So today we have on, online with Sampath, the CEO of hSenid Business Solutions, Nilendra, the CFO, and Ravin, Finance Controller, to answer questions. So with that, I will actually pass it to Sampath to take over and start the conversation.
Hi, good morning, good afternoon, good evening, people who are joining in different regions. So, Nilendra will go through, like, you know, a couple of slides. We shared the presentation a couple of days back. Hope you all have gone through it. And, but, Nilendra will highlight a couple of key points, and then we can get into question and answers. Nilendra, over to you.
Thanks. Once again, good afternoon, good morning, everyone. Let me quickly start off with the readout, and then we'll go into the Q&A session. So first of all, again, let me welcome all of you to the Q1 FY 25 Investor Forum. We sincerely appreciate your participation and look forward to actively engaging with you over the next hour by addressing your queries. A kind reminder that the format of the IR call will be as per our practice we started last year, meaning there will be no formal presentation made, and the entirety of the call will be devoted to addressing your queries after this readout. Also, as promised and notified, the quarterly earnings presentation was sent to you via email and uploaded to the IR website.
To start with a quick rundown of Q1, we recorded revenue of LKR 466 million for the first three months ended June 30, 2024. This represents a 30% year-on-year growth in LKR terms, and a 36% year-on-year growth when measured in USD constant currency basis. PeoplesHR Cloud remains our core focus, recording a year-on-year growth of 27% in LKR terms and 31% in USD constant currency terms. As of the close of Q1, the core exit ARR, annualized recurring revenue, exceeded $3.5 million, which is a 50% year-on-year growth in USD constant currency terms. During the quarter, we also recorded new deals of $357,000.
This is a 44% year-on-year growth when compared to Q1 of last financial year, and an 87.5% share of this came in from the PHR Cloud business. Also due to higher partner commissions on account of partner source deals and normalized EBITDA margins slightly declined to negative 9.6% from negative 7.8% achieved during Q4 of last financial year. The free cash flow margin of the firm in the quarter improved to negative 5% from negative 7% on a quarter-on-quarter basis. We should note that this is a significant improvement from negative 28% recorded during the full financial year 2024.
Apart from that, we need to draw your attention to 2 important slides, which is on slide number 20 and 21, which covers the key corporate actions announced during this quarter. The first one is reallocation of IPO funds, I think this has been a recurring question, where the initial LKR 650 million allocated for M&A will now be redirected towards organic market development activities. This is driven by the superior risk-reward profile of organic growth compared to what we expect on the inorganic side.
I think we have been repeatedly talking about GTM efficiency ratio, where we achieve or acquire organic growth revenue streams at about 111% of our cost in terms of sales and marketing expenditure, which is essentially an acquisition multiple of 1.1, compared to a significant premium that we would have to pay for the 4.9x EV revenue multiple that you typically find a SaaS company trading at. And this is particularly looking at the 1.4x EV revenue multiple that we are trading at as a company, our stock, and hence we believe the organic route of market development is having a much better risk return profile than inorganic opportunities. So this is subject to shareholder vote at the AGM happening next week.
Corporate action number 2 was on the special dividend distribution to shareholders. We have a unique structure where shareholders have the option to receive the LKR 1.25 per share dividend that was declared in either cash or scrip form. The decision is based on the initial results from our organic growth initiatives and the anticipated future free cash flow generation of the business. We feel that shareholders can best take this decision of whether to prefer short-term liquidity, i.e., receive the dividend in cash, or go for long-term capital gains by opting for scrip dividends. We need to highlight to you that the cutoff date for preference election forms is Friday, the ninth of August, 4:30 P.M. IST.
So if our shareholders wish to receive scrip, or 50/50, they should send in their preference forms, before that cutoff date. If you intend to take cash, even if you don't submit a preference form, the default option will be cash, and you will receive the cash at the respective payment dates announced to the CSE. With that, our opening remarks come to an end, and we would now like to open the session for Q&A. Please, either raise your hand so that we may enable you, unmute you, so that you can ask your questions, raise your questions in person, or you can type in your questions to the Q&A functionality of this video call, and we will answer your questions. Over to you.
Okay,
Let's start with this. Yeah, you can comment on the current discussions on the new deal discussion and closures. Is there any seasonality of the deal closures? Yes. Usually, historically, if you really look at our numbers, Q1 sales closures are low. That is because of budget approvals and various things. So, Q2 and Q3 sales numbers are higher and, traditionally, like, you know, Q4 is the highest. So trend is, starting with low number in Q1, and it will pick up during Q2, and Q3 and Q4 are usually good, when it comes to sales. So that is what is happening at the moment. Like, you know, so the three regions we are working on, that is the MEA region and South Asia, and Southeast Asia, all three regions, we are expecting a similar pattern.
