Hi, good evening, everyone, and welcome to Capillary Technologies India Limited's earnings call for Q2 and H1 FY 2027. We have with us the management of Capillary Technologies, represented by Aneesh Reddy, Anant Choubey, and Rishi Ray. Before we start the call, we will just give a safe harbor statement where we say that every statement given on this call, which may contain or be related to business, financial performance, strategy, and results of Capillary Technologies Limited, will be identifiable as can vary from the actual numbers in the future. To start the call, I hand over the call to Aneesh. Aneesh, over to you.
Thanks, Kanav. Welcome, everyone, to our Q2 results. Rishi, do you want to go to the next slide? We will start with a quick introduction for those of you who are joining us for the first time. Please bear with me. It is the same slides we do every time. Quickly on us, we play in the loyalty and customer engagement space. We are a global leader in loyalty management. We work with more than 20 of the Fortune 500 today, over 2.9 billion consumer profiles for the customers that we work with, roughly about 150 large enterprises as customers. We have customers in about 55 countries now, 19 global offices, about 750 full-time employees. We typically work with large enterprises. It is multi-year recurring contracts. A lot of good aiRA, a lot of automation, good. Compared to our competitors, you can run our stack with one-fifth the number of people.
That is how productive the platform tends to be. With that, let us go to the next slide, Rishi. For those of you who are new to this space, the best place to look at loyalty in detail is the Forrester Wave. Forrester is a leading marketing analyst in the West. They do a wave on every subcategory of marketing, which is more than $5 billion each in TAM. They have had a wave on loyalty for many, many years now. If you take the latest wave, which came out last December, that is the one that you see on the screen.
This covers the top 15 providers, platform providers in the space. You can see us at the top right. Although we are not the largest company in the space, we are definitely the best rated, both in terms of our current offering and the strategy of what we are building.
If you look at spending a little bit of more time, given loyalty is a new space in Indian markets. If you look at the They have 27 criteria on which they evaluated this time's wave. Last time was a different number. We had a 515 on 22 of the 27. If you read the commentary on what they talk about, they like about the Capillary stack is our AI-first platform approach. Quite a bit of the stuff on the stack is very AI-native, unlike a lot of our agency competitors like Epsilon or Kobie or Bond Brand Loyalty, etc., where they tend to be more agencies with a very thin layer of software. The other piece is, given we support large enterprises, we do support a lot of complex programs and complex use cases.
And of course, the report talks about customer feedback and talks well about us in that sense. Let's move ahead, Rishi. Just quickly covering on the product stack, what we try and do is deliver loyalty as an outcome, and hence it does a little bit more than loyalty in that sense. What we do is we first plug into all the data sources or any place where a customer engages with a brand, right? Which could be your POS systems, your mobile apps, your social media, your third-party apps, et cetera. We get all of that into our native CDP. We don't monetize our CDP as a separate product today. It's more part of the core platform. Once the data is in, you have various apps that you can fire up.
Loyalty, which is a system of record for. Think of it as a points ledger for your loyalty program, right? All your points, rewards, coupons, all of that in one place. That's the loyalty stack. You then have the Engage+ stack, which is for personalized one-on-one automated communication journeys that you can run with customers. Third is our Insights+ stack, where we have over 80 different dashboards and playbooks on what you can do with loyalty data that's readily available for the business to use. We finally have a Rewards+ stack, which is a redemption stack where you can redeem offers, you can redeem points, and third party. And finally, this is a new product, Experience+. If you remember, in the last quarter, we spoke about acquiring the IP of this company called CustomerGlu. So that product has been rebranded into Experience+.
It's basically, most of the Capillary stack sits on the backend and helps you run a program at scale. You can run new promotions, campaigns very quickly. What Experience+ does is helps you do that in the front end. It's an SDK that sits in your mobile app or on your web front ends, and without writing a line of code, you can configure it to run a game, to change, whatever you want to do, right? And we're seeing some very, very good traction. We've already had three of our existing customers buying the stack. There's another nine where we have proposals going, right? So, that's on the Experience+ side. And finally, we spoke a little bit about the AI piece. aiRA, which is our AI platform, sits horizontally across all these products.
We have a more detailed slide on aiRA in the next slide, but the idea is aiRA is your growth agent. Rishi, you want to go to the next slide? What we're trying to do with aiRA is, given we are a system of record, aiRA is a system of intelligence and a system of workflow on top of all your customer transaction and loyalty data, right? What it does is it connects into Capillary, into some of the other products which our customers use to keep their customer data, et cetera, and helps you come up with growth strategies, helps you come up with execution. You can run a ton of campaigns, promotions, et cetera, and we natively integrate it into an Adobe, Braze, Salesforce, et cetera, where you can push these campaigns out of.
Now, what we have done over the last couple of quarters on aiRA is we typically come after a customer is acquired, but what we have done now is we have extended aiRA into native Google Ads, Meta, TikTok, Amazon Ads type acquisition channels as well. For a marketing team now, they have a full view of their funnel, right, from acquisition to retention and then loyalty. We will talk a little bit more about this, but I think with aiRA, the loyalty stack has become very differentiated, which is leading to us winning a larger order book on an ongoing basis. I will talk about that in the next few slides. Let us go ahead, Rishi. Coming to, I think we have had a pretty good quarter in Q2. Just covering high-level numbers before I hand over to Anant. On the growth side, we have three levers of growth.
