Ladies and gentlemen, good day and welcome to Q3 FY 2023 conference call of Newgen Software Technologies Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then 0 on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Deepti Mehra Chugh. Thank you, and over to you, ma'am.
Thank you. Good evening, everyone. I'm Deepti Mehra Chugh, Investor Relations, Newgen Software Technologies Limited. I welcome you all to the Q3 FY 2023 results of the company. Wishing you all a very happy New Year. Joining with me today on our call is our management, Mr. Vivek Nigam, Chairman and Managing Director, Newgen, Mr. Varadarajan, Whole-time Director, Mr. Virender Jeet, Chief Executive Officer, and Mr. Arunkumar Gupta, Chief Financial Officer. Before we move on to the discussion, let me highlight that this call may contain certain forward-looking statements concerning Newgen's future business prospects and profitability, which are subject to a number of risks and uncertainties, and as actual results could materially vary from these forward-looking statements. Past performance may not be indicative of future performance.
The company does not undertake to make any announcement in case any of these forward-looking statements become materially incorrect or update any forward-looking statements made from time to time by or on behalf of the company. For any further details, you must please refer to the investor relations section of our website. I will now hand over to Mr. Nigam for presentation of the results, which will be followed by a Q&A. Thank you.
Good afternoon, everyone, and wishing all of you a very happy New Year. Thank you for joining us today for our Q3 financial results call. 2022 has been an exciting year for us. We completed 13 years of Newgen. We had a new look with the new logo launch. Most importantly, we were excited to interact, engage, and celebrate with our customers and stakeholders in person through various events, leaving behind the phase of COVID. We are happy to share our progress and performance in the third quarter. This is our first quarter with revenue exceeding INR 250 crores at Newgen. We witnessed a strong revenue growth of 26% year-over-year. All our geographies witnessed growth for us. Our traditional market continues to be the drivers of our growth.
India, EMEA witnessed a growth of 40% and 27%, with good business from both existing and new customers. APAC and US region witnessed a growth of 18% and 13%. We have seen continued adoption of subscription-based business model. The overall subscription revenues have been growing steadily at a healthy pace of 37% Y-o-Y and were INR 84 crores in Q3. These are the building blocks of our long-term sustainable revenue. The annuity revenues for the quarter were INR 154 crores, witnessing a growth of 38% Y-o-Y. The annuity revenue comprised 61% of our total revenue in Q3. It is noteworthy that these growth numbers incorporate the continuing transition to subscription from license-based model and is expected to result in faster growth and higher revenue visibility over coming quarters. The quarter was marked by 16 new logo wins spread across geographies.
We had significant wins in existing as well as new accounts during the quarter, including cloud deal with full-service financial institution in the Southeast region in America, license-based project for a financial institution in America providing offerings for life and health insurance, annuity, pensions, real estate, banking, and investment needs. In India, Newgen won large-size projects from a leading public sector bank and a private sector bank. Mid-size projects in Philippines for a global financial services group. Project for one of the fastest-growing banks in Nepal. Moving to update on our offerings and opportunities. Our platforms are well equipped for handling large variety of complex processes and use cases, helping our customers in meeting their end-to-end digital journeys. NewgenONE platform has capabilities for automating complex processes and content services at scale. The AI/ML capabilities of NumberQuery are now fully integrated with our product platform and philosophy.
Our Trade Finance platform is also receiving good response from our customers. As mentioned in our press release earlier during the day, we are excited that for yet another year we have been positioned as a niche player in 2022 Gartner Magic Quadrant for enterprise low-code application platform. While many platforms are offering more citizen and simple low-code application development, our low-code application development platform provides enterprise-wide large-scale application development that needs to be scalable and robust. We will continue to work on our long-term platform and cloud goals. On the operational front, attrition has stabilized now. We continue to invest in strengthening our team wherever required, including campus recruitment and lateral hire. Our focus is on adding fresh talent, working on their development needs, and making them productive in a short period of time.
A lot of emphasis is put across on training and developmental growth of our employees with regular training across various aspects, including product, business management skills, team development, et cetera. We are trying to build large capacity at a reasonable cost to deliver large business opportunities we are seeing in our geographies. On the sales and marketing front, business travel has fully resumed, leading to in-person customer interaction. Following the customer meet in Mumbai in September, we had successful in-person customer meets in Dubai and Delhi after a break of three years. The response received was tremendous. Participation included existing and new global customers, system integrators, and large consulting firms. It served as a good platform for showcasing our product roadmap and customer success stories, as well as enabling customers, system integrators, and consultant networks to provide their input, understanding, and product capabilities, collaborating and exchanging notes.
In the long term, we believe partners will be strengthened and will strengthen and drive our growth along with the direct sales channel. We are rigorously working towards enabling these channels. For profit and tax, profit after tax for the quarter was stable at INR 48 crore compared to Q3 of FY 2022. During the year, R&D expenses comprised 10% of revenue, and sales and marketing expense comprised 22%. In the first nine months of the year, our total revenue was INR 669 crore, witnessing a growth of 22% year-over-year. Our profit after tax was INR 98 crore. On the cost front, this year is marked by the continuing impact of elevated employee costs, higher costs on account of increased growth in market initiatives, return in-person events, and gradually normalizing travel expenses.
