Ladies and gentlemen, good day, and welcome to the Newgen Software Technologies Limited Q4 FY 2022 Earnings Conference Call hosted by ICICI Securities. 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 zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Aniket Pande from ICICI Securities. Thank you, and over to you, sir.
Thank you, Inba. Good morning, everyone, and welcome to the Q4 FY 2022 results of Newgen Software Technologies Limited. Connecting with me today from the management side is Mr. Diwakar Nigam, Chairman and Managing Director, Mr. T. S. Varadarajan, Whole-time Director, Mr. Virender Jeet, the Chief Executive Officer, Mr. Arun Kumar Gupta, Chief Financial Officer, and Mrs. Deepti Mehra Chugh, Head, Investor Relations. I now hand over the call to Mrs. Deepti for further proceedings. Thank you, and over to you, Deepti.
Thank you, Aniket. Good morning, everyone. I'm Deepti Mehra, Investor Relations, Newgen Software Technologies Limited, and I welcome you all for the Q4 FY 2022 results of the company. Hope everyone is keeping safe. Before we move on with 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 the actual results could materially vary from the 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 may please refer to the investor relations section of our website or connect to me. I would now hand over to Mr. Nigam for the presentation of the results, which will be followed by a Q&A, with Mr. Nigam and Mr. Jeet. Mr. Nigam?
Good morning, everyone, and thank you for joining us today for our Q4 results call. The year 2021-2022 was special for us in many ways. We complete 30 years of our journey in fostering a culture of product innovation. When we started in 1992, our goal was to create a connected enterprise requiring one world, one workplace then. Today, as we complete 30 years of our journey, we have achieved our goal and have become a trusted partner for our many customers' digital transformation needs. Today, we are serving over 530 customers across the globe with our product and platform. The next phase of our journey would be led by AI/ ML and low-code for digital automation. This financial year was a transition year, bringing us back on our growth track.
Overall, we achieved a 16% YoY growth in revenues during the year and closed the year at INR 779 crores. Worldwide, we saw signs of normalization for the first time post-pandemic. We are seeing organizations accelerating their digital transformation and automation initiatives. We believe that Newgen has the most comprehensive and deep product for accelerating digital in the enterprise. We are constantly working on making our customers successful through our digital automation platform, Newgen ONE. Focus on subscription revenue. We have been able to achieve a smooth transition from license to cloud and subscription revenues that are more long-term and multi-year in nature, along with accomplishing growth. Our cloud and subscription revenues have witnessed a robust growth of 23% YoY. We now have large cloud and subscription orders bookings, leading to more assured revenue in future.
We are seeing increasing adoption of subscription and cloud across geographies with large order in India, EMEA, APAC as well as Australia. We got our first few cloud orders from Australian market this year and will start getting revenues from next year onwards. The year witnessed several expansion deals with existing customers as well as addition of 53 new logos. Some of these logos are still in the process of being built currently. We are focusing more on large-size customers with higher margin capability. We see a trend of growing average order size and billing from our customers. Of the 530-odd customers, 38 customers witnessed billing of over INR 5 crore in FY 2022 compared to 26 customers in FY 2021. Our overall annuity revenues were at INR 456 crore, witnessing a growth of 18% YoY. They now comprise 59% of overall revenues.
Our international footprint is growing in terms of existing markets. EMEA and APAC continue to outshine during the year. In the U.S., revenues have been stable. Revenues last year included revenues related to PPP loans of around INR 25 crores, which is no more part of our typical offer. Moving to update our offering and opportunities. Our products and banking have performed well with lending and trade finance accelerators picking up, opening up opportunity, larger deal sizes. We believe we will be able to capitalize on the back of these accelerators in coming years. We continuously invest in research and development activities to further amplify our customers' digital transformation initiatives and keep them ahead of their competition. This year we have grown our patent portfolio across key content services technologies. We now have 23 patent grants in place.