Net retention rate, which is our existing customers buying more from us. The second is new customer wins. This is net new customers who we have not, who were not customers of ours earlier. Then the third is the inorganic motion, right? M&A. Touching on each of these, on NRR expansion, we are now trending at, for Q2, we were at a, the organic NRR was about 116%, constant currency about 109%, right? So, largely from three levers. One is increased platform usage. We do have a small inflation, and as you break, cross your threshold of what you are subscribed to use, we do send you an overage, right? So that is the first line. The second is product upgrades and service upsells.
This is kind of products like aiRA or Experience+, where you are using a loyalty stack or an Engage+ stack and you want more, and you end up buying that. The third is expanding into newer markets, geographies, and this we call as Category 3, where we work with a lot of multinationals or with a lot of conglomerates, where over a period of time, they tend to add more countries or they tend to add more brands onto the platform, which leads to natural increase in usage, right? The good piece is that we are now seeing similar NRR in even acquired customers that we have acquired through acquisitions and migrated to, who have migrated to Capillary, as we see on our own stack, right?
So aiRA, Experience+, some of these products, Engage+, are seeing as much love from acquisition migrated customers as we see from the Capillary core customer set as well. Coming to the second piece, the new customer wins. I was talking about this. We are seeing growth in our new business. If you look at our Q1 and Q2, we have both quarters had like almost an 80% increase in new ACV. If you remove that one large healthcare customer outright, that was an exceptionally large deal. So, eliminating that deal, we are seeing about a 79% year-on-year growth. On a constant currency basis, I think it is like 66% or 67% new ACV growth. This is largely being driven by our AI stack. Although if you look at our AI stack, it is priced at roughly 10%-20% of the total deal value.
What we are seeing is the fact that we have such a strong AI stack means that customers end up buying the whole stack from us, the loyalty stack as well as AI, which is what is leading to that increased new ACV number. The third piece is M&A. We did not do an additional acquisition in Q2, but we did a very large acquisition in Q1 in SessionM. The good piece is that, for both Q1 and Q2 now, SessionM has broken even. We had got a very, very great deal on it, given it was a loss-making entity at Mastercard before we bought it over. But the good piece is that for both of the quarters, it has been on a break-even. In fact, we are very excited about upsell opportunities on the SessionM side.
We had our annual customer event last month in Nashville, in the U.S., and we had a bunch of SessionM customers who had joined the event. The kind of conversations, we definitely think, I think we are learning from each acquisition that we do, and this is our fifth, and I think we have kind of a very nice playbook now on how to make customers feel comfortable, get them to buy more. I am hopeful that some of these will translate into better NRR and farming numbers going forward as well. Yep. Let us go next. Coming to the profitability levers, there are again three levers there. The first is your NRR-linked margin expansion.
Given your cost of hosting the data, server costs, and cost of customer success, et cetera, and customer support are already baked in, any new dollars that come from an existing customer lead to very, very good margins. If you look at H1 or Q2, our gross margins have stayed stable at 67%. This is in spite of the fact that the SessionM revenue that got added actually comes at a lower gross margin. I sometimes joke around that we are probably amongst the most profitable loyalty companies out there. So, any competitor we buy or any company we end up buying tends to come at least 30%-40% lower margins than Capillary is. So, in spite of that, it is at the same 67% because the Capillary margins have moved up while SessionM, being just acquired, pulls that margin down a bit.
The second is leverage on non-COGS. So we are a 65%+ gross margin business. Costs below it, which is things like technology, sales and marketing, corporate functions, et cetera, those costs do not grow at the same pace as revenue. Those grow at a much lower pace, probably inflationary or a little bit more. Hence, as our revenues grow, a lot of the revenue growth tends to, a lot of the gross margin increase tends to go into the EBITDA margins. Again, if you look at a good example for this, if you look at H1, although revenues increased 47%, your non-COGS cost increased 34%. Again, the more important part to note in this is a lot of this 34% increase is actually SessionM costs.
Like, there's a tech team, there are management, all of that that comes with that acquisition as well, right? Hopefully, you will see some of this play down into margins over the next few quarters as well. Finally, coming to upgrade of customers from M&A. Like I mentioned, typically, the companies we end up buying are at the 30% gross margin, 5%-10% or loss-making net margin type numbers. Once these customers upgrade over to our platform, which is typically a two-to-three-year cycle, you end up seeing that 30% gross margin go to 65% 70%, right? Leading to better profitability and cash flow generation for us. The good thing is our first three acquisitions have all delivered a four-to-five-year cash payback. We had a slide on this in our earlier results. That trend seems to be on track even for Kognitiv.
In Kognitiv, we're trying out a new AI-based upgrade capability, migration capability. The first customer in this new format has migrated over. The good thing with this is, thanks to AI, that you're basically training the AI to do these movements faster, right? Hopefully, over the next few quarters, you will see a lot more momentum on Kognitiv customers or even some early SessionM customers over the next few quarters, right? With that, Anant, I think over to you on the numbers.
Right. Good evening, everyone. Here's a view on Q2 and H1 results. We got revenue of INR 271 crores from operations. That's about 51% year-on-year growth and 43% on constant currency basis. This revenue came at an adjusted EBITDA of INR 44.8 crore, then doubled from same time last year. That's 17% margin on our top line. PAT for Q2 is at INR 22 crores, which is about 8% of the top line. In terms of H1 performance, revenue stands at INR 528 crore, which is 47% year-on-year growth, or 38% on constant currency. INR 89 crores adjusted EBITDA, which is about 17% margin, and INR 12 crore PAT, which is about 2% margin on the top line for H1. Rishi? Now, to have a look at organic versus inorganic performance. This 47% year-on-year growth on the overall H1 top line, dividing this into organic and inorganic.
