Okay. Yeah, we can start in a minute, right?
Yes.
Okay, cool. Yeah. Yeah. Hi, hi everybody. Welcome to hSenid Business Solutions Quarterly Investor Forum. We are talking about the Q3 that finished, 31 December 2024. As we have shared the presentation with the investor community, we will actually directly go into Q&A. Before that, I would like to pass this to Nilendra to start the proceedings and welcome to hSenid Business Solutions Quarterly Update. Over to you, Nilend.
Thanks, Dinesh. Once again, a warm welcome to all of you. We sincerely appreciate your participation and look forward to actively engaging with you over the next hour or so by addressing your queries on our quarterly earnings. The quarterly earnings presentation has been sent to you via email and uploaded on the IR website, immediately after the release of the quarterly filings. Before we get into the Q&A, we will have a quick summary and opening remarks on the performance of the Q3. To start with a quick rundown of Q3, we recorded a revenue of LKR 431.3 million for the three months ended December 31, 2024. This represents a 5% year-on-year decline in LKR terms, but a 4% year-on-year growth in USD constant currency terms.
As you all know, we took a further appreciation of the LKR against the USD, which has caused, resulted in a slight decline in LKR revenues. Peoples HR Cloud, our co-focus, remained the key revenue driver, achieving a 10% year-on-year growth in LKR terms and a 23% growth in USD constant currency terms. Within this segment, the recurring subscription revenue grew by 20% year-on-year in LKR terms and a much higher 33% in USD constant currency terms. At the end of Q3, our co-exit annual recurring revenue, exit ARR, reached $4 million, an important milestone, and delivery of consistent growth over the last period under review. New deal closures during the quarter totaled approximately $256,000, with Peoples HR Cloud almost making entirety of the deals.
While the new deal volumes declined both on a year-on-year and quarter-on-quarter basis, we have significantly ramped up our demand generation efforts over the past two quarters to strengthen our deal pipeline, positioning us for stronger results in the upcoming quarters. Due to the effective cost control measures that have been implemented, the normalized EBITDA margin improved significantly to -8% this quarter from -17% in quarter two. With our continued efforts to enhance demand generation, optimize the cost structure, and strengthen our presence in core focus markets, we are well positioned to drive ARR growth and improve the financial performance in the coming quarters. With that, our opening remarks come to an end, and we will now move into the Q&A section.
You can use the Q&A function to send in your questions, or alternatively, use the raise your hand button on this platform to ask any questions so that we can help you unmute yourself and pose your question. Let's start with a question that has already come in. How will new government policies impact HBS? If the question is on the taxation part of it, I'll take that first, and then maybe Sampath, you can talk about some of the digitalization initiatives. On the taxation side, services income, for export services income, are to be taxed at a 15% tax rate. However, something worth noting is that most of our incremental revenues and growth in revenues, cash flows are coming in our overseas markets, particularly in the Southeast Asian region, where those revenues accrue to our Singaporean subsidiary.
Given that, those incremental cash flows are being recorded in the overseas subsidiaries, we see very little impact from the change in government taxation policy. Sampath, do you want to comment on the digitalization drive?
Yeah, overall, there's no big impact, hSenid Business Solutions point of view. Of course, since there's a big focus on the digitalization exercises, there will be new opportunities, in the government sector in Sri Lanka. Like, you know, other than that, overall, there's no impact to hSenid other than the service export service tax component.
There's another question. Is HBS subject to the 18% VAT on digital services? If so, what percentage? In fact, this VAT on digital services, what we understand is that the objective is to create a level playing field for domestic vendors and overseas vendors. I mean, we are on the same, we experience the same, and sometimes we are on the receiving end when it comes to our overseas operations, where some of these markets have imposed VAT on foreign vendors like us so that we get on an even and level playing field with the local vendors in those markets.
The same, we now witness, has happened in Sri Lanka, where overseas vendors, because there was an argument about the point of consumption of those digital services, they were not liable to VAT, but the budget seems to be proposing that the VAT act be amended in a certain way that all vendors, whether they are local or foreign, will come into the ambit of the VAT act. hSenid Business Solutions, for all our Sri Lankan revenues, we charge VAT, and there is no change to that. Sorry, while we wait for any other questions, let me remind you that you can click on the raise your hand icon if you need to raise a question. I think we have one question.
Yes, another question.
Yeah. Any margin projections, around when will HBS have a net profit? So from a profitability point of view, what has been dragging us down, apart from, of course, the unfavorable FX movements, is a slowdown that we experience over the last two quarters in sales. With the demand generation that has happened and the strong deal pipelines that we've built, we are expecting a strong closure to the financial year with Q4 having strong levels of deal closures, at the levels that we originally planned for. With that coming in, Q4 is expected to achieve break-even levels. With that recurring revenue then getting booked starting the next financial year, we are looking into getting into net profitability in the coming financial year. From a margin projection point of view, definitely, our margins have been continuously on the rise.
As I mentioned at the start, normalized EBITDA margin improved from minus 17 to minus 8. We are expecting, like I said, a break-even scenario at EBIT level in this quarter and then to get into positive margin territory starting next financial year. I think there's one more question on corporate taxation. I'll read the question. At what corporate tax rate co-business income from Sri Lanka is taxed at? Are there any exemptions? Sri Lankan business revenues and profitability is taxed at 30%. We do not have any exemptions there. However, given that we've been investing in our market development and product development, and as a tech company, we've been running that through the P&L, there is a substantial brought carried forward tax loss that has been accumulated in the business, which will, which can be used as a shelter when we start generating profitability.
