Sales and marketing and talent aspects are concerned, and then I will come in at the end to talk about the finance and strategy update. I would like to remind you that all questions can be channeled towards the panel using the Q&A icon on this platform, or And those questions will be answered at the end of this presentation, where we have adequate time allocated for Q&A. Or alternatively, at the end of this presentation, you could click on the Raise Your Hand icon, and then the moderator would allow you an opportunity to speak and present your question to the panel. With that, let me now hand over to Sampath, CEO of hSenid Business Solutions PLC. Over to you, Sampath.
Yeah. Good afternoon. I'm very happy to meet you all again, after six months' break, to give you overall business background, what we are doing, business climate. Overall, at a glance, if you really look at our total accessible market is $10 billion. That's what we are working on at the moment, especially the markets, as we promised earlier, like, you know, Asia-Pacific region and the Middle East and Africa, MEA region. Those are the two regions we are very much focused our activities, partner development activities, and market development activities. At the same time, if you really look at the current context, as at end 2022, 2023 financial year, we have $2.3 million exit ARR. Recurring revenue is growing year-on-year.
Same time, like, you know, we have a half a billion dollar subscription revenue backlog. We are planning to clear that during next two quarters, current quarter and next quarter, and maybe a small portion will go to third quarter as well on large accounts. At same, we are again generating, like, you know, new recurring revenue as well, especially the Q1 and Q2. We are hoping, like, you know, those revenue also will add to our ARR end of this financial year. Cash point of view, $4.8 million cash in hand, like, you know, we are going to utilize this cash, like, you know, for our product journey and the market development journey, especially Asia-Pacific region.
I'll explain some of the initiatives that we have already taken during last financial year and during last two months as well. Overall, like, you know, company and the product point of view, like, you know, now the product is seamlessly connected with all global ERP solutions, like, any branded ERP solutions and regional ERP players as well. We are in a position to handle large accounts and complex organization structures. We are getting, like, you know, more accounts in that line. We briefed sometime back about Government of Uganda business, like, you know, so that's a structure like, you know, within the product we created during last 24 months or so.
System point of view can handle today, like, you know, even a workforce, like close to 500,000 workforce, 300 entities, like, you know, large structures we can handle within the system. Especially like, you know, manufacturing plants, hospitality industry, retail, and back-end finance industry, like, you know, large accounts. We keep on getting large accounts. In terms of customer acquisition point of view, now we are little over 1,600. We achieved this milestone, like, you know, a couple of months back. Again, the same regions, like, you know, 40+ countries and 20+ industries, even though we focus on some of the critical industries I mentioned earlier.
User base point of view, we are one million-plus user base, and our churn is, again, like, you know, we are maintaining less than 5%. Throughout, like, you know, we are, churn is very low, and that is a very healthy situation for a typical sales customer. Number of employees point of view, right now, like, you know, we are around 370 employees. Good news is actually our global workforce is increasing. Some of the reason additions are from regional locations. Global workforce will increase little bit. Like, you know, we don't have big plans to increase other than the sales guys, but things are moving in that direction.
On the other hand, product offering point of view, obviously, PeoplesHR is our platform. PeoplesHR, we have two offerings: a Cloud offering, that's where, like, you know, we focus on our market development activities, and we have the PeoplesHR On-Premise offering as well, and PeoplesHR Turbo offering. And also, like, you know, HRO operation is growing. hSenid Tracking Solution also growing, because tracking business is IoT and related access control business also growing regionally. We have a fantastic PeoplesHR ecosystem. Ecosystem point of view, we have the Marketplace. Marketplace is to bring, like, you know, third-party solution to our product range. PeoplesHR Social, that is little bit on the enterprise social network, purely focused on HR angle.
We have our own PeoplesHR Academy, that is to educate our customers, educate our partners. They can come and, like, you know, do their own certifications online today. That's the beauty of the whole ecosystem. Like, you know, today, PeoplesHR is a very comprehensive ecosystem, supporting all our direct sales, partner-driven sales, and partner development activities. If you look at product and talent point of view, we are happy to announce that, like, you know, we have achieved the Cloud security certification, during last few months, top of ISO 27001 certification we acquired during last financial year. That's a good achievement, especially a company with SaaS operation and also with HR operation.
We launch a comprehensive, enterprise, analytics dashboard set, so the, CXO-level, organization leadership will enjoy getting, first-hand information, HR-related information. Like, you know, department heads can enjoy, like, you know, looking at their employees in a different angle. We looked at like, you know, the critical, employee-related analytics to bring as dashboards, like, you know, within the system. Like, you know, we launch a very comprehensive workforce planning module. As a value addition, we had a module like, you know, so as part of our solution, but we enhanced and released a new module, during last financial year. Also, like, you know, recruitment module, lot of enhancement work we did, like, you know, during last few months.
Today, like it is even AI-enabled some of the activities like, you know, so you can enjoy within the recruitment application. Like it is a seamless operation from workforce planning to recruitment module, onboarding module to employee master. Like, you know, so it's a seamless operation company can achieve with this product launcher. We introduce RPA, Robotic Process Automation, and intelligent automation into the product range, so customers can benefit in payroll automation and payroll area, and the payroll reconciliation area especially. Key talent point of view, we filled couple of critical positions. We recruit Thushara Dissanayake with 20 years' experience in handling large-scale enterprise accounts.
Like, you know, as the Chief Delivery Officer, he will focus on enhancing our capabilities on the delivery efforts, especially, Cloud delivery and On-Premise delivery, plus the support service angle as well. We recruit, like, you know, Luxsho Logan. He's joining, like, you know, this quarter. As the VP, Global Sales, his base station will be in Singapore. Like, you know, he's a Australian citizen, like, you know, and he's helping us to build the sales organization globally in the two regions I mentioned earlier, Asia-Pacific region as well as MEA region. We are further added few resources as country heads in different regions, like, you know, focus countries in the both regions, APAC region as well as MEA region. Right now, the total head count is 370, as I told you earlier.
