revenue exceeding INR250 crores at Newgen. We witnessed a strong revenue growth of 26% year-on year. All our geographies witnessed growth for us. Our traditional market continued to be the drivers of our growth; India, EMEA witnessed a growth of 40% and 27% with good business from both existing and new customers. APAC and U.S. regions witnessed the growth of 18% and 13%.

We are seeing continued adoption of subscription-based business model. The overall subscription revenues have been growing steadily at a healthy pace of 37% Y-o-Y and we are at INR84 crores in Q3. These are the building blocks of our long-term sustainable revenue.

The annuity revenues for the quarter were INR154 crores, witnessing a growth of 38% Y-o-Y. The annuity revenues comprised 61% of our total revenue in Q3. It is noteworthy that these growth numbers incorporate the continuing transition to subscription from license-based model and is expected to result in faster growth and higher revenue visibility over coming quarters.

The quarter was marked by 16 new logo wins spread across geographies. We had significant deals in existing as well as newer targets during the quarter, including cloud deal with full service financial institution in the Southeast regions in America, license-based project for a financial institution in America providing offering for life and health insurance and with these pension, real estate banking and investment needs. In India, Newgen won large size project from a leading public sector bank and a private sector bank, mid-sized project in Singapore for a global financial services group, project for one of the fastest growing bank in [Indecipherable] India.

Moving to update on our offering and opportunities. Our platforms are well equipped for handling large variety of complex processes and use cases, helping our customers in meeting their end-to-end digital journeys. NewgenONE platform has capabilities for automating complex processes and content services at scale. The AI/ML capabilities of Number Theory are now fully integrated with our product platform and philosophy. Our trade finance platform is also receiving good response from our customers.

As mentioned in our press release earlier during the day, we are excited that for yet another year we have been positioned as a niche player in 2023 Gartner’s Magic Quadrant for Enterprise Low-Code Application Platform. While many platforms are offering more citizen [Phonetic] and simple low-code application development, our low-code application development platform provides enterprise-wide large scale application development that needs to be scalable and robust. We will continue to work on our long-term platform and cloud roadmap.

On the operational front, saturation has stabilized now. We continue to invest in strengthening our team wherever required, including campus recruitment and lateral hiring. Our focus is on adding fresh talent, working on their development needs and making them productive in a short period of time. A lot of emphasis is put across on training and developmental work of our employees with regular training across various aspects, including product, business management skills, team development, etc. We are trying to build large capacity at a reasonable cost to deliver large business opportunities we are seeing in our geographies.

On the sales and marketing front, business travel have fully resumed, leading to in-person customer interaction. Following the customer needs in Mumbai in September, we had successful in-person customer meets in Dubai and Delhi after a break of three years. The response received was tremendous, but the patient [Phonetic] included existing and new global customers, system integrators and large consulting firms. It served as a good platform for showcasing our product roadmap and customer success stories as well as enabling customers, system integrators and consultants network to provide their inputs, understanding and product capabilities, collaborating and exchanging notes. In the long-term, we believe partners will strengthen and drive our growth along with the direct sales channel. We are rigorously working towards enabling these channels.

Our profit and tax — profit after-tax for the quarter was stable at INR48 crores compared to Q3 FY ’22. During the year, R&D expenses comprised 10% of revenues and sales and marketing expense comprised 22%. In the first nine months of the year, our total revenues were INR669 crores, witnessing a growth of 22% Y-o-Y. Our profit after-tax was INR98 crores.

On the cost front, this year is marked by the continuing impact of elevated employee cost, higher cost on account of increased [Indecipherable] market initiatives, return in-person events and gradually normalizing travel expenses. We are continuously investing in widening the employee pyramid by higher intake at bottom of the pyramid and working on their training and development to make them productive quickly. We see large scale development need in the future.

On the cash flow and balance sheet front, our net cash generated from the operation activities was INR100 crores for the nine months. Our net trade receivables were INR283 crores at the end of December, which resulted in the net DSO of 115 days. Our compelling proposition — value proposition in the market includes our low-code platform approach which is capable of handling complex content and process requirements at scale as well as the growing opportunity for digital transformation across organization. We are thankful for the continuing support and faith shown by our customers and for giving us newer opportunity to show-cause the immense value our solutions can bring to their organization. Our cloud and subscription revenue continue to grow at fast pace, helping us in developing a long-term sustainable business model. We will continue with our investment in our people and their development to build a future-ready organization.

We are now open to Q&A. Thank you.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.

Mihir Manohar — Carnelian Asset Management — Analyst

Yeah, hi. Thanks for giving the opportunity, and congratulations on a good set of numbers. Sir, I largely wanted to understand your traction on the trade finance platform, I mean, given the fact we launched this platform in September. So how is the traction over there and what kind of inquiries or what kind of conversations are you having over there? And my second question was on the GSI. I mean, how did GSI panned out this particular quarter? And my third question was on the margins. I mean, you have seen sequential improvement in margins. But despite that, since travel costs have normalized or still on a Y-o-Y basis it is down 500 [Phonetic] basis points. So I didn’t know we as investors how could we see margins for the balance part of the year and even for the next year? Yeah, those were the questions, sir.

Virender Jeet — Chief Executive Officer

Thanks, Mihir, and I’ll try to answer them one-by-one. See, on the trade finance, what we launched a few quarters back, I think we have developed a very promising funnel across all regions. And especially in Middle East, India, APAC, the funnel has — in fact, we have also got some interest in U.S. in certain customers. So we are going slow because right now they are looking at also our capability to execute on that front.

