Right. Right. Okay. Yeah. Good afternoon, everybody. Thank you for joining our IR call today, and this we will actually go through the last quarter results, which had been kind of the details had been given to you. With that, I'd like to welcome all of you for today's session, and we are here to answer any questions, and with that, I will actually pass it to Nilendra to kick off the session for today.
Thank you, Dinesh. Once again, good evening to all of you. Welcome to the Q2 Financial Year 2025 Investor Forum hosted by hSenid Business Solutions. We sincerely appreciate your participation and look forward to engaging with all of you over the next hour by addressing and clarifying your queries. As usual, the quarterly earnings have been sent to you via email and also uploaded to the investor relations website of hSenid Business Solutions shortly after the release of the quarterly filings. Before we get into the Q&A, as usual, I will do a quick readout summarizing the financial situation of Q2 and the business update, and then we'll move on to questions and answers. So the quick rundown of Q2, to start with revenue, we recorded a revenue of LKR 421.5 million for the quarter ending September 30, 2024.
This represents a 5.3% year-on-year growth in LKR terms and a much stronger 12.7% year-on-year growth on a USD constant currency basis. If you look at the comparative quarters of last financial year and this financial year, there has been roughly about 6% or so of LKR appreciation, which has led to the difference. PeoplesHR Cloud business, as usual, our core focus continued to drive growth with a 24.5% year-on-year increase in LKR terms and a much stronger 33% growth in USD constant currency terms. As at the end of the quarter, our core exit ARR, annual recurring revenue, reached $3.7 million, reflecting again a year-on-year growth of 31.4% in constant currency terms.
Despite continuous growth in recurring revenues, which is moving according to plan, the volatility in non-recurring revenue components caused by lower milestone invoicing from large on-prem deployments, including the Government of Uganda project, low invoicing from the reduced level of new customer acquisitions, new deal closures, and lower non-core revenues impacted total revenue growth. This, in turn, resulted in the company recording an increase in the losses for the period. During the quarter, we recorded a new deal closure value of almost $300,000, with PeoplesHR making up 96% of these deals. So the deal quality has improved. Due to the revenue decline from Q1, the normalized EBITDA margins decreased to minus 17%, down from minus 9.6% of the previous quarter.
Larger milestone invoices expected in the coming quarters are likely to boost revenues for the second half, while remedial action has already been taken to revitalize the new customer acquisition process. We have doubled down on demand generation efforts, resulting in a robust pipeline of deal opportunities for the upcoming quarters. And we have also implemented a repricing program for low-margin clients and enhanced cost controls to support profitability improvements in the latter half of the financial year. Essentially, our costs have been contained at a fixed rupee value for now almost three quarters. With that, our opening remarks come to an end, and we will now move into the Q&A session.
Again, a quick reminder, you can use the Q&A function to type in your questions, or alternatively, you can raise your hand, click on the raise your hand button, and we will help you unmute yourself and post your question.
There's a question. The slower deal closure quarter on quarter, and especially for Q2, yes, like some of the expected deals push it to Q3 and Q4, especially in the African region, there's a USD currency issue that leads to postponement of a couple of deals. At the same time, some of the expected deals in SEA market, Southeast Asia market, moved to current quarter. So that leads to lower sales closures in Q2, but we are expecting to pick those sales in Q3 and Q4 this year. So we are expecting good sales closures in Q3 and Q4.
Maybe we'll move on to the second question. Out of the on-prem non-recurring, how much does come from implementation and licensing? Have you identified any non-recurring revenue from Uganda project during the quarter? Maybe we can move to that particular slide, which gives a revenue segmentation. We'll just move to the slide and point you to the data so that. On the Government of Uganda project, Ravin, I think if you can give the figure, the milestone invoice for the second quarter.
Yeah, Q3 and Q4, we are expecting around LKR 60 million from the milestone invoicing. Part of that annual maintenance contract, quarterly-wise, we are gaining some revenue from that annual maintenance contract as well.
Yeah. So for roughly $500,000 phase three value, 40% will be recognized across the two quarters, Q3 and Q4. In Q2, there was a lower 20% milestone invoice.
Q4, there's a March onwards phase two support also will kick off. We are expecting additional revenue from that as well. That will start from March 2025.