As we discussed last quarter, we also acquired Number Theory in January. This acquisition is expected to further strengthen our NewgenONE digital automation platform with AI/ ML modeling and data analytics capabilities. We look forward to accelerating our journey in data science and AI/ ML domain with this acquisition. Reinforcing our strong position in the industry, we continue to receive additional analyst recognition during the year from Gartner and Forrester. NewgenONE platform improves customer and employee experience, enables rapid application development, and utilizes intelligent automation. It also enhances scalability, security, manageability, and deployability. We don't just offer a comprehensive platform. We view all the deployment as a long-term relationship and an opportunity to help our customer with their digital transformation journey.
On the operational front, understanding the changing requirements of the workforce and the need to provide a safe work environment, we have chosen a hybrid work model. Business travel has begun now, and we have started hosting and participating in face-to-face events. However, collective safety and productive working remains paramount for us. At the same time, we continue to offer the required flexibility to our employees. Last year there have been elevated attrition, which has impacted demand fulfillment across industry. At Newgen, we are focusing on empowering our high-potential employees with industry benchmark remunerations. We are also coming out with ESOPs with wide coverage for enabling our employees to participate in the growth of the company through continued service.
On the sales and marketing front, we are continuously working on building our direct sales channel along with a focused alliance with our partners, especially the system integrators, to expand our market footprint. We are driving joint sales and marketing activities and campaigns as well as joint solution development with our partners. Profits and margins. We witnessed normalization of cost base compared to last year, as well as increased remuneration to manage attrition. Still, we have been able to deliver healthy margins. Our EBITDA was stable at INR 195 crores and profit after tax was up by 30% YoY at INR 164 crores. We continue to invest heavily in our global expansion, our products, and in our people. During the year, R&D expense comprised about 10% of revenue and sales and marketing expense comprised 20% of revenues. Our balance sheet is strengthening with every quarter.
Our cash, bank balance and investment put together amount to INR 462 crores. The net cash generated from operating activities was at INR 143 crores. Our net trade receivables were INR 279 crores at the end of March, which resulted in a net DSO of 131 days. In Q4, our revenues were at INR 232 crores with a growth of 16% YoY. We witnessed acceleration in business from customers and healthy operating margin. EBITDA was stable at INR 67 crores and profit after tax was INR 57 crores. Our key orders from new and existing customers during the quarter include a transformation deal for a leading housing finance company and leading private sector bank in India during the quarter. Large project wins for a leading privately owned Philippine commercial bank.
Executing projects for a leading omni-channel pan-fintech company delivering digital financing solutions in Saudi Arabia. Projects for a federal government entity in UAE, managing the federal budget and regulation, regulating the financial law and financial institutions. As we move to FY 2023, we believe digital acceleration through AI/ ML-led automation is the need of the hour.
We continue to work with our customers to transform them holistically rather than in silos. We continue to build on our growth momentum. Our subscription-based model is showing healthy visibility of revenue. The year is expected to witness further cost normalization along with long-term investments in R&D and enhanced sales and marketing. As we complete our 30-year enterprise journey and embark upon AI, ML-led digital automation of enterprises, I would like to thank our customers who have shown faith in us, industry analysts who have recognized our products and platforms, partners who have invested in us, and employees who have supported us at every step of the way. We continue to look forward to your support in the future as well. We are now open to Q&A.
Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Anyone who has a question may enter star and one. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question is from the line of Sarang Sanil from RW Investment Advisors. Please go ahead.
Good morning, sir. Hello, am I audible? Good morning, sir. I have two questions. On the GSI side, what is the GSI percentage of revenue? Because the last time we had a conversation it was about 16%-18%, and going forward we said it will approach towards 50%. How is the GSI environment looking like in the coming year?
Okay. Sarang, thank you for your question. The percentage of revenue from partners, it was not a GSI because GSI was a little more you know, a recent initiative. Our work roughly around 17%-18% previous year. I think this year we moved roughly around 23%, if I'm right, but we can check the data. It has grown. The overall funnel of GSI has also shown improvement. I think last year end we were sitting at around 40 cases. Now we are more like at 70-80 cases. The funnel has doubled. But the GSI cycles of closure are much longer, so the revenue accumulation will happen in coming quarters and years. It's growing and we are still very far from the 50%, but it's moving in the positive direction.