We are not enhancing this number, like, you know, on other areas other than the sales and sales-related market development work. We had a high staff turnover, like, you know, due to migrations and all, like, you know, but now the current signs are really good, like, you know. I think like, you know, we're stabilizing this area, like, you know. The attrition rates are going down, like, you know, during last two quarters. That's our experience. At the same time, there's a significant escalation in talent spend within the company. This is especially to retain and improve our retention, the high-skilled retention. This resulting in margin erosion, but we'll be addressing, like, you know, with repricing programs we just launched.
We want to do it like just before COVID, like we postponed due to COVID. We haven't done, like, you know, repricing for many years. We are planning, like, you know, this year to iron out, like, you know, cost increase. Sales and marketing point of view, as I told you, we are traditionally a engineering-led organization. While maintaining that competitive edge, we are like, you know, now developing a sales organization to transform to sales-led organization. While technical team is focusing on the tech stack and moving with latest technology trends, the sales organization will transform the external sales organization to sales-led organization.
We have revamped the whole sales team, new hires in multiple regions with country-level responsibilities. Local sales also, like, you know, we strengthen for different areas. Same time, like, you know, we are investing time and energy on sales automation and the marketing automation activities with right tools in place, like partner relationship management solution, CRM solution. With right toolset added to these, integrated to the CRM and PRM, to get the right information at the right time for us to make the right decision and move forward. Market development activities, point of view, our promise is to develop partner channels, like, you know...
While like, you know, we do sales activities in some of the regions on our own, and we do, like, you know, certain events with partner channels as well, like, you know. Multiple events happened during last six to nine months in Philippines, in Cambodia, in Bangladesh, and few other regional countries, including Africa. Same time, we launch aggressive lead generation campaign. Hopefully these give us, like, you know, results coming quarters. Lead generation activities streamlined. We introduced, like, you know, growth hacking mechanism within the organization, led by Nilendra. Like, you know, things are moving in the right direction. Brand awareness point of view, you can see like, you know, the recognition we received from G2 during last six months.
Like, you know, we are heavily investing time and energy on this area as well to develop the brand visibility in the regions that we are working on. New deals booking point of view, we generated $2 million+ new deals during last financial year due to the market condition and especially Sri Lankan condition. Like, you know, we are little down, like 10% down, like, you know, compared to the last financial year, overall new deals booking point of view. Channel partners contribute to roughly 48% of new deal bookings during last financial year. We expect that to grow, like, you know, during this year, because we are investing time and energy on partner development activities as well.
Regionally, like, you know, we are very much focused on APAC region. Of course, like, you know, Sri Lanka is always a good market for us. Like, you know, both Sri Lanka and APAC accounted to 59% of new deals during last financial year. Good news is actually, if you look at the new business point of view, 60% new sales are on SaaS area. Even if you look at the balance, 40% also like, you know, with one large deal, like, you know, because of that, you can consider as like, you know, majority of new sales, if you really look at number point of view on SaaS, recurring revenue business.
That's overall like, you know, just to give you overall summary of the business in terms of product, in terms of, the market development activities, in terms of, sales activities. Over to you, Nilendra, to discuss about the financial and our strategy.
Thanks, Sampath. Let me spend the next 15 minutes to talk about the to go deeper onto the financial aspects, and strategy direction going forward, then we can open up for Q&A. To start with, I'd like to take you through our revenue segmentation, both from a product point of view and a geographical point of view. Focusing your attention on the graph on the left-hand side, PeoplesHR Cloud, from accounting for 29% of our revenues three years ago in FY 2021, has now come up to almost 57%... 47%, I'm sorry, in financial year 2023.
Now, why we are highlighting this is, after all, a lot of our time and effort and capital invested, in terms of the business, is to build the Cloud business and is to build strong recurring revenues, on the Cloud side. This is a number that we would like to invite you to closely watch, and we'll be more than happy to report our progress on that aspect. From a geographical segmentation point of view, on the brighter side, APAC grew from 25% last year to about 29% of revenue this year. Of course, you'll see a shrink in Middle East and Eastern African regions, down from 26% last year to 14% this year, which has been pretty much taken up by Sri Lankan sales.
Despite a turbulent year, Sri Lankan revenues still have coming strong. Moving deeper into the product segments, are two key segments, which is On-Prem and Cloud offering. You see an interesting trend where On-Prem is almost flat from a CAGR point of view in LKR terms, and even 16% down in USD constant currency terms. If you look at our Cloud revenues, this is where you see a three-year CAGR of 48% in LKR terms and really attractive 21% in USD constant currency terms. What's happening here is a result of two key phenomena. One is that there's lower invoicing on the Government of Uganda project as we move towards the subsequent phases, which are smaller, and then towards completion.
Secondly, there is a shift in business mix happening towards the SaaS offering, and this is something that Sampath alluded to as well. I'll be highlighting a lot about that in this slide and also when we talk about margin fluctuations towards the end of this presentation. Going deeper into the shift in business mix, there are two reasons that's causing this. One is we are seeing successful migrations happening for the Cloud. Secondly, a higher share of the new deal closures are obviously in the Cloud area and the SaaS product. Obviously, you'll see that focus and that results getting reflected in the numbers. Having said that, demand for On-Prem still does come from mainly the East African region and select South Asian markets.
As a company, we are well positioned to cater to both of these pockets of demand, as a product, from a product point of view, and we will continue to cater to them. However, the exponential growth is going to come from Cloud, with the On-Prem maintaining both headwinds because of migrations and the tailwinds from the markets that we are operating in. Moving on to Payroll Outsourcing and Tracking Solutions. Again, a very bright spot, two bright spots in the overall scheme of things. Tracking Solutions recording 34% $ constant currency CAGR over the last four years, and then Payroll Outsourcing, similarly recording 13% in USD constant currency over the last three-year period.