The Q2 sales closures, we are expecting contribution from all three regions.
Maybe on the second question, I'll take it. Can you give us a breakdown of the on-premise non-recurring revenue implementation versus licensing, and Uganda versus other projects? I think this is best answered on this particular slide, slide number 13. You will clearly see under PHR on-premise, you have the recurring revenue component and the non-recurring revenue component. And if you look at first quarter of FY 2025, the recurring revenue component is approximately LKR 40 million. This is essentially the annual maintenance contracts or the recurring part of the revenue. Non-recurring, you see LKR 81 million, a significant contributor there, roughly LKR 36 million was from the government of Uganda, milestone-based invoices.
The rest of it, implementation revenue from other on-prem projects, carried out by the company. There's a question on, what has been the reason behind the on-premise support revenue volatility. Last three quarters, LKR 48 million, LKR 26 million and LKR 40 million. I think the main source for the volatility is coming from migrations, upgrades. When typically our on-prem customers migrate to the cloud, we lose that AMC revenue stream, so that goes as a reduction in AMC recurring revenues on on-prem side. And of course, particularly, looking at the Middle East Africa region, when we onboard new clients on the on-prem side, you see that number rising because of new AMC contracts. So, you'll see volatility coming from those two sources when it's, as far as the on-prem business is concerned.
There's a question on implementation revenues. Despite having very healthy new deal closures during the last three quarters, cloud implementation revenue has gone down Q on Q, from LKR 62 million to LKR 40 million. Can you explain any possible reason? I would say there are two answers here. One is a short-term reason for fluctuations, other one is a long-term one, a long-term trend. Short-term reason is naturally this aligns with the milestones of a project where we can invoice. So if there aren't any milestones in a, say, relatively larger implementation, even if it's a cloud project, you would see some revenue volatility coming, because unless otherwise, we complete that milestone, get the necessary milestone-related documentation signed off from the client, we won't be able to raise those invoices. So that partly brings volatility in the short run.
But in the longer run, there is another trend that is also worth taking note of, which is, the more we venture out and grow in, our focus markets, you will see, partners also playing a larger role, in implementation. Because the, the reason or the secret behind scalability, one of the key ingredients in the scalability, is having an ecosystem of service partners or implementation partners who can provide the necessary professional services to implement our software, because that makes us much more scalable as a software company. So the more we do that, you will see our ARR growing, but our implementation revenue is coming down. I mean, I think if you look at the presentation, we reported that, ARR accounts for 58% of our total revenue.
Ideally, as a software company, we would like that number to be in the 75% range. That happens partly because of ARR growth and partly because of professional services revenue shrinking, with there being a ecosystem of implementation partners out there. There's a question on what has been included in the other mobile segment revenue. What was the reason for the sudden Q on Q pick-up in revenue from LKR 15 million to LKR 50 million? Sampath, you want to take that?
These are Singapore.
Yes.
Because actually, there's a invoice pattern in Singapore office when you raise the invoice. So like, you know, invoice recognition will happen when you realize the revenue. So quarter one - quarter on quarter, there can be different figures. So it is not you recognize revenue like, you know, by one twelfth for each month. This is actually based on the projects completed, you have to recognize the revenue for that quarter, like, you know, so that is why there's a difference in patterns.
... Okay, there's a question-
Bangladesh.
Bangladesh.
Yeah, so, our Bangladesh operation is a fairly small operation. So we have a development team of around, like, you know, 8-10 members with the technical team. So at the moment, there's no big impact on exposure to ECL overall, like, you know, less than 3% overall. So, it is manageable at the moment.
Yeah.
There's a question on staff-related costs have further escalated to LKR 171 million from the last quarter's LKR 157 million.
Yeah.
Can you explain the reason behind further delay?
This is actually our increment cycle is in April. So when you compare with Q4 last year, staff cost and Q1 current year staff cost, of course, there's an increase because of annual increments. But when it comes to staff recruitment, other than customer success, sales, and marketing area, we are not recruiting in other divisions. So, like, and we can stabilize the cost structure going forward. So we are not expecting major increment in the employment cost structure during the next couple of quarters, other than, like, you know, some of the notable hires in multiple regions, like MEA region and Southeast Asia region. We will strengthen our sales and marketing efforts, so we will recruit few in that area.
But other than that, engineering, support services, or implementation area, we will not recruit any new hires, and then we can manage the current cost structure.
The next question is on competitive differentiation. How does hSenid differentiate from competitors like Workday and Paycom?