Okay. I'll follow- up on that, sir. How many deals did we win this year? Because last year I think we were at eight deals out of 40.
I think the GSI deals this year have been spread across territories. Unlike last year, they were localized more towards U.S. I think we have got some deals in Australia. We have got some deals in APAC as well as Europe and also in U.S. I think I don't have the exact number, but they're surely better than last year and we can send you the exact number if you wish.
Okay, sir. One more question. On the employee cost side, we saw climb to 53% this year as percentage of revenue from 49% last year. We were expecting it to come down as the annuity revenue increases, right? Where can we settle on this in the medium to long term?
If your question is about employee costs, see that right now the way the demand is escalating, there's been some pressure on the cost on the employee front, and I think all organizations are facing it. Last year costs were not the normal cost because lot of activities were not happening in the business. We think the employee costs further to go up even coming in this year by few more percentages. Over a longer period of time, you are absolutely right. A lot of our growth has got very little to do with direct costs involved with. You know, as you're rightly saying, around 60% of our revenue has got no direct costs associated with it. We should be able to, you know, expand the margins.
In the near term, right now we are working on the new reality of normalizing costs across all channels, so there's gonna be some more pressure on the employee cost side.
Got it. Okay, sir. Thank you so much.
Thank you, Sarang.
Thank you. Our next question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.
Yeah. Hi, thanks for taking my question, and congratulations on good execution. You mentioned about the cases. I mean, you know, last year there were roughly 40 cases of GSI and this time close to around 70-80. I mean, what is the size of these cases roughly? I mean, size of inquiries, if we can understand that.
Yes, I think they are. See, right now under those cases come to very close in the later stage of the funnel, we don't determine the exact size because the buying behavior is very different. Generally from our typical deals in these accounts where the GSIs deals are being pursued are slightly larger in nature. They are slightly bigger than our average deal size. Our expectation is that these accounts should have a potential to build from $500K of annuity to a kind of $1 million of annuity over a period of time.
Okay, got it. My second question was on more on the conceptual side and, you know, how should we understand your operating leverage? I mean, because when I see travel costs, that is in FY 2019 and 2020, that was roughly 9%-10% of revenue. Also the R&D cost, which is also close to 10% of revenue. How should we see your operating leverage with improving revenue? I mean, how should we understand that?
I think you know, one way of looking at this business is predominantly you will see a lot of revenue heads have got no cost associated with it. But a lot of our costs are in two areas. One is sales and marketing. We historically are spending roughly around 25%-30% on our sales and marketing. We think as the business grows and as the business gathers more margins, we should be able to spend higher for the growth. Our R&D costs may not have changed drastically. Right now, they are between 9%-10%. They can go up by a percent or so in the near term. Unless there's a huge opportunity, I don't think they will move. But on the sales and marketing, as the international travel opens, the marketing expenses, travel expenses will go up.
The sales and marketing costs can go all the way back up to 28% or more. The operating lever is typically that any growth in the business beyond a particular historical trend rates of 15%, 20% significantly expand the margins for us. For next year, the operating margin expansion may not be practical because the base costs are very high. Even the base costs we are running this year, as well as there will be some additional costs next year. We still should be able to deliver our PAT margins of between 18%-19% and an EBITDA margin between 23%-25%. That should be sustainable.
Sure. Got it. Just to extend here, I mean, you know, from a conceptual angle, I mean, given the fact that we are a product company, I mean, should we have a hockey stick, slight hockey stick kind of effect on our margins with revenue sizes going up?
You are thinking.
This question is more with reference to the fact that we are a product company. Just to extend.
Product company always works with this hope that the hockey stick is just around the corner. I think the hockey stick has got nothing with margins. If you look at the gross margin level, we still operate around 70% gross margin. Which is as high as it gets. You know, we can go up to 75%, but I don't think that's worth it. I think we are looking at growth coming from the top line and the expansion of the business, and that's where we expect a hockey stick. We are investing in that growth. In next three, four years, we are hopeful that we should be able to substantially change the numbers for the company.