We closed the deal on trade finance in last — this quarter as well and we have at least two or three more closures left for this quarter to come. So broadly, these deals are substantial in size and are very different in size and execution compared to our traditional size. So we are looking at not large numbers out here, but potential to crores, three, four, five deals a year is also a substantial jump over revenue. So we are very hopeful and we are running with very aggressively.

On the GSI front, it continues to — we continue to invest in that. And I think we are happy that the funnel overall keeps on improving out there. This quarter, we have been able to close three deals with GSIs, two in U.S. and one in Australia. And though it’s not still — it’s very long way to go in terms of where whatever expectation from GSI is that, it continues to grow, but it does continue to grow at only at an organic pace rather than a pace which could disrupt the market for us.

On the margin side, you’re right. I think we have come back to that previous margin, which was prior to COVID area on account of normalization of travel and normalization of also operational costs. And also as Mr. Nigam said, I think there is lot amount of cost pressure on in terms of talent management, wages. That keeps to be one of the most important challenges still we are facing on terms of managing the talent.

So what we had indicated that last year’s margins were not any benchmark sustained because lot of our operational and business activities were not being conducted, not even in near-term in Q4 as well as next year. I think we aim to achieve a margin percentage of net margin between 17% to 18% and EBITDA between 22% to 23%. Now we are at roughly around 14.5%, 15% for nine months. Q4 is generally a very strong quarter for us. And if we are able to meet the historical trends of Q4 and meet that growth rates, we should be very close to our estimates of what we had estimated at the beginning of year. Does that answer your question?

Mihir Manohar — Carnelian Asset Management — Analyst

Sure. Sure, sir. That is really helpful. Just on the trade finance side, I mean, you mentioned that the deal sizes are higher here. So I mean, if you could throw some more light on what kind of deal sizes are there. And just on the differentiation side, I mean, there is [Indecipherable] which is operating in this particular platform. So what is the differentiation over there, over here? What is our right to win in this particular offering?

Virender Jeet — Chief Executive Officer

Generally — so trade finances, eventually, while the traditional deals, which we are closing — close between INR400,000, INR500,000, the deals are roughly in between $1 million, $2 million upfront. But the long-tail revenue in them is very strong because these projects take large amount of team, large amount of engineering activities to manage them over the lifetime. So the lifetime account value maybe multiple times than the traditional size for us.

Mihir Manohar — Carnelian Asset Management — Analyst

Sure, sure. So the upfront revenue is $1 million to $2 million?

Virender Jeet — Chief Executive Officer

Yes.

Mihir Manohar — Carnelian Asset Management — Analyst

Got it. Sure, yeah. And just on the right to win side?

Virender Jeet — Chief Executive Officer

Yeah. So I think — we are the challenges in this market. And luckily, we have got some of the best cases and customers eventually. So we have seen that there is lot of activity on the trade portal and paid origination which has been completely not addressed previously. And our technology of process automation, low-code and content — strengthen content provides a very compelling value prop to the customer out there. This is an area which people are finding a lot of interest in and they’re now coming back to us. We were lucky to get at least first four, five customers which are marquee names and that is building strong credentials for us. But every market will have to really discover. I think we have touched so far on India and Middle East. We have not really got deals still in Europe, U.S. or U.K. So I think we’ll have to go and discover that as we enter those markets.

Mihir Manohar — Carnelian Asset Management — Analyst

Sure, sure. That’s it from my side. Thank you very much, and best of luck for your future endeavors.

Virender Jeet — Chief Executive Officer

Thank you, Mihir.

Operator

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

Harsh Shah — Dimensional Securities — Analyst

Hi. Good afternoon, sir. Sir, my question is on the Indian market. So this quarter has seen a sort of sharp increase in the revenues. We were around INR65 crores sort of run rate and this quarter we saw around INR86 crores, INR87 crores. So just wanted to know is there any one-off in this quarter or is this the run rate we would maintain going ahead for Indian market?

Virender Jeet — Chief Executive Officer

So Harsh, thank you. Harsh, this Indian market keeps on surprising us. Every time we say that it’s going to slow down, it keeps on coming bouncing. And every two, three years, it’s delivered very strong performance. I think last year and this year we are in that cycle that India market is delivering performance above 30% for us. Though in a particular quarter, as steep jump can be because of some license deals coming in which could have upfront revenue realization. But overall, if you look at for the whole nine months period also, it’s a substantial growth. So nine months period is also almost growing close to 40% growth. So we think right now the market in financial services and also in other product is really strong, people are investing very aggressively for growing their businesses. That’s where we are able to get a lot of renewals of large contracts from existing accounts as well as penetrate new logos.

So I would not call it one-off. There is no one-off major deal which could disrupt the revenue in — but yes, some amount of fluctuation in quarter can happen because of large license deals. But on a year — I think for us to look at regional, I keep on saying that it’s very important to look at our annual results for regional performance rather than a quarterly, because the numbers are still. And the numbers are in range of INR30 crores, INR40 crores, INR50 crores. A single deal can change the whole percentage scheme. But if you look at our nine month results, India has been very strong. So we still feel that this year is going to be very strong for India.

Harsh Shah — Dimensional Securities — Analyst

Okay. Just if I may follow-up on this. Is the investment coming from the fintech side, the smaller emerging companies or the investment has been across all segments in the larger banks and NBFCs are participating?

Virender Jeet — Chief Executive Officer

Predominantly, banks and NBFCs, not fintechs because fintechs have generally IT shops of their own. So the automation platforms which we provide to banks and financial services, fintechs are generally creating most of the technology in-house or having a very alternate way of doing that. So customers in public sector, customers in NBFCs, private banks are our primary drivers of this growth.

