Good afternoon, ladies and gentlemen. Welcome to hSenid Business Solutions' Quarterly Investor Forum Q1 2026. I warmly welcome you to this event. The format would be that we have shared the presentation with you, the deck, and this session will be mostly dedicated for Q&A. I would like to pass this to Nilendra and Sampath to take over and start the session. Also, a little bit of info. I need to leave around 3:30 P.M. for another commitment. I will be logging out at that time. If there's any questions that you would like me to answer, please ask within the first 30 minutes. With that, over to you, Sampath and Nilendra.
Thank you, Dinesh. As usual, let me start off with a quick readout, summarizing our Q1 performance. First of all, good afternoon and greetings to everyone joining the call. We're excited to share the progress made during our journey towards being the most preferred HR tech solution for emerging markets. Today we'll discuss our recent achievements, financial performance, and overall strategy to drive sustainable and profitable growth and create long-term shareholder value. As mentioned before we get into the Q&A, let me go through a quick readout, summarizing what happened in Q1. We recorded a revenue of LKR 471.7 billion for the three months ending June 30th, 2025, witnessing a significant improvement in quality of revenue. All recurring forms of revenue accounted for 72% of total revenue, with recurring subscription revenue recording a robust 36% year-on-year growth.
This growth was partially offset by a decline in professional services revenue, particularly from large on-premise projects, leading to total revenues recording a 1% year-on-year growth in LKR terms and 2% in USD constant currency terms. PivotHR Cloud continued to be the top performer, delivering 32% year-on-year growth in both LKR and USD constant currency terms. At the end of Q1, co-exit ARR or annual recurring revenue reached $4.5 million, continuing the momentum in our ARR-led growth journey. New deal closures for the quarter amounted to a total of $441,000 approximately. That is subscription and implementation combined, with 91% attributed to the PivotHR Cloud segment. Our normalized EBITDA margins stood at 2% for the quarter, and free cash flow remained positive for the second consecutive quarter since Q4 of last financial year, continuing the positive turnaround momentum from the previous quarter.
While at group level, hSenidBiz recorded a net loss of LKR 35.7 million. During the quarter, the company completed the full utilization of funds raised at the time of the IPO, which were deployed towards market expansion and product development initiatives, marking a milestone in our post-listing journey. As we move forward, we remain committed to expanding our ARR base and maintaining our focus on long-term profitability underpinned by recurring revenue growth and continued margin improvements. With that, our opening remarks come to an end, and we would now like to move to the Q&A session. Again, you may use the Q&A function to send your questions, type it in, or alternatively, click on the raise your hand button so that we may give you access and prominence so that you may post your questions verbally. Feel free to use any of the two methodologies that suit you.
I'll start off with the Q&A. There is one question that has come in. In Q4, FY2025, HBS was profitable, but Q1, FY2026, slipped back into a loss despite ARR growth. At what ARR level do you expect to consistently generate positive EPS and free cash flow, and what specific cost controls are in place to get there? Maybe I can quickly touch on the financial question there. As we mentioned during our previous call, Q4 profitability was caused by two factors. One, obviously, revenue growth, and that being contributed to by some of our larger on-prem projects coming to a close. In fact, the government of Uganda, full digitalization of the entire project came into close in Q4, and the relevant invoices were raised as well. There was that revenue recognized.
I think we highlighted during our last call that there was a deferred tax reversal, basically a creation of a deferred tax asset that helped the P&L level. There were those two factors that led to Q4 profitability. I wouldn't mention that it actually slipped back because from a recurring revenue point of view, there has been continuous progress. The second part of the question is, at what ARR level do you expect to consistently generate positive EPS? The exact number is about $4.9 million, give or take $5 million. We hope to get there by the end of next quarter. That is the level at which the company will be making basically consistent profits with any growth that comes beyond $5 million ARR. In terms of cost controls, there's a last section on that question.