We are continuously investing in widening the employee pyramid by hiring at the bottom of the pyramid and working on their training and development to make them productive quickly. We see large-scale development needs in the future. On the cash flow and balance sheet front, our net cash generated from the operation activity was INR 100 crore for the nine months. Our net trade receivables were INR 283 crore at the end of December, which resulted in a net DSO of 160 days. Our compelling proposition, value proposition in the market includes our low-code platform approach, which is capable of handling complex content and process requirements at scale, as well as the growing opportunity for digital transformation across organizations.
We are thankful for the continuing support and faith shown by our customers and for giving us newer opportunities to showcause the immense value our solution can bring to their organization. Our cloud and subscription revenue continue to grow at faster, helping us in developing a long-term sustainable newer business model. We will continue with our investment in our people and their development to build a future-ready organization. We are now open to Q&A. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star one on their desktop telephone. If you wish to remove yourself from the question queue, you may press star two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Reminder to the participants, anyone who wishes to ask a question may press star one now. The first question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.
Hi. Thanks for giving the opportunity, and congratulations on a good set of numbers. Sir, I just wanted to understand, you know, your traction on the Trade Finance platform. I mean, given the fact you launched this platform in September. How is the traction over there, and, you know, what kind of inquiries or what kind of conversations are you having over there? My second question was on the GSI, and you know, how did GSI pan out this particular quarter? My third question was on the margin side. You know, we have seen sequential improvement in margin, but despite that, since travel costs have normalized, also the Y-o-Y this is, it is down 50 basis points.
I think, you know, we as investors are concerned with the margin for the balance part of the year and even for the next year as well. Those were the three questions.
Thanks, Mihir, and I'll try to answer them one by one. On the trade finance, what we launched a few quarters back, I think we have developed a very, you know, promising funnel across all regions, and especially in Middle East, India, APAC, the funnel is. We have also got some interest in U.S. from certain customers, so we are going slow because right now we are looking at also our capability to execute on that front. We closed a deal on trade finance in last this quarter as well, and we have at least two or three more closures left for this quarter to come. Broadly, you know, these deals are substantial in size and are very different in size and execution compared to our traditional size.
We are looking at not large numbers out there, but potential to close three, four, five deals a year is also a substantial jump to our revenue. We're very hopeful, and we are running it very aggressively. On the GSI front, We'll continue to invest in that, and I think we are happy that the funnel overall keeps on improving out there. This quarter we have been able to close three deals with GSI, two in U.S. and one in Australia. Though it's not still, you know, it's very, a long way to go in terms of where what our expectation from GSI is that. It continues to grow, but does continue to grow at only at an organic pace rather than a pace which could disrupt the market for us. On the margin side, you're right.
I think we have come back to that previous margin which was prior to COVID era on account of normalization of travel and normalization of also operational costs. As Mr. Nigam said in his presentation, there's lot more, lot of more cost pressure on in terms of talent management, wages. That is still one of the most important challenges still we are facing on terms of managing the talent. What we had indicated that last year's margins were not any benchmark to sustain because lot of our operationals and business activities were not being conducted. On a near term, in Q4 as well as next year, I think we aim to achieve a margin percentage of net margin between 17%-18% and EBITDA between 22%-23%.
Now, we are at roughly around 14.5%, 15% for nine months. Q4 is generally a very strong quarter for us. If you are able to meet the historical trends of Q4 and meet that growth rate, we should be very close to our estimation, what we had estimated at the beginning of the year. Does that answer your question?
Sure, sure. Sure, sir. That is really helpful. Just on the Trade Finance side, I mean, you know, you mentioned that the deal sizes are higher here. Sir, if you could throw some more light on what kind of deal sizes are there? Just on the differentiation side, I mean, you know, there is 7Up also which is offering this particular platform. What is the differentiation over there, over here? What is our right to win in this particular offering?
Trade finances eventually while the traditional deals which we are closing close between $400,000-500,000. The trade deals are roughly in between $1 -2 million of size. The long-term revenue engine is very strong because these projects take large amount of teams and large amount of engineering expertise to manage them over the lifetime. The lifetime account value may be multiple times than the traditional size for us.
Sure. Sure. The upfront revenue is $1- 2 million?
Yes.
Okay. Sure. Yeah. Just on the right to win side.
I think, you see, like, we are the challengers in this market, luckily we have got some of the best cases and customers eventually. We have seen that there's lot of activity on the trade portal and trade origination, which has been completely not, you know, addressed previously. Our technology of process automation, low-code and content, strength in content. It's a very compelling value prop to the customer out there. This is an area which people are finding lot of interesting and, you know, coming back to us. We've been lucky to get at least first four, five customers which have the market name, and that is building strong credentials for us. Every market we'll have to really discover. I think we have bet so far on India and Middle East.
We have not really got deals still in Europe, US or APAC. I think we'll have to go and discover that as we enter those markets.
Sure. Sure. That's it from my side. Yeah. Thank you very much, and best of luck for your future endeavors.
Thank you, Mihir.
Yeah.