Yeah
... in its key market?
Yeah, actually, we are very strong in our core product. If you really look at the region-wise, now we operate in 40 countries in the region, three regions, I told you earlier as well. So one of the key differentiator is our localization capability. Now, if you really look at markets like Philippines, Indonesia, Brunei, or Cambodia, or whatever market, we have localized our product to suit the local requirements. So that is one key differentiator, because some of these global products, they work with local players in some of these payroll and other related areas. So in our case, it is not so. Like, you know, we are a single product goes to these markets. So there's a clear advantage working with one single product. There's no integration requirement when it comes to payroll, HR suite, including payroll. That is one.
On the other hand, we are an end-to-end product. Now, if customer want to start the journey with payroll, attendance, leave management, and personal file management, later can extend to recruitment, training and development, performance appraisal, talent management framework. Likewise, they can keep on adding. So it's one side, it's very strong, like, you know, core HR product suite these market segments we are operating. On the other side, if customer want to grow into other areas, still, like, you know, you can deal with the same company, same product, and, grow, parallelly as well. So that is, I think, one of the key advantage. Of course, like, you know, we are, competitive in price as well. It's a good world-class solution at a very competitive price for the local market. That's how we compete in these three regions.
If I may just also add to that, most of the products that was mentioned in the question come from developed markets where HR practices are very homogeneous. We operate in emerging markets, where there are complex HR business processes, where HR practices are very heterogeneous. It's very different. It's very complex. It's different from one organization, even operating in the same industry, to another. And our product, as a product that is born and bred with complexity in emerging markets, grew in emerging markets, naturally has an inherent advantage of being able to cater to this complexity. And that is one clear reason that we win in these markets, where more mature Tier One developed market products will always be rigid and not be able to cater to the complexity and flexibility that is required to cater to address the complexity in these organizations.
There's another question on sales, promotional expenses. So of course, yes, like, you know, because, we are investing on these markets, especially Southeast Asia and MEA region. So we are right now investing on, demand generation. So once we invest on demand generation through our marketing efforts, events, and, and even digital marketing activities, so we have to incur the cost now. But of course, like, you know, once you do the demand generation, sales cycle, we discussed earlier as well, like roughly around 6 months to 9 months sales cycle. Like, you know, so we are expecting results in coming quarters. But of course, we have to invest now for brand building, demand generation, and we are expecting good results in coming quarters. And of course, we are investing on partner network building as well.
So initial phase, like when you are developing partners, it's a very slow movement, because partner... We have to enable partners, we have to enable their sales teams, we have to enable their implementation. A lot of efforts goes into partner development work. So that is why we are investing onto these, these markets to build the market, but we are expecting good results in quarters to come.
Yeah. And then also, I think how we measure the effectiveness and efficiency of this spend is not by looking at revenue. The reason is we don't need a good 90% of this sales and marketing expenditure to maintain the current revenue base. I mean, we might need a little bit of corporate branding, PR expenditure, but bulk of it is an investment that goes into generating future revenue, i.e., growth. And how do we measure the efficiency of that? Is through the GTM, go-to-market efficiency ratio, which is calculated as fully burdened sales and marketing costs. This is people, tools, promotional activities, digital marketing, all that, divided by net new ARR. And that ratio for us for FY 2024 is 111%, meaning we spend 1.1 times the annual-...
recurring revenue that we acquired from these new customers, that came on board. Now, when you do that, come next year, your sales and marketing expenditure will get reinvested to acquire new streams of revenue. But that ARR that was acquired in the previous period continues at a very high GP margin, thereby leading to the non-linearity of revenue growth seen in SaaS companies. So I think sales and promotional expenditure itself is that accelerator, that if done with the right monitoring and efficiency metrics, that can really give the hockey stick effect in the revenue. There's another question, Sampath, on market landscape. Could you provide insights into-
Yeah
- the HCM software market in South Asia and Southeast Asia?
Yeah. So these are two regions we are already working on. If you really look at, we are primarily focusing on Southeast Asia market because that we feel as a good market. There are two things to look at it. One is size of the HCM market. It is considered as $9 billion, like, you know, as per some of the, the Gartner reports. So there's a sizable market in Southeast Asia. At the same time, like, you know, number of employees, because the population in this, some of the countries we are working on, it's very healthy population, like, you know, so the workforce is extremely high. So those are the two parameters we look at. And then, I think it's a very sizable market for us to work on.
There's a question on the partner conference. Let me read it out, Sampath, maybe you can take it.
Yeah.
What were the key outcomes of the first partner conference, and what strategies are being implemented to enhance the partner channel?