I think we mentioned on our deck as well, particularly in our update on talent. We are trying to be efficient wherever possible, bringing in the latest, particularly on the AI tools technology side. We've increased our spend on the level of employees using the degree to which they use these tools and technologies, and that's paying off. One indicator, one number to closely follow that I may draw your attention is the total number of employees. As of June 30, 2024, the company had 380 plus, around, say, roughly 384, 385 full-time employees, whereas as of June 30, I think on slide number three of the deck, which is on the screen, the number has come down to 287. We believe it can further go down, and we are working on further improvements. I hope that answers question number one. Question number two, why have the GP margins increased?
Is this because of LKR appreciation? No. Any currency-related movements are reflected in the other income line below GP. GP margin improvement is purely driven by what I mentioned in the readout, which is the increase in the quality of the revenue. Typically, if you look at our revenue streams, subscription revenue is a higher margin as opposed to services revenue, which is a lower margin. Slide number 11 is on the screen right now, and you can see how our recurring revenues, I'll imagine recurring revenues, have been consistently going up from FY23 at 48% to last financial year we closed at 63%. First quarter, FY26, we closed at 72%, and we are of the view that if this trend continues, we should be getting to about 80% by year end this financial year. A higher proportion of high margin recurring revenues obviously will result in further margin expansion.
Let me move on to the next question. Sampath, maybe I'll read it out and hand it over to you. Why are the new deals increasing at a lower pace? Is there a temp in Sri Lanka still? Two questions there. Sampath, you're on mute.
Yeah, I'll start in the Sri Lankan market. Usually, every quarter, there's a demand coming from Sri Lanka as well. If you look at the numbers during the last two to three quarters, we are getting consistent revenue, ARR from the Sri Lankan market as well. That momentum will continue. If you look at the region, we are working on a couple of regions, that is Middle East and Africa, East African Belt, and then South Asia and Southeast Asia. Africa, we are facing some challenges because the Kenya situation is unstable at the moment. There are some riots going on, and because of that, there's a delay in some of the expected sales. Of course, when things are settled, we can start working on those accounts again. We are working on some of the other markets like Uganda and a few other markets.
Southeast Asia, yes, we had a few challenges, but now if you really look at the demand generation point of view, we are generating a very good demand in both targeted countries in Southeast Asia. Primarily, we are targeting two large countries, and demand generation activities are happening. Our funnel building is happening at the moment. We are expecting the next two quarters, current quarter and next quarter, to close some of the higher value deals from the Southeast Asia market. We are aggressive. We just got two country directors for two countries we are focusing at the moment. Pre-sales, sales, customer service, all areas, we are aggressively now, we have got a certain set of people in the region. In fact, I'm also spending roughly three weeks in these two countries. Even at the moment, I'm in Jakarta. We are aggressive. Of course, there's a time to market.
That's the time we are spending now building the brand and building funnels. With the current funnel level, we are expecting sales to improve during the next three quarters in the current year.
Maybe I'll read out the next question and hand it over to you also, Sampath. Why is the company not aggressive in the East Asian region?
Yeah, so that's at, like, you know, some of the countries we are working. We are very, very focused because we can't focus too many countries at the moment. We are aggressively working on the Philippines and Indonesia at the moment because those are very big markets with 400 million population, both the countries, within both the countries, so working population is extremely high. We believe, like, you know, we can bring good results by focusing on these two countries.
Yeah, and then if I may just add to that, typically when we look at a market, we need three types of investments: product, people, and then branding, marketing. Product investment, typically, given that we are an HR product, it needs a lot of localization, a lot of statutory compliance, and usually 6-1 2 months, sometimes more in complex statutory markets. We need to build local sales teams, local know-how, local implementation, local customer support. Thirdly, you need to build a brand so that customers trust and purchase from you. There's a lot of events, sponsorships, digital marketing spend that goes in.
