Okay, yes. Good afternoon, ladies and gentlemen. A warm welcome to hSenid Business Solutions Investor Forum. I'm Dinesh Saparamadu, Chairman of hSenid Business Solutions. The objective, as we did from last quarter, is to kind of do a very high-level update on our current activities. And then to spend most of the time question and answer. And the objective of that is to kind of give our audience analysts and the audience to be able to ask detailed questions where the team will be able to kind of take you through and give you some insights to what we have been doing and also some of the plans. So with that, I will actually ask Nilendra to take over and go through the couple of slides that we have prepared for you.
Thank you, Dinesh. Good afternoon, everyone. Warmly welcome you to the third quarter Investor Forum, and look forward to your engagement during this call. I'll start off with a quick commentary on the quarter and then move on to a few important slides we have prepared to address some of the common queries we get with regard to the sales business, the shift from on-prem to cloud business and the resulting impact on revenues. So let me quickly start with a quick rundown of our Q3 performance. We recorded a revenue of LKR 453.9 million for the three months ended December 31st, 2023, which is a 23% year-on-year growth in LKR terms and a 32% year-on-year growth in USD constant currency terms. PeoplesHR Cloud, our main offering which remains our key focus, recorded a year-on-year growth of 40% in LKR terms and 54% in USD constant currency.
We reached an important milestone as a company in our growth journey, surpassing $3 million in core exit ARR. More on that on my explainer slides later. During the quarter, reflecting a 34% year-on-year increase in LKR terms and 42% in USD constant currency. Despite the higher operating cost base, continuing to impact the company's net margins, our core-business EBITDA margins have shown gradual and steady improvements from Q1 right up to Q3. Q3, negative EBITDA margin of 6.5% on the core business. Q2 was - 12.6%. As revenue recognition of the closed new deals coming to the P&L, we anticipate EBITDA margins to get into the black in the upcoming quarters. During the quarter, we successfully managed to close new deals worth roughly $500,000.
While this represents a 16% decline compared to the same number of Q2, we are pleased to note that the quality of the deals have improved significantly, as measured by the cloud share of new deal closures. With that commentary, I'll move on to the second segment, where before Q&A, we want to take five min to address some of the continuous queries we get from our investors, especially on three areas.
One is the change in our business mix, our deal closures from on-prem to cloud. How is that affecting us? Second point, why are we so focused on the cloud? Why is it important to our shareholders? Why does it, what does it matter to the business? How does it matter to the business? And point number three is basically how our exit ARR is one of the most accurate forward indicators of our performance going into the future.
On point number one, I'll move on to my first slide. On the top left corner, we have taken an illustrative cloud deal of $500,000. Typically having about $200,000 in implementation revenue inside that. And subscription, annual subscription of about $300,000. On the right, top right corner, you see a on-prem deal. So if this cloud deal on a typical scenario was converted to an on-prem deal, usually the $200,000 implementation fee would remain the same, whether it's cloud or on-prem. It's the same implementation effort. However, on the licensing side the value is typically two to three years of subscription payments. So what is $300,000 would now, if you assume 2.5x , would be $750,000. Now this would mean that a cloud deal which was valued at $500,000 would go as high as $950,000 as an on-prem.
The reported values from a cloud deal point of view, basically we report implementation fee + 12 month subscription. Which is $500,000 when reporting the deal closure value for cloud. However, on on-prem, implementation still remains at $200,000. Licensing, as I mentioned before, assuming a 2.5x multiple is $750,000, giving $950,000 as a deal closure value. So obviously you see as we move from on-prem to cloud our deal values are shrinking. In fact, on-prem deals on average can be about 2x of cloud deal values. Now, how does that reflect in actual terms if you look at our numbers? Last quarter versus same period, same 3rd quarter of the previous financial year is a good example. In the graph in the bottom, you can see third quarter we closed $503,000 in sales, out of which $471,000 was on the cloud.
However, we had a $1 million sale in the third quarter of financial year 2023, out of which almost $759,000 was on-prem. Now, if you look at the cloud component of this, the $288,000 last quarter has grown by almost 1.5x to reach $500,000. So generally speaking, on-prem deals are higher in deal value, but lower in recurring revenue compensation. The reported value of deal closures and initial revenue recognition are significantly higher in on-prem because of the front-loading effect. Then the question is, why do we still focus on cloud? And the reason for that, the short answer is, there is roughly 3x uplift in net present value terms when you consider the total customer lifetime value in a cloud deal versus an on-prem deal. So this example basically takes two equal value deals, say $500,000 on the cloud, $500,000 on-prem. You would see.