Harsh Shah — Dimensional Securities — Analyst

Okay. And what is the outlook for the SaaS companies now globally? I mean, post-COVID, the industry was gung ho. There was lot of funding coming around. But with the funding squeezing a bit, lot of companies going out of the business and even the employees cost have gone down quite a bit. So is the buy versus build narrative still going on? I mean, SaaS segment will continue to be strong or people are shifting towards building their own team and building their own software?

Virender Jeet — Chief Executive Officer

So I am not probably the export to comment on what’s going to happen globally to SaaS companies. But I can tell this buy versus build narrative has been there for last 15, 20 years. More and more customers depending on the nature of business and more and more complex things are coming into buy phase rather than build because just time to market and the advantage to get something quickly launch for their customers is very, very important.

So I think broadly, if I can answer on that buy too, there is a huge interest to look at products, look at ready-made things which customers can absolve and really customers want to focus on their business rather than really ease large engineering cycles. So that way we find the same traction, and it’s true for our own offerings as well. More and more customers are taking our ready-made solution escalators and deploying them for complex businesses around that. But SaaS companies is a very different business. I would refrain from commenting on that because that’s a…

Harsh Shah — Dimensional Securities — Analyst

Yeah, okay. Get it. Thank you so much, sir.

Operator

Thank you. [Operator Instructions] The next question is from the line of Ankur from Jefferies. Please go ahead. The current participant has left the question queue. We’ll move on to the next question from the line of S. Chatterjee [Phonetic] from AS Capital. Please go ahead.

S. Chatterjee — AS Capital — Analyst

Good afternoon, sir. My first question…

Operator

Mr. Chatterjee, the audio is not clear from your line. Please use the handset.

S. Chatterjee — AS Capital — Analyst

Yeah. Am I audible?

Operator

Yes, sir. Please go ahead.

S. Chatterjee — AS Capital — Analyst

So annuity is now currently 60% of our business, so SaaS, ATC and the book. So if one of our clients in this segment wants to cut cost and switch to a different vendor, what is the switching cost? I mean, what is the kind of problem they will be facing if they switch their vendor? How sticky are they?

Virender Jeet — Chief Executive Officer

Yeah. So you’re absolutely right. The annuity keeps on growing. And part of — we have a constant endeavor to grow the annuity business. But to understand, we are still in the enterprise business space where cost of engaging for a vendor or customer engaging with the customer is very high because the fee systems are very deeply integrated with customer ecosystems, integrated with core bankings, ERPs, multiple vendors running core business activities.

So technically, everything can be switched. But we have seen almost negligible switching over last 15 years. So what we sell to customers are their primary business solution. Like in banks, we become probably the second most important system after the core. Same is true in insurance. Same is true in financial services or shared services. We are the core shared services platform. Technically, it can be switched, but enterprise products, if they are running fine and the customer’s technology is not obsolete, they continue to be used. So I don’t think the switching happens because of that people get a better deal or an offer. The switching only happens that if your technology stack becomes obsolete or you are not able to meet the customer business requirements. And so far, I think we have been ahead of the curve or that’s not been the challenge.

S. Chatterjee — AS Capital — Analyst

Thank you, sir. My last question is, today we are a $100 million company and we had a aspiration to go probably $500 million in probably next five, six, seven years. So what are the challenges in it and what will be the growth drivers? I mean, would that GSI or trade finance platform or anything else?

Virender Jeet — Chief Executive Officer

See, we are very confident with the products and the solutions and customer referenceability we have. The potential is there. Of course, there are couple of strategies which we need to execute. And one of them has been what we’ve been working for some time or GSI where we have built the ecosystem, but we are still — on the results, it’s still slow. I’m not saying that the results are not there, but they are coming at a slow pace.

The other part of it is really getting strong foothold in mature market and Fortune 2000 clients where GSI is a strategy, but we are also augmenting that with our own go-to-markets, whether we are opening subsidiaries in Australia, U.K., U.S. And so these are — now of course, it’s a very organic process. I think things start picking up. Last two years on COVID, I think we have been slightly left behind on that initiative, not able to execute really on those business plans. But I think this year, we have started showing the business momentum. And if we are able to keep this momentum for next six, seven quarters, we should be able to really create a direct linkage between a timeline by which we can reach there.

S. Chatterjee — AS Capital — Analyst

Okay. Thank you, sir. Thank you. I have no more questions.

Operator

Thank you. The next question is from the line of Ankur from Jefferies. Please go ahead.

Ankur — Jefferies — Analyst

Hi. Am I audible now?

Operator

Yes, you are audible.

Ankur — Jefferies — Analyst

Yeah. I’m sorry for the last time. Wish you a Happy New Year, and thanks for the opportunity. So could you provide some color on your various markets that you have and the outlook for each of these markets, especially U.S., I see that there has been a 13% growth this year? So what has been the growth in terms of constant currency? And there has been a doubling in terms of your SaaS revenue. So what has led to that? So my first question is this.

Virender Jeet — Chief Executive Officer

Yeah. So Ankur, Happy New Year to you. On the various markets, one is I think if you see through the results, clearly what’s happening in the emerging markets which have been strong for us, continue to be performing very strongly. India is driving that growth, but also Middle East on the value terms, if you look at on nine months and year base will become the primary growth driver for that. APAC also is becoming very strong. From hardly being for 4%, 5%, 7% of our business it has started going to more like 14%, 15% of our business. And with Australia subsidiary also kicking in from next year in terms of we should be able to build a much more stronger APAC.

