Hi. Good afternoon, everybody. Welcome to hSenid Business Solutions quarterly investor forum. I warmly welcome all of you. It's been quite a group of people who have actually registered. We have shared the presentation with all of you. I think this we are trying to keep the same format. I'll pass it to Nilendra to explain. We keep the same format as we have sent all the details, keep this time for mainly to question and answer. With that, I will pass it to Nilendra to take over the meeting from now on. Yeah. Over to Nilendra.
Thank you very much, Dinesh. Hello, everyone. Thank you for joining hSenid Business Solutions Q4 and full year FY 2026 investor forum. We appreciate your continued engagement as we execute our ambition to become the most preferred HR technology partner for organizations across emerging markets. Financial year 2026 was a transformational year, where gains were recorded in all key revenue metrics, margins, and free cash flow generation. We delivered 13% revenue growth, reaching LKR 2.1 billion revenue, while fundamentally upgrading the quality and predictability of our revenue base. Recurring revenues rose to 74% of total revenue for the full year, reflecting the continued shift towards high-quality cloud subscription economics. Gross profit margin expanded 4.2 percentage points during the year to 50%, and normalized EBITDA swung from a loss of LKR 120 million last year to a profit of LKR 200 million this year, delivering a 10% margin.
Free cash flow turned positive at LKR 53 million for the full year. That's a 3% margin, an LKR 384 million improvement year-over-year. We closed FY 2026 with an exit ARR of $5.5 million, up 32% year-over-year, having surpassed the critical $5 million milestone during the year. This growth was achieved with excellent capital efficiency, as witnessed by our GTM efficiency ratio, which stood at 98% for the year, materially better than both private and public SaaS peers in the comparative ARR band. On the PeoplesHR Cloud business, we delivered net revenue retention of 100% and a revenue churn rate of just 6% over the last 12 months. Strong evidence of customer stickiness is seen herein and healthy expansion also within our existing accounts. Q4 performance demonstrated both resilience and accelerating momentum in our core SaaS business.
Total revenue was LKR 522.2 million, up 4.5% year-over-year. While we faced temporary headwind in non-core PeoplesHR tracking solutions hardware business due to global memory and chip supply disruptions, cloud subscription revenues grew a robust 38% year-over-year, 29% in USD constant currency. New deal bookings reached USD 843,000, approximately up 184% quarter-over-quarter, and 3% year-over-year. Notably, PeoplesHR Cloud accounted for 74% of full year new deals with particularly strong momentum in Southeast Asia, where new deal acquisitions rose 305% quarter-over-quarter. On the product front, we launched Lexi Insights, an advanced agentic AI capability that delivers predictive workforce insights and strategic recommendations directly to C-suite decision-makers. We also introduced payroll anomaly detection and delivered a significantly redesigned mobile user experience. These enhancements strengthen our competitive position as we move toward becoming a more intelligent human capital operating system for emerging markets.
Looking ahead to FY 2027, our priorities remain focused on accelerating new deal momentum, especially in our key focus markets, further leveraging our AI product capabilities and driving towards sustained profitable growth. With exit ARR at $5.5 million, best-in-class GTM efficiency, near perfect net revenue retention on our core cloud business, and positive free cash flow, we enter the new fiscal year with a strong platform for value creation. With that, as usual, we now open the floor for your questions. Please use the Q&A function on this platform to submit your questions, and we look forward to interacting during the Q&A. I think we already have some questions, let me directly jump in. I'll read through the question then pass it over to the respective panelist. We have a long question with multiple questions built in, maybe we'll take it one by one.
Could you please explain the reason for the company making a PAT loss after Q3 when we can expect continuous growth in profits? Okay. We mentioned about this in our filings as well. The unwinding of the deferred tax assets created as a result of the past losses we made over the last several years has been actually faster than expected. If you look at company level, there was almost 30-plus, maybe LKR 30 million, LKR 35 million unwinding of different tax assets, and that's non-cash, but an accounting entry that's going through the P&L. That was a factor that affected. Nevertheless, core operating metrics and profitability remains intact. Of course, like we mentioned, slightly slower hardware or tracking business, which was caused by certain supply chain disruptions, also affected some of the non-recurring revenue parts of our quarterly performance.
