Welcome to hSenid Business Solutions PLC quarterly investor forum. This is for Q4 financial year 2024. Unfortunately, our chairman, Dinesh Saparamadu, at the moment, he's not available due to a flight delay, so he will not be able to attend today's session. So Nilendra will hope you all received the deck well in advance. So Nilendra will quickly brief overall situation, and then we can get into question and answers.
Thanks, Sampath. Hello, everyone. We warmly welcome you all to the Q4 FY 2024 investor forum, hosted by hSenid Business Solutions. We sincerely appreciate your participation today and look forward to actively engaging with you over the next hour or so by addressing and clarifying your queries. A kind reminder to all that the format of the IR call will be as per the practice that we started in our Q2 call. That is, there'll be no formal presentation made, and the entirety of the call will be devoted to addressing your queries. And also, as promised and notified to you via email, the quarterly earnings presentation was uploaded to the IR website shortly after the release of our quarterly filings.
Before we get into Q&A, we will have some opening remarks summarizing the performance of the Q4. To give you a quick rundown of how Q4 has turned out, we recorded a revenue of LKR 433 million for the three months ended March thirty-first, 2024. This is 11% year-on-year growth in revenue in LKR terms, and a 21% year-on-year growth in USD constant currency basis. We need to remind the audience that the LKR strengthened almost 8% or so against USD during the period under review. Full year revenues came in at 1.64 billion LKR, which was up 12% in LKR terms and 20% in USD constant currency terms.
PeoplesHR Cloud, which remains our core focus, recorded a year-on-year growth of 36% in LKR terms and 51% in USD constant currency basis. Also, with the closure of the quarter, our core exit ARR, annual recurring revenue, is now at $3.1 million, reflecting a 39% year-on-year growth in USD constant currency terms. New deals for the quarter came in really strong at $1.6 million, a record high in recent times, with demand driven by Middle East and Africa and South Asian regions, recording a 212% year-on-year growth in new deal closure value.
Of course, the bottom line for Q4 was significantly impacted by LKR 102 million in one-off and non-cash items, which comprised LKR 57 million in FX losses, LKR 22 million on gratuity provisions, and LKR 23 million on deferred tax expenses on account of bad debt, trade receivables provisions being reversed. Our continuous "margin improvements" that we highlighted and witnessed from Q1 to Q3 were unfortunately reversed in Q4. More of that explanation is given on the slides due to the margin contraction on account of the LKR appreciation. With that, the normalized EBIT and EBITDA margins for Q4 were at -19% at EBIT level and -8% at EBITDA level, respectively.
With that, our opening statement comes to an end, and we would like to now move to the Q&A. I think we have some questions coming in, so I'll start with that. PeoplesHR On-Premise recurring revenue during the quarter. We'll get you the exact figure on that. So, on a total revenue basis, during Q4, we recorded about roughly LKR 85 million or so, approximately, total revenue. The recurring component of that, Raveen, if you can get me that number.
When it comes to Government of Uganda, we managed to complete phase two, and we kick off phase three as well. So we recognize phase three license revenue, like, you know, in Q4. And of course, implementation revenue will move to Q1 next financial year, that is current financial year. And the phase two is fully done now, and sites are live successfully.
Just to answer the previous question, the total recurring revenue component on the on-prem business amounts to $82,000. $82,000. So again, if you look at... Let me go into slide 12, which shows that, it's slide 12 on the investor presentation. The recurring component of the on-prem business is highlighted in row number five. And for quarter four, that is about LKR 25 million. And there was a LKR 57 million non-recurring component that is partially coming out of the GOU project, as Sampath mentioned. Going back to the Q&A: How much and when do you expect to recognize implementation revenue from Uganda project phase three? Sampath, do you want to take it?
... Yeah, values, Nilendra just mentioned the values. So Uganda Phase III project, we kick off April, March, actually March, 2024. So, I'm also, like, gonna head into Uganda today, because there's a critical meeting happening, like, you know, with the government. So, the team is in Kampala these days, like, you know, we already started the Phase III activities, change management exercise, and other implementation activities. So we are planning to fully recognize Phase III revenue during first three quarters of current financial year, so then the project will be fully done. We already start the support activities of Phase I, that is around $100,000 per year.
We are planning to kick off Phase II support activities effective from first March 2025. That is again $40,000. And Phase III support from January 2026, that is $60,000. Like, you know, so the overall addition to our recurring revenue would be $200,000, and will continue from January 2026. But right now we are getting 50% of that. That is $100,000 recurring revenue for the current financial year. So yeah, other than the Phase III license value, which we recognized for Q4 last year, rest of the payments will come or recognition will happen during current financial year. Raveen, if you can mention the value of that.
Total, total Phase III value is $491,000. Out of that, that, a hundred and forty-seven thousand and forty-seven thousand have been recognized in the Q3, Q4. So the rest of the thing will be like, will be recognized in the order period of, like, during next financial-
Next three quarters.