U.S. we have prevented in strategy for a couple of times. We are deliberately walking out on some amount of business which was not really leading to long-term growth and margins. So we are preventing on that. So we have recorded a growth of 13%, but it’s very weak compared to what we have been able to traditionally do from U.S. So U.S. is one of our biggest challenges right now which we are trying to solve.

Coming back to the SaaS and growth of SaaS, one thing we should — we started last year in November, now it’s almost like four quarters. We started deliberately shifting lot of our deals to subscription-based deals. And so what — which also led to — we didn’t have lot of revenue realized in those quarters. Now that that revenue is coming in slowly, you will see the subscription and the SaaS-based revenues growing at a much more compounding speed. In fact, during this quarter, out of 16 logos, nine logos which we have won are completely subscription-based logos. So they will start adding into future quarter revenue.

So on the order book size, we have a far better performance than what is also reflecting on the top-line because of the deferred revenue coming from subscription deals. So it’s very natural on the SaaS growing at this speed. And we think that we can continue to grow the SaaS at a much higher speed over next four, five quarters. Does that answer your question, Ankur?

Ankur — Jefferies — Analyst

Yes, yes, that’s very helpful. And on the other — I see the other expenses have risen quite sharply this quarter. Anything around that, like what led to that? I understand business travel is one part of it, but do you expect it to go further higher incrementally or sequentially for the next quarter and also for the next year? How do you see that line item?

Virender Jeet — Chief Executive Officer

Yeah. So I think, generally, our other expenses will have significant growth compared to last year because on account of normalization of travel, operating costs and also more marketing activities which we’re starting. Other expenses will go sequentially up slightly, because for next quarter, they may not go substantially up. But as we grow and start investing more in travel and marketing, they may sequentially go up. They will keep pace with the growth of the company. But the base is pretty large. We do expect to spend more on marketing, more on travel next year, it will go up, but the jumps will not be compared to — comparable to this year’s jumps because this year’s jump is on a very artificial base.

Ankur — Jefferies — Analyst

All right. And if I did catch your comment — earlier comment right, your EBITDA margin that you expect 22% to 23% was for next year, right? That is the kind of number that you’re looking at, right?

Diwakar Nigam — Chairman and Managing Director

That is for FY ’24.

Virender Jeet — Chief Executive Officer

Yeah, next year also. Also our exempt for this year was also around the same percentage. We are having some amount of challenge because we are at 14%, but also, historically, Q4 is always the larger quarter for us and more because the costs almost are — Q4 on the cost front is not going to be substantially different from the Q3. But any increased percentage of top-line growth will completely reflect in the margin side.

Ankur — Jefferies — Analyst

Sure. So the costs would be flat and you are planning to — and the revenue would be hopefully comparatively higher, that’s what you’re saying?

Virender Jeet — Chief Executive Officer

Yeah. And that have been the traditional if you look at last five years; data, this is exactly. Most of the margin actually comes in Q3 and Q4, and predominantly in Q4.

Ankur — Jefferies — Analyst

Okay, thanks. That’s all from my side. Thank you.

Virender Jeet — Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Devang from IDBI Capital. Please go ahead.

Devang Bhatt — IDBI Capital — Analyst

Hello. Am I audible?

Virender Jeet — Chief Executive Officer

Yeah, Devang, please go ahead.

Devang Bhatt — IDBI Capital — Analyst

Thank you for taking my question. Congratulations on a good set of numbers. So I have a couple of questions. One is, what is your the CC growth in the quarter? Second, will you be able to surpass the Q3 performance in Q4 and FY ’24? What led to the dip in government revenues? I have two more questions, but I’ll come after your answer.

Virender Jeet — Chief Executive Officer

Okay, okay. Let me — so on the constant currency, for Q3, we’re at around some 19.5%, right, Deepti?

Deepti Mehra Chugh — Head Investor Relations

Yes.

Virender Jeet — Chief Executive Officer

So around 19.5%. That is on the Q3. Q4, historically Q4 has been always stronger than Q3. But Q3, since you have done and delivered a 26%, we do expect the base for our business keeps on improving because of the subscription revenue which we are building and our attempt is to have a stronger Q4 compared to Q3. But how strong, I think that will come as the results unfold. But yes, it’s not that the Q4 can be weaker than Q3. So it will be strong.

On the government revenue, I think right now government for the nine months period — can you just give me one sec. Government for the nine month period has grown by 70%. And for the period of Q3 it was minus 6.4%. That’s why I said, the quarter numbers when you break further into verticals and segments and regions, they become so small that a single deal makes the percentage look odd. So it will be better to look at either nine month or a 12-month number to look at. So this year, I think the banking, government and insurance are still performing strong. We are slightly becoming weaker on the shared service and manufacturing side which we are trying to recover.

Devang Bhatt — IDBI Capital — Analyst

Okay, cool. And on the FY ’24 side, will you be able to maintain the FY ’23 kind of revenue growth?

Virender Jeet — Chief Executive Officer

See, our endeavor is to even exceed that because we have — as we said, we have aspiration of investing aggressively for growth. And depending on if the market is favorable and we are able to execute our plan, there is no reason why we can’t exceed the growth this year.

Devang Bhatt — IDBI Capital — Analyst

How much was travel as a percentage of revenue this quarter or nine month basis whichever is? And with increase in direct sales, how much the cost will increase? Despite that you would be able to maintain that 22% to 23% band?