Thank you. The next question is from the line of Harsh from Dimensional Securities. Please go ahead.
Hi. Good afternoon, sir. My question is on the Indian markets. This quarter is seeing a sort of sharp increase in the revenues, where around INR 65 crore out of one rate, and this quarter we saw around INR 86-87 crore. Just wanted to know, is there any one-off in this quarter, or is this the run rate we would maintain going ahead for Indian market?
Harsha, thank you. Harsha, this, you know, Indian market keeps on surprising us every time we say that it's gonna slow down. It keeps on coming bouncing, and every two, three years it delivers very strong performance. I think last year and this year we are in that cycle that India market is delivering performance above 30% for us. Though in a particular quarter, a steep jump can be because of some license deals coming in which could have upfront revenue realization. Overall, if you look at for the whole nine-month period also, it's a substantial growth. Nine-month period is also almost probably close to 40% growth. We think right now the market in financial services and also in other sectors is really strong. People are investing very aggressively for growing their businesses.
In fact, we are able to get lot of renewals of large contracts from existing accounts as well as penetrate new logos. I would not call it one-off. There is no one-off major deal which will disrupt the revenue. Yes, some amount of fluctuation in a quarter can happen because of large license deals. On a year, I think for us to look at, I keep on saying that it's very important to look at annual results for a regional performance rather than a quarterly. When the numbers are in range of INR 30 crores, INR 40 crores, INR 50 crores, a single deal can change the whole percentage gain. If you look at a nine-month result, India has been very strong. We still feel that this year is going to be very strong for India.
Okay. Just if I may follow up on this. Is the investment coming from the fintech side, the smaller emerging companies or the investment has been across all segments, I mean, larger banks and NBFCs are participating?
Predominantly banks and NBFCs, not fintechs, because fintechs have generally IT shops of their own. The automation platforms which we provide to banks and financial services, fintechs are generally creating most of the technology in-house or having a very alternate way of doing that. The customers in public sector, customers in NBFCs, private banks are our primary drivers of this growth.
Okay. What is the outlook for the SaaS companies now globally? I mean, now post-COVID the industry was going global. There's a lot of funding coming around. With the funding squeezing a bit, lot of companies going out of the business and even the employees' cost has gone down quite a bit. Is the buy versus build narrative still going on and SaaS segment will continue to be strong or people are shifting towards building their own team and building their own software?
I'm not probably the expert to comment on what's gonna happen globally to SaaS companies. I can tell you this buy versus build narrative has been there for last 15, 20 years. More and more customers depending on the nature of business and more and more complex things are coming into, you know, buy phase rather than build. Because just time to market and the advantage to, you know, get something quickly launched for their customers is very, very important. I think broadly if I can answer on that buy to build, a huge interest to look at products, look at ready-made things which customers can absorb. Really customers want to focus on their business rather than really these large engineering cycles. That way we find the same traction. True for our own offerings as well.
More and more customers are taking our ready-made solution accelerators and deploying them for complex businesses around that. SaaS companies is a very different business. I would refrain from commenting on that because that. Yeah.
Okay. Got it. Thank you. Thank you so much, sir.
Thank you. Reminder to the participants, anyone who wishes to ask a question may press star and 1. The next question is from the line of Ankur from Jefferies. Please go ahead. The current participant has left the question queue. We'll move on to the next question from the line of S. Chatterjee from ASK Capital. Please go ahead.
Good afternoon, sir. My first question.
Mr. Chatterjee, your audio is not clear from your line. Please use the handset.
Hello? Yeah. Am I audible?
Yes, sir. Please go ahead.
Yeah. Thank you. So annuity is now currently 60% of our business. That's a good thing and so forth. If one of our clients in this segment wants to cut cost and switch to a different vendor, what is the switching cost? I mean, what is the type of problem they will be facing if they switch their vendor? How sticky are they?
Yeah. Sorry for the echo. You're absolutely right. You know, the annuity keeps on growing and part of we have a, you know, constant endeavor to grow the annuity business. You know, to understand, we are still in the enterprise business space where cost of engaging for a vendor or cost of engaging with the customer is very high because the fee systems are very deeply integrated in customer ecosystems. Integrated with core banking, ERPs, multiple vendors running core business activities. Technically everything can be switched, but we have seen almost negligible switching over last 15 years. What we sell to customers are their primary business solutions. Like in banks, we become probably the second most important system after the core. Same is true in insurance, same is true in financial services or shared services. We are the core shared services platform.
Technically it can be switched, but enterprise products, if they are running fine and the customer technology is not obsolete, they'll continue to be used. I don't think the switching happens, because of, you know, that people get a better deal or an offer. The switching only happens that if your technology stack becomes obsolete or you're not able to meet the customer business requirement. So far, I think we have been ahead of the curve on that. That's not been the challenge.
Thank you, sir. My last question is, today we are a $100 million company. We have an aspiration to go probably $500 million in probably next five to seven years. What are the challenges in it and what will be the growth drivers? I mean, whether it's the API or the final platform or
Anything else? I think we are very confident with the product and the solutions and customer responsibility we have. The potential is there. Of course, there are a couple of strategies which we need to execute, and one of them has been what we've been working on some time with GSI, where we have built the ecosystem, but we are still, you know, on the results it's still slow. I'm not saying that the results are not there, but they're coming at a slow pace. The other part of it is really getting, you know, strong foothold in mature market and 14% clients, where GSI is a strategy, but we are also augmenting that with our own go-to-market, whether we are opening subsidiaries in Australia, U.K., U.S. Of course, it's a very organic process. I think things start picking up.