Cloud has very little revenue recognition upfront. When a project typically goes through an implementation cycle and goes live, you will see your subscription income, your recurring revenue building up. And essentially this has a kind of a hockey stick effect because it keeps adding and accumulating. Subject to churn being maintained at healthy levels. Similarly, if you look at a $500,000 on-prem deal, you see much more revenue being recognized upfront because of the front-loading effect, because it's a perpetual license being sold as opposed to a license value being materialized or recognized via subscription revenues over a long period of time. However, the values taper off and doesn't give you that exponential growth. For simplicity, ignoring costs, the present value of future revenue, assuming a simple discount rate of 10%, is $2.23 million for this $500,000 on cloud deal.
As opposed to the present value of future revenues being slightly under $900,000 for the on-prem deal. So this uplift in value is what makes us focus on the cloud so much. Of course, the downside is there's short-term revenue hits being taken. Nevertheless, there's long-term exponential revenues being built. Point number three is we have spoken a lot about exit ARR exceeding $3 million at the end of last quarter. Why is this important to the business? It is because exit ARR is the best leading indicator of our revenues. Our $3 million consists of several components: cloud subscription, AMC annual maintenance contracts of on-prem deals. The recurring revenues from our payroll outsourcing HRO business and tracking solutions related device maintenance annual maintenance contracts.
Typically how our analysts and investors could use this exit ARR that we will be reporting continuously, that we have been continuously reporting over the past several quarters... is to use that as a forward indicator for revenue. So essentially our exit ARR for the previous period minus the churn, our churn rates, annual churn rates last quarter was about 2.6%. Plus expansion revenue which comes in three forms: either selling more product to our customers, selling more volume... there are more users, more seats or higher prices. So these three basically have given a 4% revenue uplift over the last period. Our target is to take this above 10%. And then we have order book deals which go through a go live and start generating subscription revenue that adds to our ARR base. And then we have the non-recurrent revenues, which is the tracking solutions business.
The delivery revenue coming from new bookings and the order book delivery projects which move across the funnel. That essentially gives us the cumulative non-recurring revenue for the next period. And our exit ARR plus expansion minus churn plus order book realized ARR essentially gives the cumulative recurring revenue for the next period. So we believe our shareholders, investors, and analysts will closely track this so that you would get a better understanding of the direction of the business and a good... leading indicator for future revenues. With that, we would now like to open up this session for Q&A. Yeah, I think we have already a question coming in through the Q&A function. What is the amount of revenue that you expect to raise from Uganda project phase 3? Around when is the revenue recognition expected to happen?
So the entirety of phase 3 is roughly $490,000 in total value. And typically we would realize this over the next four quarters of next financial year. So Q1, Q2, Q3, and Q4. I hope that answers the question. Sampath, do you have anything to add? Onto the.
Yeah, in addition to phase 3 revenue, there's phase 1 and phase 2 support revenue start like, you know, phase 1 support revenue start from December 2023, and phase 2 support revenue will start like, you know, 2024, March onwards. So there will be additional revenue coming through those channels as well.
Moving on to question number two. Your current enterprise value to ARR is around 1.2x. What is your target EV to ARR multiple? Specifically for valuation purposes. So again, I mean.
It's not up to us to, you know, tell what the market will value us, but value us at, but however, I think it's worth looking at where similar companies, similar HR tech companies are trading at globally. Typically, enterprise value to recurring revenue multiples are right now as high as 8%-10%, which is the global average, sorry, 8 to 10 times enterprise value to ARR. If you look at multiples across the world, and by the way, this is a function of growth. If you look at the ARR growth rate across the more larger established companies, they are hovering around 20%-30% annual growth. If you took a look at our slide on ARR on our quarterly earnings filing, which was uploaded to the CSE, the investor relations website soon after the release of the earnings last week. We are growing our ARR at 12%.
We grew ARR at 12% quarter-on-quarter. Which is 42% if you look at the last 12 months. That is year-on-year growth of 42%. So from a growth point of view, I would say we are at a at the high end of the spectrum of growth that you'll see out there in the B2B SaaS world. And we believe, you know, that that even commands a higher premium given our growth. And why we've been harping around ARR is and the go-to-market motion we've built over the last 12 to 18 months is because now we are seeing the results in our ARR growth as witnessed by the 12% quarter-on-quarter ARR growth. As a as a management team, our target is to maintain this at a minimum of 10%.
And I mean, if you maintain a quarter-on-quarter growth of 10%, that works out to about roughly 45%-50% annual compounded growth. And with a $3 million ARR base I mean, in four quarters, it can be almost $4.5 million in eight quarters. It's $6.5 million in 12 quarters. It can even exceed $10 million. So that's the power of compounding. And that's the power of the non-linearity that we've been highlighting throughout. And the value of building ARR. I'll move on to question number three. How much did you recognize as Uganda phase 2 implementation revenue during the quarter? How much is expected to be recognized during the fourth quarter? So in Q3 out of phase 2, we recognize 30%. Roughly that was about, I think, LKR 69 million, LKR 70 million.