Sure. Got it. That's it from my side. Thank you.
Thank you. Our next question is from the line of Sanjay Awatramani from Envision Capital. Please go ahead.
Good morning, thank you for giving me this opportunity. Sir, can you give some guidance on FY 2023 revenues and EBITDA margins and the attrition level which we have faced for FY 2022 and for quarter four?
Yeah, Sanjay, thank you very much. You know, first of all, we don't provide any guidances, you know. I think we are still a small business and we are still in an aggressive phase of growth, so it's very difficult for us to provide guidance. But as I said, you know, this business generates a significant gross margin, and it depends on our own investments in sales and marketing and other things to determine the net margin for the company. So as I said earlier, we are expecting to keep on our net margins above 18% and our EBITDA margins above 23%. But you know, entirely depends on the growth numbers we hit. On the attrition front, you know, last year we have faced substantial attrition. We almost touched an attrition percentage which we have never seen in the history.
We think that in Q3, Q4 of this year it will get normalized, but right now we don't have the absolute numbers in control. I think, you know, as the situation is, it is getting slightly more stable than last quarter. There are signs this quarter that it has come back to a slightly lower level than what it was doing historically. We are still running attrition levels above 30%, which is very, very high.
Oh, this was very helpful. 30% you mentioned is for FY 2022?
Mr. Awatramani, sorry to interrupt, but if you could just hold the microphone closer to you and speak. Your audio is sounding a bit muffled.
Yeah, yeah. The attrition you mentioned of 30% is for full year FY 2022, right?
Yeah. It's much more than 30%. It may be touching close to 40% for us. For this year, we are planning to bring it down significantly.
Okay. Thank you so much, sir. That's it, from my end. Good luck.
Thank you.
Thank you.
Before we take the next question, we would like to remind participants to ask a question, you may enter star and one. Our next question is from the line of Ankush Agrawal from Surge Capital. Please go ahead.
Yeah. Hi, sir. Thank you for taking my question. Firstly, I want to understand little bit on our product offerings, specifically the vertical solutions that we offer on the BFSI side. You know, I wanted to understand how is it that our offerings are different compared to, you know, a core banking software provider. We have this peer called Intellect Software, right? Wherein they also offer a trade finance product. If I look at our product offering, we also have a trade finance product. I just wanted to understand what is different between our product and this core banking products.
Ankush, thank you for your question, and I would advise that to understand more detail, I think it may be better to visit our website to understand our value prop. Just to, you know, spend some time to answer your question. See, we are predominantly a horizontal product play company. We have products in the enterprise business, you know, Enterprise Content Management, Business Process Management, and Customer Communication Management. We use these platforms to redefine products and challenge the existing solutions which have been, you know, built for purpose or built for need. Our next generation products in commercial lending, retail lending or trade finance are built on a low-code platform, which provide enough flexibility, have a lot of technology components, so that they are more ready to change, more ready to adapt to digital businesses.
Customers, you know, use them as a next generation of these products. They are functionally, they do the same thing what our other product done, but have a very different architecture and a very different principle. The underlying platform, our customers expect to use that platform for not only just one case, use case in the company, but multiple use cases. That's our business. I would highly recommend that if you can go to our website and get more detail about the product.
Okay. Great. Just putting my understanding over here, what you are saying that, you know, our platform, that is very clear that our platform is very general in nature and a lot of use cases can be built over that. What you are saying is, you know, the specific use cases can be used to create specific functionalities which is similar to, you know, some of the products where these core banking software products might go up in. Would that be the right understanding?
Exactly. It's the next generation because, enterprises are finding ways to change their products very fast, have very agile products. There in this time, they see the advantage of a platform, and that's why they choose the platform and build those products over that.