Virender Jeet — Chief Executive Officer

So I think this year, you should look at what has happened in terms of whatever additional cost of INR20 crores on travel or SG&A or manpower cost has all got into keeping in the margin. But historically, since not the mixed base of margin has been set-up. We have a travel of roughly around INR30 crores to INR40 crores is going to be this year. And also SG&A costs have been — we are operational on almost 80%, 90% of our capacity. So now the cost growth for even historical for any x percent of growth, our cost only grew by almost half of x on the manpower side. That has been the traditional, because as we generate high gross margin business, roughly around 62% to 65% is our gross margin historical as well. So there is lot of operating leverage in terms of multiple revenue streams, ATS, license, SaaS. We don’t have any direct costs, as stated.

So for getting 25% growth, we don’t need to spend 35% more cost. We need to spend incrementally more like 13%, 14% of the cost. So there is going to be operating leverage. And I think next year, even at growth rates similar to this year, we should be able to expand the operating level.

Devang Bhatt — IDBI Capital — Analyst

Okay. And what was the contribution of GSI to revenues? And is your U.S. margins which you did this quarter, is that sustainable going forward?

Virender Jeet — Chief Executive Officer

I think quarterly margins, again, is not the right way to look at. I think annual margins is what. I think we should be able to do better in U.S. because our U.S. Q1, Q2 were weak. Q3 and Q4, if they become strong, we should be able to restore some margins. But next year, we don’t expect U.S. to be weak at all. We expect U.S. to be the growth driver for the company. And once it’s a growth driver, there is no reason why the margin contribution will not be happening there.

Devang Bhatt — IDBI Capital — Analyst

And what will be the contribution of GSI this quarter?

Virender Jeet — Chief Executive Officer

I think this quarter we — see GSI percentage revenue is still very small because we look at partner revenue which is roughly between 20% to 25% of our revenue. But the GSI is — we look at number of deals which GSI has really bought in. So this quarter, three deals were bought in GSI out of 16 deals we got.

Devang Bhatt — IDBI Capital — Analyst

Okay, great. Thank you. Thank you for taking my questions.

Virender Jeet — Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.

Deepak Poddar — Sapphire Capital — Analyst

Hello.

Virender Jeet — Chief Executive Officer

Hello.

Deepak Poddar — Sapphire Capital — Analyst

Yeah. Thank you very much sir for the opportunity. Sir, first up I would just wanted to understand — I mean, the comment that you made in the — to the last participant that for — I mean, a 25% revenue growth, our cost will grow only a 13%, 14%, right, it will not grow proportionately?

Virender Jeet — Chief Executive Officer

Yes.

Deepak Poddar — Sapphire Capital — Analyst

So ideally, then if we stance today, if we take this quarter as a base, I mean, already our PAT margin is 19%. So ideally then our PAT margin is, if we have to look at maybe three years down the line, it should cross 22% to 25% in that range ideally if our revenue grows at 25%, whereas our cost grow at only 13%, 14%?

Virender Jeet — Chief Executive Officer

Yeah, Deepak. So actually I’ll try to answer it. I think it’s slightly more complex subject. You’re absolutely right. The business keeps on expanding margins at both gross level as we expand and scale. But then what happens is, direct costs could grow at the same level, but we keep on growing our cost in sales and marketing and R&D because if you want to compete at the global space, right now our sales and marketing costs are at 22%. If you look at global product companies, they go all the way up to 40% depending on if we can hit the high growth.

So when you look at net margins, it’s also a function of business. Am I trying to pre-invest in growth? Am I trying to match it along with the growth rate? So sometimes when we see clearly that there is a opportunity to grow and invest in markets, then we go and invest in those markets. So we increase our sales and marketing and R&D expense. So that’s why we are saying that being listed in India, we endeavor to at least maintain that kind of a margin. But then as a business of course can deliver much higher margin.

Deepak Poddar — Sapphire Capital — Analyst

Okay, understood. So net margin of 17% to 18% which you mentioned is considering all these factors, right? I mean, in spite of…

Virender Jeet — Chief Executive Officer

Considering all those factors, yes.

Deepak Poddar — Sapphire Capital — Analyst

Okay, okay. And $500 million in next five to six years effectively means you have to grow at a CAGR of 25% plus for next five to six years, right? So that’s what we are looking at?

Virender Jeet — Chief Executive Officer

I think, much, much higher than that. And for that we have to — multiple things have to kick in. And I think the GSI has to kick in. The sales percentage contribution from U.S. and Europe has come to almost 60% of the revenue because the larger addressable market is in those areas. And that’s what we are spending on marketing for expanding regions out there, investing. And those will be the investment-led activities which we’ll do over next three, four years.

Deepak Poddar — Sapphire Capital — Analyst

Okay, okay. So that’s a very high growth we are talking. I mean, much higher than 25%, maybe if you have to assume 30% CAGR over the next five to six years. So what can go wrong according to you? I mean, it’s a big growth we are talking sustainably for next six years, right?

Virender Jeet — Chief Executive Officer

See, the only thing we can go right is we end up doing it and everything else can go wrong. So I think yeah. So I think our ability to penetrate mature market clients, our ability to build brand in mature markets — see, I don’t see there is a challenge on the technology stack. Our products are very well recognized globally for the last 14 years. And depending on the kind of customer base we have we are able to stay ahead in the market and really prove our credentials. We’ll keep on updating the product at that investment.

Our ability to sell market and position ourselves is the biggest challenge. And especially, we have to pivot from emerging market player to a mature market player. There are multiple activities, GSI is one initiative and we are also looking at multiple initiatives. And at some time, maybe we’ll have to look at also inorganic steps to complement.