Last two years and COVID, I think we have been slightly left behind on that initiative. We're not able to execute really on those business plans. I think this year we have started showing the business momentum, and if we are able to keep this momentum for next seven quarters, we should be able to really create a direct linkage in terms between the timeline by which we can reach there.
Thank you.
Thanks. There's no more questions.
Thank you. The next question is from the line of Ankur from Jefferies. Please go ahead.
Hi. Am I audible now?
Yes, we are.
Yeah, I'm sorry for the last time. Wish you a Happy New Year, and thanks for the opportunity. Could you provide some color on your various markets that you have, and the outlook for each of these markets? Especially U.S., I see that there's been a 13% growth this year. What has been the growth in terms of constant currency? There's been a doubling in terms of your SaaS revenue. What has led to that? My first question is this.
Ankur, Happy New Year to you. On the various markets, one, I think 22 results clearly what's happening in the emerging markets, which have been strong for us, continue to be performing very strongly. India is driving that growth, but also Middle East on the value terms, if you look at on nine months and year base, may become the primary growth driver for that. APAC also is becoming very strong. I think, you know, from hardly being 4%, 5%, 7% of our business, it has started growing to more like 14%, 15% of our business. With Australia subsidy also kicking in from next year in terms of, you know, we should be able to build a much more stronger impact. US, we have pivoted in strategy for a couple of times.
We are deliberately walking out on some amount of business which was not really leading to long-term growth and margins. We are pivoting on that. You know, we have recorded a growth of 13%, which is but it's very weak, you know, compared to what we have been able to traditionally do from U.S. U.S. is one of our bigger challenges right now, which we are trying to solve. Coming back to the SaaS and growth of SaaS, one thing we should, you know, we started last year in November. Now it's almost like, you know, four quarters. We started deliberately shifting a lot of our deals to subscription-based deals. Which also led to, you know, we didn't have a lot of revenue realized in those quarters.
Now that revenue is coming in slowly, we will see the subscription and the SaaS-based revenue growing at a much more compounding speed. In fact, in this quarter, out of 15 logos, nine logos which we have won are completely subscription-based logos. You know, they will start adding into future quarter revenue. On the order book size, we have a far better performance than what is also reflecting on the top line because of the deferred revenue coming from subscription deals. It's very natural on the SaaS growing at this speed, and we think that we can continue to grow the SaaS at a much higher speed over next four, five quarters. Does that answer your question, Ankur?
Yes. Yes. That's very helpful. I see the other expenses have risen quite sharply this quarter. Anything around that, like what led to that? I understand business travel is one part of it, but do you expect it to go further higher incrementally or sequentially for the next quarter and also for the next year? How do you see that line item up?
You know, I think, generally our other expenses will have significant growth compared to last year because on account of normalization of travel, operating costs and also, you know, more marketing activity which we are starting. Other expenses will go, you know, sequentially up slightly because, you know, for the next quarter they may not go sequentially up. But as we grow in and start investing more in travel and marketing, they may sequentially go up. You know, they will keep pace with the growth of the company. The base is pretty large. We do expect to spend more on marketing, more on travel next year. It will go up, but the jumps will not be comparable to this year jumps, because this year jump is on a very artificial base.
All right. And if I did catch your comment, earlier comment, right, your EBITDA margin that you expect 22%-23% was for next year, right? That is the kind of number that you're looking at, right? That is for next year.
Yes, sure. It's for next year. Oh, yeah. Next year also. Also our attempts for this year was also around the same percentage. We are having some amount of challenge because we are at 14%. Also historically, Q4 is always the largest quarter for us and more, because the costs almost are equivalent. Q4 on the cost front is not going to be substantially different from the Q3. Any increased percentage of top line growth will completely reflect in the margin side.
Sure. The cost would be flat and the revenue would be, it's hopefully comparatively higher. That's what you're saying.
Yes. That has been the traditional, if you look at last five years' data, this is exactly. Most of the margin actually comes in Q3 and Q4, and predominantly in Q4.
Okay. Thanks. That's all from my side. Thank you.
Thank you.
The next question is from the line of Devang from IDBI Capital. Please go ahead.
Hello. Am I audible?
Yeah, yeah. Please go ahead.
Yeah. Thank you for taking my question. Congratulations on a good set of numbers. I have a couple of questions. One is, what is your CC growth in the quarter? Second, will you be able to surpass the Q3 performance in Q4 in FY 2024? What led to the dip in government revenues? I have two more questions, but I'll come after your answers.
Okay. Let me. On the constant currency of Q3, we are at around some 19.5%. Sound right to me? Yeah, it's around 19.5%. That is on the Q3 result. Q4. Historically, Q4 has been always stronger than Q3. Q3 we have delivered at 26%. We do expect the base for our business keeps on improving because of the subscription revenue we are building. Our attempt is to have a stronger Q4 compared to Q3. How strong, I think that will come as when the results unfold. Yes, it's not that the Q4 can be weaker than Q3, so it will be strong. Sorry. On the government revenue, I think right now, government for the nine-month period, let me just give you context.