Yeah. Right. Got it. Secondly, sir, again, on this operating leverage that, you know, typically a software product company should ideally see, you know, operating leverage playing out on three sides. First is on the gross margin front, wherein, you know, over time as the AMC and revenues builds up, you ideally should see an operating leverage playing out. Secondly would be in the R&D wherein, you know, similar level of R&D could be, you know, spread over a larger customer base, and same thing on the sales and marketing front. But if I look at Newgen over the last four, five years, you know, our R&D costs have increased from say over 6%-7% to now 10%. The sales and marketing have expanded from, you know, 17%-18%- 20%.
You know, wanted to get a sense, you know, why is it that, you know, Newgen as a company is not seeing that operating leverage play out on these cost trends, you know? The argument that, you know, you are investing for growth is, you know, makes sense. You know, that would mean that, you know, you don't get an operating leverage. In our case, we are seeing operating leverage on this side. You know, some more thoughts on this.
Yeah, Ankush. I think you're right. I think one of the things is you said rightly that at the core of the business, you should see the gross margin. The gross margins, we are already at around 69%-70% of the business. The business has been operating. Whether we spend 6%, 10% or 15% on R&D is determined by the opportunity we see across the horizon. Same is true with sales and marketing. As we are expanding into more and mature targets, we'll keep on. If you look at an international benchmark of companies and products, their spend on R&D is more like 17%-22%, and then their sales and marketing expense are roughly around 45%-48%. We are far below the international benchmark.
As we are entering these territories, as we are getting into more mature markets, we need to enhance and increase our spend on these areas. We'll continue doing that. Having said that, since the business has very high gross margin, we should be able to still deliver good net margins at the end of the day.
Right. Since our gross margin is already high at like 70%-75% what you mentioned, and, you know, if we are looking to expand on our R&D and sales and marketing investments, ideally over the medium term, we should still be around this 20% EBITDA margin and, you know, 20% net margin. Would that be the right understanding?
Yeah. With our growth targets meeting, we should be between 18%-19% of PAT margins and around 23% of EBITDA margins for the next.
This is the long-term range, right?
This is near term. Long term, I think we have not drawn that plan yet. It depends on how the company grows.
Okay. Right. Lastly, sir, just a feedback. You know, would it be possible to start providing a functional P&L, you know, in terms of the software delivery expenses so that we are able to get the gross margins same for the R&D and, you know, sales and marketing, if that could be provided, that would be very good. Just a feedback.
Yeah. See, right now we are still a kind of a sub-INR 1,000 crore kind of a company. We are at INR 780 crore. I think, our second segment is geo. That is where we are looking at geo margins and geo P&L. I think once we you know, have a substantial size, then we can have a product P&Ls and other things. Right now, I think in near, next two, three years, we are not planning to go there.
Oh, got it. Thank you for that. I'll get back into the queue for the questions.
Thank you.
Thank you. Our next question is from the line of Homiyar Irani from Kotak Mahindra. Please go ahead.
Yeah. Basically, it's a concern. I was just browsing the internet for my analysis purposes, and I came across a company by the name of Newgen Payments. It has a website called www.newgenpayments.com. Now, if this is not a subsidiary of your company, then customers are gonna mistake that company for your company, and this could be a trademark or copyright violation. What are you going to do about this?
First of all, you know, you are the first one to bring it to my notice. We have not seen Newgen Payments. Though we know there are some Newgen-named companies across the globe, and they are in different business areas, and some may have a small overlap, and we are having some kind of concerns with them. We have raised those. Newgen Payments, we have not heard. I think.
Actually, there's a website called www.newgenpayments.com, all one word.
Yeah.
It's based in New Delhi area only. I had in fact spoken with the corporate office receptionist once. I had called up and she had taken down the note. I had raised this concern with her as well, and she said they will look into it. It seems she has not brought this to your notice.
I think we can separately.
Yeah, we can take a look at it. You know, if it goes to a legal and things, they have on their own time. Nobody's gonna just close down their business just because I don't want them to use word Newgen. Newgen is a very generic word. I think people use it in different. Also the way trademarks work, if they have a different business and a different purpose of the business, we should not.