This quarter, three quarters, during this financial year, basically.
I think there's a follow-up question on the on-prem deal closures. Does the on-prem new deal closures relate to Uganda Phase III? If not, when do you expect to recognize licensing revenue on these $1 million on-prem deals? How much do you expect to realize as licensing revenue? So out of the $1.6 million on-prem deals, I go to the new deal closure slide for everyone's benefit. Out of the LKR 1.6 million in new deal closures, roughly, $492,000 is the amount relating to Phase III, which we secured during the last quarter. $1.1 million balance component basically is net new deals across both on-prem and the cloud business.
The total amount from the cloud business, roughly, stood at about $600,000, and the balance coming from on-prem. So obviously, an on-prem, like we explained during our last call with some additional slides at the beginning, you will typically have licensing revenue recognized upfront in the first couple of quarters. So on the on-prem deals that were closed in Q4, you would see revenue getting recognized fairly upfront. It's front-loaded, so Q1 and Q2. And of course, on the cloud deals, like we explained last time, it'll be over a longer period of time, but of course, with the benefit of the accumulation, because it is entirely subscription revenue, recurring revenue. Going back to the Q&A. I think we've answered questions up to now.
If there are any participants who want to pose a question, we can take that.
So there's another question on progress of the new deal closure. So, historically, Q1 is a very low quarter, like, you know, if you really look at deal closure point of view. But we are investing time and energy in both the regions, that is, APAC region as well as MEA region. APAC region, also like, you know, very specifically few countries like, Philippines, Indonesia, and stuff like that. So we are building our funnels. So like, you know, there are two, two areas: one is the demand generation and one is the closure. So, so we invest quite a lot of time on demand generation at the moment because our funnels are now becoming very strong. So we are expecting a, a good set of closures towards Q2.
But Q1 also, like, you know, we are planning may not as Q4 last year, but of course, like, you know, we are planning to close good set of deals, like in APAC region as well as MEA region. But Q2 onwards, like, you know, we are expecting a steady flow of deal closures because funnels are becoming very strong.
There's a question on the growth and the factors contributing the growth. Out of the 50% year-over-year growth in USD constant currency in PeoplesHR, could revenue grow in PeoplesHR Cloud? Revenue growth, what is the contribution of price growth? So I assume the question is on the effect of the repricing program. If you go back 12 months, Exit ARR was at about $2 million, and we explained that we were able to achieve about a 7% growth on the $2 million ARR base through the price increases. So if you look at the 50% year-over-year growth, I would say there is 7% or less than that that is contributed by price growth, and the rest is purely growth coming from two areas.
One is new deals, and then the existing order book getting converted into subscription revenue-paying customers. There is one more question: what has caused the 13% quarter-on-quarter increase in staff-related costs? Let me navigate to the respective slide. Yeah. So I'm assuming this question is on staff-related costs, the item below total cost of sales. We've gone from basically LKR 117 million in corresponding quarter of the previous financial year to LKR 157 million. The growth rate, of course, is 34%. I'm not sure where this exact number came from. Nevertheless, from a reasoning point of view, what we have inside cost of sales is bulk of the delivery team costs.
Obviously, with the significant payroll cost increases that we had to take as a result of the high staff turnover, the increasing personal income tax rates in the country, particularly in Sri Lanka, this basically led to the significant increase in staff-related costs. Nevertheless, we have been parallelly driving an efficiency improvement initiative, where essentially we are trying to improve employee productivity so that with the existing cadre, we can essentially handle more work. There's a question on the reason for the increase in finance cost. Finance cost for us predominantly is whatever interest costs on overdraft facilities that we use. We don't have any permanent facilities other than overdraft facilities used for working capital financing.
So, all the finance costs you see is predominantly, those and, of course, certain finance charges involved when it comes to, our, transactions overseas. Anything else to add on that, Ravi? Oh, yes. I think, Ravi raises a, the important point. As per accounting standards, the interest costs of our lease, part of it goes as an amortization, and a part of it goes as interest cost under finance cost. So the figure you see here, I would say majority of it is that accounting interest cost component of the lease rental that, as per accounting standards, are, recognized under finance costs. There's another question on, why was the selling and distribution expenses increased significantly against, last year? Let me go to that relevant slide again.
I mean, we can look at it as selling and marketing expenses as a percentage of sales. Essentially, this is the entire or a significant portion of the market development expenses we've been making, and this essentially has two costs. On the sales front, we've been building teams, in-country sales teams. And secondly, obviously, marketing expenses, so this would involve digital marketing for lead generation purposes, sponsorships of HR events, PR activities, to basically make sure that our PeoplesHR brand is visible to our ideal customers, ideal customer profile within these markets. Anything that you want to add there, Sampath?