So yes, like, you know, because this is the first time we had a partner conference in Sri Lanka, so we invited most of partners in the three regions. So it's a building space. As I told you, like, you know, now we have developed partners in multiple regions, like, MEA region, then Southeast Asia, and South Asia. So right now we are in the partner building stage, partner funnel, development stage, demand generation stage. So we are closely working with them. There are some notable partners in both MEA region and Southeast Asia, so we are closely working with them to improve their sales funnels, sales promotional campaigns, some of the joint events organized in multiple regions.
So it is in the growing stage, so, we are expecting these partners to give us steady revenue in the years to come, like, you know, for the next year and year after.
The next question is on the dividend policy. What is hSenid's long-term dividend policy, considering its financial performance and future capital needs? I think as I mentioned in the readout, what is being declared now is a special dividend. Long-term dividend policy will definitely be that of a residual distribution policy. That is where we will always make sure that we have adequate cash for the investments that are happening. And when I say investments, these are all essentially sales and marketing and product development investments. And net of that balance, we will return to the shareholders.
I think the very fact that we paid a substantial dividend of LKR 346 million, despite having an almost equal amount in losses last financial year, itself is an indication that we don't intend to hold on to more cash than we need. I think that signal has been given clearly. But in the long run, to answer your question, it will be a residual dividend policy.
So there's a question on regulatory compliances. What measures has hSenid taken to comply with developing tech and data privacy regulation between Sri Lanka and EU? So, we are looking at actually regions, we are working on three regions, so we are not very much keen into, new, like, you know, because what is applicable in these regions, we are very much keen. We are ISO 27001 certified company, and also, like, you know, last year we acquired the cloud security certification as well. So these two certification give us, like, you know, the required, bandwidth, in terms of, like, you know, data protection. And also certain country-specific regulation we have already adapted.
And then at the moment, like, you know, we are adapting to Sri Lanka Data Protection Act as well, which most probably, like, you know, will be enacted effective from early 2025. So we are ready with whatever compliance requirements when it comes to data privacy.
The next question is on capitalized contract costs. How are capitalized contract costs amortized, and what do they include? So this is a practice we started end of last financial year, where out of our sales and marketing expenses, we identified one item, which is our sales team, internal sales team commission costs, which needs to be capitalized as per the accounting standards and amortized over the three-year contract period. Because typically, our cloud contract we sign up is for three years, and the commissions paid to the sales team that closes the transaction, closes the deal, essentially hits the P&L in day one, whilst the revenue of that contract comes over a three-year period.
So from a accounting and fair reporting point of view, we followed what was provided in the accounting standards, and we have checked this with our auditors and checked this to be in line with practices followed by other IFRS compliant software companies overseas, where sales commissions related to the cloud contracts, in this case, three-year cloud contracts, are being capitalized and amortized over the relevant contract period. There's a question on the asset yield: What is the current yield on hSenid's other financial assets? So basically, this goes into two buckets, LKR assets and USD assets. LKR assets right now, the yield is roughly in the range of about 9%-10%. On the USD side, that's around 4%-5%.
Dividend options rationale: Why does hSenid offer varied dividend options, and what would you recommend? I'll first answer the why. Why is because we feel our shareholders are best suited to decide whether they need to take cash, which is liquidity, whether they need short-term liquidity, or whether they have a medium to long-term view on the company, on the performance, that they would want to rather reinvest that money and take shares, as in opt for the scrip dividend option and participate in more medium to long-term capital gains. So we thought that it is best that we leave this decision with our shareholders. I believe this may be the first time in Sri Lanka that the cash or scrip option is given. And we look forward to our shareholders making the decision that best suits them.
As for a recommendation, again, as a company, we would not be able to recommend any option because it all depends on the circumstances of the individual shareholders. So I would like to reiterate, if as a shareholder, you prefer short-term liquidity, you can go for the cash option, or if you don't respond, the default option will be cash. If you intend to either take full scrip or 50/50, and by doing that, your shareholding in the company will increase at the expense of those who get diluted and take cash dividends, then you could benefit from longer-term capital gains. You need to send in your preference before day after tomorrow, that is Friday, the ninth of August, 4:30 P.M. IST.
You can either submit the hard copies to the registrars or stockbrokers, or the easiest option would be to download the preference form available on the Colombo Stock Exchange website and just email it across to us, as per the instructions given. There's a question whether the company is planning to continue investor preference dividend method for next year as well. We can't commit on what will happen in the future. I think it, it's a decision for the board and, and ultimately, obviously, the shareholders to approve. I need to reiterate in response to the previous comment also, this dividend is subject to approval of the shareholders at the annual general meeting happening on the fifteenth of August.