Government for the nine-month period has grown by 70%. For the period of Q3 versus -6.4%. That's why I said, you know, the quarter numbers, when you break further into verticals and segments and regions, they become so small that a single deal makes the percentage look odd. It will be better to look at either nine-month or a 12-month number to look at it. This year, I think the banking, government, and insurance are still performing strong. We are slightly becoming weaker on the shared service and manufacturing side, which we are trying to recover.
Okay, cool. On the FY 2024 side, will you be able to maintain the FY 2023 kind of, revenue growth?
Let's see. Our endeavor is to even exceed that because we have, as we said, we have a high aspiration of investing aggressively for growth. You know, depending on if the market is favorable and we are able to execute our plan, there is no reason why we can't exceed the growth this year.
How much was travel as a % of revenue this quarter or nine-month basis, whichever is. With increase in direct sales, how much the cost will increase? Despite that, you would be able to maintain that 22%-23% band?
I'm telling you, I think this year you should look at what has happened in terms of whatever additional cost of 20% travel or SG&A or manpower costs. It all got into hitting in the margin. Historically, since now the mix base of margin has been set up, you know, we have a travel of roughly around INR 30-40 crores going to be this year. Also SG&A costs have been near operational and almost 80%, 90% of our capacity. Now the cost growth for even historical, for any X% of growth, our costs only grew by almost half of X on the manpower side. That has been the traditional because, you know, as we generate high gross margin business, roughly around, you know, 62%-65% in our gross margin historical as well.
There is lot of operating leverage in terms of multiple revenue streams, ATS, license, tax. We don't have any direct costs associated to it. For getting 25% growth, we don't need to spend 25% more cost. We need to spend incrementally more like 13%, 14% of the gross cost. There is gonna be operating leverage there. I think next year, even at growth rate similar to this year, we should be able to expand the operating leverage.
Okay. What was the contribution of GSI to revenues? Is your US margins which you did this quarter, is that sustainable going forward?
I think quarterly margins is not the right way to look at. I think annual margins is what I think we should be able to do better in U.S. because our U.S. Q1, Q2 were weak. Q3 and Q4 they become strong. We should be able to restore some margins. Next year we don't expect U.S. to be weak at all. We expect U.S. to be the growth driver for the company. Once it's a growth driver, there's no reason why the margin contribution will not be happening there.
What will be the contribution of GSI this quarter?
I think this quarter you see GSI % revenue is still very small because we look at partner revenue which is roughly between 20%-25% of our revenue. The GSI is now we look at number of deals which GSI really got in. This quarter, three deals we have got in GSI out of 16 deals in total.
Okay, great. Thank you. Thank you for taking my question.
Thank you.
Thank you. The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.
Hello. Hello. Yeah, yeah. Thank you very much, sir, for the opportunity. Sir, first up, I would just wanted to understand, I mean, the comment that you made in the to the last participant, that I mean, a 25% revenue growth, our cost will grow only at 13%, 14%, right? It will not grow proportionately.
Yes.
Ideally, then if it stands today, if you take this quarter as a base, I mean already our PAT margin is 19%. Ideally, then our PAT margin if you have to look at maybe three years down the line, it should cross 22%-25% in that range. Ideally if our revenue grows at 25% whereas our costs grow at only 13%-14%.
Yeah. Yeah, Deepak. Actually I tried to answer your question, but I think slightly more complex subject. You are absolutely right. The business keeps on expanding margins at both gross level as we expand and scale. What happens is the direct costs would grow at the same level, but we keep on growing our cost in sales and marketing and R&D.
Okay.
If you want to compete at the global space, right now our sales and marketing costs are at 22%.
Mm-hmm. Mm-hmm.
If you look at global product companies, they go all the way up to 40%, depending on if you can hit the high growth. When you look at net margins, it's also a function of business. Am I trying to pre-invest in growth? Am I trying to, you know, match it along with the growth rate? Sometimes when we see clearly that there is a opportunity to grow and invest in markets, then we go and invest in those markets. We increase our sales and marketing and R&D expense. That's why we have a saying that, you know, being listed in India, we endure to at least maintain that kind of a margin. As a business, of course, can have a much higher margin.
Oh, okay. Understood. The net margin of 17%-18% which you mentioned is considering all those factors, right? I mean, in spite of-
Considering all those factors, yeah. Yeah.
Okay. Okay. $500 million in next five to six years effectively means you have to grow at a CAGR of 25% plus for next five to six years, right? That's what we are looking at?
I think much, much higher than that. For that, you know, multiple things have to kick in.
Mm-hmm.
I think the GSI has to kick in. You know, our sales percentage contribution from US and Europe has to come to almost 50% of the revenue. The largest addressable market is in those areas, and that's what we are spending on marketing for expanding regions out there, investing. Those will be the investment-led activities which we'll do over next three, four years.