Organic business grew by 23% from INR 257 crore to INR 318 crores, and inorganic business more than doubled from INR 101 crore to INR 210 crore. This growth in inorganic has largely happened on back of the SessionM acquisition. In terms of adjusted EBITDA growth, this has grown from INR 41 crore for same time last year to INR 89 crores.
This is a 600-bps expansion from 11% to 17%. This margin expansion has happened on the back of NRR expansion, the operating leverage on non-COGS cost, and on M&A synergies on both Kognitiv and SessionM. Rishi? Now, coming to annual recurring revenue. These two KPIs are basically leading indicator for the business. If you look at Q2 FY 2026, we were at INR 717 crores of ARR. For FY 2026, we got to INR 765 crore ARR, and that has now increased to INR 1,085 crore of ARR, right?
That is a 51% growth over same time last year. Again, a strong contribution to this comes from SessionM acquisition, NRR, new ACV, and this is on a significantly larger recurring revenue base. In terms of new ACV, for Q2, trailing 12 months data for Q2 FY 2026, that is at INR 52 crore. From there, we have increased to INR 93 crore and trailing 12 months for Q2 FY 2027. What this means is that we are winning more, and this higher win rate comes on the back of our AI capabilities, which increasingly differentiate us from our competition in the enterprise space. Rishi? Coming on to profitability metric for both adjusted EBITDA and PAT. Q2 performance, we looked at about 400 basis point improvement from INR 22 crore in Q2 FY 2026 to about INR 45 crore in Q2 FY 2027.
In terms of PAT, from negligible PAT same time last year to about INR 22 crore of PAT. We talked about H1 adjusted EBITDA. In terms of PAT performance, we have seen improvement from about INR 1 crore to about INR 12.4 crore from H1 FY 2026 to FY 2027. These increases reflect higher margin revenues coming in from existing customers, again, operating leverage on non-COGS cost, and margin uplift on acquired customers.
How does this improvement happen from INR 41 crore adjusted EBITDA in H1 last year to about INR 89 crore? That is kind of doubling or more than doubling in this time period. So, I put a waterfall over here. There is a small contribution, about INR 2.5 crore in terms of contribution from the inorganic business. About half of this improvement has come from the migrated customers, the customers which we acquired and then migrated onto Capillary platform.
And the other half of the improvement has come from the organic new business. What does this number mean for the organic business? What it means is that for every INR 100 of new organic revenue, it is generating INR 44 of adjusted EBITDA. And this is largely on the back of operating leverage. So all the cost below COGS is increasing at more like inflationary increase, bringing in all the operating leverage in the business. And hence, you see every INR 100 generating INR 44 of that in adjusted EBITDA. A view on the cash. So we ended the quarter in terms of cash balance of INR 573 crore. Our borrowings, which is all short-term working capital borrowings, we have zero long-term debt. The borrowings are at about INR 45 crore. So, the net cash generated by operating activities stands at INR 113 crore for the half.
There is one important metric that we track, which is operating cash flow to adjusted EBITDA, and that stands at 128%. So, the business generates more cash than the adjusted EBITDA. In terms of free cash flow to PAT, we are at 506%. And you would see consistent improvement on ROCE. It was about 5% last quarter. It has improved to about 7%. In terms of cash return on invested capital, we have improved from about 22% last quarter to about 29% this quarter. So here is a walkthrough of flow from adjusted EBITDA to PAT. I am going bottom to top on this. If you look at Q2 FY 2027, the Column 2 over here. So adjusted EBITDA margin of 17%, which is about INR 44.8 crore. In this, the adjustments are done for finance income and ESOP expenses, which more or less cancel each other out.
That gets you to an EBITDA of about INR 45.5 crores, again at about 17% of top line. In this, you reduce about INR 1 crore of finance cost, depreciation of about INR 24 crores. This number was about INR 20 crores last quarter. This has increased by about INR 4 crores a quarter. This increases from the depreciation and amortization coming from the SessionM acquisition. Then you have tax credits of about INR 2 crores. That takes you to PAT of about INR 22 crores, which is 8% of the top line. With that, we come to an end on the presentation.
Thanks, Anant. Now, I would like to ask all of you to raise your hands in case you have a question.
We have a question from Vinay Menon. Vinay, you can unmute yourself and ask your question, please. Go ahead.
Hi, everybody, and congratulations on a great set of numbers. A few questions from my side. In terms of aiRA, Aneesh, you were mentioning that you can give access to things like TikTok and others. If you could just elaborate on that, because that looks like a new capability. If you can just elaborate, that would be helpful.
Think of aiRA as an analytics and a campaign management agent, Vinay. Till now, we would support everything which is post you acquired a customer, right? You've gone into the database and then, we had a bunch of customers saying, "Look, can we also have this working on our acquisition channels?" If you look at the marketing team, they also do acquisition of customers and then retention as well, right? The idea was to and a bunch of our customers came back with this feedback of saying, "This works great on the post-acquisition thing. Can you plug it in to where they spend money?" And typically, these are consumer brands, so you end up spending on Google Ads, on TikTok, on things like that.
What the platform does now is, it basically pulls your last two, three years of, or six months, or eight months, whatever, of campaigns that you've run on these platforms, says what ended up working well, what ended up not working well, and you could ask it to modify. We are not the ad tech in this sense. It's more a system of intelligence on top of these acquisition channels. The good thing is that you get a single view across. If you're on Google, you get only Google data. If you're on Meta, you get only Meta data. If you're on TikTok, you only get TikTok data, right? I think what the tool has done well is get all of these together, so you know which campaigns are running well, which campaigns are not running well. I hope that explained it to you.