Deepak Poddar — Sapphire Capital — Analyst

Okay, okay. So any kind of inorganic steps also kind of factored in this $500 million that we have taken as a vision in next six years?

Virender Jeet — Chief Executive Officer

So it’s a vision. So nothing is left out.

Deepak Poddar — Sapphire Capital — Analyst

Okay. So that is kind of I mean included in it?

Virender Jeet — Chief Executive Officer

Yes.

Deepak Poddar — Sapphire Capital — Analyst

Okay, fair enough. Okay, sure. That’s it from my side. Thank you so much. All the very best.

Operator

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

V.P. Rajesh — Banyan Capital Advisors — Analyst

Yeah. Thank you for the opportunity. The first question, just you called out about the Indian business being very strong on the growth side. So if you can just elaborate a little bit more as to why we’re winning in the Indian market? Is it because the banks, etc., are becoming more automated or are we replacing somebody else? Some color on that would be helpful.

Virender Jeet — Chief Executive Officer

Yeah. No, one thing is clearly — so India, we have been traditionally very strong in all the banks, insurance companies and most of the shared services. So almost all enterprises end up using us in one way or the other. So what happened lately over last two years, especially in financial services, there’s is lot of money being spent on digitization, automation and also transforming their business models to digital. So we have been one of the prominent players and we are getting our share.

Also on the other hand, what we are doing, as we are getting into any vertical, we keep on our — extending our portfolio of products in that vertical. So like in banking we started with digital onboarding and lending origination. Now we have gone more and more deep. Now we are doing complete digital lending journeys for major banks and those projects are substantially different size and that opportunity is opening in multiple areas at the same time. And we being an incumbent out there and having a good relationship with customers, we end up getting an advantage out there.

So we are competing with the SIs out there, we are competing with international players, all financial services players. So it’s not that the competition is quite wide, but I think in Indian market, Middle East market, in financial services, we are very, very strong depending on the kind of engagements we have done out or the kind of relationships we have out there. But the market is really opening up and the digital lending is one of the drivers. And any other areas and enterprise where they could digitize which have not been digitized traditionally. Service management is another large area. Sales we have recently launched, and that’s another area which is picking up. So these are some areas which are developing the attraction. Does that answer your question, Rajesh?

V.P. Rajesh — Banyan Capital Advisors — Analyst

Yeah, that’s very helpful. So just if I can summarize, it’s not necessarily replacement of other vendors, it’s more about either the process is being automated or new things or new way of doing business that is coming up which is flowing to you. Is that the way to understand this?

Virender Jeet — Chief Executive Officer

Exactly, yeah.

V.P. Rajesh — Banyan Capital Advisors — Analyst

Okay. And then second question is, as one of the participants earlier was talking about that the funding has come down for the start-ups. So globally, are you seeing your competitive landscape changing where some of these start-ups who are coming into your space either have become less aggressive in the marketplace or have gone away?

Virender Jeet — Chief Executive Officer

So I don’t think they will go away. I think the ones which are worthwhile and have a sustainable business model will stay and will disrupt the market. And then at some places we partner with them, some places we complement. One of the things what I’ve seen at least in the financial services, as soon as the partner or an incumbent or a challenger becomes sizable, he gets the same, he gets hit by regulation as other structured financial institutions. So all of a sudden, the business model again comes back to the same area.

So I think there is a challenge in terms of smaller entities always disrupting the market. But we always find our space either complementing them, augmenting or substituting the same capabilities. I don’t think that they are going to vanish. I think this is — this change of the challenger ecosystem also keeping everybody on the toes is going to be there in the market. That’s what I think, and it’s healthy also. They also end up providing us lot of other ideas what can happen.

V.P. Rajesh — Banyan Capital Advisors — Analyst

Right. But incrementally, let’s say, if you go back one year or one and a half years back versus today now, would you say it has come down or is it same as what you were experiencing a year ago?

Virender Jeet — Chief Executive Officer

See, on the business side, I don’t think it was material at least for our business right now. But I think — I could say the noise is less maybe. But yeah, I think it has not changed too much for us. Other thing is we are still — in U.S. and Europe, we are on the fringe, we are not still in the core. We are very small part of the market. So that’s where it is a lot of action happening. In traditional markets, we are very, very strong. And I don’t think so far these guys have been able to challenge us in larger areas of what we do.

V.P. Rajesh — Banyan Capital Advisors — Analyst

Understood. And then finally on the U.S. side and the European side. So what is not going right in the U.S.? For example, you said that you are making some changes. Is it the product set that is lacking in some ways or is it the sales and marketing, marketing capabilities? What sort of is the thing that you need to fix to start increasing the U.S. business, because that’s the largest market?

Virender Jeet — Chief Executive Officer

So I think it’s presence in sales and marketing. Presence in terms of localizing your organization, but predominantly, sales and marketing and marketing-led sales rather than sales on that because it’s a product brand. At the end of the day somebody is buying the platform which is going to use for 20 years. So the ability to be comfortable, knowing the company, analysts recognizing that company in a better shape, lot of people talking about it is very essential to close deals for them. I would say the number one is our marketing-led sales. And number two is going to be typically much more deeper presence in markets.

V.P. Rajesh — Banyan Capital Advisors — Analyst

I see. And in terms of your retention, what is sort of the retention you’re experiencing in your subscribers in your SaaS business?