Okay. Okay. That's a very high growth we are talking. I mean, much higher than 25%. Maybe if you have to assume 50% CAGR over the next five to six years. What can go wrong according to you? I mean, it's a big growth we are talking sustainably for next six years, right?
Yeah. See, the only thing which can go right is we end up doing this. Everything else can go wrong. You know, I think, yeah. I think, you know, our ability to penetrate mature market clients, our ability to build brands in mature markets.
Mm-hmm.
See, I don't see there's a challenge on the technology stack. Our products are very well re-recognized globally for last 14 years.
Mm-hmm.
Depending on the kind of customer base we have, we are able to stay ahead in the market and really prove our credentials and keep on updating the product at that inflection.
Mm-hmm.
Our ability to sell, market and position ourselves is the biggest challenge. Especially we have to pivot from emerging market player to a mature market player. There are multiple activities associated. GSI is one initiative, and we are also looking at multiple initiatives. At some time, maybe we'll have to look at also inorganic steps to complement.
Okay. Okay. Does any kind of inorganic steps also, kind of factored in this $500 million that we have taken as a vision in next six years?
Yeah. It's a vision, so nothing is yet final.
Okay. That is kind of, I mean, included in it.
Yes.
Okay. Fair enough. Okay. Sure. That's it from my side. Thank you so much all the way there.
Mm-hmm.
Thank you. The next question is from the line of V.P. Rajesh from Banyan Capital Advisors. Please go ahead.
Yeah. Thank you for the opportunity. The first question, just, you called out about the Indian business being very strong on the growth side. If you can just elaborate a little bit more, as to why we are winning, in the Indian market? Is it because the banks, et cetera, are becoming more automated, or are we replacing somebody else? Some color on that would be helpful.
Yes. One thing is clearly... India, we have been traditionally very strong in all the banks, insurance companies and most of the shared services. Almost all enterprises end up using this in one way or the other. What's happened lately over last few years, especially in financial services, there's lot of money being spent on digitization, automation, and also transforming their business models to digital. We have been one of their, you know, prominent players, and we are getting our share. On the other hand, what we are doing as we are getting into any vertical, we keep on, you know, extending our portfolio of products in that vertical. Like in banking, we started with digital onboarding and lending origination. Now we have gone more and more deep.
Now we are doing complete digital lending journeys for major banks. Those projects are substantial different size. That opportunity is opening in multiple areas at the same time. We being an incumbent out there and, you know, having the good relationships with customers, we end up getting an advantage out there. We are competing with the SIs out there. We are competing with international players, all financial services players. It's not that the competition is quite wide, but I think in Indian market, Middle East market, in financial services, we are very, very strong, depending on the kind of engagements we have done out or the kind of relationships we have there. The market is really opening up, and the digital lending is one of the drivers.
Any other, area in enterprise where they could digitize which have not been digitized traditionally. Service request management is another large area. Pay we have recently launched, and that's another area which is picking up. So these are some areas that, you know, developing their traction. Does that answer your question, Rajesh?
Yeah. Yeah. That's very helpful. Just if I can summarize, it's not necessarily replacement of other vendors. It's more about either the processes being automated or new things or new way of doing business that is coming up which is flowing to you. Is that the way to understand this?
Yeah. Exactly. Yeah.
Second question is, you know, as one of the participants earlier was talking about that the funding has come down for the startups. Globally, are you seeing your competitive landscape changing, where some of these startups who are coming into your space either have become less aggressive in the marketplace or have gone away?
No, I don't think they will go away. I think the ones which are worthwhile and have a sustainable business model will stay and will disrupt the market. Then at some places we partner with them, some places we complement. One of the things what I have seen at least in the financial services, as soon as a partner or an incumbent or a challenger becomes sizable, he gets the same. He gets hit by regulation as other structured financial institutions. All of a sudden the business model again comes back to the same area. I think there is a challenge in terms of, you know, smaller entities always disrupting the market. You know, we always find our space either complementing them, augmenting or substituting the same capabilities. I don't think that they're gonna vanish.
I think this is this change of, you know, the challenger ecosystem also keeping everybody on their toes is gonna be here to stay. That's what I think. It's healthy also, and we also end up providing a lot of other ideas what can come up.
Right. Incrementally, let's say if you go back one year or one and a half year back versus today now, would you say it has come down or is it same as what you were experiencing one year ago?
See, on the business side, I don't think it was material at least for our business, you know, right now. I think I could say the noise is less. The noise is less maybe. Yeah, I think it has not changed too much for us. You know, the other thing is, you know, we are still, you know, in US and Europe, we are on the fringe. We are not still in the core. We are very small player in the market. That's where there's a lot of action happening. In traditional markets, we are very, very strong, and I don't think so far these guys have been able to challenge us in larger areas of what we do.
Understood. Finally, on the U.S. side and the European side, what is not going right in the U.S., for example? You said that you are making some changes. Is it the product set that is lacking in some ways or is it the sales and marketing capabilities? What's, what sort of is the thing that you need to fix to start increasing the U.S. business? Because that's the largest market.