As far as Tracking Solutions are concerned, we are seeing a lot of packaged deals where some of our larger clients, we are in a better position to offer devices packaged together with the software, which is a very unique and rare offering in the market. That has helped us perform well in this segment. Payroll Outsourcing continues to perform really well, particularly in terms of acquiring overseas clients and in the Sri Lankan business environment as well. Moving deeper into the whole focus or primary focus of the entire business, which is to build recurring revenues, subscription revenues. Our annualized recurring revenues have grown at a CAGR of 32% over the last three-year period.
When we talk about recurring revenues here, we are talking about core recurring revenues, and the distinction there is we are excluding the staffing revenue, the umbrella staffing operation, which is being wound down and right now has very negligible revenue. Taking out the effect of the staffing revenue, if you look at the core recurring revenues from 36%, graph on your left-hand side, FY 2020, 36% were recurring revenues, up to 49% in FY 2023. If you zoom in further on second half FY 2023, this number is at about 51%. This is the key element that's going to bring us the exponential growth, essentially the hockey stick effect in our revenues as we expand.
Basically, we closed financial year 2023 with a LKR 751 million, roughly $2.3 million in terms of exit ARR. I want to highlight on two ratios at the bottom. One is the gross retention ratio, and the second is the net retention ratio. The gross retention ratio is essentially one minus churn. The dollar value of our churn, to be precise, is 4%, which means 96% of our revenue is retained and renewed, which is a very high above benchmark performance in enterprise software. However, on the net retention ratio, that leaves us some work to be done.
The difference between net retention rate and gross retention rate is essentially the upsells and the expansion revenue you make on your existing customer base without considering any new logo wins on your business deals. If you look at the breakup there, essentially our 96% gross retention comes down to about 94% to 93% due to 2%-3% of headcount loss among our clients. Most of our Cloud customers pay on a per-user, per-month basis. Particularly looking at our Sri Lankan clientele, you see this in terms of the headcount billing. The headcounts have taken a 2%-3% hit. GRR comes down from 96% to about 93%-94% range once the headcount deceleration is accounted for, and then upsells take it back up to about 97%.
Our target as an organization is to get this number clearly above the 100% zone, ideally closer to 105%, because the net retention rate being above 100% really contributes a flywheel effect in our revenue growth. When your existing customer base is also growing year-over-year in terms of expansion revenue and upsells, with new business bringing in that additional impetus, that allows real exponential growth to be unlocked in the overall P&L. That's something we'll be closely watching and reporting to you. From a revenue drill-down per aspect, I think I mentioned the key categories.
We've given you the same level of transparency and detail as we did last year in terms of each category, how those revenues are coming from an implementation, licensing, support point of view on On-Prem. On Cloud, it's basically implementation and subscription revenue. On the Tracking Solutions business, Payroll Outsourcing and our smaller projects, yet growing projects, Turbo and Marketplace. If you look at core revenues, we closed the year at about LKR 1.26 billion, which is a 22% CAGR and a 4% CAGR if you look at USD constant currency terms. Diving deeper into the cost of sales, which contributes, you will see in our next couple of slides, to a majority of the margin erosion that you're witnessing on the P&L.
Two areas, I wish to draw your attention to two areas here. One is row number two, infrastructure costs, the final, the second one being the penultimate row, which is staff-related costs. On infrastructure, we've seen a significant increase, a three-year CAGR of about 90%, year on year, about 180%. This is partly due to the heightened security compliance needs of our customers, particularly those in sensitive industries. We have had to upgrade our Cloud infrastructure to more premium versions that provide high service standards and specifications. However, it will take some time for this to get reflected in the price. In fact, Sampath alluded to the repricing program that we are launching, which we hope to launch within this month, where we will.
across the board, be compelled to relook at pricing to our customers to recoup some of these higher infrastructure costs that are associated with the business. On the staff-related costs, Sorry, on staff-related costs, bulk of this increase is coming from the multiple salary increases and allowances that were necessary to retain our talent in the midst of the high turbulence and staff turnover that we were facing over the last financial year. As Sampath mentioned, we are seeing signs of stability, and we'll be looking into driving efficiencies wherever possible in this in this area when it comes to staff-related costs in the cost of sales. Essentially, this is our development team costs, which are captured under cost of sales. Looking at the margins on a normalized basis.
When I say normalized, essentially what we are doing is we are removing the effects of interest income, Forex gains or losses, any debtor-related provisions for long-outstanding dues, so that we really look at the core business performance. Highlighting on the graph on the left, from the mid-2020s to the high 2020s, several years ago, FY 2023, we are down to 7%, so that's a 22% margin contraction. 13% of that is accounted for by cost of goods sold increase from 43%- 56%. Admin expenses have gone up from 16% - 24%, so that's 8% out of the 22% being explained there.
T his is mainly coming, uh, because of some of the senior-level hires we brought into the business, and then sales and marketing, uh, uh, expenses have been managed at about a one percent increase. So all in all, this adds up to our P&L, where, uh, basically, we closed the year at, uh, almost LKR 1.45 billion , which is about $5 million . Uh, and, uh, reported net profitability at LKR 184 million , which is an, an earnings per share of LKR 0.66 . Uh, second quarter-- second half is essentially where most of the cost increases were taken in. Uh, so obviously, on a normalized basis, you're seeing our EBITDA drop, uh, as, as low as LKR 7 million , which is 1% , from an EBITDA margin point of view.
As we explained, the Cloud cost optimization and the repricing program will help improve these margins. In fact, I'll be talking about the margins separately in our final slide. Looking at the cash position and IPO fund utilization, we ended the financial year at almost LKR 1.57, almost LKR 1.6 billion in cash, which is a mix of currencies in LKR and USD, and Singapore dollars. IPO fund utilization, market development, product development, has basically utilized the bulk of the funds earmarked from the IPO, almost half, with the total allocation standing at 24%. This is another important graph that we want to draw your attention to from a free cash flow generation point of view.