While there are so many attractive large markets in East Asia, we feel the Southeast Asian markets that we've selected right now have a good fit with our product, and we are making the right investments in those three aspects: people, product, and brand to be able to kind of harness that potential. Again, Sampath, I'll read this question out to you and hand it over to you. Why the company can't increase the quality of the software up to Payco, Paylocity, et cetera?
Yeah, so we have done substantial investment on the product side. If you look at the version 10 we released at the end of June and the mobile app we released at the end of July, with now a complete AI layer. We transformed the product. If someone is buying now or the upgrades we have planned, in the next 12 months, all subscription customers will get into a version 10. With that, there's a major improvement on the AI layer. The self-service area and you can, there are certain activities you can do seamlessly, I would say. There's a big improvement happening in that area. On the other hand, what we're trying to do is these two markets, we are trying to bring the product up to the best product available, best product in the market. We are getting there.
The feedback we are getting from the market, from the existing customers who use the product in both the countries, certain areas now we are competing with the world-based solution in the market. That's good news. While improving the operational area, we brought a complete AI layer into the product to benefit our existing and new customers.
Yeah, and then if I may just add a comment there, when making product comparisons, I think it's really important to pay attention to the target market segment as well. For example, if you take something like Payco, Payco is an SME-focused product, whereas PivotHR is more middle market to enterprise focused. Typically, SME-focused products will have very stringent, seamless UIs, lightweight products, but cannot handle the depth and breadth that is required for a complex HR digitalization in a large organization. Therefore, I think when drawing comparisons, I think it's important to kind of look at the target focus, what we usually call the ideal customer profile of these products as well. I'll move on to the next question. HBS is still trading at around 2.2x ARR, while similar SaaS companies in global markets often trade at 7x-8x ARR.
In your view, what's the main reason for this valuation gap? Once profitability is consistent, do you plan to introduce dividends next year, or will all cash be reinvested into growth? There are bits and pieces of questions here that maybe Sampath, Dinesh, and myself all can take. I'll start off with the valuation question. Like you correctly pointed out, definitely we believe that HBS should be valued at 8x , if not higher. What has to happen to get to that? I would say we need to prove that we can operate at the gold standard that is required for SaaS companies, and that is the rule of 40. I think we've been adding this slide for a couple of years next, tracking this carefully. If you look at our data today, our ARR is growing at about 28%, 29%, free cash flow margin of about 1%.
On the rule of 40 scale, we are at about 30. Still below, if you draw a median line with those other peers that we have put in, still below the median line in terms of valuations and significant upside there. I think we mentioned this last call, our target is to maintain 30% ARR growth and get to a 10% free cash flow margin at a minimum so that 30 plus 10, we get to 40. At 40, you can clearly see, you know, that's where you get the 7x-8x kind of multiples. From a valuation point of view, I think that is what explains the gap.
I think we've been going that extra mile to kind of explain how we are planning to maintain our ARR growth at 30 and get our free cash flow margins up to 10 so that on a rule of 40, you know, we'll be operating at that gold standard level and hopefully getting valued at, you know, 7, 8, if not higher in terms of ARR multiple. Sampath, Dinesh, do you want to comment on, I think there's a question on the dividends also?
Yeah, let me take that part. I think, as you saw, we are very prudent when it comes to capital allocation. Last year we did that particular dividend because we felt that it was the right thing to do from a shareholder's point of view. Similarly, what we will do is once we get into a consistent profitability, we will look at both investment and dividends and look at what is the mix that we need to grow at the rate that we are planning to grow and what we need to kind of distribute that dividends for the shareholders. The board outlook is very much aligned with that.
I think we have answered all questions that have been post up to now. Again, we invite you to either click on the raise your hand button or send in your questions on the Q&A by typing them in. We have one question. Why is HBS not aggressively investing in sales and marketing? Sampath, do you want to talk about some of the investments we are?