It's an agentic product, so what an analyst would have done by pulling all that data and all that stuff, it'll do, like, simple English. You can ask it that, "How did my last week's campaigns run?" And it'll give you the analysis, right?
Okay. On aiRA standalone, last quarter you had mentioned that we are at a $2 million-$2.5 million kind of yearly run rate. How has that run rate changed, and what kind of deal sizes are we seeing for this?
Yeah, so, I think we are seeing roughly about $100K-$200K average deal size, mostly existing customers, right? Which is where the selling has been easier because, I think on the newer customer side, like I mentioned earlier on the call, it is the reason why you are ending up winning now, that it is a big differentiator, which is why you end up winning. Although the aiRA price is only, let us say, $100K in that deal, typically it is 10% of the deal value in new deals, right? So, you are also winning much more, that faster momentum that you are seeing across the last few quarters is because, I think you have a much more differentiated product now with the aiRA stack than you had earlier. So definitely good momentum. In fact, we do have about $8 million-$9 million of pipeline.
Not all of it is converted and closed on the aiRA side, right? So some pretty good momentum there.
Okay. Just on a larger frame, we had Meta launch Muse last month, especially in U.S. So, this kind of gives a lot of access for agents to kind of shop and buy things across. How do you think this is going to impact loyalty, and is this a positive for our business?
I think, let me explain this. It will take a few minutes, but I think it is worth the explanation.
Yeah.
Right? What happens with loyalty a little bit, Vinay, is today, when a human is buying, loyalty typically ends up being a little bit of a subconscious preference. You are loyal to a jeans brand, you are loyal to Air India because you are probably a platinum on the Maharaja Club or IndiGo BluChip 3, right? Or whatever, right? Blu 3. So those are slightly subconscious preferences, right? So, I am not going checking each time what is the airfare on IndiGo, or on Air India if I am one of those two, right? So, I have a preference, I go do it, right? What happens with an agent is an agent is not lazy. As humans, we have cognitive load issues. We cannot compare too many numbers. We are generally lazy. We have preferences, right? Which are not always rational.
What happens with agents like a Muse or an Instinct or any of these, is these are extremely rational, right? So, if you have even a 5 rupee or a 10-rupee difference, all else equal, you are buying the same place, flight from here to there, or you are buying the same Levi's jeans or whatever, it will be extremely rational, right? And that is where we think that loyalty is always you give 5% points, you give 4% points, you give at best 8% points, right?
So it is never a 20% off or a 30% off, right? We hence think that with agents, we think the behavior will be a lot more rational, right? And what we are also seeing, Vinay, is thanks to the agents, I think, payments and promotions and loyalty will kind of come a little before the decision cycle than today at the end, right? Usually.
So, what will happen with that is, if you take most of our competitors, these tend to be agencies. Very thin layer of software, whether it is a Kobie, whether it is a Bond Brand, Epsilon, all of them, right? They are agencies inherently. So, their tech is not that great. So, they would not be able to deal with the faster throughput or the complexity that agents can deal with, right? Can deal with, which is where I think, again, a better software technology platform becomes that much more relevant. So, in my head, I think we are in fact now building a lot more to provide better data, better information to agents when they are shopping, right? So that I got 2% extra points or I am a gold, hence I get this small thing extra.
Those things which today are more subconscious preferences can also be converted rationally onto a buying decision. I hope I answered your question, Vinay.
Yeah. Thank you so much. Otherwise, I will get back in line. Thank you.
Thanks, Vinay. I request everyone to limit their questions to two, as we have a long queue. Next question is from Divyansh Gupta. Please go ahead.
Hi. Hope I am audible.
Yeah.
Divyansh, go ahead.
Hi. First question is, when we do these inorganic transactions and we acquire, actually, I am very new to the company. I am just revising from transcript. You mentioned that you give about 10% discount, and then anyways, there was a 3% to 4% hike if, let us say, the customer is in U.S. Yet customers do not. Which means that at least for three years out, they will probably pay equal or lesser cost to what they were paying right now, and they probably get a better tech solution than what they were using. Why do not all customers migrate? Why do we experience a loss in revenue or customer fall-through?
Let me answer that. Usually, Divyansh, we give the discount only when they are migrating. We do not give now. That too, it is not for all customers. Typically, like let us take SessionM, right? There are a bunch of customers who are like, "Look, we like your AI stack. We want to move first." In those cases, there is no need to. Usually towards the end is when you say, "Okay, look, we really want to sunset this platform. There is benefits in migrating," and you give a small discount at that point in time. Now why do all customers not migrate? Typically, in the acquisitions we have done, we have seen about a 70% revenue retention post-migration. 66% to 70% is the number in the last few acquisitions that we have done.
Now, typically it takes two years to get the migrations going and about 30 months when you fully migrate. These platforms that we are buying are not. Our annual churn is probably 6%, 7%, 6%. These platforms are probably at a 10% annual churn. In two years, you tend to lose like a 20% of revenue there, and then you give this discount additionally. That kind of broadly gets you to that 70% revenue retention. But what is important is this 70% revenue retention now comes at a 65% gross margin or a 70% gross margin, as compared to on the earlier platform, where you had 100 dollars coming, but they were coming at like 30.
Yeah.
30 dollars of gross margins, and then you take the tech costs and all, you are at probably a loss or a 5%. You are essentially going from 5% free cash to probably a 45% free cash.
No, that part I understood. I was more trying to understand why do the customers not migrate and then who do they migrate to?