In Q4, we have a balance 10% out of that project to be recognized in Q4. Then, like Sampath said, starting Q1, we will have phase 3 revenues coming in. Of course, the support for phase 1 and phase 2 also kicking in to our revenues at the end of the warranty periods. So there's a question on what is the outlook for profitability? Do you have any target as to which quarter we will be profitable? So from a profitability point of view, we look at it at EBITDA, EBIT, and PBT levels. At EBITDA level, we were at -6% last quarter. Our expectation is we would get very close to breakeven, if not over, and into the black during this quarter. Obviously going forward, that'll continue to improve.
EBIT margins will probably take about two quarters to get into the black. If you look at a medium term growth, medium term profitability, medium to long term profitability expectation. For a software product company, for a B2B SaaS company like ours. The target is to get to at a minimum 15% EBIT margin. So if we maintain our quarter-on-quarter growth momentum with our fixed cost base, our operating cost base largely being fixed apart from certain market development expenses and customer acquisition costs, which would vary with the volume of deals we close. There's very high operating leverage in this business. So as as we've been continuously saying over the last couple of calls, we've taken a significant portion of the cost increases upfront. I mean, all essentially CapEx in the business is hitting up ENL.
So we expect, like I said, EBITDA getting into break even next quarter. And EBIT margins getting into positive territory two quarters from now. There's a question on, can you please repeat the Uganda project support revenue timeline? Sampath, do you want to take that?
As I told you earlier, phase 1 support started December 2023. So phase 3 completion will happen in February 2024, that is this month. So with that, there's a warranty period of 12 months. So phase 2 support will start from March 2025 onwards. And then again, we are starting phase 3 in April. March, April this year. So we are expecting to close that phase 3 project also like, you know, within next 12 months.
Hopefully, like, you know, 12 months' time, we should be able to start phase 3 support as well on completion of phase 3, which will happen somewhere around March 2025.
Thanks, Sampath. And also for you, for everyone's information, the total AMC or support value of the GOU project works out to about $200,000 annual. So upon complete handover of phase 3, basically we are expecting a $200,000 annual USD AMC component coming. Moving on to the next question. How much is the dividend payout and are you planning to continue the DPS? Dinesh, I think you can also come in on this. From a corporate finance point of view, I must say that as you can see, we've made investments and taken that hit on the P&L.
So from a profitability PAT point of view, the company is in the red, has been in the red last three quarters. So obviously that needs to be taken into account and the board will have to decide on, you know, the ultimate dividend payment. Dinesh, do you want to add anything to that?
I think very, very much in similar line what Nilendra mentioned. The board will be looking at it and we are looking at what options and we are looking at also what are the future plans that we have. So with that taken into account, we will actually make a decision on that. I think that's one of the other questions is about also why the company is maintaining a high level of cash. I think that's so because there are certain plans that we are also looking at.
The investments that we did in the last 18 months or so actually is paying dividends for it at this moment. So we will take all that into account and make a decision on future plans.
Thanks, Dinesh. Move on to the next one. Would you expect your On-Premise revenue to be in line with Cloud? I think the answer is no. I mean, Cloud essentially is building recurring revenue. And hence we are seeing this 12% quarter-on-quarter, 42% annual kind of growth rates. Cloud, as the indicative example I shared at the beginning, depicted is not that exponential revenue kind of business. However, those deals tend to be lumpy. Usually these are very large organizations, public sector institutions. Therefore it'll bring in, you know, earnings surprises as and when they come. Sampath, do you want to elaborate anything further on that?
Yeah, so one question is actually basically asking on-premise to cloud movement. So like, you know, primarily in Sri Lankan and some of the other markets like India expecting even last quarter like, you know, there were a few businesses moved from on-premise to cloud. So conversions are continuing. If you really look at the new business point of view, 90% new business from cloud area like in only 10% we recorded on-premise area. So that is one area is existing enterprise accounts or the on-premise accounts are converting into cloud as well. So we are expecting that pattern to continue next couple of quarters as well because we already like, you know, in the discussion with the customers with old version on-premise customers to convert to cloud latest version.
Naveen, I think you can go ahead.
Hi Nilendra and Dinesh, thank you very much for the call.
Just a couple of questions. One, just trying to understand the cost structure and in particular the staff cost. Now that has grown by about 48% if I look at from Q3 2023 to the current quarter. Just for me to understand how much of that is really coming from wage inflation, how much of that is because you added more staff. And the staff, is it development staff or is it sales staff?
Yeah, so overall point of view, there's an increase in the current staff cost as well. But same time like, you know, we increase leadership strength. So there are a few notable recruitment happens during last few quarters like, you know, bringing Chief Delivery Officer to overall like, you know, delivery head position at same time like, you know, VP Engineering joined the same team strengthen the global like, you know, development efforts.