So, in answering this question, we cannot commit on this, but as a method, we feel this is a very democratic method that gives the option, places the option squarely on the shareholder to decide whether they want to reinvest their money or take cash. So we look at this method preferably, but I think future decisions on dividends will always be dependent on company performance and free cash flow generation. Can we get a sense of how the major shareholder is going to be taking their dividend? I think at this point, we haven't basically communicated any, neither the major shareholders nor individual shareholders' preferences to the market. We are in the process of collecting these preferences. Dinesh, I don't know if you want to make a comment on that.
No, I think, we are still looking at it, but, as from major shareholders, I think we are... It may be we will be opting to, like even a 50/50. So from, you know, so that has to be approved by hSenid Ventures. So hSenid Ventures is the major shareholder. We are looking at, a scrip dividend of, at least 50/50, but that needs to get approved within the next couple of days.
Thank you.
What are the top countries with the highest demand for PeoplesHR Cloud and PeoplesHR On-premise? Like, when you look at the Southeast Asia market, Philippines and Indonesia are our main markets, so we are getting good demand for especially cloud business in two countries. And MEA region point of view, PeoplesHR On-premise especially countries like Kenya, Tanzania, Uganda and Malawi, like, you know, those are the East African belt countries, demand is for on-premise. But there's now growing demand, like some of the on-premise accounts are converted to cloud. So there are certain upgrades happening, like, you know, customers are moving from on-premise to cloud. So we are expecting like, you know, MEA region also slowly move to cloud, especially mid-sized companies.
Of course, high, high corporates will still, like, you know, go with on-premise. And of course, South Asia markets point of view, Sri Lanka and Maldives are the major markets for us. Projections point of view, like, you know, we are actually in the investment mode. Hopefully, towards the end of this year, we are trying to achieve like, you know, net profit. So that's the plan at the moment. So, I think like, you know, the way things are happening, we can expect, things to change in, Q3 and Q4.
On the margin projections, see, while I mean, we've spoken and focused a lot on EBITDA and EBIT margins. I think we've mentioned EBITDA at -9.7, and there was a slight decline because of the higher partner commissions that we had to take in on the PNL this quarter. Our immediate focus obviously will be to be EBITDA positive, but we are also focusing a lot more, and if you may have read between the lines in our readout and the presentation, we are focusing a lot more on free cash flow margins. As I mentioned before, -28% was our free cash flow margin, given that we were in a significant investment mode on the talent side and market development side last financial year.
We improved over the years, over the quarters of that year, where we ended Q4 on -8%, and Q1 we're at -5%. So, you'll be hearing a lot about free cash flow and free cash flow margins from us in the future. We are really focused on making sure we get in line as soon as possible with the industry, and industry is at about 20% free cash flow margin.
How is the competitive environment for Charting? Of course, like in all three regions we are working on, competition is extremely high. But, we have differentiation factors like Nilendra mentioned earlier, and then, I explained that, further. So, we are building, like, you know, some of the industry-specific feature set to target certain industries in the regions we operate. On top of that, actually, we focus on our core product and localization for those countries. So that is how, like, you know, we compete with local competitors as well as, global, competitors, operating in multiple countries.
An update on the Uganda project.
Yeah. So Uganda project actually, as I explained during last meeting as well, this financial year, we are planning to close the full project. Simple example, like, you know, so we start the phase 3 in Q1, and it is progressing well. So there's a invoice we raised in Q1 as well. The other balance invoices spread over Q2, Q3, and Q4. And we already started support services for phase 1 project, and phase 2 support activities will kick off in Q4, current financial year. And then, of course, like, we have to wait another 12 months to kick off the support services for phase 3 with the warranty period. So project, as per the current plan, we are completing somewhere around October-November timeframe, successfully. So that's the current update.
There's a question on: What is the rationale to announce a dividend given the continuous losses reported? So, couple of things here. First and foremost, a dividend for us, while it is a distribution of past retained earnings, is more a forward-looking decision than a decision that we take looking at the rear view mirror. So we are looking at free cash flow generation, the improvement in the trend, our plans in terms of getting that into significant positive territory, as I answered before. Second, we are looking at improved working capital management. And third, we are looking at getting our customers also to move to annual contracts, which is typical of the software industry globally.
I mean, we have most of our clients right now on monthly payments, and that leads to certain working capital challenges. So we are rolling out some a program internally to get our customer success to speak to our customers and get them converted wherever possible to annual contracts. So all this, looking at the future, is going to lead to improved cash flow generation, and we want to make it clear to our shareholders that we have no intention to hold on to any more cash than what is required to run the business. And I think Chairman has been also mentioning about, you know, capital allocation, proven capital allocation in his letters to the shareholders continuously.
