Welcome to hSenid Business Solutions, you know, quarterly investor forum. Just a quick welcome to everybody, and then I will actually get both Sampath and Nilendra to go through the details. So just to kind of very high level, we are happy to kind of announce our results that happened a couple of weeks back, and also, as mentioned in the previous IR calls, that we have been kind of working towards a plan, and that actually we have been emphasizing that during our AGMs as well as our quarterly briefings. And I think we see some of that results actually happening in the previous couple of quarters and also this quarter.
So we will go into the details of that, and if there's any questions that we would be very happy to answer, and also, are there any, things that you want to clarify? I think we're all here. So with that, I'll pass it to, Sampath and Nilendra to, take it from here.
Thank you, Dinesh. Let me quickly thank you all for joining the third quarter financial year 2026 investor call for hSenid Business Solutions PLC. We are excited to share the progress made on our journey towards becoming the most preferred HR tech solution provider in the emerging markets. Today, we'll discuss our recent achievements, financial performance, and overall strategy to drive sustainable and profitable growth that creates long-term value for our shareholders. As usual, the quarterly earnings presentation was uploaded to the IR website shortly after the release of the quarterly filings. Before we get into the Q&A, I will go through a quick summarized readout of the performance of the third quarter.
So to start with a quick rundown of Q3, we recorded a revenue of LKR 547.6 million for the three months ended December 31, 2025, with PeoplesHR Cloud continuing to lead top-line performance. Recurring revenue share of total revenue edged higher, reaching 73%, with subscription revenues growing 46% year-on-year in LKR terms, and 41% in USD constant currency terms. By the end of the third quarter, the core exit ARR, annual recurring revenue, surpassed an important milestone in our journey, the $5 million milestone, reaching $5.2 million, marking a significant milestone in our ARR-led growth journey. New deal closures for the quarter amounted to $330,000, with 97% almost entirely attributed to the PeoplesHR Cloud segment.
Normalized EBITDA margin improved to 17% this quarter, up from 11% the previous quarter, driven by strong revenue growth and operational efficiency gains. The company also recorded a free cash flow margin of 9%, reflecting continued improvement in cash generation. The company recorded a net profit of LKR 34.8 million for the quarter, and I want to draw attention that this was after recognizing an LKR 17 million non-cash deferred tax expense. As we go into the next quarters, we further expect the deferred tax asset previously created on account of the accumulated losses to now be expensed over the coming quarters. So that's something to watch out for.
As we move into the final quarter of FY 2026, we remain focused on strengthening our growth momentum and leveraging product enhancements to create greater value for HR communities globally. With that, our opening remarks come to an end, and we will now move into the Q&A session. So you can use the Q&A function on this webinar to send in your questions, and we will answer them. Let me go with the first questions that have come in. Please provide the reasons for the improvement in the GTM efficiency ratio and the weak performance in the churn rate ratio. Additionally, do you expect the GTM efficiency ratio to be maintained at current levels going forward? So maybe I'll quickly touch on the GTM efficiency and certain aspects that affected the churn.
So the GTM efficiency ratio, just for everyone's understanding, basically, takes the total sales and marketing costs, which is, in our world, the customer acquisition cost, divided by the net new ARR added. So, we basically have maintained, 101%, as seen in the slide on the screen right now, versus, the industry, whether it's private SaaS, or public listed companies, which seem to be much more inefficient in their customer acquisition. We are planning to operate between the 100%-150%, kind of range. So that doesn't mean that, 100% will be, continuously, maintained. We have that kind of range that we have, left for when it comes to planning.
But, from a overall customer acquisition principle point of view, we tend to be very diligent in what we spend in, spend for, whether it's events, marketing, recruitment of customer acquisition, teams, to be very kind of efficient in this area. Because, I think as we have discussed over the last call, the growth at all costs era is over, as we knew it. And, being efficient in growth is really important. We would try our best to maintain at 100, but from a range point of view, 100-150 is something that we would consider acceptable. On the churn, maybe I'll just add a word and pass over to Sampath as well. So churn ratio, typically, we maintain around 4%-5%.
There are a few accounts that churned in response to certain pricing decisions that we've taken, and also due to group decisions where head offices have decided to use other products and move away from PeoplesHR. But we don't see this as a sustainable increase in churn, and we would expect the number to come down to around the 5% range that we've seen continuously. Anything to add there, Sampath?