So likewise there were a few regional recruitment as well and also we brought VP sales in Singapore like, you know, for the global sales operation. With that we are increasing some of the numbers like, you know, in sales and business development resources in the region. Especially countries like Philippines, Indonesia, stuff like that. So because of that cost will cost is high and also like, you know, next few quarters you can expect sales cost to go up. Sales recruitment area but not the operational cost structure will not increase drastically during next few quarters. Obviously staff cost compared to 2021, 2022 time like and it's obviously higher. But operational cost structure will not drastically increase during next few quarters.
And to be yeah, sorry, go ahead. Sorry.
Just to add to the question you asked on the mix, if you really look at the mix, a good two-thirds of that additional cost is on the GTM side. When I say GTM, sales and marketing. So this is basically to make sure we have, like Sampath said, on the ground presence, sales leadership, which is our VP of global sales. So that's significantly tilted towards the customer acquisition side. Whereas if you look at the product development side, it's essentially more or less wage inflation plus one senior hire that Sampath mentioned, the VP of engineering.
I think Nilendra, in your presentation you mentioned a churn rate of 2.6%.
If you can break that down by churn rate for on-prem versus cloud, I would expect on-prem to be a lot more stickier than cloud.
Yeah, I mean, 2.6% to start with. 2.6% compares with about usually 8%-10% churn in B2B SaaS. Our 2.6% I mean, if you look at on-prem, it'll be very much closer to the zero point. However, on-prem dollar value of business is very low right now. As you can see in our revenues, cloud now dominates more than 60% of the revenues. So I would say I mean, you do a weighted average to be at 2.6%. I don't have exact numbers in front of me, but cloud still would be in the range of 3%-4% from an annual churn point of view. Right.
Typically if you look at your cloud business, what does that translate into average lifetime of a client being someone being one of your clients?
It's very long. Typically I mean, we've had see the cloud journey is not very long. Yeah, but if you look at cloud clients who started out with us maybe Sampath 2017 as early as 2016, 2017.
Yeah, 2013 onwards.
Yeah. Yeah.
Okay, right. Thank you. That's from me for the moment. Thanks.
Thanks, Naveen. We'll also probably go to Bimani.
Yeah, thanks, Nilendra. I have two questions. Actually three questions. So particularly if you look at your quarter on quarter profitability, we saw some improvement at least coming in the September quarter. What made it substantially sort of deteriorate from that level in December? That's one.
The second question is, despite all of these changes that you all have been doing to cloud deals to moving switching to cloud deals, still the USD constant revenue seems to be quite sharply down. Why is it and how is that going to get sort of addressed? And finally, exchange losses would continue to be there quite strongly in the first, I mean, this quarter as well the current quarter we are talking. So in that sense, how would the profitability look like and if in case this sort of strengthening continues that how, I mean, at like at what point would you really look at profitability improving despite all of these growth numbers and margin expansions that you are seeing?
Okay, so Bimani, I might need your help to refresh some of the first questions, but let me go in reverse order starting from the third question.
So on the currency side, see, that's something purely out of our control. As a company, we will be valued ultimately if you look at our business on a dollar basis. And with the currency strengthening, whatever that we have in terms of LKR revenues, it's a very small portion, yes. But it's worth more in USD terms. And on top of that, whatever LKR cash reserves we have also stretches more when it comes to market development work when we always spend in USD terms, be it sponsoring an event, spending on digital marketing campaigns, or travel or whatever. So all our cash reserves stretch further whenever the rupee strengthens. So from a company point of view, from an operational business point of view, an operational point of view, the currency strengthening has really helped us, I would say.
But yes, from a P&L point of view, we will see a certain loss on the P&L. But if you really look at a USD P&L, I mean, that that really doesn't matter. So that's that's honestly beyond our control, and it's something that from an external perspective really creates more value to us. Going back to your.
If I could ask, if I may ask, will it be possible for you all to give the USD numbers as well? Because some of the other companies like the Hayleys companies provide the USD balance sheets and P&Ls as well. So in that sense, it might be helpful. Will that be something that will be possible going forward?
We will consider your request, Bimani. I think for for the moment we try and provide at least USD numbers for revenue and other key headline items, but we will consider your request.
Let me go back to your second question. On a USD constant currency basis, you referred to declines. I'm not sure which number you're looking at because revenue across the board has higher USD constant currency growth rates than LKR. Be it total revenue, recurring revenue, cloud revenue, you name it. Constant currency USD growth rates are much, much higher than LKR growth rates. So I'm not sure which line item you are referring to there.
This is the full year and Nilendra. Nilendra, it's down 20.3, right? On USD constant currency?