I'll first focus on the left-hand side. We have had strong free cash flow generation throughout FY 2020, right up to 2022, and FY 2023, with significant investments going into the business, you could see free cash flow drop to about LKR -82 million. The graph on the right-hand side basically tells you how this happened and what we've been doing about it. Q1 of FY 2023 saw a huge LKR -150 million free cash flow, and Q2 saw a similar, but lesser than LKR 150 , roughly about LKR -100 million free cash flow. We spoke to you about this during our first half investor call, mentioning that we are taking remedial action, particularly from a working capital point of view.
I think we saw somewhat delayed payments, particularly from our Sri Lankan client base, given the economic difficulties that we've been experiencing. We've managed to record healthy progress in third quarter, where the free cash flow generation was near 0. Fourth quarter, you see a significant improvement of about LKR 150 million in positive free cash flow. Nevertheless, the entire year, given the quarter one, quarter two negative free cash flow figures, we ended up at LKR 82 million negative free cash flow. However, again, worth highlighting what I've mentioned in the call-out box here, this is even after incurring LKR 144 million in CapEx and CapEx-like items expense in the P&L.
Basically about LKR 73 million in terms of capitalized product development, R&D expenditure, and other CapEx-like items, which are essentially account OpEx items as per accounting rules, but like CapEx-like items for us as a business, particularly in terms of market development, hiring new sales resources who take certain time to start developing a sales funnel and revenues in certain markets. That component was about LKR 68 million, adding up to about LKR 144 million of costs hitting the free cash flow number, resulting in a LKR -82 million figure. My final slide is on a deep dive to tell you what's going on behind the scenes leading to this margin erosion. Taking a bird's-eye view of the margin erosion, it basically has three components.
One is natural and is reflective of the changing business mix. What do I mean there? Hypothetically, let's assume all the deals closed and executed during the year were On-Prem deals. Our P&L is going to be vastly different from what it is now. Our margins are going to be significantly more than what it is right now. Why? In an On-Prem deal, the intellectual property investment in the software is being recognized as a sale on year one upfront as licensing revenue. On the Cloud, it's spread across a period of time and is billed as part of the subscription revenue.
Yet our strategy is to build Cloud revenues because we know that once we manage the churn well, and we expand on the revenue by upselling to these customers, that that flywheel effect comes into play, and we manage to unlock exponential revenue growth. How this first factor will be addressed is naturally it'll revert and normalize to where it was over time, with the compounding effect of the subscription revenues. Part number two is we know there's something wrong, and we are fixing it. We are launching repricing as early as next week to address the higher Cloud infrastructure that we've provided our clients. Like Sampath said, it would have been almost 2019 when we last did a repricing, and this is very unusual for a software company.
So while the situation calls for repricing, we are compelled to pass that on to the extent possible to our customers, so that we achieve normalization of margins. Secondly, we are also fixing things internally from a Cloud cost optimization point of view. There's a project ongoing, and we are on track to achieve the objectives and eliminate any unnecessary costs and optimize our Cloud infrastructure. This project will be completed by Q2 of FY 2024. It is our estimate that this will add 250-300 basis points on our gross margins. Point number three is basically an inevitable margin erosion that happens during growth.
Again, this goes back to my point, where most of the market development, sales, talent development, and part of the product development expenses hit your P&L as per accounting rules. Although, you know, these typically take 12 to 24 months to generate revenues. We've taken a lot of investments in this year, and that's really reflecting on the margins. Now, for your information, my last point is on what would our normalized EBITDA margins have been had we not incurred these CapEx-like items. Why we are doing that hypothetical scenario is not that we intend to curtail this growth drive, but to give you an understanding of how big those cost items are, given that they are not necessarily required to generate this revenue base that we have right now.
FY 2023 normalized EBITDA margin, as you can recall, was 7%, would go up by 500 basis points to 12%, had these costs not been there or not been recognized on the P&L. Our 1%, second half FY 2023 normalized EBITDA margin would have been 6% had these CapEx-like items been eliminated in the EBITDA calculation. That's it in terms of our presentation, our slides prepared for this presentation. Let me now move on to the Q&A. I think we have-
market's point of view, I'll explain, like, your two questions.
Right.
Nilendra, you can answer the finance questions. Market expansion point of view, as I explained earlier, we are very much focused on two regions. One is APAC region and two, MEA region. Like, you know, we are very much focused on MEA, a few selected countries in the Gulf region and East African region. Like, you know, though, that is where we operate, like in MEA region. APAC region, like, you know, again, the region, like, you know, we are developing. We are developing resources in these regions and product localization happening into these regional countries. We are very much focused on these regions, like in the APAC region as well as like, you know, MEA region.
We'll not remove that focus during next couple of years as well. On the other hand, hSenid Business Solutions PLC point of view, we don't have a office in at workplace. Like, you know, workplace office is a group office, like, you know. Because of that, we are not incurring any cost there. New customer acquisition point of view, yes, of course, like, you know, you all can see, like, you know, when we announce some of the. Usually we won't announce when we acquire a customer. We only announce, like, you know, when customer go live.
Because of that, so, we keep on acquiring new clients in Sri Lanka, like, you know, so they're moving from different vendors to our systems as well. Like, you know, we'll keep on announcing some of these acquisitions when they go live. Nilendra?
Sure. I'll take some of the finance questions here. Question number one was: With the recent appreciation of the exchange rate. Sorry, before that, there was a question: Overall, what kind of impact on HBS with the appreciation of dollars? Obviously, just as we enjoyed margin expansions during times where the dollar appreciated, of course, these are temporary margin expansions, because over a period of time, you'll have your cost base, you know, increase to make up for the cost of living and the purchasing power of your employees, which is our biggest cost item. Similarly, when the LKR appreciates and the dollar appreciates, we'll have a one-off margin decline there as well. That is to be expected.
Second question was: With the recent appreciation of the exchange rate, is there a requirement to drastically restate the accounts? I mean, from an accounting point of view, no, that doesn't arise. I mean, if you look at our revenues at the end of the day, I think there's an echo. Yeah. If you look at our revenues at the end of the day, from an LKR point of view, yes, it'll reduce with the rupee having appreciated 22%.