Nevertheless, I think the aspect we want to highlight is that we continue to execute strongly with ARR growth, which is the best forward indicator of recurring revenues consistently growing, as can be witnessed by the above 30% year-on-year growths that have been achieved. I'll move on to the second question. Why is the total revenue only has grown 4.5% year-on-year for the fourth quarter? Is there a specific reason? Again, I would still draw your attention to the growth in the recurring revenue, because I want to draw your attention to two numbers. One is ARR year-on-year growth is about 35%. However, total revenue growth is only 13%. Essentially what's happening is there are two things happening here.
More predictable and stable recurring revenues are continuing to grow, their acceleration is 30% and above year-on-year terms, and we are replacing other forms of non-recurring revenue with this growth. The second factor is, as a customer acquisition strategy in certain markets, we are reducing another component of revenue, which is typically the implementation cost or what we call the professional services revenue. Again, a non-recurring services revenue component. We reduce this to acquire customers to be competitive with other vendors and to accelerate our growth. There has been a conscious decision taken to be competitive on the professional services side to increase the customer acquisition base and recurring revenue growth. That is why you're seeing a softer growth of 4.5% year-on-year. However, as we continue to push recurring revenue growth, you will see that the ARR growth tends to translate to total revenue growth.
Today, you see ARR growth at 35% and total revenue at 13%. Recurring revenue is 74% for the year of our total revenue. As we continue to push the envelope here, you will see these two numbers converging, meaning ARR growth, and total revenue growth basically converging. Basically, total revenue growth reflecting ARR growth. If I move on to the third sub-question on that, ARR growth percentage is falling continuously on quarter-over-quarter basis from Q1 to Q4. Are you happy with this growth, and what kind of ARR growth do you expect in the next few quarters? Sampath, do you want to take that?
Yeah. Of course, recurring revenue, as Nilendra rightly mentioned, recurring revenue is growing year-over-year, and also the quality of revenue. As we discussed earlier, we are not targeting the implementation revenue. In fact, we introduce a partner implementation strategy as well. We are globally enabling partners to do implementation. We are in the process of collecting recurring revenue. Recurring revenue growth is 35% last year, so that's a healthy improvement, and we are planning to continue that momentum for next couple of years as well. What is important is to growth of recurring revenue, stable revenue for HBS. That will grow year-over-year. Markets are stabilizing. We are getting good revenue from the overseas markets we are developing at the moment. That will continue to happen during next few quarters as well.
Yeah. Just to add to that, obviously, as the base becomes larger, you could see some flattening of growth. Broadly speaking, I think as a management team, we are trying to make sure that we maintain ARR growth momentum. That's something that we've been consistently talking about on the past seven, eight calls, then that's one of our primary focus areas.
Yeah. Absolute number is growing quarter-on-quarter. When the value increases, percentage might slow down a little bit even next financial year also. The absolute value is growing.
I'll move on to the next question. Do you believe the current churn rate is at a healthy level, and is there a specific reason for this increase? Sampath, do you want to take that as well?
I think over a period of time, we are maintaining 95% stability.
Okay
only 5% churn. Last year, we implemented price revision in fact, because we want to bring all the customers into a good quality price point. That leads to a few churn, but that is done last year. We are expecting the stability in that area now. Yeah.
Yeah. To also add, compared to peer, whether it's private self-reported data or public churn rates, still in the SaaS domain, these are best-in-class numbers. You just want to highlight that as well. New deal bookings for PHR Cloud have been declining from FY 2024 to 2026. Please give your perspective on this. In fact, I'll add some clarity there. Total deal value has two components. Again, this ties to one of our previous responses. In that total deal value, you have a onboarding or implementation fee and an ARR fee. The ARR component of these deals have been steadily increasing. However, given our strategy to sacrifice on the non-recurring professional services fee or the implementation fee, that one-off component has been declining. If you look at both, yes, you may see pretty static numbers, but actual net ARR added on to the business keeps growing.