No, no, no. Full year revenues. Full year revenues are up.
Wasn't it down USD constant currency term?
Not really. Let me just get that slide so that I can read out the numbers to you. So core revenues on a year-on-year terms has shown 20% LKR growth and 29% USD constant currency growth.
If you look at total revenues including all other non-core revenues, 23% LKR growth, 32% USD constant currency growth. This is slide 12 of the IR presentation we have uploaded.
Thanks.
Is that all, Bimani?
So this question was in terms of profitability September to December. What were the specific attributes for the decline?
So September to December, if you look at slide 4, all margin indicators have improved. GP, EBIT was at -23% in second quarter, -16% in quarter three. EBITDA has improved -13% in second quarter to -7% in 6.7% in quarter three. I think you're referring to PBT, and that is because quarter two had a roughly LKR 44 million exchange gain. But if you look at core business from GP margins to EBITDA to EBIT to PBT, excluding exchange gains and losses, have improved across the board.
We can take some of the other Q&A questions.
Let me move on to the Q&A. So there's a question on how much revenue is coming from the partner network last quarter out of our. So the best indicator of that is partner share of new deal volume. We had 38% of our new deal closures coming from the partner network. These are improvements that we have been seeing continuously. And what this means to us is that it's making our business more scalable. Again, to give you a kind of example there. Safe example. Let me take a hypothetical number. New deal closure value grows tenfold, let's say $10 million. If we were to kind of source that business, we'll have to do a lot more recruitment.
And similarly, if we were to implement them on our own, that would also take we would need a much bigger services team, a professional services team to implement that, which would deviate us from being a pure software company and and have a very significant services arm. But what the partner share of new deal volume increasing means is that, A, we are becoming more efficient on the customer acquisition side, and B, some of these partners, we are taking them through an enablement process so that they become implementation partners as well. So we are foregoing the implementation revenue. They take that. They they make that margin. But we become more scalable as a software business. So no matter how much our GTM motion kind of grows and starts revving faster, we would be able to meet that demand without headcount increases.
Let me move on to the next question. Are you looking to continue with mobile solutions? Because in the presentation it has shown an increment in costs and revenues. Dinesh, maybe you can also comment on this, but just to highlight on the numbers, mobile revenues, if you look at annual values, has been quite, I would say, static. In fact, slightly reducing as well. But between quarters you might see that volatility. I think the plan is over a period of time with these contracts expiring, this will be naturally phased out. Anything you want to add?
Yeah. I think that's correct. It will be phased out because we are focusing it onto HR to be a pure core HR business and hSenid Software Singapore. Now we're actually purely the regional arm for all of the HBS work currently.
Right. Can you shed some light on the profiles of the recently acquired talent on the marketing front? Do they have firsthand experience of the APAC region or any other region that you have plans to penetrate? Sampath, do you want to go back?
Yeah. So yes. Now, APAC talent, especially we recruited from APAC region, not from Sri Lanka. Like, you know, still there are a few Sri Lankans working on the APAC region. But now, like, you know, as director sales and the VP sales, both are in Singapore, working on the regional sales activities and even recent recruitments in Philippines, Indonesia, and stuff like that, all are regional resources with HCM experience and ERP experience in sales and marketing activities in the region countries we are primarily focusing.
So it's very much we are working on acquiring talent on the relevant areas, not very much focusing on the local talent and pushing them to the regional markets, like, you know, other than the experience guys onboarded. And especially APAC region, then the Africa and Middle East, we haven't done much recruitment during the last two years or so. Same partner network is working on with us, like, you know, to bring sales from the MEA region.
Next question. Will AI pose a threat to the business in any way? Sampath, do you want to take it?
So, of course, like, you know, all the products and services will get the support of AI. So we are also incorporating AI into our product range. So you will see future releases, some of the notable areas of use, like, you know, will come out.
So we are very much into an AI journey as well, like, you know, especially embedding these AI technologies into product and services.
Yeah. And also to add to that, I think we are running a few initiatives in-house where we believe AI can bring in more efficiency in the way we develop our product. So, of course, it'll take a while to realize these benefits, but we feel that that can make us more efficient as an organization, and it'll make software companies across the world efficient. So we all have to do it.
Yeah, especially intelligent automation side, like, you know, we are doing a few projects internally as well. And also, like, you know, the product functionality point of view, we are very much they are, like, you know, with the leading products in the region, like, you know, level one products.
So you can always compete and get shortlisted, not only in Sri Lanka, like, you know, in the region as well. So you can functionality point of view. So you can easily compete with global players.
And also to add to that, I think we have had several success stories where either we competed with Tier One players or replaced Tier One players in certain accounts that we have acquired. There's a question on how many clients have shifted to the cloud. I think as a total, Sampath, it's correct to say we would have about another 100-150 or so.
Yeah.