However, to answer the question, there are no exemptions, and the co-business is taxed at 30%.
Yeah, there's another question. Any new regions that you focus on to improve sales? Not at the moment. We are actually targeting three regions as we discussed during our last business forums as well. Primarily we are into Middle East and East African Belt and South Asia and Southeast Asia. Those are the three regions we are working on. In fact, like, you know, we slowed down Bangladesh because of some of the local problems, like, you know, in the country, like, you know. Other than that, there's no difference in our focus. We keep on working on these three regions.
There's another question. Can we elaborate a bit on the $4 million ARR milestone? What are the main drivers of the growth from $3.7 million ARR last quarter to $4 million this quarter? I think that's a fundamental question, fundamental factor that drives value in a SaaS business, in a software subscription business, which is the annualized recurring revenue that is achieved by a business. We crossed the $4 million threshold during the last quarter. This essentially means that, provided we manage churn, which is at very low levels, below 2% if you look at an annualized churn ratio for the company, essentially next 12 months, we'll see $4 million of ARR getting recognized on the books. Any additional sales that we do, which bring in new revenues, will add to this base.
Of course, this base offers cross-sell, upsell opportunities, which we are also focusing on. I think we had highlighted on the presentation that we had achieved the net revenue retention, NRR ratio of 104% last quarter, which means now our existing revenue base, recurring revenue base is also growing by 4%. This is through upsells, repricing, so that, then there are two growth levers essentially for the company. One is obviously the new business, and second one is the existing business, that can grow with higher usage from the existing customer base. There's a broad question on any particular challenges faced by HBS. Sampath, do you want to take that?
Yeah, so, one challenge is actually that the Bangladesh operation, as we discussed earlier, so, because of country situation, we had to slow down the Bangladesh. And, so like, you know, there's no focus for the Bangladesh market at the moment. On the other hand, like, you know, there are some challenges in Africa and Southeast Asia market, like, you know, slowed down on sales. Of course, like, you know, as Nelindra mentioned, with the focus on demand generation, we are building strong funnels in both the regions. With that, like, you know, sales we are expecting to improve in Q4 and going forward as well, like, you know, because our funnels are strong now. So, primary challenge is actually the competition and sales, like, you know, so we are facing that, local market.
We are not facing that challenge, like, you know, because we are keep on getting sales from the, the local market. Like, Southeast Asia and Africa, like, you know, we had some challenges, but now with the, the pretty much focus on lead generation and some of the activities we carried out, events and digital marketing activities. Our funnel is becoming strong with that. Actually, we are hoping sales closures in Q4 and next financial year, Q1 and Q2 as well.
Another reminder that, if you have any questions, you can click on the raise your hand button so that we can unmute yourself and let you speak. If not, type in your questions into the Q&A. I think we've answered all questions that have been posed up to now. There is one more. Can you provide insights on the growth of new deal closures over the next 12 months? Currently there is a declining trend in new deal closures. Sampath, do you want to take that?
Yeah, let's look at last two quarters. Yes, there was a decline, like, you know, in sales because we had to do some changes in the regional sales heads as well. Like, you know, we had to move out, VP Sales in the primarily, like, you know, focusing on the Southeast Asia market, but with the strengthening the sales team in the region. We are expecting good closures from Q4. That is current quarter. Current quarter, we are expecting minimum closure level of around $700,000. That is compared to last quarter, roughly we are talking about 2.5-3 times higher sales volume in the current quarter. We are planning to continue that trend during next three quarters as well, four quarters. Hopefully with the funnel size, we are confident that we can continue good sales, like, you know, in next four quarters.
The good thing is, like, you know, since recurring revenue is growing, revenue basis will be very much stable. That will keep on growing, like, you know, roughly around 8-10% quarter on quarter as well with the revenue backlog we have on ARR as well.
Yeah, just to share an additional data point there, I mentioned that ARR crossed $4 million end of last quarter. The moment this gets closer to $4.8 million or $5 million, at that point, the entirety of our cost base is fully covered by the recurring revenue. Which means that, now that we have built the teams that are enough to take us to the $10 million ARR journey, any incremental deals that are closed and subscription revenue that is added to P&L will basically keep accumulating profitability. There is one more question that has come through. Any insights on the repricing program for low margin clients? I'll take that question. We have looked at low margin clients as two different buckets. One is the small and medium enterprise clients.
I think we've been able to achieve significant repricing, almost, the effects of that would increase our total revenues from the SMB segment by about 30-40%. Again, repricing negotiation, which is agreed, will then get fully reflected over the next 12 months because these are subscription revenues. Also, on the larger customer base, we have now gone over about 40-50% of the accounts, and we've been able to achieve about 20% total repricing gains on the customer base. Again, the results will be shown over the next 12 months. I think we have answered all questions posed on the chat up to now. Maybe we'll give it another couple of minutes.
If there are any additional questions, feel free to send it on the Q&A, or you can click on the raise your hand button so that we can unmute and help you raise the question on this call. Dinesh, Sampath, I think if there are no further questions, I think we could wind up the call.
Yes, let's do that. Yeah. Thank you, everybody, for participating on today's quarterly update. If there's anything, please feel free to reach out to us. Thank you.
Thank you.
Thank you very much.