Could you please explain what CARR, subscription backlog, and NTM revenue in simple way and how it is calculated? Essentially, when we report ARR, we mentioned this on a previous call, ARR is on an invoiced basis. As long as it's invoiced, we consider it as ARR. That is your best forward predictor for the next quarter of what recurring revenue would be. Of course, that divided by four to get from annual to quarterly. CARR is contracted annual recurring revenue. There may be certain phased-out implementations where once phase 1 is completed, typically in large enterprise projects, once phase 1 is completed, an additional particular module or area of the product is deployed, and then there is a step increase in the recurring revenue. Those contracted but not yet invoiced ARR gets captured under CARR.
The second part of the question was NTM revenue in a simple way. Next 12 months revenue, essentially, is going to be ARR, and a certain component of the contracted will get added to the ARR, plus the non-recurring forms of revenues, which would be implementation revenue, hardware tracking solutions business, which goes hand-in-hand with our software, and any additional subscription revenue that we book and monetize during that 12-month period, essentially would be next 12 months revenue. Again, to summarize, NTM revenue, next 12 months revenue, would be the brought forward ARR business subject to, of course, any churn, plus non-recurring forms of revenue in terms of hardware, professional services, so on and so forth.
Third component is during that 12-month period, whatever ARR that we net new, and even expand existing customers that we monetize during the period gets added to the NTM revenue. The next question, appreciate if you could explain how to read the NTM revenue growth chart mentioned in the investor presentation. Essentially, I think the chart is back by request. I think we had a timeline issue in publishing it last time. Essentially what we've done is we've added as many more peers as possible, widened the data sources. If you really look at this graph, you see a clear story where revenue multiples or valuations are essentially the correlation coefficient is almost 0.7, fairly well explained by next 12 months revenue growth. Internally, we are targeting somewhere between 25%-30%.
Based on our current valuation, our multiple is somewhere around three, that's marked on the graph. You see a trend line clearly emerging where companies that are growing, the green color ones that are growing north of 20% are getting really high multiples. The middle segment, the yellow amber marked dots, that's roughly about the 15%-20%, 25% bucket. They are around roughly the kind of 4-8 kind of multiples. You have the low growth, low teens, and single-digit growth companies having much lower multiples. We've basically plotted this to show where we stand.
On top of that, given the free cash flow dynamics of the business, the fact that we are free cash flow positive, the margin profile, the operating leverage position that we are sitting in, that speaks for itself from a valuation point of view. There's a question: Is the revenue from PeoplesHR tracking solutions expected to decline in the coming quarters? Sampath, I'll hand it over to you.
Actually, yeah, I'll answer that, Nilendra. Due to the chip issue and the supply chain disruptions, we didn't budget a lot on this area. Whatever budget number, we are in a position to get it even Q1, and of course, like Q2.
Sampath, I think there was a connection issue.
At the moment, everything is under control.
Sampath, would you mind repeating the answer? I think there was a connection issue.
Yeah, Sampath is traveling.
I was talking about this supply chain disruption chip issue.
Maybe Nilendra.
Maybe, I'll fill in for that. Essentially, some of our suppliers had shortages in memory chips and chips that go into these attendance tracking devices. Some of the demand we had weren't monetized or couldn't be converted to revenue because of these delays. We expect by the end of Q1 some of these to normalize. There may be some effects in Q1, but after all, these are very large-scale suppliers, so they are also working on broad-basing and de-risking their supply chain. It is a temporary problem, but we see it getting sorted very soon. There is one more question. How different is the story for hSenid Business when compared to other growth stocks on the CSE? Essentially, the story for hSenid Business that we have been mentioning multiple times on the calls, I think there are three main factors to consider.