This is into payments and it's an IT company.
Yeah, yeah. I mean, so many people have.
That's right. You also have Newgen, you have a payments product, right, on your website, which I've checked it out. They also have a some kind of a payments product on their website.
Yeah.
Sir, I think we haven't yet looked at it, so probably we'll just have a look at the website, and then we'll have our team take a call.
Okay. All right. That was just a concern as a shareholder, so that was on my concern.
Very well, sir.
Bye. Bye-bye.
Thank you. Our next question is from the line of Dipen Sheth from Buoyant Capital. Please go ahead.
Hi, I hope you can hear me.
Yeah, I can hear you. Thank you.
Good morning, thanks for the opportunity. I have a question on your segment reporting, the consolidated segment reporting, which I think is on the 14th page of the results PDF. I can see that almost all the revenue growth for the year has actually come from one segment, which is the EMEA. I'm assuming that's Europe, Middle East, and maybe Africa or something. Right?
Middle East and Europe.
Okay, fine. Middle East and Europe. Now, is there a specific reason for this? How come the margins also? This is the only segment in which the segment margins have risen over the year rather than fallen, which is surprising in view of your overall margin decline and your claim that manpower costs have led mostly to the fall in margin. Is there some specific color around the EMEA segment which I'm missing?
No, I mean, you are absolutely right. See, we have as a business, we have been far better in EMEA this year. I think there are two reasons for that. One is, the market is looking very healthy, depending on, I think, this market. You know, significant business in Middle East. Depending on oil prices and if the environment is healthy, the market does show a strong. Historically, it has also been a strong market. This also, this growth is also on the base of a very low growth last year, which was, you know, because of the kind of oil shock, the market did not respond. As the margins, you know, since most of our costs are attributed in India, generally the top-line growth will expand this margin significantly.
If the margin, you know, the growth of the territory is higher than the average growth of the company, their margins will continue to expand. Historically, Middle East and Africa have been strong growth countries for us. Though other countries like APAC, India also this year have come back to the growth momentum. U.S. last year, we had a kind of a one-time PPP revenue of more than INR 25 crore. We have just maintained a kind of a momentum on that and compensated for that. Our growth has been broad-based. But the margin, you're right. In EMEA margins, because of the 40% kind of a growth, the margins are looking much better in EMEA.
Yeah, I don't wanna sound stubborn here, but actually your growth has not been broad-based last year. It's been led by the EMEA segment, but that's fine. I can understand that the other segments will pick up in a bit. Now, within EMEA, you're saying the big thrust has come from the Middle East market, not so much from Europe. Is that correct?
Yeah.
Okay. My second question, sir, is that I can see a rise in intangible assets on your balance sheet over FY 2022 of a significant number compared to the last year's balance, and the number is close to about INR 16 crores. Can you kind of share some information on what this might represent?
This represents the acquisition we have of Number Theory as a company. We had an acquisition towards last quarter of Number Theory, an AI/ML platform. This is on account of that.
I would have thought it would reflect in goodwill on consolidation and not in intangible assets, or maybe I should take it as the same.
It is the same. There is a small amount of goodwill also I recognized in the balance sheet.
Yeah, basically.
Yeah.
Yeah.
Go ahead.
Yeah. Basically, as per the valuation by the independent valuer, it is coming out that product valuation as the intangible as well as the goodwill also. Slightly goodwill also is there around INR 2.5 crore.
Yes.
INR 16 crore is the product valuation.
Both these bump ups are on account of the acquisition, which I think is perfectly okay.
Yes. Yes.
Both are on account of acquisition only.
Okay. Will you be taking write-offs against these over a period of time?
Yeah. It will be amortized in next five years.
In the next five years. Perfectly fine. Thank you, sir.
Thank you.
Thank you. Our next question is from the line of Nilesh Jethani from BOI Mutual Fund. Please go ahead.
Hi. Thanks for the opportunity. My first question was on the margin only. Today-
I'm sorry to interrupt, but if you're in a speaker mode, please switch to handset and speak.