So we want to live by that and make sure that any excess capital is returned to the shareholders. When can we expect the company to reach breakeven and earning profits? Were these continuous losses due to provisions, non-cash adjustments? So the target, like Sampath said, is to be profitable by the end of this financial year, and we will be reporting quarter-over-quarter on how we improve, not just on EBITDA numbers, but also on the more important free cash flow generation and FCF margins point of view. The losses are not because of non-cash adjustments or provisions, right?
In the last call, full financial year, we called out roughly LKR 100 million plus non-cash adjustments and provisions that came in, due to various factors, including deferred taxes, Forex gains, Forex losses, and, gratuity adjustments. But Q1, basically, this is—these are, actual expense structure that you're looking at, and these are, losses due to the investments we are making, mainly on the, sales and marketing side. What are the plans to cover up the loss incurred in 2023, 2024?
So basically, like Sampath said, we want to be profitable by, the end of this financial year, which means that Q2, Q3, and Q4, we are pushing really hard to, get our EBIT and EBITDA numbers up into positive territory and also, more importantly, get our free cash flow generation, significantly improve. What are the planned improvements to the product? How has it changed-
Yeah.
over the year?
So, as I told you, like, you know, the regional presence is very important, so we keep on, like, you know, adding value, looking at regions we are working on, especially Philippines market, Indonesia market, and some of the African countries. So we're adding value to product, to localize the product, and then develop some language capabilities, to accommodate some of the regional requirements. That is on one side. On the other side, like, you know, technology area, overall stack, how we develop, how we deploy that area, there's a major improvement, going on, so we can expect good results in coming quarters. At the same time, like, you know, AI and other related changes happening across globe, so we're incorporating some of the critical areas to the product, especially the recruitment module and, payroll area.
Like, you know, we are adding some value using latest technology. So it is different areas we are focusing, and security as well. So it's always like it's a continuous improvement journey when it comes to product. Like, you can't sell the same product again and again over a period of time now, but you keep on adding value to all directions, especially country-level localization, security, compliance requirement, the feature additions, and technology adoption. These areas we are keep on investing.
There's a question on the reason for significant increase in marketing and distribution expenses. I think we've spoken about this. This is the main area where we are investing in, which is basically bringing in the lifeblood and the oxygen into the company, which is growth. And the results are visible. I think you heard that our ARR has grown 50% over the last twelve months. Now, there aren't many companies on the exchange, nor globally, growing at that rate. I mean, $3.5 million ARR is small in the global scale, yes, that's admitted, yet it's significant growth numbers. And we are doing it from a, from an execution point of view, we are pushing as hard as possible to make sure we maintain these growth numbers. Can you split the foreign and local borrowings?
On the balance sheet, you may see a certain borrowings number, but the largest part of that essentially is coming because of IFRS 9 ROU, or right of use assets. Essentially from a borrowings point of view, all we have is just two small LKR overdrafts that are used to manage day-to-day working capital requirements, no long-term borrowings whatsoever, and none in foreign currency. What percentage of new cloud revenue deals in Sri Lanka involve migrating on-prem to cloud? What is the potential for generating brand-new deals in Sri Lanka in the future?
Yeah, if you-
Which countries... Maybe we'll answer that in a moment.
So, the last quarter point of view, more than 50% of new sales are moving from on-premise business to cloud business. So that is a trend, and then, yes, there are planned conversion like, you know, for Q2 and Q3 as well, especially in Sri Lanka. So customers are moving from on-premise to cloud, so that trend will continue during the next three quarters as well.
The second question there, Sampath was asking-
Yeah
... the potential for generating brand-new deals.
So yes, like, you know, because there are some conversion happening from computer products to PeoplesHR platform. And also, like, you know, there are some brand-new, mid-sized company, as well. So still, like, you know, there's a potential in Sri Lanka. So like, if you look at last few year numbers, steadily, growing, both, both scenarios, like, you know, cloud movement as well as new sales.
Then, which countries in Southeast Asia contributed to the new deals? What percentage?
Yeah. If you really look at, like, you know, if you look at the number one is the Philippines, and number two is, Indonesia. Like, you know, so these are the two countries we'll get highest business. Of course, then, like, you know, the Cambodia, Myanmar, Brunei, those are the other countries where we operate. But percentage point of view, I would say, like, you know, last quarter, 80%, came from Philippines.