Firstly, the market size in the markets we operate, and the fact that we've already built meaningful brand presence and distribution in these very large and under-penetrated markets across South Asia, Southeast Asia, and Middle East, and Africa, all high-growth economies, emerging economies. These investments have largely been expense through the P&L. You've seen how the last seven, eight quarters, we've taken this expense on the P&L front-loaded. We now have a pre-funded distribution moat, essentially, with this market presence that new entrants would need significant time and capital to replicate. That's definitely an advantage we have. Secondly, as you all have seen in the numbers, we are transitioning into a very high-quality SaaS model now with recurring revenue and high incremental margins.
Unlike many traditional businesses that you would see on the exchange, once a product is built, additional revenue can be delivered at structurally higher margins. This is already visible in our gross margin expansion that you saw over the last several quarters. With recurring revenue reaching 77% of total revenue in Q4, that operating leverage effect is going to be higher. Putting in simple terms, we are selling a product that is infinitely reproducible, so that puts us in a very unique position. Thirdly, we've demonstrated strong operating leverage and best-in-class unit economics. From the way we acquire customers, GTM efficiency is something that we continuously harp on. In FY 2026, you saw normalized EBITDA margins turn positive at LKR 200 million, free cash flow turn positive. Our core cloud business, we delivered 100% NRR and 6% revenue churn. GTM efficiency, as I mentioned, 98%.
These are metrics that compare favorably to SaaS peers, public, private, across the world. Together, all these factors, they create a very fundamentally different earnings quality and growth profile compared to the rest of the market. I think that's the story. Let me move on to the next question. Do we have any new product developments in the pipeline for FY 2027? Sampath, if your connection is back, maybe you can try answering that.
Yeah. I think because from Manila, there's a rainy situation here, very unstable connection. Yeah. Can you hear me, Nilendra?
can, there are some disruptions, I think.
Yeah.
So maybe-
I'll start again.
Yes, please go ahead.
Better. Yes, AI-related development will continue because the whole world is talking about AI, and a lot of things are happening. As Nilendra mentioned, we just released the Lexi Insights, where the CXO level, you can get insights directly from the system rather than waiting for tech guys to involve. That piece, we are further continuing that area. There are a few other areas also customer will see a difference. Mobile development-related work will continue, but not in the same speed. There are development will continue for next year as well.
Just to maybe add a little bit onto what Sampath said. Lexi, which is our AI suite of products, essentially right now has three layers. One is all about the Lexi Smart Navigator, which completely takes away the product discoverability challenge, makes a product very discoverable. From a search bar, you can search anything, data, pages, perform quick actions, all that is possible. Basically trying to make it much more easy to discover, easy to basically flattening the product. Second area is the Lexi Super Agent, where we're trying to use text or voice prompts to perform simple tasks without having to even navigate the user interface.
The third, like Sampath mentioned, is Lexi Insights, where we're trying to really step up and be the platform that a CXO or a key decision maker or leader of an organization will talk to before they take a decision involving human talent that has serious business outcomes. If they are deciding about opening up a new branch, a subsidiary, a new country, entering a new country, if they want to select people to send there, as opposed to depending on human biases, human judgment that are driven by biases. You can ask the system that has a complete context of employees' availability, remuneration, past performance, how they've grown within the organization, skill sets, to get a very objective answer that can have significant benefits in terms of taking true data-driven decisions that drive success.
That's something that we are really investing in, and as a product company, product investments will always happen. We have to keep changing and improving, more so now than ever before, given the rate of change in the world. We've covered the questions that are on the Q&A up to now. If there are any further questions, please feel free to either click on Pose a Question, the button, Raise Hand button so that you can ask question on this platform. Type it in to the Q&A. There is one question. What kind of costs are related with these AI-related developments? Yes, all these AI-related developments do have costs attached.
