Newgen Software Technologies Limited Q4 FY23 Earnings Conference Call Insights

Key highlights from Newgen Software Technologies Limited (NEWGEN) Q4 FY23 Earnings Concall

Management Update:

• [00:02:14] NEWGEN said it crossed the total income milestone of INR1,000 crore in FY23.

Q&A Highlights:

• [00:12:13] Baidik Sarkar from Unifi Capital asked how does the systemic banking crisis in the U.S. affect the company’s pipeline given the good traction this quarter. Virender Jeet CEO replied that the US business is diverse and operates in financial services and large enterprise accounts from GSIs. The pipeline shows no apparent risk, and deals were closed organically or with GSI support. The strategy is shifting to focus on larger accounts, and early successes have been seen. The US is contributing to growth, achieving significant two-digit growth by year-end.

• [00:12:23] Baidik Sarkar of Unifi Capital queried if the momentum in the Middle East will continue or is it a cyclical high due to commodity prices and difficult to repeat. Virender Jeet CEO replied that the Middle East market behavior changes when oil hits extremely low levels. Many companies are trying to de-link their economies from oil and there is economic activity in Oman, Saudi Arabia, and UAE. The growth momentum in the Middle East should continue this year.

• [00:16:22] Baidik Sarkar of Unifi Capital asked what is the long-term plan for the cash build-up and distribution to stakeholders given the muted payout relative to cash flows this year. Virender Jeet CEO answered that NEWGEN is maintaining its dividend payout as a percentage of PAT while seeking opportunities for growth through organic and inorganic investments. A policy on dividends or deploying the accumulated cash is expected to be formulated in the coming quarters.

• [00:17:28] Mihir at Carnelian Capital queried how is the trade finance platform performing in the U.S. given the larger deal sizes, shift to larger accounts, and the organic sales channel. Virender Jeet CEO replied that trade finance is gaining popularity in the Middle East and India, and attracting interest from the US and other markets. Marquee accounts have closed significant deals, and seven more deals are projected globally. The US strategy aims to target larger banking accounts and traditional products, with promising initial returns.

• [00:17:28] Mihir at Carnelian Capital asked how is the traction in GSI and how many deals were won in 4Q23 and FY23 vs. last year. Virender Jeet CEO replied that the GSI movement has added value but not at the expected speed. New relationships and alliances have been formed and 3 new deals were closed in 4Q23. Substantial deals were also closed from existing accounts. The number of new logos acquired was not significantly high but revenue realization is better.

• [00:20:44] Mihir at Carnelian Capital asked how should the margins be seen for FY24 and FY25 given the recovery in 4Q and the 300 bp decline from a YoY basis for FY23. Virender Jeet CEO said last year, margins were lower due to a revised manpower cost base and travel restoration. The target is to do 18% net margin and 20% EBITDA. This year is a growth year with aggressive investment in sales and marketing. Manpower costs will have an impact and margin levels should be maintained with a bit more PAT for growth.

• [00:22:31] Harsh Shah with Dimensional Securities asked how is the competitive landscape and pricing pressure in traditional markets and the U.S. given the slowdown in revenue growth of larger companies. Virender Jeet CEO clarified that competition for core products is standard, while vertical banking products face different competition. ECM market consolidation has left few key players. Larger U.S. companies have less impact due to diversified revenues. Next year’s funnel and order book are healthy, but environmental conditions may affect actual results.

• [00:25:03] Harsh Shah with Dimensional Securities enquired how NEWGEN expects its growth to come in the next 3-5 years, from more client addition or increasing revenue per client. Virender Jeet CEO said that as a software company, NEWGEN aims to reach $500 million to $1 billion in revenue by capitalizing on the vast market potential of its product categories. Growth in emerging markets has been encouraging, and anticipate even higher growth in the next 4-5 years through increased client acquisition and larger deal sizes.

• [00:29:29] Chirag Kachhadiya at Ashika asked are the new geographies NEWGEN is targeting for logo addition having similar deal sizes as the existing geographies. . Virender Jeet replied that the new geography is typically mature markets and NEWGEN expects the deal sizes to be the same or better.

• [00:32:17] Saurabh Sidhwani of Sahasrar Capital asked are NEWGEN’s products built in India at a lower cost compared to peers due to labor arbitrage, and if NEWGEN always win on pricing. Virender Jeet CEO said India offers a 6-7% cost advantage on R&D vs. the US, which is balanced by larger peers with larger R&D budgets. This cost arbitrage provides a competitive edge and benefits customers. However, product pricing is benchmarked to the market and not directly correlated with R&D costs.

• [00:36:54] Manoj Bahety with Carnelian Capital asked when entering into a partnership with a GSI that deals with competitor products, is cost a big consideration for NEWGEN’s offering vs. existing products. Virender Jeet CEO answered that NEWGEN is the leading product for content-based process automation and GSIs recognize its value. Customers have a significant say in product selection and if they choose NEWGEN, they will have a trained GSI ecosystem for implementation.

• [00:45:08] Rahul Jain from Dolat Capital enquired about the benefits of the partnership with Mambo and Sopra and the intersection and complementary elements of the offering. Virender Jeet CEO replied that NEWGEN is exploring the partner ecosystem for complementary products and go-to-market strategies. With Sopra, NEWGEN is selling digital lending products in Europe and adjacent areas. With Mambo, NEWGEN is expanding beyond core banking with structured loan products, Enterprise Content Management, and Customer Communication Management. Both partnerships are in the early stages with some market successes.

• [00:49:04] Dhruv Bhatia from AUM Fund Advisors asked about the reason for increase in DSO days to 145 days in 4Q23. Virender Jeet CEO answered that DSOs have risen over the past year due to a surge in end-of-year billing. Billing growth has outpaced revenue growth, resulting in higher DSOs. NEWGEN’s goal is to lower DSOs to approx. 120 and optimize further. DSOs are slightly higher in EMEA and India but significantly lower in APAC and the US. The aim is to continuously reduce DSOs to achieve the target of 120.