I mean, from an overall point of view, our business is essentially a global business, and when it comes to performance measurements and reporting, we prefer to look at USD as the base currency so that, you know, we eliminate any of these currency movements and really focus on the underlying performance of the business. I think Sampath took question number three. There's a question on: What interest rates have you fixed deposits been locked in at? Again, we are not in the business of making speculative investments, we've kept all our investments on the short end, in a mix of fixed deposits, money market investments, and treasury bill investments.
Obviously, we don't want to lock in funds unnecessarily for a longer period because business needs are paramount, and given the acceleration we are doing on the sales, marketing, and product front, we don't want to have funds locked in in the long run. Nevertheless, there is a treasury operation that tries to maximize the returns on the funds. Raveen, correct me if I'm wrong, average yield of about 25%-26% on the overall LKR funds is something that we've been enjoying up to now. Would that be correct, Raveen?
Yeah, that's correct. Yeah, that's all.
Right. Sampath answered the other question about the workplace office. What explains the drastic change in free cash flow in quarter four? Basically, we've been very tight and disciplined in collections, constant reminders, follow-ups. We've have two dedicated resources in our finance team who has a single KPI of collections. Rather than waiting till they cross certain buckets and fall into the provision buckets, we really go after them from day one. I see a few hands being raised. Maybe we can answer those questions first, and then come back to the rest of the questions. I think we have about six, seven more questions left. Can we unmute one of the participants so that they can post their questions?
Asanka, I'll go with you first.
Hi, Nilendra, Dinesh and Sampath, thank you for your time. I'm trying to draw a baseline to understand the performance in comparison of where it was about 17 months ago. If I look at the prospectus, in December 2021, you guys projected $6.6 million worth of top line for FY 2023, and about $7.8 million worth of top line for FY 2024. I believe for FY 2023, you ended up recording about $5 million. Roughly, versus the projections, you guys are tracking about below 32% in dollar terms. I'm trying to understand the reasons for the deviation. Also, it'll be great if you can give a sense as to how much of a deviation from those projections we can expect in FY 2024.
As I said, FY 2024, you had projected $7.8 million worth of top line. Thank you.
Sure. Sampath, Dinesh, do you want to take that, and I'll maybe comment on the numbers?
Yes. Yeah, Nilendra, go ahead on.
Okay
Financials.
Asanka, clearly, there is no question that we are facing longer sales cycles. Every IT CapEx decision is attracting much more scrutiny than it used to before. Typically, I mean, our sales cycles and sales velocity, sales cycles have extended. I mean, a deal that we would have closed in three, four months, now probably taking six to nine months. Sales velocity has come down. We are obviously feeling the slow down in sales with it not accelerating according to the level we would have expected it to.
Nevertheless, with the investments that we are putting in in terms of headcount and, sales headcount and market development, in terms of creating more visibility for our product and our brand in our target markets, we are expecting in FY 2024, to really minimize this 25% or so deviation that is there in FY 2023. We're trying to really minimize it by catching up, to the FY 2024 numbers, that has been indicated. Dinesh, Sampath, you want to add anything to that?
Sorry. Even especially in African region also, we face a difficulty on dollar, just dollar shortage in certain countries. That also impacted certain sales delays in that region as well. Fortunately, the Uganda government project, there was no cash issue because it's a funded project. We are getting those collections on time. At the same time, there's another question with regards to same. We completely complete phase one, the development work and delivery work for the Government of Uganda. We got a new business from there, the deployment business. Second phase, we are deploying to 100 new entities.
Cash flow will continue in phase two, and hopefully like, you know, we are planning to complete phase two some around September, October time frame during this year. With that, like, you know, with the warranty period coming to an end, like, you know, for phase in September, we'll kick off the maintenance work of phase one with additional revenue from Q3, like, you know, this financial year. Above that, like, you know, there's a phase three as well. Hopefully, we'll get the phase three as well, like, you know, with the success we are building within that project overall, like, you know. Those are some of the contribution, like Nilendra mentioned, even APAC region, some of the large accounts like, you know, the time they take to finalize is dragging little bit.
Like, you know, those are some of the experiences during last year, like, you know, from the expected numbers.
I think in the prospective, you guys have indicated about $1.1 million worth of new deals in FY 2023, but I think when the year closed, you guys could only close around $240,000 worth of new deals. Can you mention the big-ticket items which contributed to that, below the expected, new deals?
Asanka, you mentioned $240,000?
No.
What is that figure?
$242,000 for FY 2022 FY 2023, new deals.
New deals figure for FY 2023-
No, Asanka.
It's $2 million.
It's $2 million.
$2 million new deals in FY 2020?
2023.
FY 2023.
Yeah.
you've actually gotten $2 million worth of new deals in FY 2023, is it?
Yes, I think your-.
Yeah
N umbers may be incorrect.
Right. Okay. If you got $2 million worth of new deals, what are the big-ticket items where there's a revenue miss on FY 2023?
We can't name the account, Asanka.
Right.
Like, you know, there are a few in the APAC region and few banking and finance sector in the African region, and a few postponement from Sri Lanka as well, due to, like, you know, some of the uncertainties we had during last year.
Is that to do with, delays in conversion, or were those...
Yeah
those revenues are not been materialized at all?
Delays in like, you know, getting the new business.
Right, right.
We have more or less like, you know, deals are finalized, but they didn't sign, like, you know, because of the situation.
Right. Okay. Nilendra, my apologies. I think I got the new deal closures for the quarter.
Okay
And the new deal closures.
Okay
F or FY 23 confused.
No problem.
Thanks, Nilendra.
Can we move on to, Ruchi? Over to you.
Hi, hi, thanks for your presentation. Just a couple of questions. On the margins, so you showed your normalized EBITDA margins went down to about 7% because of all the reasons that you gave, but what is the outlook for your margins? Do you see any uptick in FY 2024, given that you've made all these new hires for sales and the other, you know, hires you made? Your costs will probably still remain on the higher side. When can you see some improvement in your margins? Is that likely this year? Also, on the pricing, you mentioned you plan to increase prices from June, or from this month, basically. What is the price increase that you're going to do for your clients?