Yeah, I think, Nilendra, you are correct. Even this quarter and coming quarters, we can maintain churn below five or around five rate. So this is because of some of the decisions we took, like, you know. So but that part is over, like, you know, so we can maintain around five or less than five.
Okay. I'll move on to the next question: Out of the total LKR 34 million in profit, how much is contributed by the cloud business? Based on the current business model, can we expect a similar contribution in the fourth quarter as well, in addition to the profits from new ARR? See, I wouldn't comment on exactly—we don't look at, you know, we don't report numbers when it comes to cloud business versus other business segments in specific. But I think we've been very clear from the get-go that increase in ARR has an extremely high flow-through to profitability. So if you think from a Q2 versus Q3 point of view, as ARR view, pretty much the entire profitability you see here is predominantly created from that incremental ARR.
But I would refrain from kind of talking of margins of, like, separate business divisions. So as we continue to grow this ARR, you would see, net of support and infrastructure costs that typically tend to be variable costs on this incremental ARR. The balance will essentially flow down to the P&L, and that's where we've been telling since I think almost a year ago, that beyond the $5 million ARR point, the company will be profitable. Because as long as we maintain our churn, anything that comes incrementally on top of that has a significant flow-through to the bottom line. I'll go on to the next question: Why wasn't the Rule of 40 metric chart included in the investor presentation?
I think there were slight delays in updating peer data because some of the earnings results and all were not out yet. So we couldn't put that in on time for the release this time, but we'll make sure we include that in the future. I'll move on to the next question. Maybe Sampath, you can take that. I'll read it out and hand it over to you. Can you provide an update on new deal closures in Philippines and Indonesia?
So as Nilendra mentioned, overall, last quarter sales value was at LKR 340,000 overall. So out of that, all three regions contribute to this total value. So they're roughly around one third came from the Southeast Asia region. And also, like, you know, as we discussed, our GTM is working, funnel building is happening, so we are expecting that to slowly grow in coming quarters as well.
There's a question: Can you all sustain the profits in next quarters as well? Is the company planning to increase the sales and marketing expenses?
Of course, with the market development work, there will be slightly improved marketing expense because we have to build a brand globally in the two regions we are working on. But we are not expecting a huge difference in the cost structure. So our plan is to maintain a similar cost structure going forward, because we implement certain cost controls during last couple of quarters, so we'll maintain to do that. But of course, like, you know, when you are developing markets, there can be certain expenses market related. But we are very mindful, and when the sales values are growing, we will try to improve our marketing expenses also to fast-track the growth.
I'll move on to the next question: Is the growth in ARR on the back of price increases or an increase in purchasers from the offering? I would say net new customer additions is the primary driver of growth in ARR. And I think as we have explained in previous calls, there tends to be usually a lag effect between a deal closure and that getting reflected and realized in recurring revenues invoice. So I would simply answer the question by saying that majority of the growth in ARR comes from net new customer additions. What is the reason for the decline in new deal closures?
... So there's no direct reason. So quarter by quarter, like, your numbers might change depending on the quarter results, like, you know, so closure results from the multiple regions. So this compared to Q2, like, you know, it's slightly up, but I think compared to last year quarter, like, you know, slightly down. Like, you know, so that's a result in the given information. So we are expecting that to slowly grow in coming quarters.
Typically, I think...............
So-
Yeah, and typically, I think we've also spoken about certain cyclicality in our deal closures, where usually quarter four tends to be heavy because of budget cycles and purchase decisions being taken during Q4. So we will continue to expect that cyclicality as well. I'll move on to the next question: Can you shed some light on the new deal closure expectations in the quarter, as 70% of this is attributable to South Asia and 97% attributable to PeoplesHR Cloud? Is it attributable mostly to migrations from cloud to on-prem in Sri Lanka?
There's no cloud to on-prem migration. It is other way around, like, you know, so there were certain accounts migrated from on-prem accounts to cloud. So there's a contribution from that segment as well, especially in Sri Lanka. Some of the, the old on-prem accounts moved to cloud environment, because, that way, like, and easily we can manage these customers as well, rather than maintaining multiple on-prem, instances. So, but of course, like, you know, they are slightly down in the, the expected results in, some of the overseas, markets, but, we expect them to peak, like, you know, in current quarter and the next quarter.
Can we expect this growth momentum to continue over the next 4-5 quarters, and what are the major upcoming cost structures that could impact profitability? I mean, if I just give a kind of financial perspective to this, definitely the management team is focused on, you know, achieving and continuing this growth. The simple reason is, if you look at our sales and marketing costs right now, on an annual basis, we spend roughly, I would say slightly over $1 million, maybe $1.2-$1.3 million a year, expensed in our P&L for customer acquisition.