Typically, now again, that is a very good question. If you look at the 20% churn that we have seen in the first three acquisitions, a bunch of it was bankruptcies. One of those acquisitions that we had done had, in fact, two of those acquisitions that we did had a lot of retail. We had TCP, Children's Place, and Express, which were customers there, which went bankrupt. Variety of reasons, but majorly, given we are so well-rated on a Forrester or any analyst for that matter, pick any analyst, you will see us in one or two. The product is better, has a lot of AI. We usually see quite a bit of willingness to migrate. Everyone wants a better platform. We are further enticing you with a small discount. We are not charging you for the implementation. It is a, yeah.
I mean, if you remove the bankruptcies, probably you will see an 80%-85% willing to migrate.
Got it. Understood. It is helpful. The second question is that you had mentioned that SessionM, there is some 50% of revenue goes in server cost because of whatever reason, it was a badly architected solution. Two-part question to this. What can this number reach to? Because for us, I think it was 8% to 9%, 7% to 9%, right? Is there a 41% delta that we can realize? I am guessing some will be restricted to their geographies because of law requirements. Over what period should one expect these things to come into the P&L?
Divyansh, first thing, as they migrate, they will migrate to the Capillary platform. Eventually, it is probably a three-year story. It is also a lot of customers on the SessionM side, right? You will eventually get to that 8% to 10% server costs. Because the Capillary platform runs on an 8% to 10% server cost model, right? We already have customers in all, like, we have customers in the U.S., in APAC, in Southeast Asia, in India. We already have all those colos available, all those co-locations available. Although SessionM is a global business, as those customers migrate, we shouldn't see a market increase in server costs, right? What we are anyways doing is given this is a It will, I mean, it is roughly about 40 customers who are on that book.
You can't migrate all of them in like six months, right? It will take time. Different customers have different preferences, so they will migrate probably in two years, three years, whatever, right? We are anyway pulling the server costs. We are doing a bunch of work to improve server utilizations, moving from Windows servers to Linux servers, doing a bunch of that kind of stuff, right? To bring down our server costs. We think that it will come down by about 50% by March, April, right? You will see those numbers come down.
You are saying 15%, right?
Yeah, by 50%. Today
By 50% or 25%?
Correct. 50% will become 25%. Correct. Something like that, right? So, those projects are well underway, and I think we will hit that target by March, right? Where we get it down significantly. There is more work you can further do. The thing about SessionM was, the reason I say it was badly architected is it was a single instance, which is, each customer had their own individual colos, right? While Capillary is a multi-tenant platform, which is all customers sit on one of these four colos or five colos globally. So, as each customer migrates, you will start seeing that further improve on the SessionM side. Unlike, in our earlier acquisitions, where they were also multi-tenant. So, it did, till you moved a significant chunk, you would not see the value, right? Some of that.
We do think you will start seeing benefits every quarter, as we migrate a few customers or as we further improve on the server costs on the SessionM side.
Got it. Can I just ask one more question before I join back the queue?
Sure.
aiRA, does it work only with the Capillary SaaS-enabled platform, or it can work with any other, let's say, loyalty platform and provide the same insights and then provide us a foot in the door to those clients, and for players who are not doing that much in AI domain right now?
That's a very good question, Divyansh. We covered this a little bit in our earlier, in the last call. Now what we're doing is aiRA can sit on top of Databricks or Snowflake or BigQuery. As long as a business has pumped all of its loyalty data into a data lake, right? Or into a tool like aiRA can sit freeform on top of it. We, in fact, we just launched an independent sales motion for aiRA. Today, mostly loyalty is our leading product which we sell. Now we are also doing a separate dimension where aiRA can directly be sold to non-Capillary customers as well, right?
Do you see those other platforms having this tech stack to which aiRA can plug in? Or theoretically it can work, but practically there is no one doing those implementation though?
Yeah, so what happens is, mostly these large enterprises push all their data into a Databricks or into a BigQuery or into a Snowflake kind of a tool, right? As long as you have your data in. So, what aiRA is really is a great harness and a good context engine for loyalty analytics and for loyalty campaigns and things like that, right? As long as the data is available, it is pretty easy to have the harness plugged on top.
Understood. Got it. This is helpful. I will join back the queue.
Thanks.
Thanks, Divyansh. The next question is from the line of Rishabh Mehra. Please go ahead.
Hi, am I audible?
Yes.
Yes.
Okay.
That is a good set of results. I had a couple of queries. One is, could you help me with the split of your gross margins? The expectation would have been that SessionM will put a damper on them, but you all have hit 67% subscription GMs. Could you help me with the split between organic, inorganic, X, SessionM, and what SessionM has its own gross margin, by your definition, has been this time?
Anant, you want to take that?
Yeah. Actually, I will pull the exact numbers, Aneesh. I do not remember those, so we will come back to that in a minute.
Okay, sure. Secondly, out of the new ACV, what percent in H1, I think you will have done a total of some INR 148 crore, right? Out of that, how much of that has been from existing customers, like farming, and how much has been newly acquired, organically acquired customers?
Rishi, do you want to take that? Typically, 93 crores is Sorry, Rishi, go on.
Yeah. 93 crores is our TTM math, Rishabh. We would have roughly 35% of that coming in, or 35%-40% of that coming in from new logo additions, with the remaining 50%, 60% coming in from your farming motion. We typically would add about, by the end of the year, we would end up adding about 70-80 crores of new logos. This is a leading indicator to whatever the year is going to end at. You would probably get to about 70-80 crores of new logo additions in a particular year.
Got it. Got it. Sorry, just to actually just to clarify, you are saying that by the end of this year, of the INR 93 crore that you all have onboarded in H1, you are saying about a third, so say INR 30 crore is new logos. You are saying you will add another 70-80 crores , or on the whole, you will do 70-80 crores roughly this year?