Clients remaining on the on-prem and around 100. Typically, we would see about five to 10 of them probably converting each quarter.
Since it's difficult to reach 10x as global players, can you mention a number of a target revenue multiple that you would like to reach in the near future? Again, I mean, we don't want to give any definitive comment on it. Yeah. So we don't want to give a definitive comment on what the valuation should be. But see, I don't see why there's any reason if we get to a $10 million ARR, which is decent scale in the global scheme of B2B SaaS companies, why we should have a valuation that is any lower than, you know, 10x as a global player, because our business is not going to be a Sri Lanka-centric business. It's going to be a global business. If you look at our deal closures right now, a good 70%-80% is coming from the APAC region.
Sri Lanka's contribution in the overall business is significantly reducing because, obviously, the growth rate outside is higher than inside. So the more we become a regional and then subsequently global company, I don't think why there should be any differential in that multiple, because especially this business is software. This is an intellectual property-driven business as opposed to a physical brick-and-mortar asset that is located in a particular country that is subject to a lot of country-specific operational risks. I mean, if you look at our talent pool right now, it's spread across probably five, six, if not seven different offices. And the more and more talent additions are happening outside the country, therefore, there's no reason for any discount to be placed on the business from a valuation point of view. With regards to ESG practices, what initiatives have you taken from an environmental aspect? Sampath, you.
So last few years, actually, we are working on compliances and certain initiatives that are like, you know, we acquire ISO 27001 certification and cloud security certification, stuff like that. So the team continues to look at the ESG aspect as well. So initially, what we are doing is we are doing an internal assessment on the ESG. And then look at, like, you know, long term, what are the measures we should take going for a certification if required in the future, like, you know, so we're very much aligned because SLASSCOM, like, you know, develops an ESG framework for IT companies. So we are practicing that framework. And we are checking against our internal practices against the ESG framework.
Next question is, what are your expectations on Talent Acquisition and talent pool expansion?
So as I told earlier as well, like, you know, expansion will happen, especially in sales and marketing area for next, if you look at 12 months, especially these 2 regions, APAC region as well as MEA region. MEA means especially African region. We'll do some, like, you know, recruitment on sales and marketing area. Other than that, we are pretty much okay with talent on other areas, like engineering areas of development and implementation area. We will not expand much on those fronts, but especially sales and marketing area, we will do regional expansion. What is the main benefit that you get from Bangladesh Development Center? So primarily, we are using Bangladesh Development as a second development center to minimize our risk as well. So because we have global clientele, like, you know, over 40 countries.
So we need a second development center, the support center outside Sri Lanka as well. So that's one of the main benefits. At the same time, like, you know, we position as an international company in the Bangladesh market. Because of that, we are capable of recruiting high-end talent as well. Right now, the resource pool is actually very committed, and they are delivering good productivity at the moment, like, you know, so because of that, one side, like, you know, it's a stable market and a good set of resources with quality delivery. On the other hand, like, you know, as a second development center to minimize our risk as well.
The next question, I believe, was addressed. When are you planning to report in USD? Like I said, we will take that into consideration.
I think that might need certain changes to our systems and practices, but we'll take it into consideration for sure. What is the market share of HBS in the Sri Lankan workspace management software market? Looking ahead, how competitive is the PeoplesHR product in the local market? How is the market share impacted when existing customers move, improve the scale of their business? Do they shift to more sophisticated products like Oracle, SAP, SuccessFactors?
So local market, if I give you a number, like, you know, let's say top LMD 100 companies, 72 are our customers. So that gives you the right message on the market share. On the other hand, like, you know, so PeoplesHR product is evolving with global practices. Because of that, there's no risk in the local market, obvious, like, you know, there's a positive impact on the product and customer acquisition front.
At the same time, there's no threat from the global players. Because we are going global, like, you know, these PeoplesHR is now not a local product. Actually, it's a globally competitive product in multiple markets. Because of that, like, you know, there are certain accounts moving away from the global players and signing with us because of the cost advantage and the functionality advantage.
What is your current position on using IPO funds for strategic acquisitions? I'll take that. As you have seen, I think the last two years, we have been very much deploying or following an organic growth strategy. We have been actively looking at inorganic opportunities. However, we feel that in certain cases, the valuations and in certain cases, the risks that are posed by these acquisitions probably may not be worth pursuing the same. Nevertheless, we continue to look for it.
However, like I said, in the meantime, we have made sure that the investments made on the organic growth side have now brought the company into a growth trajectory with ARR growing 12% quarter-on-quarter and 42% year-on-year, which is really, really attractive growth numbers. I mean, globally, if you look at the B2B SaaS industry. But we will continue to watch the market closely for inorganic opportunities. How do you see the short-term new deals growth outlook given the extensive sales efforts? Sampath.