So, I mean, if we take an extreme scenario, say, the company doesn't intend to grow further, that's essentially $1 million plus of the cost structure that can go off day one. So obviously, given that we are continuing to invest, that implies that we want to not only continue, but also accelerate this growth momentum wherever possible, looking at, you know, the markets that we are focusing that has much more, you know, opportunity to grow. Like Sampath said, there may be slight increases in marketing investments, but we will manage it in a way that, you know, doesn't impact the profitability to an extent where, you know, the company goes back to the red.
So it's about setting aside some of the incremental revenues, part of it, to boost up our marketing expenses, so that we can sustain and increase our growth rate. I'll move on to the next question: Can you break down the region-wise revenue contribution? So if I simply answer that question, almost half, slightly above half of our revenues would come from Sri Lanka, I would say broader South Asia. And that would be almost close to 60%, and out of the balance portion, slightly more than half, 20%-25%, would be from Southeast Asia, with the balance coming from what we call MEIA, that is Middle East and East Africa.
That would kind of be a, like a bird's-eye view of our revenue geographical contribution to revenue. I'll move on to the next question: Just for clarity, do you own your own cloud infrastructure, or do you sublease out services from existing cloud providers?
We use actually Microsoft Azure services. So, that is like, you know, we subscribe and, that instance owned by, of course, like, you know, PeoplesHR . So, but it's Azure infrastructure.
Okay, so there's a question: How does the current valuation look, considering that the market price is 20? I'm not very clear, you know, what the question is exactly, kind of trying to get, but, I mean, if you look at it from a valuation point of view, at a market price of 20, market cap is roughly at about, maybe $18 million or so. So with a $5.2 million ARR, exit ARR growing at about 25%-30%, free cash flow in the high single-digit region, this $18 million or so valuation, considering the cash on the balance sheet, works out to a multiple, a revenue multiple, ARR multiple of in the range of about 3.5 or so.
So again, that kind of shows where we are valued at by the market right now, compared to, you know, what the potential could be, considering that, you know, we are on the brink of or almost achieving the Rule of 40 metric, where we are both profitable and growing on a Free Cash Flow basis. I mean, I would let the market kind of ultimately determine, you know, what the right valuation is. But you know, we are focused on execution and making sure we not only achieve, but wherever possible, exceed the Rule of 40 metric, so that we are both growing and generating healthy levels of Free Cash Flow. I'll move on to the next question: Will the revenue increase up to the level of sales and marketing expenses?
I think we discussed the GTM efficiency ratio earlier. Nilendra explained that. So of course, on the other hand, when the sales and marketing expenses increases, funnel development will happen, or the finance will grow, and then the sales will grow. So, but same time, like, we are controlling the expense also, considering the revenue.
There's another question: Have you taken any price revisions for subscriptions? So we've done several repricing programs in the past. Right now, we are basically looking at the usual renewal cycles, and then based on customer usage, based on how heavy of an infrastructure cost impact it is there for us, we would basically try to reprice the at renewal point. But blanket price revisions have been done in the past, not this quarter. Then there is a question about a specific shareholder's transaction in the shares. I would say, I think as management, we would refrain from commenting on individual shareholders' trades on the share. So let me skip that question. I think we've answered the questions that are there up to now, so we'll maybe give it...
Okay, I think we have a question from one of the attendees who wants to raise a question. Let me. We will enable so that you can speak up and pose your question. I think we have given access. Could you speak and pose your question?
They're still on mute. Maybe the person can talking permitted already is enabled, so they can talk.
There's another question, Nilendra.
Yeah. In the meantime, I'll move on to the other questions. Is it right to say that the management is more focused on ARR growth than FCF margins, and is of the view that earnings at the PNL level would follow in the medium term, or does management also have specific ROE targets to achieve over the next 12-14 months? So I mean, our belief is that delivering growth and free cash flow is the ultimate value creator for shareholders. Why? I'm sure we have seen situations where, you know, companies report profitability but don't have, you know, cash flow that is freely distributable to the shareholders or free cash flow by the definition generated by the business.