There's a question on... "So the company not planning to acquire any company, are you planning to fully utilize the remaining LKR 350 million for organic growth?" The answer is yes, but I must say, please don't be alarmed. That doesn't mean that we are going to spend additional LKR 350 million on organic growth. This is investments that would have happened in either case, using cash flow generation of the business, and all we are doing is basically reallocating this IPO funds for that purpose. So that doesn't mean that there'll be incremental LKR 350 million going into organic growth.
The P&L you see in Q1 from a sales and marketing expenditure point of view is, I would say, pretty much fully loaded, except for very few in-country hires that we will be making in our focus markets. These are local hires in those particular markets, like Philippines and Indonesia, et cetera. How do the price and volume contribute to the growth in exit ARR in Q1 FY 25, in what percentages? We don't have the exact numbers right now in front of me, but I can tell you that since we haven't been driving up a lot of price increases in this particular quarter, bulk of this is coming from volume growth. Basically, that would be new additions, customers going live, adding to our billable headcount, therefore leading to growth in ARR.
Can you explain how the company suffering significant forex losses? Can you explain this? Are these forex losses realized funds or just accounting? So for the Q1, we don't have forex losses. In fact, we have a small forex gain in the range of about LKR 14 million-LKR 15 million. I'm not sure the actual question here probably has got mixed up with the numbers for last year. Last year, yes, we did take a significant Forex loss on account of our receivables getting repriced at a lower exchange rate, given that the rupee appreciated roughly probably 10%, in the range of 10%. I stand to be corrected, but approximately in the range of 10%. Do you have modules for Wi-Fi access and restricted web browser?
No, we are not targeting these areas. We are a pure play HCM player, so like there are other tools available for these activities, freely available, so we don't focus.
Can you break down the cost of sales in percentage terms for this quarter? I think a detailed breakdown of the cost of sales is given on slide 14, which I have now moved to. It clearly shows the separate line items involved. If there's a specific question on any of the line items, maybe we can take it, but I'll, I'll leave it at that. If you have any data of a European, you are subject to European data laws.
Yes, yes. Like, how we do that actually, client-wise, we know, like, you know, what percentage of European Union employees are available. So, as per the GDPR regulation, we have restricted the required access company-wise. So each agreement we manage with those companies, and as per the GDPR, we manage those whatever, like, you know, fields required to accommodate the GDPR requirements. So we manage that on a case-by-case basis because we have understanding about our customers and the European Union employees working for those companies.
Do you have any government contracts within Sri Lanka? With political changes, is there any scope to increase this role?
We only have actually a very few government contracts, so there's no major impact we are expecting due to any political change at the moment.
What are the top countries with the highest demand for PHR Cloud and on PHR on-premise?
That is repeating, like, we explained this earlier as well.
Also the question on top line, bottom line.
Yeah, yeah, I think same question.
What has caused the increase in partner commissions percentage? Is it due to peer pressure? So I think we need to clarify that. It's not that we have given higher partner commissions because of market pressures. Our partner commissions work in one of two models. The most common model is we charge a net price to the partner, and the partner would keep his markup on top of that and charge to the end customer. So that markup or the margin of the partner never runs through our P&L. That's model one. Model two is where we invoice the customer directly, and whatever the partner commissions are paid through our P&L to that partner. This particular negative movement in margins is because there was a large deal in that second model.
Our usual deal flow through partners is mostly on that model one, where the partner commissions don't run through our P&L. But in Q1, this particular transaction followed model two. So it's not an overall increase in partner commissions, but the fact that we had to run it through our P&L, given the arrangement with that partner. Will hSenid Mobile be listed or merged into the company? Is that entity profitable, can cross-subsidize if the two entities are merged? Dinesh, I think I'll leave it to you to respond to that.
Yeah. So the hSenid Mobile is very different business as hSenid Business Solutions, so there will not be any kind of, merging or listing or anything like that, which has nothing to do with... Because we are very focused with the hSenid Business Solutions core business. This is something we have been very focused to focus on, HR systems and also related to HR systems. So hSenid Mobile is completely a different business, and that has no, cross benefit, even if we kind of, do any, further thing. It'll dilute hSenid Business Solutions if we try to do any of that. So to be very focused on what we are planning, and that's the hSenid Business Solutions', growth, which is purely on the HR side.
The next question: How is Dinesh taking the dividend? Personally, I believe this was addressed in our conversation before. Any new products to be introduced in FY 25?
Yeah. Actually, we do quarterly releases, so every quarter we are doing a release. So product will have incremental impact, quarter by quarter. So that's a pattern of product releases, in coming years as well.