Yeah, as I told you, we got the country heads at the moment. Three regions we are working on. We have a person in Kenya at the moment to look after the East African region. We got one Country Director Sales for the Philippine market, and we just recruited a Country Director Sales for the Indonesia market as well. We are aggressive. We are building teams, and the only thing is there's a time-to-market gap. That's what we are experiencing at the moment. We have to build a brand to compete with all tier one solutions we are doing. We are getting sales at the moment, especially in the Philippine market. Hopefully, we can accelerate that journey with the demand generation activities we are doing at the moment. If you look at the last three quarters, demand generation has increased tremendously.
We are getting a very good demand generation with that. Sales closures will definitely improve in the next two quarters.
If I may just also add to what Sampath said and draw your attention to this slide on the screen, which is the SaaS company peer benchmarking. One metric that guides how much of money we put into sales and marketing is the GTM efficiency ratio. I think I explained this on the call last time, but to refresh everyone's memory, GTM efficiency ratio is fully burdened sales and marketing costs. That is tools, people, programs, sponsorships, all that marketing costs included, divided by the net new ARR that we generate in a quarter. We try to titrate our investments in sales and marketing so that we stay slightly above and more efficient than private SaaS companies, which are at 180%. They are spending $1.8 for every $1 of ARR. Public SaaS companies, mostly U.S. companies, are spending $1.6 for every $1 of ARR. We are at $1.54.
We feel that some of the activities that Sampath mentioned, where we are using more tools to scale our demand generation and make sure our sellers have higher pipelines to work with, deal flow to close, can improve this efficiency ratio further, and our internal target is to get to about 125%. With that, we will then be able to push the outcomes further by pouring in additional dollars into sales and marketing spend so that leads to better growth. Right now, we are really focused on this number, and this number is the metric that guides how much of money we put into sales and marketing. I'll go back to the questions. Any impact from the implementation of 18% VAT on digital services?
There is a cash flow impact, yes, but no P&L impact because we do have substantial input VAT that we can use to set off against the VAT on digital services. Most of our large spends on digital services, particularly for infrastructure, are billed by local partners of the principal, and these are already VATable items. Therefore, there may be cash flow impacts, but from a P&L point of view, we don't see any material impacts with the imposition of this tax. There's a question. How will OpEx growth be controlled as ARR scales, especially in talent and overseas expansion? The usual operating model for a SaaS company is that every incremental dollar of ARR typically flows through to the bottom line with an 85% margin. Ours is no different because the product investment is done. That incremental stream of revenue basically has very little variable costs attached to it.
The marginal costs are typically additional support, customer success, and the infrastructure cost of the relevant customers' product usage. From a total OpEx, excluding those variable items basis, we feel our cost structure is largely adequate for us to get to the $10 million ARR destination target that we are working on. In fact, if you go back over the last six quarters, you can observe that our OpEx has, in fact, come down in dollar terms. There is tight control on the operational expenditure. From a talent acquisition point of view, the second part of the question, whatever savings that we make due to higher efficiency gains, particularly on the services side, how we implement our product, how we do R&D and develop our product, all those efficiency gains, a fair bit of it is being reinvested into the go-to-market side, which is sales and marketing.
It'll either be sales talent or marketing, mostly investments into programs, sponsorships, events, digital marketing, and so on and so forth. Sampath, I'll read this question out and hand it over to you. Why an East Asian? I believe the person who asked the question may be referring to Southeast Asian, which is our focus. Why should a Southeast Asian company select HBS over Workday software apart from the cost effectiveness?
Yeah, obviously, cost is one factor and market segmentation. Like, you know, the market Workday is working on and the market we are working on is a little different. We have a niche area to work on. At the same time, localization capabilities. Now, as we repeatedly mentioned during the last two years or so, we are building the product to satisfy the local market. That is especially the Philippines and Indonesian market because both the countries, there are complex step 10 payroll calculations. Now our product is fully ready for these markets. On the other hand, our tagline is actually we simplify complex HR problems. We can manage very complex manufacturing environment and very complex HR problems using our product capabilities. That's where we are driving at the moment. That's where, like, you know, we create interest among customers against local product and the global players in the market.