I think presence and sales and marketing. Presence in terms of localizing your organization, but predominantly sales and marketing. Marketing-led sales rather than sales on that because it's a product brand. At the end of the day, somebody is buying the platform which he's gonna use for 20 years. His ability to be comfortable knowing the company, analysts recognizing that company in a better shape, lot of people talking about it's very essential to close deals for them.
Sure.
I would say the number one is our marketing-led sales and number two is going to be typically much more deeper presence in markets.
I see. In terms of your, you know, your retention, what is kind of the retention you are experiencing in your subscribers in your SaaS business?
Yeah. I think, you know, the way we look at retention is any customer which is above INR 50 lakhs of annual PTOI, whether it's a SaaS or non-SaaS, we almost have 98%-99% retention in those cases. There's a churn as customers turn smaller coming through channel partners and on. SaaS, you know, since in US customers were of smaller size, some of them, there has been a limit of churn, but actually still we have more than 90% retention on that level. Globally, if you look at, you know, non-SaaS customers and our enterprise customers, larger ones, we almost have 100% retention. We don't have losing too much out there.
Thank you. Mr. Rajesh, may we request that you return to the question queue for follow-up questions. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we would request you to rejoin the question queue. The next question is from the line of Chirag Kachhadiya from Ashika Institutional Equities. Please go ahead.
Hello. Congratulations on a good set of numbers, sir. I have a few broad question. In last five years, what strategically we change in our business model, like, coming into power since we listed in market to, you know, change, streamline the processes which earlier were not there. In comparison to the ballpark vision of reaching INR 500 million kind of turnover we have in mind. Can you just throw some strategic highlight on that?
Chirag, last five year or more continuously what has happened, but I can tell you specifically what we have done slightly in last three years and that is the timeline when we started working on the GSI. The idea was not working on GSI, the idea was to find a way to enter Fortune Global 2,000 market and that could not be just directly only sales led. I think we have invested a lot on creating the, you know, GSI enablement ecosystem, which is typically a GSI sales team out of India which is working with relationships, competence centers, practice sets out there. We have augmented those sales teams out there. It's a whole enablement, training, certification model for that.
Lot of investment has happened there and that's a framework which will continue to give us return over next many, many years because at whatever speed the GSI grows or the partner ecosystem grows, we'll keep on leveraging that framework. The other thing is we have started, you know, increasing our investment in mature markets. We're opening up the Australia subsidiary, strengthening the UK subsidiary, extending the enterprise sales team in US. Those are some other initiatives. Third has been predominantly about looking at positioning, branding and the product which is typically to look at how the product... We are, you know, recently coming up with the next very happy that probably we'll be releasing it in this week.
One of the products which is typically to address lot of, you know, concerns around or opportunities over mature markets in terms of what people expect in the productBoth are the user interfaces, compliances, regulations. I think lot of... I would say if you summarize, more and more preparing ourselves for mature market and finding ways to really succeed out there, that is where the investment. On the other hand, to protect ourselves and to grow strong in our traditional markets, we have gone deep into the, what you call, creating multiple verticals within the same, business segment. Banking, we came up with paid digital lending products, collections, service request management. Insurance, we got more deep out there. Working on two wings.
One is wherever we have a named account strategy, we know what we are selling, we are going very deep in those verticals and trying to, you know, protect our market share out there, expand within the same accounts and get more accounts. On the mature market, really investing in sales, marketing, GSI ecosystem enablement, product, brand. I'll stop there. Yeah. Does that help?
Thank you. The current participant has left the question queue. We'll move on to the next question from the line of Sarang Sanil from RW Investment Advisors. Please go ahead.
Hi, good evening, sir. Am I audible?
Yeah. Please go ahead.
Yes. Thank you for the opportunity. My first question is, in general, how is the situation in U.S. and Europe right now, considering, you know, the ongoing macro events, apart from us walking away from the deals of long-term focus in U.S.? On the same line, if you could provide what % of EMEA is Europe?
Yeah. I think I'll answer the second one easier. EMEA for us actually is predominantly Middle East, Africa. Europe is a very small. I think we just do roughly around $3 million of revenue in Europe. Just that too also in London, with few clients. Europe, we are completely, you know, starting our journey. US is roughly around, you know, 27%-30% of our global revenue. You know, first of all, generally in Europe, we have seen very slow down, especially the feedback coming from our system integrators or partners. We are finding it challenging. We are really looking at how to optimize right now their operations.
U.S., I would say we are still in the account profiles are very small, and I think they have been seizing the pandemic era and they've not even come back after that. That's that area. On the larger account size, we are, I think there has been a you know, last, at least last three quarters, there has been a kind of conversation about that there is probably inflation around the corner. They need to optimize, they need to go slow on that. Has it affected our business? Like, I wouldn't say that because our share of our business is so small. I think our own actions right now determine our outcome rather than the overall global market.
Mm-hmm. Understood. My second question is, when can we see the net DSO going down? In the last quarter, you had told that it could stabilize soon, right?
Yeah, you know, I think we have done that journey of taking it from 200 days to 110, 115 days. Next phase of our, you know, endeavor is to build it sub-90 days, roughly around that. What you'll see, when you break this problem into multiple regions, we have sorted out for most of the geos apart from Middle East and Africa. These are the only geos. Since it's a large territory, it's affecting us still.