There's a question on our take on the potential listing of PickMe and the price-to-earnings ratio it would trade at. Unfortunately, we are here to discuss hSenid Business Solutions' performance, so we won't be able to comment on that, on market developments. What are the tax implications of this dividend? Can't you redo it as a share repurchase, as you don't have regulatory capital requirements? In Sri Lanka, whether it's a dividend or a repurchase, it is subject to withholding tax because it's considered as a distribution. Therefore, there wouldn't be a differential tax treatment given to two options. So to answer the question, the tax implications would be the deduction of the withholding tax on dividends. What are the major challenges the company is going through sometime?
At the moment, like, you know, because last year we had employee migration issue, like, you know, but that is stabilized at the moment, like, you know, so we are not expecting major challenges in that area. Of course, talent remain a challenge, like, you know, globally. It is not a problem only in Sri Lanka, like, even regionally, like, you know, we are facing that difficulty. Picking up the right talent, especially for market development works, business development activities, sales and marketing funds. So I would say, like, you know, globally, the talent would be a major challenge. On the other hand, like, you know, increasing competition, and those are common challenge every company will face. So those are the things and also, like, you know, geopolitical environment, the changes happening globally can impact us as well.
Like, you know, but we are watching the conditions and, like, you know, things happening in multiple regions we operate. So at the moment, like, you know, those things are manageable because we are into emerging markets, and there are some major changes in these markets. So, that's how we operate. Like, you know, other than that, we are not expecting major challenge.
There's a question on what are the contents of the selling and distribution expenses and reasons for the significant increase? I think we spoke about the increase before. In terms of contents, just for completion's sake, if I can recall, reiterate the line items are basically... So what's happening in selling and distribution is, A, we need to create demand because we all agree that the addressable market for us is huge. So it's about making sure our customer is aware of PeoplesHR. So there's a lot of marketing spend that goes in there. It might be digital marketing, it might be PR, it might be event sponsorships, speaker slots, panel discussions, webinars, all of that. And then whatever the demand you create, how do you take it through a sales process and convert into closed-won deals?
And that's where you have a lot of sales skills involved. So the talent that we hire to run the sales process, pre-sales, post-sales, all that comes in to essentially run a effective GTM go-to-market engine. So that's what you see inside selling and distribution, and that is the increase that you're seeing. How much snooping can you do via the application on employees? Can they see what I do over the weekend? Is the location data collected outside the check-in, check-out function?
Yeah. It's our responsibilities only to track employee work-related activities, so we track all employee work-related activities. If the employee is working on a shift over the weekend, still geo-tracking and geo-fencing facilities are available, but we won't track anything outside the workforce, work scope.
I think there's a comment, follow-up comment. Please check on the tax implications between dividends and share purchase. Noted. We will definitely check on that. I think we are done with all the Q&A. Did we cover the-- I think we received some questions on email, we have covered that. If there are any participants who wish to ask a question, you could raise your hand and we can unmute you so that you can pose your question to the panel. There's a question that has come in: What is the variable component of selling and distribution expenses? The variable component essentially is the commission expense-
Yes.
Alone, and it's safe to say, of course, there are various performance thresholds that need to be met for the sales team members to qualify for the commissions, and this can range anywhere from 4%-5%, right up to about 10% of the deal value. I think roughly it's safe to say somewhere in between. So 7%-8% is what we'll expect as sales commissions as a percentage of total deal closures.
What is the... There's another question, what is the potential of
PHR tracking and PHR-
PHR tracking? Yes, actually, PHR tracking also growing. If we look at our numbers during the last three years, and expected number this year is a sizable increase compared to last year. Like, you know, so we are getting a good traction on PHR tracking solution because we are not just selling devices, we are giving embedded solutions like, you know, tracking related. So because of that, there's a good demand, especially for factories and various other environment. And of course, outsourcing is a different business. It complements our current business strategy as well. So that segment also growing, especially in Sri Lanka, and even outside Sri Lanka, we see a good potential in that business. So both are growing if you really look at currently, like, little grow compared to last year.
There is one question on, the salaries of sales staff. Does it come under admin, S&D, or other operating expenses? It comes under S&D, sales and distribution expenses. One more question: How much of sales and development, sales and distribution costs is the variable component? Please mention as a percentage of total S&D. Just give us a moment, we will get that to you. The commission cost divided by total sales and distribution costs. That's about 5%. I think we've come to the end of the session, so, we could wind up if there is no further questions. Okay, so let me once again thank you for your active engagement and participation, throughout the call with your questions.
We look forward to keep this engagement with you as we move on across the next several quarters of this financial year, and keep you abreast of how we are tracking against the numbers and the targets that we have communicated to you. Thank you very much.
Thank you.
Thank you, everybody.