Virender Jeet — Chief Executive Officer

So I think the way we look at retention is any customer which is above INR50 lakhs of annuity to us, whether it’s a SaaS or non-SaaS, we almost have 98%, 99% retention in those cases. There is a customers which are smaller coming through channel partners and on. So SaaS, since in U.S. customers were smaller size, some of them, so there has been a limit of churn, but still we’ll have more than 90% retention on that level. But globally if you look at non-SaaS customers and our enterprise customers, larger ones, we almost have 100% retention. We don’t have losing too much out there.

Operator

Thank you. Mr. Rajesh, may we request that you return to the question queue for follow-up questions. [Operator Instructions] The next question is from the line of Chirag Kachhadiya from Ashika Institutional Equities. Please go ahead.

Chirag Kachhadiya — Ashika Institutional Equities — Analyst

Hello. Congratulations on a good set of numbers, sir. I have a few broad question. In last five years, what strategically we changed in our business model like coming into power since we listed in market to streamline the processes which earlier were not there in conjunction to the ballpark vision of reaching $500 million, the kind of turnover we have in mind. So can you just throw some strategic highlight on that?

Virender Jeet — Chief Executive Officer

Yeah. So Chirag, last five year or more continuously what has happened, but I can tell you specifically what we have done slightly in last three years and that is the timeline when we started working on the GSI. And the idea was not working on GSI, the idea was to find a way to enter Fortune 2000 market and that could not be directly only sales-led.

I think we have invested lot on creating the GSI enablement ecosystem, which is typically a GSI sales team out of India which is working with relationships, competent-centered, [Indecipherable] and we have augmented those sales teams out there. So it’s a whole enablement, training, certification model for that. So a lot of investment has happened that. And that’s the framework which will continue to give us a return over next many, many years because at whatever speed the GSI grows or the partner ecosystem grows, we’ll keep on leveraging that framework.

The other thing is we have started increasing our investments in mature markets. The opening of the Australia subsidiary, strengthening the U.K. subsidiary, extending the enterprise sales team in U.S. those and some other initiatives. And third have been predominantly about looking at positioning, branding and the product, which is typically to look at how the product. So we are recently coming up with the next very happy that probably we’ll be leasing it in this week, one of the products which is typically to address lot of concerns around or opportunities in our mature markets in terms of what people expect in the product. Those are the user interfaces, compliances, regulations. So I think lot of — so I will say if you summarize more and more preparing ourselves for mature market and finding ways to really succeed out there, that is where the investment.

On the other hand, to protect ourselves and to grow strong in our traditional markets, we have gone deep into the what you call creating multiple verticals within the same business segment. So banking, we came up with paid, digital lending products, collection, service request management, insurance we got more deep there. So working on two wings. One is wherever we have a named account strategy, we know what we are selling, we are going very deep in those verticals and trying to protect our market share or expand within the same accounts and get more accounts. And on the mature market, really investing in sales and marketing, GSI ecosystem and enrollment product, brand. So I’ll stop there. Does that help?

Operator

Thank you. The current participant has left the question queue. We’ll move on to the next question from the line of Sarang Sanil from RW Investment Advisors. Please go ahead.

Sarang Sanil — RW Investment Advisors — Analyst

Hi. Good evening, sir. Am I audible?

Virender Jeet — Chief Executive Officer

Yeah, please go ahead.

Sarang Sanil — RW Investment Advisors — Analyst

Thank you for the opportunity. My first question is, in general, how is the situation in U.S. and Europe right now considering the ongoing macro event apart from us walking away from the deals was a long-term focus in U.S.? And on the same line, if you could provide what percentage of EMEA [Technical Issue]

Virender Jeet — Chief Executive Officer

Yeah. So I think I’ll answer the second one, it’s easier. So EMEA for us actually is predominantly Middle East Africa. Europe is a very small. I think we just do roughly around $3 million of revenue in Europe just, that too also in London with few clients. So Europe, we are completely starting our journey. U.S. is roughly around 27% to 30% of our global revenue. So, first of all, generally in Europe, we have seen there is a slowdown, especially coming — the feedback coming from our system integrators or partners, we are finding it challenging. They are really looking at how to optimize right now their operations.

U.S. I would say we are still in the account profile which are very small. And I think they have been sleeping in the pandemic era and they’ve not even come back after that. And so that area. But on the larger account size there, I think there has been a last — at least last three quarters, there has been a kind of conversation about there is probably a recession around the corner. They need to optimize, they need to go slow on that. Has it affected our business? I wouldn’t say that because our share of world business is so small. I think our own actions right now determine our outcome rather than the overall global market.

Sarang Sanil — RW Investment Advisors — Analyst

Okay. Sir, my second question is, when can we see the net DSO going down, because in the last quarter, it was told that it could stabilize soon, right?

Virender Jeet — Chief Executive Officer

Yeah. So I think we have done that journey of taking it from 200 days to 110, 115 days. And next phase of our endeavor is to bring it sub-90 days, roughly around that. And what your — when I break this problem into multiple regions, we have sorted out for most of the geos, apart from Middle East and Africa. We were the only geos. Since it’s a large territory, it’s affecting us still. So I think slightly — it has slightly shifted on the upward because of, one is of course the higher revenue being blocked in last two quarters, but also on account of some amount of inability to travel in those regions. And again, the currency fluctuations happening in Africa over last one and a half year. I think we are looking very strongly on that. And I’m sure as soon as we are able to get the EMEA under control, I think we should be able to get a much stronger number all across.

Sarang Sanil — RW Investment Advisors — Analyst

Okay. Okay, sir. Understood.

Virender Jeet — Chief Executive Officer

I would say in the next two years, I think we should be there.