Yeah, I'm on a handset mode only. Am I audible now?
Yes, this is better. Thank you.
Yeah.
Yeah. Nilesh, thank you.
Yeah. Today, our implementation share in the overall revenue is broadly 20%-25%. Going ahead, we want to make the mix to GSI towards 50% from 23% currently. I believe most of the low-margin implementation work would be done by the GSI partners. Still we are guiding for a lower margin when our company would more look like a product company next three to five years versus implementation.
Nilesh, you are absolutely right. I think when we are guiding for a kind of a lower, that is on account of what's happening today and what's gonna happen over this year. The implementation, we will still continue to do implementation for our core customers which we have already acquired, while at the newer customers in mature markets, the GSI is gonna be. Overall gross margin positions will improve and overall the margins would expand. You know, we have a responsibility also to invest for growth for the company, and we'll continue to invest for growth, and those investments would balance it. You're right, the margin expansion should happen through that as well. For next year, we don't think that implementation will move so, you know, so much to GSI that it will change the overall dynamics of the margin.
Okay. Okay, got it. On this investment side, today we are at, say, 12%-12.5% on the R&D expense to the top line. What we aspire this number to be?
We are around 10%. As I said, I think this will not budge, you know, significantly in this year and next year. It will remain around the same thing. It can go up to 11% or 9.5%. Beyond that, I think if we find great opportunities to further accelerate it, I think we'll come back and inform everybody if there's an opportunity like that.
Okay. Where the other investments could be then?
Sales and marketing is a predominant one. I think before the pandemic, we are already at 28%. Now we have come back around 20%-23%. I think this will surely go back close to that percentage. Even as we grow in mature markets, this can even go higher.
Got it. Now, our active clients are always in the range of 550-560 odd levels. That number has come down to 530. Anything we should read into this decline of 20 clients or it is the tail end of rationalization which you guys are doing?
No. I think, you know, if you look at, I think our account growth in all accounts which are above INR 50 lakhs is significant. I think our more than INR 5 crore accounts have grown from INR 27 crore-INR 38 crore. There's a growth all across. You know, there are two things which are happening. One, during the pandemic, we had a lot of smaller customers, their ATS/ AMC renewals have not happened. We take active customers who give us business that year. There's a churn in the lower end. The other thing is a lot of new businesses which we are acquiring this year don't have direct revenue reflection because now we have shifted to the subscription model. Since they were previously license-based businesses, they would have been recognized in those.
Now they are more on subscription-based basis. That between those two, there is some account of number of customers contributing to revenues that year, that's roughly around 530 now.
Got it. On the overall, on a very macro level, so the three business line which we are into, so broadly, most of the industry consultants are guiding about a strong growth in the low-code, no-code venture. I believe our share in that is slightly lower when I compare to the other two segments.
Yeah. You know, you see the low-code, no-code push has been for last two, three years from analysts. I think we have been historically a kind of a company which deals with no-code rapidly building applications. It used to be called BPM workflows, and we added more low-code capabilities. This is a broad market. Low-code is a technology which is now almost an expectation from all companies, and there's a lot of other companies who are doing in the low-code area. We expect to be a company strongly working on, you know, automating all business processes of an enterprise through an approach of low-code. Our all installations which are today, I think almost 70% of those end up using low-code in one form or the other. We are broadly in that business. The overall industry category of low-code, I think that estimation keeps on shifting and that category itself keeps on getting redefined.
Got it. Broadly with the three line item that is low-code, content and communication, what is the broad growth we expect on a blended basis next, say, three to five years? With the GSI, I think catching up, is there a scope for incremental growth and what can that number be?
Projecting numbers right now may not be possible, but we are expecting to accelerate our historical growth rates of 20% by having additional growth momentum coming from larger Fortune 2000 clients from GSI. I think we have got some footprint in that, but it has not gathered momentum. Once that gathers momentum, we should be able to push our growth rate above 20%.