So this quarter also, like, you know, we are obvious, like, if you look at the last two quarters, we record good numbers. Overall, compared to last year, we already, like, you know, record better numbers, like, you know, up to last quarter.
Q4 quarter we are working on, we'll have better numbers as well, like, you know, so with that, I think growth outlook is really good. Next year, we are expecting, like, you know, with the new recruits happening in regions. Because obvious, like, you know, for them to, they will take at least three to six months time, like, you know, for them to come to speed selling solutions in the region, like, you know, so now we have done that investment. Hopefully, these guys will start performing current quarter as well as next few quarters. With that, like, you know, obviously, we can increase the number of deals in the regions, especially.
Can we expect a drop in selling expenses after the aggressive marketing campaigns, or will you continue the campaign for the foreseeable future? So from a financial point of view, I can answer that.
Maybe Sampath, you can add. See, the whole strategy in the software industry, in the B2B product space, is that we need to get to meaningful scale as soon as possible, as efficiently as possible from a customer acquisition point of view. So we watch customer acquisition-related metrics very closely to see the entire CAC versus the new ARR we onboard every quarter. Definitely, when we get to a certain scale, which we believe, you know, $8 million-$10 million is something that is realistically achievable for us in a space of 12 quarters. That's where growth will then slow down, and you'll see selling and marketing, or what we call GTM costs, customer acquisition costs, then stabilizing. So from a financial point of view, I think we are very closely; it's correct to say that we are closely watching GTM spend efficiency with our growth rate.
As long as growth is accelerating, we will do certain sales and marketing-related investments so that we get into meaningful scale as soon as possible. Anything to add on that, Sampath?
No, I think that's correct. So, like, we'll continue short term, obviously, we'll continue doing those investments, especially APAC region investments.
Explain the nonlinear scalability of your business model. So I believe we used that slide to demonstrate this. So if you look at the left-hand side, basically, I'll just take off. Yeah. If you look at the left graph here, so this example assumes $500,000 of on-prem deals, sorry, of cloud deals being closed every quarter. So there's no growth. $500,000 fixed every quarter for 12 quarters. Yet, although new deal closure is constant, you see that hockey stick effect in revenue. That is because your recurring revenue keeps accumulating, provided you manage your churn.
And now, on top of this, if we, I mean, we have made investments, and we are trying to grow this $500,000 deal closure number aggressively as well. And if that then moves into revenue through successful delivery, the gradient of this graph can be much, much higher. So that's the entire game plan. That's what we're trying to do by growing new bookings. We're trying to push the gradient of this curve much higher. And that's one of the few industries that's possible is the software industry, the B2B product space. I believe we answered the question on the balance of the IPO funds. What was done in the cloud optimization project? Maybe I'll take that. So we looked at several aspects where how we can optimize the cloud resources required to serve our customers.
We unified the cloud by providing a standard set of features and standardizing what was given across our different customers. We've taken more longer-term contracts so that we can get more favorable pricing from our cloud infrastructure vendors. We've looked at working with several vendors, cloud partners as well, to maximize the discounts we get, the rebates we get, and manage our costs. Internally, we've also improved the delivery terms, teams, discipline when it comes to usage of cloud resources. That has kind of combined to give us improved margins on the cloud consumption side. How about energy and water consumption in your data center? So just a technicality there, we don't run our own data centers. We consume cloud infrastructure resources of globally recognized cloud infrastructure providers.
So naturally, they follow, you know, all ESG practices, and particularly on the environmental side, where they try to minimize their footprint. How cheaper is your product compared to an ERP? I think someone can answer. Yeah.
So you can't compare an HCM product with an ERP solution because pricing models are different. But obviously, like, you know, compared to global players, global ERP players, we are very competitive. We are not very low, like, you know, but we are competitive in the global market, Sri Lanka as well as other regional countries. So you can't apples to apples. You can't compare with ERP pricing. But obviously, global level, like, you know, we are very competitive.
I think I've been nudged that there is a question on R&D spending that I have missed somewhere further up. I'll put that question to you, Sampath.
Are you comfortable with your current level of R&D spending, or do you plan to increase?
So current level of spending, we are comfortable. So we'll continue to do that because there are a lot of things evolving: security area, then the AI journey, and new functionality additions and stuff like that. UI/UX. So investments will continue. But we will not increase drastically in that area.
Next question. Do you believe that you have reached product-market fit? Maybe I'll answer that. I mean, with 1,600+ customers globally using the software across banks to governments to manufacturing retail organizations, yes, the answer is definitely there is product-market fit. And right now, we are in the scaling phase. But however, I think it's worth noting that product-market fit itself is a fluid thing.