Sarang Sanil — RW Investment Advisors — Analyst

Probably two year, is it? Okay. So my last question is, also what is our exposure to UAE in general? Just to understand the tax impact we could potentially have in [Indecipherable] [53:11] corporate taxes in both region. And any comment on that? Are we in tax-free zone or anything of that such?

Virender Jeet — Chief Executive Officer

We are in tax-free zone out there. I have no — I think there is room right now because most of the billing is from branch office in UAE. So right now, in existing contracts, there is no taxation. But we are also looking at localizing in both UAE and Saudi in a period of time. And we should be able to come in the taxation. And there is a taxation, we don’t think there is a substantial impact on that. So right now, I think our UAE and Africa region is quite distributed. There is no single region which is giving us. So we are having business in Dubai, we are having large business in Saudi, Qatar, Oman and then other territories as well. But I don’t have the numbers of exactly in each territory, maybe if you can contact Deepti, she can send you the additional details.

Sarang Sanil — RW Investment Advisors — Analyst

Sure, sure. Sure, sir. Thank you, and all the best.

Virender Jeet — Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Rohit Balakrishnan from ithought PMS. Please go ahead.

Rohit Balakrishnan — ithought PMS — Analyst

Hello. Am I audible?

Virender Jeet — Chief Executive Officer

Yeah, please go ahead.

Rohit Balakrishnan — ithought PMS — Analyst

Yeah. Thank you for the opportunity, sir. Sir, just couple of questions. One was, can you share what are your gross margins in nine month FY ’23?

Virender Jeet — Chief Executive Officer

Yeah. Just give me five minutes. I think it should be around 62%.

Rohit Balakrishnan — ithought PMS — Analyst

62%, okay. Is it possible to probably share that — I mean, in the presentation as well — I mean, you shared the employee cost and that would also include R&D and also I think some bit of sales and marketing. So if it’s possible to sort of separate that out and just to — because as you explained earlier, probably, as more subscription business becomes greater and probably gross margin, it’s easier to track that gross margin evolution for us from the outset. So if you can share?

Virender Jeet — Chief Executive Officer

Sure. I think we can. Okay, I’ll ask Deepti to look at that and see that we can present. I think you’re right. Historically, see, we have been in this range of between 62% to 64%. And you’re right, as we get into more in subscription and more annuity businesses, it will keep on expanding.

Rohit Balakrishnan — ithought PMS — Analyst

Right. And sir, second question was on the — on your U.S. and more advanced market strategy. So in these markets — I mean, how are we going — I mean, how are we sort of trying to go after the markets? And you mentioned that marketing is something that we need to work on. But in terms of the kind of customers are we targeting. Are we targeting the Tier 1 customers, you’re first going after the smaller customers and then eventually go into the larger customers? If you can share a bit around that, that will be also useful?

Virender Jeet — Chief Executive Officer

Yeah. So I think in U.S. we don’t have one strategy, we have multiple strategies. So in certain core verticals where we know exactly what the customer wants, we go directly to the end accounts, which is what we call a direct sales strategy. So like in banking, typically Tier 2 and Tier 3 banks, we have a direct sales strategy. So we go and we know exactly whether we are going to — or do a digital lending journey out there and origination or any other solution out there. So this is where we have a direct sales team which is distributed across different regions in U.S. and they’re trying to enter these accounts.

For Tier 1 accounts, other accounts, larger accounts, we are going through the GSI strategy where we are saying that the GSI is already an incumbent, they have worked on multiple projects with us across geos. Now if there is an opportunity either which they bring in or we are able to sense, then we can always go with the partner. So between we call this enterprise sales or GSI strategy and other is the banking sales strategy. So we have these two strategies going on parallel and we are continuously refining them so that they deliver.

Rohit Balakrishnan — ithought PMS — Analyst

Understood. And sir, on this GSI, one question was that, you mentioned couple of times in this call that it’s going a bit slower than what your expectation was. So one question is, why is it slow? And second, is there something that we can do to change or is it just a normal evolution that will take some time for it to deliver?

Virender Jeet — Chief Executive Officer

Yeah. So the question is first of all, why, if I had answers, I would have sorted out. But what we are doing, we are not happy with that doesn’t mean that we’ll reconcile to that. So we recently decide with lot of consulting companies to look at outdoing whatever GSI strategy, we are adopting those changes. We are also looking at complementing the whole strategy with our own brand presence, our own aggressive marketing in U.S.

See, what happens for product companies, it’s a general trend that at around the size of $300 million, $400 million, 60%, 70% of the revenue is partner-led or what you call GSI or as partner-led. So we’ll have to go and replicate that. So whatever we are investing is the right path to do. So there is no way that we can slow it down. We have to find ways of aggressively pursuing it and getting returns out of it. So this is not in one of the strategies. So this is the more prevalent as sales go-to-market strategy coming in next three, four, five years. So we’ll have to find a way to really escalate it. Now we do get roughly around nine to 10 logos a year. We could be very happy or disappointed, that depends on whatever end escalations are. So our escalations are very high that’s why we are not happy with that. But getting 10 logos through GSI is also a good feat.

Rohit Balakrishnan — ithought PMS — Analyst

Sure. Fair enough. Thank you very much, sir.

Virender Jeet — Chief Executive Officer

Thank you.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Ms. Deepti Mehra Chugh for closing comments.

Deepti Mehra Chugh — Head Investor Relations

Thank you so much everyone for joining in. For any further queries, you can connect with me or you can go to our website. Thank you.

Operator

[Operator Closing Remarks]