Yeah, and if I may also add to that, there are plenty of examples where we have not competed but worked with Workday. For example, a global multinational company, say, headquartered in the U.S., has gone through a procurement process, taken Workday as their preferred product. In the Philippines or in Indonesia or even Sri Lanka, for that matter, their office can't run fully on Workday apart from certain non-localized, non-statutory related modules, like, for example, recruitment performance. They'll run on Workday. When it comes to time in attendance, payroll, and modules which require a lot of local configurations and statutory compliance, they would work with us. We've had many instances where our product seamlessly integrates with the likes of Workday and basically helps solve the HR digitalization challenges for our customers. I'll move on to the next question on numbers.
EBITDA margin fell from 7% in Q4 to low single digits in Q1. Was this purely due to seasonal OpEx timing or structural cost increases? No, neither of those two. OpEx structure remained the same. The reduction was purely because there were certain lumpy invoices on the on-prem side of larger projects like the government of Uganda project and some large banks in the African continent that are coming to a close now, which were recorded in Q4, which helped the EBITDA margin go up to 7%. It was a kind of a one-off increase there. Right now, what the level we see and as we improve, what you will see is purely based on the recurring revenue performance. There's another question. If you could put sick leave notification and application separately within the app, it would be amazing.
As in do both with one button, I think a very feature-specific request.
Yeah, so now actually you don't have to worry about PivotHR version 10. You can even just type, like, you know, apply a sick leave for next Tuesday and then just attach, like, you know, whatever medical certificate and all, it will do the job. AI will handle the balance part, like, you know, so it's streamlined and make it into an advanced level, like, you know, so we'll benefit from that.
Yeah, like Sampath said, in version 10, we hope to have the launch soon. Our entire thinking is simple tasks should be able to be handled by AI agent where the user basically uses a text or voice prompt to instruct what needs to be done. The agent will ask you if there are any clarifications, and then it'll just be done by the agent with no human interaction. I believe in your business and will keep buying your shares. Hope we'll become a multi-bagger soon. Congratulations and all the best to the management. Thank you for the comment. I think the management team is equally invested, including shares and the option program, in the success of the business and the shares of the company. I think we've gone through all questions that have been post p to now. Maybe we'll give you a few minutes more.
Again, feel free to either press the raise your hand button and post your question in person or type in your question into the Q&A section. Okay, there's a question. Waiting to see HBS to trade at 50x PER price to sales. I think HBS has a good future if you all get new deals more and more. Again, another comment. Thank you for the comment. I mean, like we discussed during the valuation question, we definitely believe with the company delivering on the rule of 40, golden kind of rule for SaaS companies, because if a company is growing at 30% year on year and also generating a 10% free cash flow margin, that deserves a very significant premium valuation, which would be then justifiable and in line with the seven, eight times ARR multiples that SaaS companies typically give. One more question.
Is job application also a vertical you will expand into? Sampath, maybe you can talk about.
Yeah, this is actually the recruitment module. I think you are referring to the recruitment area. There are a lot of improvements we have done and we are doing at the moment also. Like, you know, we are doing our next release somewhere around early October. That release will have so many different features in the recruitment area, like, you know, let's say a CV parsing feature, then shortlisting, longlisting, automatically filling of candidate information. There are a lot of activities that we have automated with the support of AI. You will get that somewhere around early October. The fully onboarding suite that is like, you know, a recruitment piece plus the onboarding activities will be streamlined. There are a lot of investments happening in that area.
We have covered all the questions that have been posed up to now.
If there's no questions, maybe Nilendra, we can close, right? Thank you.
Yeah.
Thank you, everybody, for being here today. If you need anything, our investor relations team is always there. You can reach out to them and even have a one-on-one or have a discussion on a specific area.
Okay, thank you very much, everyone. Have a good evening.
Yeah, thank you very much. Great day.