On the whole. Rishabh, the 93 crores also is a TTM math.
Oh, yeah. Sorry.
from H2 2026 to H1 2027.
Oh. Okay, cool. I thought I saw another number on the-
It is new annual contract values added in the trailing 12 months ended September 30, 2027. September 30, 2026.
Got it. Got it. Okay. Just a last quick question.
Yeah.
Is there any update on the timeline of migration of SessionM? I mean, I think you all had said you all won't do a lot in FY 2027, and a lot of it will pick up later. But given that you all have done so well with the Kognitiv integration with your AI solution, where do you all see SessionM getting completed?
Rishabh, I actually think, thanks to AI and stuff, I think we can get a lot of the margins on SessionM even without the migrations. Right? You will see the I mean, it's 40 customers, so I would say it will still take between two to three years for the full thing to move.
But I do think that you will see a lot of the value starting to come a lot before.
Got it. Got it. Got it. Thanks. Thanks. I will get back in the queue. Thank you.
Rishabh, on your question on gross margin.
Yeah.
SessionM customers, on an overall basis, are at about early 50s, about 51%, 52% in gross margin.
The core Capillary platform customers are at about 70% gross margin now. Amalgamated, it overall comes to about 67%.
Got it. Got it. Okay. Thanks. Thanks so much. I will get back in the queue. Thank you.
Thanks, Rishabh. The next question is from the line of Shaurya Yadav. Shaurya, please go ahead.
Am I audible?
Yeah.
Yes.
Yeah. Hi, Aneesh. Hi. Thanks for the opportunity, and congratulations for a good Q2 performance. My first question on the ACV part. The new ACV, which grew 79% YoY. So, I want to understand more about on our going-ahead strategy for the deal wins. Optum is one of our major client in terms of revenue concentration. And correct me if I am wrong, that is a large contract with the Optum. Post our all the M&A and the cross-selling and the synergies that we have embedded in our business, as well as the aiRA, are we internally targeting to win a similar size of contract in the future, in a different sector? Or was the Optum more of a one-off large contract for us?
Yeah, officially, I am not supposed to take the name, so let us say this large healthcare customer. That was one of the largest SaaS deals in Asia. I mean, you cannot replicate a deal of that size. I do not think there are SaaS companies in India which have done deals of that size, or even Asia for that matter. It is hard to replicate that. Having said that, look, we do win, like we announced another deal at the start of this year, which was a $20 million plus contract over four or five years. I think you will probably see contracts of that size. But Optum is a, I mean, sorry, this large healthcare customer, it is a Fortune 5. It would not be right to expect that type of deal values.
Although we do have, instantly, our largest customer today is actually not Optum. It is someone else who has grown over the years and got there.
Okay.
You will have customers who will land and then expand into that kind of a size. But yeah, very hard to. I can tell you that it was probably the largest SaaS deal in the country by a distance, Optum. Yeah.
Got it. Second question is on the migration part. Just want to understand, like, we have some 60 combined customer in Kognitiv and SessionM. Is there any specific migration threshold, like say 25% or 50%, at which you expect that the margin benefit incrementally, like we get some sort of consolidation P&L advantage? Or is the margin uplift is more like a linear where each migration customer contributes incrementally, it does not matter where they are in the overall migration curve?
Anant covered this. As we migrated over the Brierley and the Persuade customers, you see that half the EBITDA growth between last year to this year has come from migrated customers. Similarly, the goal is to do Kognitiv first. Kognitiv we acquired in May of last year, and the idea is that by September of next year, all Kognitiv customers want to migrate. They have already signed up, and work has started on it. In fact, got one of them fully migrated out. There are SessionM customers who want to migrate by themselves.
This is not a migration they want to re-implement, because the way we migrate is we build a lot of tools so that it is easy for a customer to migrate and they do not have to do any work. But in SessionM, we are actually seeing customers saying, "We will re-implement. We will just call your APIs. We will take the cost of implementing it." You will start seeing some of those benefits. Ideally, if you ask me, it is a 30-month full cycle from May of 2020, whatever, say this May, 30 months. But I do think you will, at least we think, as these server cost movements happen, as some of the stuff happens, you will start seeing some of those movements play out, like every quarter, two quarters, going forward.
Okay. From Q3 onwards, you are saying?
You will see small movements. I mean, every quarter you will see some moment which will hopefully add up to another INR 20 crore-INR 25 crore getting added for the next H1.
Understood. Thank you. Thank you, and all the best, Aneesh.
Thanks, Shaurya.
Thanks, Shaurya. The next question is from Praveen Jayaraman from Avendus. Please go ahead.
Good evening, sir. Am I audible?
Yes.
Yes.
Yeah. My question is for the depreciation side. We had a Q-o-Q increase in depreciation. Could you help us understand what would be the contribution from the new acquisition, SessionM, here, and what would be coming from the internally generated software? Or if even possible, we can speak on the gross block addition due to internally generated assets.
Right. Praveen , due to SessionM acquisition, there is about 4 crores a quarter increase in depreciation. On the internally generated assets, while our capitalization has come down, last year we capitalized about 36 crores of our tech investment. This year, we are more at a run rate of about 20 crores. But that impact will start showing up going forward. We are more or less flat on the internally generated assets. This delta of about 4 crore is coming in from SessionM acquisition.
Understood, sir. This 4 crores includes both customer contracts and goodwill?
Correct.
What would be the period here, sir, the total depreciation period for SessionM?
The IP is depreciated over three years. The customer contracts are over the duration of those contracts. But more or less, you can take it about three years for the overall value.