The more deeper we move into enterprise accounts, very large conglomerates in the APAC market, our product needs to evolve. And we are consciously working towards that. We are very mindful of that. But to answer the question, yes, absolutely, product-market fit has been established. There's a question on a loan and the purpose for which it is being used. I think we do have an overdraft facility in the company. I think utilization as of the end of the quarter would have been in the range of about LKR 30 million. No loans, no term loans from any financial institution other than a working capital-related overdraft facility. Are there seasonality of the new deals? Sampath.
Yes, like, you know, because sometimes what happens?
I think we lost.
Cloud business.
Sampath, we lost you for a while. You may have to repeat your answer.
Yeah. Can you hear me now, Nilendra?
Yes.
Yeah. Yes, there's a seasonality. What happens, like, you know, when you are working on bigger deals, deals will happen in a cyclical manner, like, you know, so you might work even nine months, 12 months to work out a deal. So when that happens, during that particular quarter, sales will increase drastically. But if you really look at the area we are really working on, SaaS business, cloud revenue point of view, like, you know, there's a steady growth happening over a period of time. But of course, there can be spikes here and there based on some of the larger on-premise deals. What are the products which are at expansionary stage now? Sampath, do you want to take it? So basically, like, you know, our core product is PeoplesHR platform.
So PeoplesHR platform, customers who use operational area, they are moving to, like, you know, onboarding, performance appraisal, recruitment, training, and development, and those areas. Especially, like, it's a move from operational HR to strategic HR. So that's a movement happening. So otherwise, like, you know, we are working on one product, like, the PeoplesHR platform.
There's a question on the growth rate expectation from PeoplesHR Turbo in the near future, or will it moderate? So PeoplesHR Turbo essentially now is operating under the entire PeoplesHR umbrella. We have our enterprise offering and mid-market offering. Basically, the DIY-like experience we offer is for the SMEs of our cloud customer base. But if you look at it really from a value point of view, to go to our targets, it's the larger medium to larger size deals that really move the needle in terms of growth.
So if you look at our regional focus, particularly in the Southeast Asian market, it's all across medium and large-term large deals, which will really bring in the volumes as far as the numbers are concerned. Is there any way we can identify the new deal closure? I'm not quite sure what is being asked here, but we report our new deal closure on a quarterly basis in our earnings presentations. You could find that number on the presentation. What is the main dollar cost, and how much is it as a percentage of revenue? So if you look at our cost base, essentially out of all our costs, roughly 70% or higher would be people costs. The rest would be hosting costs to digital marketing to certain subscription tools we use, which are predominantly dollar-based.
Now, within the headcount cost, as we recruit overseas employees in the various markets we operate, the dollar component of that would also go up. But if you ask about the figure right now, probably 10% or so, 10%-20% at max of our entire staff base or payroll cost would be foreign currency denominated. What is your SaaS pricing strategy? So basically, we price based on usage. It's based on the number of seats and any organization that comes in. Since we are a system of record, all employees of the organization will be using our software. So we charge based on what we call PEPM, per employee, per month basis. Your price will be dependent upon the products or features within the solution that you use, whether it's Core HR or Core HR plus Talent Acquisition, Talent Management, Employee Engagement, various product bundles being offered.
How do you see the short-term new deals growth outlook? I think we answered that.
Yeah, we answered it.
Yeah. Have you increased the infrastructure costs further to increase the capacity or to increase it up to standards? Also, would you plan on increasing the infrastructure towards the future? So infrastructure costs for us essentially become a variable cost on revenue. So we'll see that go up as our revenue expands. However, like I said before, we've been through a cloud cost optimization project, which has now been fully implemented as of December last year, where we managed to bring in substantial savings in changing certain practices and processes in the way we have set up our cloud. There's one or two more questions. IT skill migration is high now. Will that not be a problem for deployment purposes?
Yeah. Actually, last year, industry average was around 26%, whereas ours also, like, you know, roughly around 24%. But this year, currently, it has gone down drastically. So, like, you know, right now, it is manageable.
Could you explain the tax treatment for business income, foreign and local tax rates? Are there any applicable tax exemptions? So based on the current Sri Lankan tax law, all foreign revenues which are remitted to the country within a certain period of time, profits emanating from that business is tax-free. The rest of the business is subject to a 30% corporate tax rate. I think we've come to the end of our questions and almost 3 min above scheduled time. If there are no further questions, I think we are ready to wind up.
So from an IR point of view, we thank you very much for your active engagement during the call with all the questions and answers, and we hope you got better insights into the business. We are committed to improve how we report performance of the business to you so that you better understand not just what happened in the past, but also, like we explained in the third slide at the start, to use the information that we provide you as an indicator to project what could come in the future in terms of revenue. So we hope to continuously engage with you and have these quarterly calls so that we provide you as much as possible insights of the direction we are heading.
Excellent. Yes.
Thank you very much.
Thank you very much.