Right.
you know, I think slightly it has, you know, slightly shifted on the upward because of one is of course, the higher revenue being clocked in last 2 quarters. Also on account of some amount of inability to travel in those regions and again, the currency fluctuations happening in Africa for last one and a half years.
Mm-hmm.
I think we are looking very strongly on that. Once we are there, as soon as we are able to get the EMEA under control, I think we should be able to get a much stronger number all across.
Okay. Okay, sir. Understood.
I would say in next 2 years, I think we should be there.
Probably two years, is it? Okay. Thank you. Okay. My last question is, also what is our exposure to UAE in general? You know, just to understand the tax impact we could potentially have in case corporate tax is imposed in the region, and any comment on that, are we in tax-free zone or anything on that front?
We are in tax-free zone out there. I think there is no right now, because most of the billing is a branch office in UAE. Right now in practicing contracts, there is no taxation. We are also looking at localizing in both UAE and Saudi in a period of time, and we should be able to come in the taxation. There is a taxation, we don't see there is a substantial impact on that.
Okay.
Right now, I think our UAE and Africa region is quite distributed. There is no single region which is giving us. We are having business in Dubai. We are having large business in Saudi, Qatar, Oman, and then other territories as well. But I don't have the numbers of exactly in each territory. Maybe if you can contact Deepti, she can send you that presentation.
Sure. Sure. Sure. Sure, sure. Thank you. I'll do that.
Thank you.
Thank you. The next question is from the line of Rohit Balakrishnan from iThought PMS . Please go ahead.
Hello. Am I audible?
Yeah, please go ahead.
Thank you for the opportunity, sir. Just couple of questions. One is, can you share, what are your gross margins, in nine months FY 2023?
Yeah. Just give me five minutes. I think should be around 62%.
62%. Okay. is it possible to probably share that, I mean, in the presentations as well? I mean, you share the employee costs and that would also include R&D, and also I think some bit of sales and marketing. If it's possible to sort of separate that out and as you explained earlier, probably as more subscription business becomes greater than probably gross margin. It's easier to track that gross margin, evo-evolution for us, from the outside. If you can-
Sure. I think we can. Yeah, I think. Okay, I'll ask the team to look at that and see if we can do it. Yeah, I think you're right. Historically, see, we have been this range of between 62%-64% and 68%. You are right. As we get into more in subscription and more into business, it will keep on expanding.
Right. My second question was on your U.S. and more advanced market strategy. In these markets, I mean, how are we sort of trying to go after the markets? You mentioned that marketing is something that we need to work on. In terms of the kind of customers are we targeting, are we targeting the tier one customers? Are we, of course, going after the smaller customers and then eventually going to those larger customers? If you can share a bit around that would be also useful.
Yeah. I think we don't have one strategy, we have multiple strategies. In certain core verticals where we know exactly what the customer wants, we go directly to the end accounts, which is what we call a direct sales strategy. Like in banking, typically tier 2 and tier 3 banks, we have a direct sales strategy. We go and we know exactly whether we are gonna, you know, do a digital lending journey out there, an origination or any other solution out there. This is where we have a direct sales team which is distributed across different regions in U.S., and they're trying to, you know, enter these accounts. For tier 1 accounts, other accounts which are larger accounts, we are going through the GSI strategy. Where we are saying that the GSI is already an incumbent.
They have worked on multiple projects with us across geos. If there's an opportunity, either which they bring in or we are able to send, then we can always go with the partner. We call this enterprise sales or GSI strategy, and other is the banking sales strategy. We have these two strategies going on parallel, and we are continuously refining them so that they deliver.
Understood. Sir, on this GSI, one question was that you've mentioned couple of times in this call that it's going a bit slow than what your expectation was. One question is why is it slow? Second, is there something that we can do to change or is it just a normal evolution that will take some time for it to deliver?
The, the question is first of all, why I had answers I would have sorted out. What we are doing, we are not, you know, happy with that. Doesn't mean that we'll reconcile to that. We instantly decided with lot of consulting companies to look at how to improve our GSI strategy. We are adopting those changes. We are also, you know, looking at complementing the whole strategy with our own brand presence, our own aggressive marketing in U.S. See what happens for product companies, it's a general trend that, you know, at around size of $300 million-$400 million, 60%-70% of the revenue is partner-led, or what we call GSI or other partner-led. We'll have to go and replicate that. Whatever we are investing is the right path to go.
There's no way that we can slow it down. We have to find ways of, you know, aggressively pursuing it and getting returns out of it. This is not in one of the strategies. This is the more, you know, prevalent sales go-to-market strategy coming in next three to five years. We'll have to find a way to really accelerate it. You know, we do get roughly around nine to 10 logos a year. We could be very happy or disappointed. That depends on what our end expectations are. Our expectations are very high. That's why we are not happy with that. Getting 10 logos to GSI is also a good thing.
Sure. Very well. Thank you very much, sir.
Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Ms. Deepti Mehra Chugh for closing comments.
Thank you so much everyone for joining in. For any further queries, you can connect with me or you can go to our website. Thank you.
Thank you. Ladies and gentlemen, on behalf of Newgen Software Technologies Limited, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.