Okay. Sir, there was an increase in the consideration, or, like, the value of SessionM acquisition compared to the last quarter. Was there any I think you mentioned around 2 million last time. Was there an increase in purchase consideration for SessionM?
No.
Okay.
It is definitely less than 2 million, Praveen.
Understood. The entire amount, the purchase consideration can be considered to be depreciated over three years?
Correct.
Okay.
What you are seeing as 2 million is essentially the cash that was paid.
Okay.
The overall value that is amortized is about 4 million.
Okay, sir. Got it, sir. Thanks for the clarification.
Thanks.
That is it for me.
Thanks, Praveen. The next question is from Akshay Jogani. Please go ahead, Akshay.
Hi. Thank you for the opportunity. A couple of questions. Aneesh, you spoke about realizing value from the likes of SessionM, the recent acquisitions, even before the migration happens or irrespective of the migration, right? What does it mean? Does that mean that you can run the SessionM platform and their technology tools at a much lower cost and hence realize that? What does it mean when you say that you can realize? Two questions. The second question I will quickly touch upon. Can you talk about incremental deal sizes and growths and how they are changing from an organic perspective? The reason I ask is that if I look at the organic growth of the business, as you have reported in your presentation, it is 23%, right?
I mean, which is, of course, there is an element of currency impact, but it is despite that, it is higher than what you generally guide. Is it fair to think about acceleration on the organic front as well? Maybe due to aiRA or any other things. These are the two questions.
In terms of new deal velocity, Akshay, we have said that our new deal velocity is now up 79% compared to the trailing 12 months basis, right? We are definitely seeing both on existing customers and on new customers more deal closures than earlier, right? It is not same in all markets. I think Europe is doing a lot better for us. South Asia is doing well. India is doing well. The U.S. is kind of similar to where we were last year. There is definitely more momentum there, Akshay. I think my gut is, probably another few quarters and we can definitely give you a better guidance on just organic moving up. For now, I would say, what we have been guiding to, right, 20% organic growth.
I think we should kind of stay in those ballparks, at least for a few quarter or two before we can fully say that, "Look, yeah, there is a definite shift in numbers.
Sure. The first question, if I can touch upon, you spoke about SessionM becoming more value accretive even before migration come through.
Correct. There are two, three Look, I think there are really two, three areas where you see value coming from, right? First is, these platforms have much lower gross margins, like Anant mentioned, 50-ish, right? Because very high server costs, a lot of people serving the same platform, right? Then you have a technology cost, which is the tech team cost, which sits below, right? Below the gross margin. As you move customers over to the Capillary platform, essentially your server costs come down, you need lesser people to run the Capillary platform than you need on the SessionM side, or any competitor side. Then finally, as you move over, you do not need those technology teams to maintain it as much, right? You use those technology teams on the Capillary side or new products or aiRA, you know, like, we keep doing more, right?
It helps in, without hiring, you are able to do a lot more. In SessionM, we think the server cost thing is a big one, which is constantly, we think we can bring it down significantly without even the migrations. They were on Windows servers, you can move it to Linux, not packed well, you can pack it a lot better there. Finally, if you see our What is basically happening is, as organic growth is happening, right? Like last year, we grew about 23%, 24%. We had a 1% headcount increase. This year, I think, you might have a 4%, 5% headcount increase on a 40-odd percent, 40 plus percent revenue growth. Basically, what we are doing is, some of the folks who have come from the acquisitions are being redeployed to implement or run our newer customers, right?
So, we are now also moving things like aiRA onto the SessionM platform. The amount of people you need to really deliver, or the support needed, goes to the software and the automation rather than to aiRA, rather than people needed, right? We do think that you might not get to the Capillary steady state on gross margins, but you can get to I do think this 50% can go to 60%, 65%, even without the 50% of SessionM can go to 60%, 65% even without fully migrating to the Capillary stack.
Sure. And if I may ask one last question. What is the aiRA last quarter? I think you have spoken about it being 2.5 million ARR. Where have we got to, and, I mean, do you think that the $10 million ARR objective by the end of the year is achieved?
You know, I think we might be a quarter here or there, but I do think the objective is achievable, Akshay. We have had to tweak around with pricing a little bit. Our initial wins on the aiRA side were all usage-based, which is, you pay us per token, per use, that kind of stuff. What we have now seen is, I think more customers are more preferring saying, "Look, give us a fixed, like the Claude license where you pay 25 on 25 to 25, and you get X number of usage, right? X amount of usage." I think we have had to tweak our license model a bit. So, we now have a team's license, which is roughly about 60,000 dollars for a customer, and then you have a professional, which is about 100,000 dollars, which are It is like, 10 users or 15 users, more fixed.
Because what we are realizing is, more and more large enterprises want a fixed fee, something which, I mean, like, I think you hear of this, right? A lot of people have just blown through their Claude bills, like unreal. So, I think some of that is played, but we are seeing more wins. But I think it will be more a, not a full open, do whatever you want to do types, but more a teams or a professional type license playing there. Yeah.
Sure. Okay. Thank you. I will come back in a bit.
Thanks, Akshay. The next question is from Siva Prakash Balaji from ithought PMS. Please go ahead.
Hi, Aneesh. Am I audible?
Hey, Siva. Yeah, we can hear you.
I have a couple of questions. Firstly, if you look at our inorganic revenue, I think previous quarter we did around INR 102 crores, and right now we are at INR 109 crores. Previous quarter, we had only two months of SessionM's revenue. This quarter, despite having three months of SessionM's whole revenue, I think the quarter-on-quarter growth is sub 8%. Could you maybe tell us the run rate that SessionM has seen?