Yeah. In terms of the data points asked for, I think slide number 13 has the data, which is the recurring versus non-recurring component for the quarter inside the on-premise category. So basically, you can see that in the on-prem category, roughly 36 million was non-recurring revenue and 32 million recurring revenue. I think the question asked for the split between implementation and licensing. Dinesh, if you can just get that figure. Until then, we'll probably move on to the third question, and we'll come back with those two data points. How much do you expect? I think that was answered. How much do you expect to raise through the Uganda project in the next two quarters? That would be roughly 40% of the $500,000 phase three value. Can you further explain the lower invoicing from large-scale projects?
The two large-scale, pretty much large-scale projects are a bank, large bank in Uganda, and the Government of Uganda project itself. The project milestones are set to certain deliverables, which are determined by the project timeline set at the start of the respective project. It happened so that neither of these two projects had significant milestone invoices during the last quarter. That's where you're seeing our recurring revenues grow according to plan. But on the non-recurring component, there is this volatility that's coming because of the absence of large milestone invoices. I hope I answered the question. Could you please explain about IPO fund utilization? Is the company going to utilize this for sales and development expenses? Just in terms of the approval taken from the shareholders and the shareholder circulars and for that purpose, the M&A budget has now been reallocated for market development initiatives.
Now, this doesn't mean that we will be doubling or increasing the market development activities that we have been doing in the past. We will be continuing with the same momentum. It's just that as opposed to M&A activities, those funds will now be earmarked for this purpose. To quickly give you the breakdown of the implementation and licensing values requested for the data point in slide 13, roughly out of the $36 million non-recurring component of the on-premise revenue for second quarter, about $6.6 million is licensing, and the rest are delivery. So roughly speaking, you can take it as $6 million licensing, roughly $30 million in implementation and services. Have you seen user migration from on-prem to cloud in Q2? Some parts you want to.
It's actually continuing. That is continuing, especially in South Asia market, because most of all the accounts are moving from on-prem to cloud because we have discontinued some of the versions as well. Simple example, whatever versions below PeoplesHR 9.0, we are discontinuing. So with that, they are migrating to cloud slowly. So that is happening at the moment in the African region as well as especially in Sri Lanka. So that will continue for next two quarters as well.
Right. There is a question on follow-up question on the IPO funds. What is the marketing ROI when the company is planning to recover from cash flow drop? So speaking about ROI, we look at ROI from a total market customer acquisitions spend point of view. That is marketing and sales investments. So the metric that we look at is what we call the GTM, Go to Market Efficiency Ratio. That is how much of sales and marketing dollars are being invested for the acquisition of $100 of annual recurring revenue, because that is a high-margin component which we are all working towards. The number for Q2 is given in slide 19, GTM efficiency ratio. We were operating around 120% in the past, if you can go back to the numbers we reported. This has increased to 189%, which means we are spending $189 to acquire $100 of recurring revenue.
In other words, in simple terms, if the customer stays with you for almost two years, you will be more than making up for the investment. I mean, 189 is roughly probably one year and nine months or somewhere there, roughly speaking. So that is the payback period required to retain a customer to pay for the marketing ROI. Now, it has moved from about 120%. That's because of the slowdown that we are seeing in the sales closures. But with what Sampath mentioned for Q3 and Q4, we are hopeful that we can improve on this number to get back to the efficient levels that we were at before.
So yes, during Q4 2024, we acquired a bank. This is a PostBank we acquired from the African region. Implementation is going on. We have already invoiced 40%, if I'm not mistaken. So 60% revenue is pending. There's another milestone invoice pending for Q4 this year. Q3, we may not be in a position to raise any invoice because the customization work required for the project is going on. So Q4, we are planning to raise one major invoice, and then it will go to 2026 Q1.
I think we have answered the questions that have come up to now. Invite the participants to send across any other questions they may have or.
Yeah, there's one more.
Yeah, there's one more. Okay. What are the top countries with the highest demand for PeoplesHR Cloud and PeoplesHR On-premise? Any top?
At the moment.
Sampath, I'll just read through the questions so that others, I think, can't see it, and then maybe you can take it. Second question is, any top line and bottom line projections and reasons? When do you expect to earn a profit? Third question, any margin projections? And fourth question, what is the potential for tracking solutions? Go ahead, Sampath.