So, we are very focused on free cash flow for that reason, and we believe, you know, that's the ultimate value creator for shareholders. Now, that doesn't mean that we are not focused on PNL. If you typically look at our business, the EBIT or earnings before interest and tax is pretty much aligned with free cash flow. So I would say that, that is a very kind of good indicator and highly correlated with the, the free cash flow generation of the business. But, ultimately, we are focused on making sure that our free cash flow numbers go up, because SaaS typically is a business where free cash flow margins can be higher than profitability margins. And, and we are focused on delivering that.
So to answer the question, yes, P&L will closely follow free cash flow movements, because like I said, EBIT is very closely correlated to FCF. Speaking about ROE, purely focusing on ROE, I would say might be even not adequate for a SaaS business, because typically when you get into the right growth rhythm and cash flow generation, you see ROE numbers which are far, far in excess of traditional businesses. If you really look at the SaaS business, frankly speaking, there is no glass ceiling for the ROE. ROE can be very high because after all, it's, you know, intellectual property that is being created, and the product that is being sold is infinitely reproducible. So usual ROE metrics that are seen in brick-and-mortar businesses, SaaS businesses can really outperform them.
ROE numbers have been in the negative, as you all know, given that we were through the investment phase, but now we believe, you know, they'll really take off once we start generating more profitability. There is one more question. If you are able to sustain profitability, what is your plan on dividend payments in the coming years? Is there a specific payout ratio target you wish to maintain? Maybe, yeah-
Comment on that. Let's see how the business is moving, and then we can decide later. I think it's too early to comment on that.
Yeah. So I think that's more of a board decision. I think, once the board sees the numbers and they're also looking at what's the growth for next year, and that the board will make the decision at the appropriate time.
We have gone through all questions that are. Okay, there's one more coming in. What's your current market penetration status in the Philippines?
It's very difficult to mention as a percentage, but, what we realize, like, you know, about the markets, the potential is very high. We are talking about 400 million population, and still, good set of companies on Excel-based, systems, spreadsheet-based, systems and data maintenance. So we see a good potential, but, we can't like, you know, mention a, penetration, percentage because, it's in the early stage.
Yeah, and just to give you some additional numbers, since the question is specifically on the Philippines, I mean, if you Google, you'll find that the private sector labor force in Philippines alone is 51 million people. And typically in any market, we feel, our experience is that almost 90% is unaddressable, meaning it'll be the, you know, what you call MSME. They don't need, you know, a formal system. So if you focus on 10% of the market that is addressable and needs, you know, an HR tech stack, there is a minimum of 5 million private sector labor force out there. So, I mean, apply the usual PEPM yields, per employee per month yields, multiplied by 12.
I mean, the market can be as big as $200-300 million, at a minimum in terms of ARR potentials. I mean, that, that country alone, you know, shows how big of a potential we are looking at. There's one more question. Any other region or country that you plan to go, Sampath?
Not at the moment. So, yeah, we'll, we'll spread over three regions: Southeast Asia, South Asia, and Middle East and Africa. So we'll keep on focusing on, building these three regions.
This question is for knowledge purposes, what valuation techniques should investors focus on for SaaS companies? Apart from the Rule of 40, I don't believe PE or PB are the right metrics for valuing SaaS businesses. So I mean, again, a bit of an academic exercise, response there. I mean, if you, if you agree that free cash flow generation is the ultimate metric for value, I mean, just an academic exercise, take a company that's generating, say, a free cash flow margin of 20%, with a simple, say, 10% cost of capital, 5% perpetual growth. If you use a constant growth model, that would mean that, you know, you have free cash flow divided by cost of equity minus growth.
That would mean that, you know, you should trade at minimum 4x, sorry, 40x on your Free Cash Flow per share. Now, most companies in SaaS, and like we are doing, we are not growing at 5, but rather, you know, we are this quarter, we reported the ARR growth of almost 30% or higher. So you can, you know, work out a model which is not constant growth, but maybe 2-phase or 3-phase, where you have an initial high growth period, then a medium growth, and then settling for a, for a, you know, larger, lower, longer term growth.
If you kind of model that, you know, you'll then realize why, you know, the U.S. or most other countries, you'll tend to see these high-growth SaaS companies that are both growing and cash flow generating, getting valued at 10x, 12x ARR. That's because if you're both growing and generating free cash flow, you know, if you put it into a model, you'll see that, you know, these high multiples are not just, you know, numbers picked from thin air, but rather justified by the free cash flow generation of the business. So I think we've been continuously saying that, at a minimum, we believe our business should be valued at around 7x-8x, at least from a ARR multiple point of view.