Anant, do you want to take that?
Yes. This quarter, we are looking at a run rate of about 30 million. So, roughly INR 300 odd crores.
Right.
For a full 12-month period.
Got it. Has some revenue moved to organic by any chance on this quarter, which was there on an organic previous quarter?
No. SessionM migrations will start only next year. As Aneesh mentioned,
Right
from the time of acquisition, it takes two to three years. You can expect the bulk of migrations to happen in FY 2028 and FY 2029. While the benefits will start showing up sooner than that. In this case, it is not like one final stack, but every customer that we migrate, we would start seeing benefits. The migrations will go on over next year and the year after.
Got it. Understood. Secondly, I would like to understand the difference between us migrating customers after us acquiring another business and maybe just going and getting another new client. What exactly is the difference between both the process? If you could just explain this in detail, it will help.
Sure. When a new customer organically, it is a customer-initiated RFP process, or it is a customer-initiated change process. In that case, the whole customer ecosystem is new. Capillary configures its product and also does integrations with all the touch points at the customer end. These integrations also take some amount of effort from the customer in bringing in those partners or doing work on their middlewares. There is a good amount of effort from both customer and Capillary in doing a new deployment for an organically won customer. When we have acquired a company, there the acquisition is something which is, sorry, there the migration is something which is initiated by Capillary. In this case, what we try and do is minimize the effort on customer's end.
This is where we are making use of an AI product that we have developed in order to do the migration mostly from our side without actually needing customer to put in effort for doing all the integrations with the different touch points. The customer would be required to just do a lightweight UAT. It would be just a couple of weeks of effort instead of hundreds of man-months of effort from the customer end. The predominant difference is, in this case, it is Capillary-initiated migration process, and hence the bulk of the effort is on Capillary's end. Even the customer's effort is done by Capillary, because it is an integration which is already there existing in the acquired company platform. Does that answer your question?
Yeah, that helps. But could you maybe just explain more about why not Capillary can just do the process themselves even if they go organically and find clients? Why not we initiate the process, we do the integration ourselves on the other case as well?
Should I take that, Anant, or do you want to take that?
Yeah. No, go ahead.
Siva, so typically, like I said, in any customer we integrate with eight, nine different points, right? Like the POS, mobile apps, e-commerce apps, whatever, right? Like their net promoter score, their ERP, et cetera, et cetera. Typically for a CIO, this is like seven projects they have to run to take a Capillary live, or eight projects they have to run to take a Capillary live, right? Which is why we generally see that even if customers are unhappy with their existing provider, they tend to not find the bandwidth or the time to really migrate, right? M&A for us is just, we are not buying new products. We are essentially just buying operators, migrating them over, right? Is there an easier way to do this? Because those platforms or that customer already integrated with, let's say, SessionM, right?
What we end up doing is, if the customer agrees, they have to do a two-week UAT. We put something like an API gateway in the middle, so the customer continues to call the SessionM APIs. The API gateway routes them to Capillary, routes the responses back, right? In simplest forms, don't hold me, I am just simplifying the way the whole integration or the migration layer runs. It just gives you that ability to take someone live with a two, three-week UAT instead of a seven-month project to go live or a nine-month project to go live. Was I able to explain it, Siva?
Yes, Aneesh. Yeah, that was perfect.
Which is why this. Even on our, I mean, you obviously looked at our decks very closely. Our CAC to our customer acquisition cost takes about 16, 17 months to payback, right? This is our payback period. We have covered it every quarter now. On the M&A side, you are essentially paying half to one time revenue to acquire these customers, and you are spending a little bit to migrate them, right? This API gateway or things like that. But what happens is you build it once for a platform, right? So, it kind of, that cost gets amortized. We actually think that the cost of acquiring a company or the cost of acquiring a customer are not very different financially.
Right.
Right? And that is the whole thesis of the M&A playbook.
Understood. Yeah.
Right? The numbers are also very much there. I mean, as long as we are at like 1x, we are not paying more than one times revenue. Your customer acquisition cost and your M&A costs are very similar, actually.
Got it. Understood, Aneesh. One last question. I think we have around INR 500 crore of cash in our books right now. How do we look for further acquisitions going forward? Do we have anything on pipeline?
Like how I have a sales team, how we have a sales team, we have an M&A team which is as active. But having said that, look, you want to buy deals which make sense, which come at a certain value. We wouldn't want to do anything which is more than a four- to- five-year payback or doesn't have good retention, things like that. I think, yeah, I mean, we always have people we're speaking to on the M&A side.
Got it. I believe our payback has also reduced, right? Because our migration time has been cut down a lot, which is a very good thing.
Yeah. I mean, you'll have to see it play. SessionM, we paid nothing, right? You paid 2 million for a 3 Not even 2 million for a INR 300 crore business.
Right.
Your payback will be a lot faster.
Got it. Thank you and all the best.
Thanks.
Thanks. I think we have reached our time limit. I will request the management to give their closing remarks, then we can close the call. Thank you.
Got it. I think, thanks everyone for joining us. Sorry we couldn't answer all your questions. Feel free to reach out to Kanav and team, and if there are FAQs, probably we can publish some as well. I think overall, we have had very good momentum through the quarter, both on the organic, aiRA, and the inorganic side. We think, we had given a guidance at the start of the year. We definitely think we will hit the guidance or do a little better. Thanks so much for the support and, looking forward to continuing on the good momentum we have today in the business.
Thanks, Aneesh. Thank you, everyone, for joining in. We will see you next quarter. Thank you so much.