We have come up with monetization models that offer some of these products, at least the initial use for a limited period, complimentary for certain customers, so that they can really make use of this and see if it adds value. Then, of course, we have certain token-based pricing, and we are thinking of maybe even getting to outcome-based pricing in the future. It's all about the value you create and trying to capture a portion of that value as a platform provider that helps unlock additional streams of value for our customers. Pricing models will evolve. We are going from a POC-based pricing to usage-based pricing, and then hopefully even in the future, outcome-based pricing. We've answered all the questions that have been posed.
There's another question, Nilendra.
Let me read through that. "Thanks for the call and congrats on the consistent ARR growth. What are your expectations for free cash flow margins in FY27E?" We will refrain from providing any hard guidance on what the margins will be. However, we can say that what we are targeting to be in this journey that we are going on to LKR 10 million ARR is a couple of metrics, and these metrics are metrics at which stable, mature size companies operate. That is, we want to make sure that recurring revenue as a percentage of our total revenue is about 85%. You've seen the trajectory over the past, from 40%-50%, 60%, and now 74% for full year, 77% for Q4. You can extrapolate that and have your opinion about how soon we can get there.
One target is 85% recurring revenue as a percentage of total revenue. The other portion is margin upliftment. Typically, you could see software companies operating at margins anywhere between lower 60s to upper 70s. We want to get there. Right now, we went from about mid-40s to crossing 50 last year. Operating leverage, as I mentioned, is high, so that will continue to climb upwards. Typically a software company, once you go through your CapEx phase of market development, can get to free cash flow margins of 15%-20% easily. That's, again, kind of a target for us. That's a benchmark that we are working towards. Typically PAT margins of 10%-12%, free cash flow margins which are higher because software is a business where, because of the deferred income, cash flow comes much before profitability.
That's kind of the overall framework of benchmarks that we are working towards. I hope that'll help you form an opinion on where we are heading. I'll move on to the next question. What are the Forex-linked costs in the cost base? Out of our total cost base, roughly about 20%-25% of costs are Forex linked, and the other elements are essentially LKR linked. This kind of gives you a rough idea about what kind of FX arbitrage we would have in the current currency scenario. There's another question, I think, which was answered. What is the cost associated with implementing AI? I think we took that. How much of ARR can the company go to with the current resources? How we measure the efficiency of generating ARR is purely based on the GTM efficiency ratio.
Again, for everyone's knowledge, by GTM efficiency, what we measure is the total sales and marketing expenses, people, tools, and programs that we invest to generate $100 of net new ARR. We ended the year at almost 98%, roughly about 100%. You can see the industry operating at much, much higher levels, 180% in the private SaaS world, 224% in public SaaS. Of course, this number will increase, meaning we will have to spend more on sales and marketing as a percentage of net new ARR. As the overseas business becomes more and more a part of the total revenue, you'll see that number going because naturally, more mature markets that we operate in would typically tend to have higher GTM efficiency or lower GTM spend per ARR. Whereas newer or frontier markets that we operate in will tend to have higher GTM costs as a percentage of ARR.
This would change, but as a cost discipline, we will always try to be in and around the 150% margin. Which means that we spend a total of $150 in sales and marketing expenses for every $100 of ARR we generate, which means roughly in 18 months or 1.5 years, the CAC or the customer acquisition cost is fully paid for. We've taken all questions that have come up to now. Maybe we'll give it a couple of more minutes for any additional questions.
If there's no questions, we can conclude the meeting, right?
Yeah. Everyone can reach out to our investor relations if there are any questions. More than happy to engage.
Excellent. Okay. Again, thank you very much, everybody, for attending today and also continuous trust in hSenid Business Solutions and PeoplesHR. We look forward to engaging with you in the future. If there's anything, as mentioned by Nilendra, please reach out to us and we'll be very happy to answer any questions or if you have any clarifications. Thank you very much for being here today. Bye-bye.
Thank you, everyone. Bye.
Thank you.