Sure.
Will this be for both the SaaS product as well as the onsite product? Thanks.
Sure. To start off with your first question, if you look at FY 2024, I think the first half will be where we see whatever the additional, key additional headcounts come in, particularly on the sales side, and there'll be stabilization from that point onwards. There will be a certain margin hit on those additional costs. Separately, because of the LKR appreciation, given that bulk of our cost, I mean, essentially 75% of our cost is in LKR, which is in this quarter, the relatively stronger currency, with our revenues being in USD. That is going to have a one-off impact on margins as well. On the margin management aspect, there are two cost savings or margin improvement activities coming in....
Cloud cost optimization, which is roughly going to bring about 150 basis points, and then repricing. We are looking at 15% on average across our client base. Of course, there'll be different clients based on when their last repricing was done, having, you know, different rates of repricing, and there'll be a very wide spectrum. But across the base, we're looking at a average kind of 15% price increase. These four items together, two items which are leading to margin erosion, two items leading to stabilizing margins, we feel should cancel off each other. Then margin uptick from that point onwards, really would come in the second half.
Once the funnels that are being generated, the deals that are being closed in this year, typically with the implementation cycle of about six months, start getting reflected in revenues towards Q3 and Q4. That's where the margin normalization would have, would get reflected in the numbers.
Okay. Okay, great. Also, you mentioned your order book for FY 2023 was down 10% year-over-year, if I'm not mistaken.
That's right.
What are you seeing? Maybe you can't talk about numbers. What are you seeing in the first quarter of this financial year? Are you seeing any improvement, or do you expect your order book to, you know, put the momentum this year compared to last year?
Sampath, do you want to comment on that?
Yeah. We believe, like, you know, and we feel that things are moving better than last year, but still, like, you know, some of the markets are a little slow, especially the impact on the manufacturing sector, supply chain disruptions, and all these things. There's a delay, but we expect the situation to change, like, you know, obviously second half of this financial year. That's where, like, you know, we focus on our effort on the partner development work, partner acquisition work, so partners and the direct sales force will be ready, like, you know, to accelerate the journey, when market also like, you know, picks.
Overall scenario, like, you know, we are working on $10 billion TAM, like, you know, and then also like, you know, this APAC and MEA regions we are working on. There's a expected TAM growth of 9% as well, like in year and year. We are expecting, like, you know, things to change. Hopefully, Q2, Q3, like, you know, of course, like, you know, we should be able to get bigger numbers.
Ruchi, if I can also add to that. I mean, yes, we are making hires that are eroding our margins at a difficult time when there's a lot of product and market development investments going on. Again, why now? Why not postpone? Is because given that the world has moved from a free money era to a era where, you know, there's a increasing cost of capital. With everything that's going on in the SaaS space, with severe job cuts, we feel there is a very highly talented and skilled talent pool out there, which may have not been accessible nor affordable to us. Say, if we go back to 2021, 2020 and 2021, boom years in the software world.
We are seeing an opportunity in this kind of tight period where we have been able to pick up really good capable and skilled talent. Given the confidence we have on the potential and uptick that markets or business will return to the acceleration we expect given our investments, we are going ahead and making those investments.
Okay, just one final question. The staff turnover you mentioned was quite high. It has come off, it has stabilized now. What is the staff or staff turnover currently? Do you have like a percent for that?
Yeah. Right now, like, it is around 15%, so it is going down. Like, you know, we are expecting that further to go down.
Yeah, at the peak, I think it was about 20%.
Okay, 20%. Okay, perfect.
There were a few other corrections, like, you know, we had one project with the government, like, you know, especially at the finance ministry. That project we complete, and we collect money as well. Like, you know, we didn't peg employee salaries, like, you know, but we introduced a cost of living allowance, like, you know, higher portion, like, you know, just to support our staff and, like, improve the retention. There's no pegging happen at, let's say, in business solution.
Okay, perfect. Thank you. All the best.
I think there is one more hand raised. Vimali, over to you.
Yeah, Nilendra. When I was just going through the numbers, I just want to clarify, in terms of whether the company's overall strategy is now more to move more towards the recurring earnings, because it seemed like your recurring earnings is now about 50%. If that's the strategy, I mean, if it's a conscious strategy, what's the percentage that you all will look at basically increasing this recurring earning to non-recurring sort of top line?
Yeah. Definitely, Vimali, yes, that is the strategy, because of the fact that I mentioned, where recurring revenues with a healthy churn rate is going to give us that exponential growth in revenue. Ideally, at steady state, we would expect recurring revenues to be anywhere between 65%-70% of our total revenues, more in the medium to long term. That's, that's our aspiration, and that's what we are working towards.
To add to that, I think, from day one, I think, from a SaaS, which is, you know, software as a service business, recurring revenue is actually the key element of a SaaS business. If you look at most of the enterprises, global, Fortune 500, you know, software companies are moving towards SaaS, you know, I mean, same thing you can see from Microsoft to others, you know, moving their, you know, current office systems to be moved from a license model into a recurring payment model. But for us, we started this almost, close to about 10 years now, you know. I think we were on at the early stage, moving on to the SaaS side. It's a, it's no.
You know, that was our core strategy from, I would say, you know, for the last almost, you know, five to six years.
In doing so all have in this shift, were there any significant revenue drops immediately that you all saw, or like, costs that went up because of this? Or it's basically, I'm just trying to understand the numbers and how this alteration will impact going forward. What I understand is your revenues are going to get locked in over a long period of time. What I want to understand is, by doing so, did you all have any short-term revenue hits or cost escalations
Definitely yes, Vimali. I think the point I made before is that, hypothetically, if all the deals we closed, executed, and went live last year, had it been On-Prem, our revenues would have been much higher. Why? Because licensing revenues are recorded upfront. It's a, you know, license, basically, the investment on the intellectual property, is recognized upfront, as opposed to recurring revenues over a period of time. But that's not the strategy. From the start, we are looking at building subscription revenues with a healthy churn that keep compounding and adding onto each other. That's the plan. Yes, to answer your question, had it been On-Prem, definitely, revenues would have been much higher.