If you work out the math, that's really based on fundamentals of Free Cash Flow generation and growth.
Yeah, that's, I think, more of a model somebody to build, right, Nilendra?
Yeah.
So it's more of a, like I said, more of an academic thing rather than a forecast or something that we are-
Exactly.
-doing. Yeah.
I think we've covered all questions on the Q&A. Maybe we'll give it one more minute. Yeah, I think we have one more question. "Given the recent negative sentiments around SaaS industry and the sell-off in global markets with the launch of Claude, interested to hear your thoughts around this, whether it could pose threats to HR SaaS like HBS." I'm sure we all will have thoughts to add to this. Maybe I'll start and then hand it over to Dinesh and Sampath. So one of the biggest realizations in this SaaS sell-off is how analysts and investors price stock-based compensation. Most of the SaaS big names you saw out there reported free cash flow margins with a footnote, which said basically adjusting for, you know, whatever the GAAP, G-A-A-P accounting expenses.
But if you really look at SBC, stock-based compensation, as a percentage of revenue, while they were generating free cash flow margins as high as 20%-30%, stock-based compensation as a percentage of revenue also were at very high levels. So if you really adjust for it, there was a question whether the real economic free cash flow generation of the company justified the valuations. With the AI disruptions, this has now come into limelight, and investors are beginning to price the cost of SBC, stock-based compensation, and that's partly what's driving the sell-off. Now, as for our numbers, there is a shareholder-approved ESOP scheme. All the numbers are in public. There are no SBC hidden costs. So what you see in free cash flow is what you get as shareholders.
So I'll just stop there on the free cash flow, and SBC impact on free cash flow side, and maybe let Dinesh and Sampath comment on the broader AI disruption possibilities.
Yeah. So I think what Nilendra mentioned on the, on the financial side is, I think, one, is that... But I think, like, I think this question also may be people thinking that, okay, AI is disrupting, and there is, definitely there's a disruption that's happening. I think we all know, and we also use, Claude and, Cursor and some of all that stuff. If you look at, HBS, PeoplesHR AI portfolio, you will actually see a significant contribution, I think, on the product side, Sampath can talk. But I think from a-- overall, what we see is that what is happening with AI currently, from a-- the, the moat that we have is that we are providing complex HR processes.
So being able to use very logical, complex HR processes, AI, AI will take a fairly large, longer time frame, you know, number one. Second, is that because we have years of data that we have actually built over the years, the organizations that have our data schemas, because these, these data schemas are very proprietary to an organization, and it's proprietary to us, right? We are able to provide much more value to the organization with our AI tools. So that we feel is a moat that we have, and it's something that we will actually expand going forward.
Yeah. So just to add what Nilendra and Dinesh mentioned, there's another development happening, where like narrow areas in HR domain. There are companies like, you know, only target narrow areas because we consider as an enterprise HR application with a lot of domain knowledge, and it's end-to-end company point of view. But when new technology replace these narrow lines, I think there are more opportunities for enterprise HR systems like us, because easily we can deliver those narrow areas as well. I'll not name, like, you know, some of these narrow areas, but, like, you know, there are many. So these things will replace, and there's opportunity for enterprise HR applications to work on those areas as well with the new technology.
Of course, product level, we discussed during last meeting as well, investor call. So we also embed the AI framework to our application, PeoplesHR application, and we deliver the efficiency through that. At the same time, to improve the development efficiency, as Dinesh mentioned, we also internally use most of these new applications, Claude and Cursor, and many other, Lovable and many other applications. So, like, you know, we keep on improving the delivery efficiency both the implementation side as well as development side. At the same time, we see new opportunities in that segment as well, because it's very difficult to replace an enterprise-level application within a short period of time. Like, you know, and if you keep on investing time on innovation, so you can easily sustain.
We've taken all questions up to this point. I think if there are no further questions, there's... Yeah, there's a comment. Thank you for the comment. Wishing the team all the best for the upcoming quarter. Thank you. Dinesh, if there are no further questions, I think we can wrap up.
We can wrap up. Yeah. All right. Yeah. Thank you. Thank you, everybody, to being, and I think most importantly, trusting on HBS, and we do value our shareholders. We spend a lot of time thinking about our shareholders, our minority shareholders. So just to kind of reiterate what we are doing, and I think you know, something that you will see a lot of exciting stuff happening. So with that, you know, thank you so much for being today at our investor forum. Bye-bye.
Thank you very much.
Thank you.