Yeah. So first question, top countries. If you look at Sri Lanka, still a top country like South Asia point of view and Southeast Asia point of view, we are getting good leads. Our demand generation is pretty high in the Philippines. So Philippines, we see as one of the highest, let's say, potential market at the moment, and we have a good pipeline on that market. And also next market is Indonesia. So that is how we see Southeast Asia. And then those are more or less Sri Lanka as well as SEA markets. We are only a cloud business. And then when you look at Africa, especially markets like Kenya, Tanzania, and Uganda, those are more or less on-premise accounts. So that's the highest potential. And we just entered the Gulf region, especially Dubai. So we are expecting Dubai to pick up during the next couple of quarters.
So yes, top line is growing, as Nilendra mentioned. Our recurring revenue is growing quarter on quarter. With that, actually, we will end the current quarter also slightly lower than the breakeven. So we can recover from Q2 to Q3, but still we will be slightly lower than the breakeven. But Q4, our plan is to make profitable. So that's the current plan. And then the good news is actually also profits are coming from recurring revenue and other core business lines. So then the lines are very steady. So that's the good news. Nilendra, margin projections?
Yeah. So from a margin point of view, basically, you can see our margins go up continuously. And the reason for that is the composition of our revenues. I mean, if you typically look at the main two components of revenues, it's a software revenue, and then the services part revenue. With the recurring revenues growing continuously quarter on quarter basis in line with plan that I mentioned at the start, which is the higher margin revenue, you will see margins picking up continuously. From an EBIT and EBITDA margin point of view, I think this quarter saw a deterioration from -9% to about -17%. With what Sampath mentioned, our plan is to get very close to breakeven, which means EBITDA neutral during the current quarter, and then profitable and EBITDA positive in Q4. So that's roughly the indication in terms of where the margins are heading.
Sampath, do you want to take the final one?
Tracking solution, if you really look at two years back, we were doing roughly around LKR 100 million from tracking solution. But currently, we are improving that business up to around LKR 200 million overall for the current financial year so because it is not just selling the devices, so we sell the middleware as well so it is IoT solution we are targeting in the space of HR. That is why tracking business is growing with the PeoplesHR core business so it will continue to grow.
There's a repeat question on the cash flow. I think let me clarify there. So EBIT is, I think, a very close proxy to our cash flow, and there usually aren't any deviations between EBIT and cash flow. So obviously, with the losses increasing due to the non-recurring revenue volatility, the cash flow situation or the cash deficit widened in Q2. But Q3, when we say that we are getting very close to breakeven on a P&L point of view, that means getting very close to cash breakeven as well. And then with profitability in Q4, we want to be marginally cash positive from a free cash flow generation point of view. I hope that answers the question. Also, just to add to that, so our target as a company is to get to 15% free cash flow margins.
And behavioral change that is required to get there has already been implemented, which is moving from monthly invoicing wherever possible to annual invoicing. So we have now set up sales KPIs and incentive structures also in a manner that promotes this behavior. So we are seeing that now happening at deal closure level. And obviously, when these projects move to revenue realization with a higher proportion of annual invoicing, we will see our free cash flow margins improve. There's a question on, let me read that out. Roughly, how much do you expect to raise per quarter through the repricing program? So roughly speaking, our Sri Lankan client base accounts for about $900,000, close to a million dollars, let's say roughly, out of our ARR base on cloud subscription. And we are trying to increase this at least by about 20%.
We are looking at certain customers where we are operating at very low margins. A customer profitability analysis has been done. And based on that, on a case-by-case basis, we are trying to increase prices. It might be a wide range for certain customers versus others, depending on where these prices are, but ultimately to achieve about a 20% increase on the Sri Lankan ARR base. There's a question about the GTM efficiency ratio. So what the GTM efficiency ratio does is in the numerator, you have your entire investment that goes into market development and customer acquisition. So that is sales and marketing costs. This includes people costs, marketing spend, and tool costs. So everything that is clubbed under go to market investments. So essentially, the entire investment here is not required to support the current revenue base of the company.
It's essentially getting invested to acquire new customers who will in turn bring in new ARR that will build onto the existing revenue base of the company. So the numerator has what we call fully burdened sales and marketing costs. The denominator has the net new ARR that we acquired during the quarter. So to have, for example, let's take 100%. To have a 1x GTM efficiency ratio means that you are spending $100 to acquire customers who bring in $100 in annualized recurring revenue, which means that within 12 months from customer acquisition, with the subscription revenue getting billed, 12 months of subscription billing will recover the full sales and marketing investment that has been put into acquiring that customer.