When we pivot from an On-Prem majority On-Prem revenue-driven company to a majority SaaS-based or subscription billing revenue-based company, and you'll see that pivot happen, switch happen with On-Prem now being smaller and recurring revenues or Cloud being 47% of our revenues as of last financial year. Definitely, that's going to have a drop in revenue because of the change in how revenue is recognized on the P&L, and that is driving part of the margin erosion.
Thank you. Also, in terms of growing further, obviously, you'll have to look at more M&A options. Have you sort of, in terms of looking at companies, given the global slowdown, have you seen any interesting prospects as such, or you're not?
Sure. I think that ties in with another question we have on the Q&A, I'll answer that together. We've seen SaaS company valuations come down from, you know, the twenties to the high teens. I'm talking enterprise value to revenue, down to the high single-digit numbers, even right now in this tight funding situation. The question we are asking ourselves is, as a company that is being valued by our shareholders at right now on the secondary market at about 1.5x EV to revenue, whether it makes sense to go and pay high single-digit multiples to acquire companies.
We feel with the funding or the availability of funding for some of these startups being tight, maybe these expectations may come down further, and then if it is an opportune investment, we'll look at it. At least until such time, we are really focused on our core strategy, where we are investing in people, in product and market development, to make sure, you know, we can organically grow until such time those opportunistic moves or M&A moves become financially viable for us. All right, let me move on to the rest of the Q&A. There's another question on how have you deployed your cash? Like I said, it's been all short term. We're not speculating. We are not doing any speculative investments, short-term, highly liquid securities.
Average duration, probably three to six months at most. I think Sampath answered the question on the Ugandan project revenue. There's a question on hSenid Ventures. I thought the listed entity was the largest entity in the group. hSenid Ventures, Dinesh, do you want to take that?
Yeah. hSenid Ventures is the largest shareholder of hSenid Business Solutions, but hSenid Ventures has its own other investments. It also, you know, hSenid, as a group, has more than nine companies underneath that. hSenid Business Solutions is the one that is the listed company, which is completely independent of the rest of the companies on that. hSenid Ventures is the largest shareholder of hSenid Business Solutions.
How about foreign borrowings and interest expenses? Our company is basically a net debt zero company. I mean, there may be slight overdrafts to manage operational cash flow requirements, but essentially, no leverage in the business. There's a question on: Given that prices have not been revised since 2019, would there be a significant increase to catch up, or would it be in the single-digit range? Unlikely to be in the single digit. It will be higher teens, if not more than that, given that we haven't had price increases for a while. Like I said, it's a very wide spectrum based on, you know, when the customer onboarded versus what their current pricing is. Across the board, our target is double digit across our portfolio.
Our revenues are not concentrated to top five customers, actually, like it's spread over many customers, like because since if you look at the customer base, it's 1,600. Because of that, like it's not concentrated to five or 10 big customers. Of course, like, you know, Uganda government gave us like, you know, good percentage of revenue, like, you know, let's say around. I would say last year, we generated around, I mean, we have the percentage, 10%-15% of overall revenue, but that will continue, like, you know, next two to three years as well. Same range, otherwise, we are not concentrated on top five or top 10.
There's a question on, Is CBSL export service dollar earning income conversion rule applicable? No, it doesn't happen now. There's another question on: Has the company strategy changed towards recurring earnings? I need to reiterate here, there is no change, like Dinesh mentioned. From the time the company started its Cloud operations to the time of the IPO, the consistent story and strategy from a product point of view, has been to build recurring revenues through our SaaS offering. Because, one, some of the markets we are focused in APAC, Cloud has really taken off, and that's where demand is, and second, there is that significant exponential effect in terms of numbers that can be achieved by generating recurring earnings, generating subscription revenue, and managing them with a healthy churn rate.
According to previous information, 90% of the revenue is from USD. Given that rupee has depreciated, has the clients asked for a price downward revision? All our clients who are paying in, either USD or USD linked will enjoy an LKR reduction in the price they pay, given the currency, strengthening of the LKR. That benefit is to our customers.
Our recommendation to customer is the Cloud because of the many reasons actually, like, you know, because then client will be always like, you know, on the latest platform, technology, security, other related matters can be easily solved. There's no hassle for customers in terms of managing infrastructure. Because of that, our priority is on Cloud. Our proposal also on Cloud, like, you know, but certain larger customers, like, you know, they have their own infrastructure. In that case, like, you know, they prefer On-Premise on certain deals.
Is there a target GP range that the company would like to hit in the long run, aside from short-term fluctuations following the said price revisions? Our long-run target would be to get back to the 55% range in terms of margins. That's where we intend to be. This will not happen immediately at the end of financial year 2024. However, towards the two-three year, next year, two-three year horizon, we are planning to manage the business in a way that we can get back to those kind of margins. The new deal pipeline, do you see a decline owing to global slowdown? I think that was answered. Yes, we are down 10%, and that is because of a lot of slowdown happening in IT procurement.
On the brighter side, none of these decisions have been or these projects have been completely scrapped off. They are ongoing, but moving at a slow pace. There's a question: Will major shareholders be selling in the near future as the lock-in period has ended? Dinesh, if you want to take the question on the shareholders.
Yes, the lock-in period finished the last November-December timeframe, but we have not had any indication of any of the larger shareholders or the employees have any intention to sell at this point.
I think the salary peg question was answered by Sampath. Do you have any contracts with SOE or the government? Have they made payment?
That was answered, Nilendra. Yeah.
Okay. All right. Could you please share how concentrated revenue is top five customers as a percentage?
That also answered.
Yes.
Yeah.
Yeah.