Yeah. As I told you earlier, like, you know, when, when it comes to sales, there are two aspects: demand generation and sales closure. So we are heavily investing on demand generation side because we need steady, funnel, for the, the future quarter closes. So we are heavily investing, both like, you know, the digital marketing initiatives, as well as, physical events in the region, both the regions, MEA region as well as, APAC region, to make sure, like, you know, our future, flows are, strong. So, like, you know, we can get a good set of closures in Q2 to Q4. So that's where, like, you know, we increased the value.
On the other hand, as Nilendra mentioned, we did some recruitments in the region, in-country recruitment, especially sales and marketing area, so that also contributed to the high cost.
There's a question on which countries in the MEA region did new deals originate from in the Q4? And what are the main focus markets for obtaining new deals in recent future? Some of you will take this.
Primarily in APAC market, we are working on Philippine market at the moment, and we are just getting to Indonesian market as well, Indonesia and Vietnam. So, we are investing heavily on product localisation work for Indonesia and Vietnam at the moment, but we have done product localisation and payroll localisation for Philippine market already. Because of that, we are getting a business now, like, you know, from Philippine market, and we are expecting a similar flow in coming quarters, Q3 onwards from Indonesia market as well, then subsequently from Vietnam market as well. So these are the three markets we are growing. At the same time, we are getting business from other regional markets as well, like, Cambodia, Myanmar, and stuff like that.
So, but focus countries would be Philippines, Indonesia, and Vietnam. Philippines already giving us deals, and Indonesia, we are moving towards that, so we are getting into demand generation process last quarter as well as current quarter. Vietnam market, like, you know, we are doing the localization, and hopefully in Q3 we should be able to get into that market as well. Same time-
Yeah.
- from MEA region.
Yeah, that's right.
Yeah, MEA region. So MEA region, primarily we are getting business from Kenya and Uganda at the moment, and so that is East African belt. So we are investing time and energy in Uganda, Kenya, and Tanzania. But of course, like, you know, we are getting a few businesses from other regional countries like Malawi and stuff like that. So we are building partner network in these regional countries as well as like, you know, through our distribution channels, and we are getting good business from the region, primarily Kenya, Uganda, Tanzania, Malawi, and the East African region.
There's another question: What are your strategies to overcome Forex loss? Okay, so now that the question was raised, I'll probably go into a little bit of details. If you look at normalized EBITDA margin, in Q4, we ended at negative 7.8%. If you look at slide 2, you'll see that we have continuously achieved improvements, ending up at about minus 6%, in Q3 of this financial year. But like I said at the start, there has been a reversal. Our estimate is that we roughly took a 350 basis points hit on our EBITDA margins because of the strengthening LKR currency.
Obviously, 70% or so of our costs are in LKR, the currency that strengthened last quarter, with about 90% of our revenues in USD or USD-linked form. From a Forex loss mitigation point of view, I think the reality still remains that we are on a favorable currency exposure from a long-term basis, meaning on the long run, we would expect the USD to be the stronger currency and LKR to be the weaker currency, thereby obviously giving us a currency arbitrage. The amount of arbitrage due in the long run will reduce naturally as the business grows, as we onboard more headcount outside Sri Lanka. So we would see our cost base also over a period of time getting into more USD or USD-linked currencies.
From a management effort point of view, I think we strongly believe that the growth that is being generated is going to more than compensate for any of these short-term, you know, margin reversals that we would experience because of LKR strengthening that we experienced in quarter four. In fact, we closed quarter three at around 326 LKR to the dollar, and we closed quarter four at about almost 296. So there's roughly about a 30 rupee, 8%, or slightly more than that percentage strengthening in the LKR. I think from a direction point of view, we are firmly still of the view that the currency arbitrage is in our favor, although there might be short-term pain because of these short-term movements.
But like I said, the currency benefit that we have in the long run would reduce as we become more of a dollar-driven PNL and net cost base as well. There's another question: What are your expectations for EBITDA and EBIT margins in the next few quarters, and when do you anticipate the margins to break even? So at a EBITDA level, obviously, given the 300-350 basis points setback caused by the currency, assuming no adverse, no favorable currency movements, assuming current currency levels, we are confident we can get to EBITDA breakeven in quarter two. Some of the hard work done in margin improvements were reversed, therefore, you know, we are starting one step backwards.
Quarter one typically is a bit of a slow quarter, therefore, that would take us into quarter two, typically to achieve EBITDA breakeven. When it comes to EBIT margins, it would be more towards the end of the financial year. So approximately four quarters from now is, where we feel we could hit EBIT breakeven. I think we also encourage investors and the analyst community to also take these margins in the context of the growth. Like we highlighted at the start, I mean, ARR grew in USD constant currency terms about 50%, last year. Starting with about a $2 million ARR base, going up to about $3.1 million, where we ended.