And extending that argument from year two onwards in that example, that customer will be basically that entire revenue of $100 in year two will be flowing through to your bottom line, of course, minus infrastructure costs and variable support costs, which typically is very low in the industry. So that's GTM efficiency ratio. And that's the main criteria we use to justify investments we make in recruitment and market development expenditure from a customer acquisition point of view. Sampath, I think the next question, how is the.
Yeah, the environment for HR tech. Yes, multiple markets' competition is different. If you look at the Middle East and Southeast Asia market, competition is coming from three segments. One is global HR players, especially ERP players like Oracle and SAP and stuff like that. And then low-end, the local players. And the mid-market, there are a lot of Indian players investing. VC-funded Indian players are available in all these markets. So competition comes from three segments. But since we are an end-to-end HCM service provider, so we can still compete with these players, especially our market is mid-market, like mid to sizable account, like 1,000 employees up to around 10,000 employees segment. So we can compete, and we are competing in some of the markets like Philippines and Indonesia and also Middle East and East African Belt as well.
The next question, what's the CapEx plan for next two years? So CapEx from a physical asset acquisition point of view is minimal. As you know, it's essentially the laptops and whatever furniture replacements we do. So it's very minimal. But CapEx, from what you see in the cash flow, is essentially the R&D we put into developing the product. This will continue because as a product company, we need to keep investing in our product. But the efficiency of that investment will significantly improve, meaning the total value can come down. And it has come down over the last 12 months as well. For example, with all the new tools and techniques, particularly AI-related improvements that are there, we've been able to optimize our headcounts and investments in product development over the last 12 months, where headcounts have come down by about 10%-15%.
We are essentially achieving the same output with an optimized team. We will continue to look at ways, whether it's automation in quality assurance, whether it's partial auto code completion for software developers, using better deployment tools and technologies to remove the human element and human involvement in onboarding new customers. We will try to further optimize, essentially do more with less. The next question, what are the cost-saving initiatives you mentioned earlier in the discussion? How much do you expect to save through these initiatives? To roughly give you an indication, if you go back about four quarters, our full-time employee headcount base was close to about 370 four quarters ago. Right now, the numbers reported on, I think, slide 3, it's 315 as at September 30th.
With natural attrition and in certain areas where we have decided not to replace because of the improved efficiency in some of the tools we use, the processes we follow, we can see this number coming further below, even close to and slightly below 300. So this then leads to cost savings, which essentially, I mean, from a three-year point of view, I think we mentioned during last call, we are confident that we can get to our three-year goal, which is 10 million ARR by financial year 2027. That's March 31st, 2027, from the current 3.7 number with the current team size. Of course, there will be recruitments in certain areas and rationalization in other areas. For example, sales and marketing, we might grow further, but rationalize in other areas so that total headcount remains in and around 300.
So process, peers, this depends on the market. If you look at markets like Philippines, there's a local player Sprout, like, you know, and overall, when you look at, like, there are many Indian players, players like Adrenalin, PeopleStrong. Those are the companies competing with us in multiple regions.
Yeah. I think just to add to what Sampath said, I think the beauty of the market is that it's extremely granular, partly because of the high degree of localization and compliance required in this area where there aren't many dominant players that have gone across countries, across regions, and created a dominating market share. So that's exactly the opportunity we see as well with the technology we have, with the payroll engine that we've built to create a sizable market share across these countries that we are focusing on. Next one, do you expect to keep selling and marketing efforts costs at the current level? Like we said before, for the current financial year, we don't see any improvements.
Actually, the focus is on making sure that we generate the adequate return in terms of new ARR for the sales and marketing investments we have already made and are continuing to make in the current and next quarter. But obviously, when it comes to growing, there will be a reallocation. Like I said before, we might have to recruit more in-country sales teams. So sales and marketing expense might increase, but we might rationalize elsewhere. So that's the plan. Like I said, we want to get to 10 million ARR with the rough 300 headcount. So within this, there might be rationalization. So you might see costs moving across line items in the P&L. But overall, we want to keep it at these levels.
The next question also relates to that, Nilendra.
Yes. I'll read it out for the benefit of others. Don't you think companies should invest more on sales and marketing to capture the new deals with the huge competition coming from Middle East, Africa, and East Asia? At least companies should acquire a company with more than 150 employees to get the benefit. Since there is something on acquisition, I'll just talk about it. So acquisition for us only makes sense if it brings customers. We don't need to acquire companies that have more employees. We don't need to acquire customers that have additional technology because we have invested in and built a solid HR technology platform. So what we need is customers. But then you need to weigh that between organic growth and inorganic growth.