There's another question on poaching talents within the sector. Like, you know, earlier, like, you know, all companies are fighting for the same resource pool, like, you know, but I think, like, you know, with less hiring now happening, this is stabilizing. At the same time, we are not planning a major recruitment drives on that area, like, you know, because we increased our numbers on that side, like, you know, during last six to nine months, like, you know. At the moment, like, you know, we are okay.
There's a question saying that in the IPO information, around 15% of cost of sales were linked to the USD. Is the situation still the same? That is largely accurate. I think about 80% of our total costs are employee-related costs, which are LKR denominated. The rest of it, including infrastructure, some subscription software tools used by our product development teams, at max, 20% would be dollar-linked costs. Do you quote Cloud and On-Prem pricing to customers, or do you just lead with Cloud pricing and only offer On-Prem to secure business, Sampath?
Sorry, Nilendra.
I'll repeat that. Do you quote Cloud and On-Prem pricing to customers?
That I answered, actually.
Okay.
You know.
Got it.
Yeah, yeah. Our priority is like, you know, our proposal is Cloud. On request, large accounts, like, you know, we propose On-Premise as well. At the same time, the fluctuation actually, sometime when you get a high-valued On-Premise account, so recurring revenue percentage will go down. Overall, like, you know, the number of clients point of view, recurring revenue is increasing, and we can expect that to increase in coming years as well. Trend is towards that. As I told you earlier, 60% of last year, new businesses are also on Cloud area.
Sure. There's a question on the $2 million new deal flow portion of PeoplesHR Cloud is approximately 60%.
Sixty.
While reaching over 50% recurring revenue is commendable, what is the reason for the high fluctuation in recurring revenues? Is it due to a shorter contract duration? The two major reasons for fluctuation can be, one is churn, but of course, churn is managed at around 4%. The second factor is what we noticed during last financial year, particularly in our Sri Lankan customer base, where there was headcount shrinkage. Subscription revenue is based on headcount, on a per-employee, per-month billing, so we take a cut in revenue if there is headcount shrinkage. We expect that not to continue with the macro situation stabilizing and hopefully, returning back to growth towards the end of this year and early next year. Are there any plans for share splits or share buybacks?
Nothing at this point. If there are any decisions on that, we will keep our shareholders duly informed. Are recurring revenue contracts driving similar margins, or is there an advantage of the recurring revenue contracts that may tighten margins? When the pivot from On-Prem to Cloud happens, there will be tightening margins because now your revenue recognition is spread across multiple years. However, that normalization will happen when your subscription revenue, your recurring revenue, starts compounding and expanding exponentially. I think this question about workplace offices keep coming multiple times. Just to set the record straight, hSenid Business Solutions is not based out of an office in workplace. We are based out of Perahera Mawatha, Hudson Road in Colombo 3. Basically, this can
Yeah, I think the reason must be, Nilendra, because the registered office that goes, I think it goes as workplace. You know, that was the reason. There's no.
Okay.
workplace, hSenid Business Solutions.
Yeah.
The registered office is the admin office. That was, well, I think that may be the reason why this workplace is...
Right.
Thing is, you know?
Right. Okay. How many foreign sales agents, sales personnel do we have, Sampath?
Sales, we have like two scenarios. One is our direct sales force overseas. Roughly around now, overall sales force, like around 30% is overseas now. Like, you know, that number will grow over a period of time. Same time, partner network. Like, you know, we have multiple partners in multiple countries. Overall, like, you know, we have around 25 good partners, like, you know, and some are like in the building stage. We work with direct and indirect, both scenarios applied when it comes to sales.
Right. I think there's a question on: Can we expect long-term targets in USD terms and revenue indicator the IPO will be met? I think we answered this question before. We are trying to catch up on the deviation, and we feel by the end of financial 2024, we can really minimize on the deviation. Given the volatility in the business environment, it will be not prudent to exactly comment on what percentage that would be, but we are definitely trying to minimize on the deviation.
also-
Uh-
Nilendra, we can say that, you know, we internally, how we monitor it, you know, constant currency, because that way we are not. Maybe you can explain a bit on that?
Yeah, yeah. I think, as we set the ground rules at our first investor forum, we'll be always looking at performance on a USD constant currency basis, so that any benefits, no disadvantages of currency movements will Cloud, you know, how we measure performance. That's a principle that we are going to stick to in all our shareholder communications. Even though salaries are paid in LKR terms, and software engineers' base scales can be dependent on USD fluctuations, would a further depreciation of the LKR increase the salaries of the developers? As a company, we've taken a stand, of, you know, not deviating from LKR salaries, not going on USD-pegged salaries. Obviously, when the USD depreciates, LKR appreciates. Yes, we are, that could affect us.
With the currency hopefully stabilizing around these levels, we feel that effect will be one-off and felt in Q1, and then stabilize from there onwards. Is there a trend moving out of working from home globally? If so, any advantage in terms of revenues? Sampath, you want to take that? On working from home.
Yeah. Like, you know, we are at the moment on the hybrid mode. But we monitor, like, you know, through our systems. Like, you know, we have implemented right set of tools, like, you know, to get the productivity. We are, we are at the moment hybrid, but especially for customer service, sales, marketing activities, and stuff like that, mostly people are, like, you know, working to office at the moment. Development and QA, like, you know, into hybrid mode. As far as we maintain the productivity, we don't have a issue, like, you know. We constantly monitor the productivity of all staff.
There's a final question: Are there any plans to do a list in Singapore? My understanding is that billing is done from Singapore. No such plans to do any dual listings. We remain a listed entity in Sri Lanka. I mean, if there is any deviation to that, of course, our shareholders will be the first to be informed of any, but no such plans. Yes, overseas, regional Southeast Asia and that region, clients are billed out of Singapore, obviously, because of proximity and the practicality of billing out of Singapore. I think that brings us to the end of the question list. Once again, let me thank all of you for joining this call.
I think we look forward to, uh, speaking to you in the new financial year, and keeping you apprised of our performance as and when we report that. Thank you very much, everyone, and have a pleasant evening
Yeah. Thank you, everyone.
Thank you.
Okay. Bye-bye.