If you focus on the cloud subscription line alone inside this ARR, that growth is even higher, almost 55%-60%. And this is where all the investments we've been making on market development, on sales teams, strengthening, and then on, of course, on the product, has been paying off. And like I mentioned during last investor call, the management target internally is to make sure that our cloud subscription revenue grows 10% quarter on quarter. So which means, well, once compounded, 10% a quarter would be anything in the range of 40%-50% on an annual basis. So that's the target that we are working towards, and I would encourage everyone to look at margins and profitability in the context of this growth.
So future plans for deal closures. So the plan in both the regions, we have two categories of partners. One is enterprise level partners, and the second is SI companies. So with enterprise-level partners, we are working on bigger deals, about $100,000 value deals, like, you know, so at the moment, like, you know, in our funnel, there are about 15 that kind of deals, like, in both the regions. So timing is issue, like, you know, because these bigger deals take time. Now, simple example, even the bigger deal we closed in Q4, it took almost nine months or 12 months to close it, like, you know. So because those deals should go through the tendering and usual closure process.
At the same time, like, you know, the tier two partners, SI companies are working on regular closures and few white label partners as well, giving us, like, you know, recurring revenue quarter on quarter. So, both the regions, we have a good set of deals at the moment in the funnel. So we are planning to close a few in this quarter and, like, you know, a good set of deals in Q2 and Q3.
Also, to add to what Sampath said, if you look at our average contract value, at the end of the previous financial year, it was in the range of about $10,000. At the end of FY 2024, that number went up to about $23,000. So this is almost more than doubling effect on the average contract value. Now, why this is really important, and why we watch this number very closely is, as an organization, in terms of hitting our numbers, we talked about a $10 million ARR target in three financial years during last call. We won't be doing 3x or 2x or a significant number more than what we are doing today in number of deals.
But where that revenue would come from is the fact that our average contract value will be larger, which means that we would graduate from serving, middle market to the high end of middle market, and subsequently, enterprise-level customers in the target markets that, Sampath mentioned, both on the MEA and Southeast Asian ASEAN markets. So driving this average contract value to at least the $40,000 range in the current financial year is something that we are closely working on. And like Sampath said, we are getting a really good traction from the partner network, which is a critical element for our growth. And that way, we would be becoming a much more efficient and productive company because we'll be working on larger transactions, and we could achieve much larger revenue numbers with much fewer resources.
In fact, during April 2024, we had a partner conference as well in Colombo, like, you know, all enterprise-level partners participated. We had a very good event that built the confidence and trust on the partner network as well. So that help us, of course, like, you know, current financial year and going forward.
There is one question on the IPO proceeds of LKR 350 million remains for strategic acquisitions. What's the current status? You may have seen an announcement that went out end of March, early April, that we are basically considering a few options there, and we are hoping to present that to the annual general meeting for approval as per the requirements of the Colombo Stock Exchange. However, from a management point of view, there are a few things that we are going to be very firm with. That is, we will basically very carefully evaluate ROI, you know, before deploying this money, because we have seen very healthy returns on the organic investments that we've done in the past.
So we'll be taking that into consideration, if and when, evaluating any inorganic or strategic, acquisition opportunity. So with that in mind, with the current deliberations that are going on, we are confident that we'll be able to, announce, our plans, for these funds, in line with the Annual General Meeting timelines. We have one more question. To reduce risk on staff, has the company considered share options as a larger means of remuneration? Very much so.
Yeah.
I think... I fail to recall the exact date, but around 15 months ago, 12-15 months ago, the company launched an ESOP scheme and obtained a shareholder poll via an AGM. So we have outstanding options amounting to about 3.5% of the total shares outstanding of the company in the ESOP scheme. In addition to that, we have probably another 3% or slightly above that of shares coming from a previous ESOP, which are now held in shares form, not in option form, by the senior management team of the company.
All in all, on a if and fully converted basis, once all these options are vested and converted, the management will own almost 6.5%-7% of the equity of the company. To answer the question, yes, we are actively using employee share option schemes as a means of remuneration.
At the same time, the current risk levels have gone down actually compared to last financial year. So, more or less, staff are like, rather than migration, because like, you know, it is more, more stable considering if you compare with last financial year.
I may, I may also want to add to the ESOP message that some of our advisers that we employ on a consultancy basis to help us on the go-to-market side, to help us on the market development side, have also seen the significant value and accepted these ESOPs as remuneration. So, I mean, going back to the initial objectives of setting up the ESOP, first, to use share options as a currency to incentivize attraction of talent, and, and we've been able to achieve that through this scheme.
Since we don't have further questions, so let's wind up the call. Thank you very much for your active participation. If you have any further queries, please let Nilendra or myself know, like, you know, so we can help you to understand the business better. We'll meet again during next quarter IR call. Thank you.
Thank you very much.