Like I mentioned during the previous call, typically right now, an HR tech SaaS company is trading at about seven to eight times revenue. This is ARR. Although hSenid Business Solutions is listed on the Colombo Stock Exchange, we are trading at two times or below. So the global average is about seven times. Now, if you're paying seven times and maybe a premium over the trading multiple, maybe 20%, 30% premium, so if you're paying 8, 9, 10 times of ARR to acquire inorganically, when you have built a capability and a sales engine that you can generate at a GTM efficiency ratio of 150%, 150% means you're acquiring organically that ARR at a 1.5x multiple versus the 7, 8, or 9, or 10 that you would pay in an inorganic acquisition.
So given the two options, based on GTM efficiency, like we mentioned during the last quarter call, we are taking the organic route. Of course, I mean, if something really interesting comes by, we can always take a look at it. But right now, we've taken the decision to focus on organic growth. In terms of incurring more sales and marketing expenditure, definitely. So that's where the reallocation will happen. We are mindful of the need to be profitable. So that is one of our primary focuses. But within that cost base, there will be reallocation happening, getting efficient in certain areas, delivery, implementation, support, product development, and redeploying some of those savings into customer acquisition. Since the SL market is already matured with HCM, almost every company is using software. SMEs can't afford this kind of software. Any comment on that, Sampath?
Yeah. So we are not targeting SME sector in Sri Lanka. There is a low segment. But in other segments, high-end and the medium-sized companies, still there's a potential. There are multiple ways you can look at it. One is on-premise to cloud migration is happening. So that will continue next few quarters as well. At the same time, competitors to PeopleStrong, that migration is also happening. So still there's a potential in Sri Lanka, but of course, potential is lower compared to some of other markets like Indonesia, Philippines, and stuff like that overall.
The next question, what's the foreign exchange fluctuation percentage impact on year-on-year growth in revenue? If the currency remains at current levels, we expect about a 7%-8% hit on LKR revenue compared to last year, which is the depreciation that has happened over the last 12-month period. Of course, we never know where the currency will end up. But based on current levels, that's the impact we are looking at. But I think on the brighter side, when it comes to the value we are creating, what matters ultimately is the ARR value that is being created within the company. Of course, a challenge operationally to us is that when the LKR appreciates, we get affected in two ways. One is, like you saw in this quarter's P&L, we have recorded a LKR 20 million plus, almost LKR 23 million one-off translation loss on our cash balances and USD receivables.
And second, there is margin compression happening because of that as well. I think we've mentioned that in slide number five because roughly 90% of our revenues are either USD-based or USD-linked, whereas about 70% of our costs are LKR-based. Therefore, if the LKR appreciates, we suffer by way of margin erosion. I mean, a rough statement to say is that had the currency been where it was at the 350-360 levels, we'd probably be even profitable at current revenue levels. But obviously, the unfavorable currency movements have eroded our margins, and we are currently facing this situation. There's a question on the Singapore office. Isn't Singapore office making expected benefits as expected with break-even with the cost incurring?
So if I understand that question correctly, so the Singapore office essentially takes the bulk of our sales and marketing investments because some of the recruitments outside happen through that entity. Most of the recruitments outside happen through that entity. And obviously, the customers acquired through those efforts, those revenues are also booked in that company that is being followed. So with the recurring revenue getting built at the Singapore company level, definitely the company will become profitable with the overall group also becoming profitable. But if you really look at the matching issue that you see in the investment or expenditure of the sales and marketing costs and the recognition of the revenues, there is clearly a timing difference. And that timing difference is getting reflected in the Singapore company's P&L, where initially you have all your costs front-loaded, but the revenue comes with a lag effect.
So that's reflecting on the Singapore subsidiaries' P&L. I think we've gone through the questions that have been posed up to now. If there are any additional questions, feel free to add into the chat. Maybe we'll give about two minutes or click on raise your hand so that you can post your question.
There doesn't seem to be any questions, so maybe we can wind up today. Yeah. Thank you very much, everybody, for being here. And if there's any questions you have, please feel free to reach out to us. IR email as well as that information is available on the website. So thank you for joining the call today.
Thank you very much.
Thank you very much.