Got it, sir. That was really helpful, and thank you so much for replying to each one of them.
Thank you very much.
Thank you. A reminder to our participants, if you wish to ask a question, you may enter star and one. The next question is from the line of V.P. Rajesh from Banyan Capital. Please go ahead.
Hi. Thanks for the opportunity. Most of my questions have been answered. Just one related question is that your
Mr. V.P. Rajesh
Subscription revenues.
Sorry, we can't hear you clearly, sir.
Yeah, hello. Hello. Am I audible now?
Please go ahead. I can hear you.
Yeah, I can hear you.
My question is that your subscription revenues have been around 31% this year of the total revenues. Where do you directionally see it going in the next three to five years?
Our estimates are that next three to five years, our subscription revenue should hit more than 60%-65% of overall gross revenues. Because this is the one head which keeps on growing at a higher pace than our growth rates.
Right.
As we are pushing more and more for subscription and removing the license-based business organically, I think we should further accelerate.
Okay. Could you also share your backlog at the end of the year, given, you know, there is a substantial subscription base you have now?
Yeah. I think, you know, right now we are not in the position to share those backlog numbers. I think give us few quarters. In next three to four quarters, we should be able to, you know, give you numbers in terms of backlogs, deferred orders, as well as the ARR for the subscription revenue. I think we have much higher backlogs this year compared to last year. I think numbers, I'm not in a position to right now give you that.
No, no, understood. Would you say your backlog is, the growth in backlog this year is higher than your revenue growth this year?
Yeah. Much, much higher than our revenue growth. Our overall order book is much, much higher than the revenue.
Understood. Okay. Thank you. That's very helpful.
Thank you. Our next question is from the line of Rahul Jain from Dolat Capital. Please go ahead.
Yeah. Hi. Am I audible?
Hello, Rahul. I can't hear you, sir.
Yeah. Hi. Is it any better?
Yeah, yeah. Much better. Please go ahead.
Yeah. Kindly bear with me for my voice. I'm actually having a cold. I'm actually referring to the data that you have mentioned in terms of the market we play in, where you have mentioned across category, multi-billion dollar opportunity that we have. What I'm trying to understand is, you know, how our positioning in some of this play has been evolving, given that our size right now is much smaller, given the opportunity set. How we think where we are in terms of the capability match and in terms of when we would try and take some meaningful piece of this market and where we are relatively better placed over the other. Any color on that would be helpful.
Yes. You know, see, the question is these broad categories of market where our product addresses have been defined by, you know, different analysts in the industry, and they keep on citing them. Our position on the product portfolio side is quite strong because if you look at the analyst readings and their reports, they will see that we are doing very well. One of our challenges is we started with from India and moved to the areas around India. Our presence in mature markets is significantly low compared to other players in that. That's where we are, you know, focusing, building the mature market sales ecosystem. Even the GSI initiative as part of that, we are pushing that.
We think that over time in enterprise content management, we have a very, very strong player. If you look at, we are among the top three or four players and very good alternative for GSIs to go and replace the older content management teams. That's one area we are looking at significantly. On the, you know, the low-code or the automation space, that's another very strong area we are trying to build, and it's gonna be built organically over a period of time. What is gonna be significant is gonna be the success which we can drive through GSIs and the sales we can drive in mature markets. They will change the position substantially. You are right. Overall, if you look at overall addressable market, we are a small fraction of that. I don't think that fraction will change unless we make a big dent in markets like U.S. and Europe. That's what our investments in sales and marketing and other things are all about.
The question is also in the context of, you know, what we've been articulating has been very, very similar for last couple of years. You know, our leadership or our product positioning or ranking has been quite strong in last couple of years, and we've been trying to crack this code through the GSI channel also from last couple of years. I can say that, you know, of course we have grown in this period, but story has been very, very same. What are those meaningful initiatives that have been playing around, which can possibly help us bridge this thing? Is there anything that you could add there?
Yes. You are right. I think, you know. Though we have grown, I think it does not change substantially the numbers for the company from the perspective of penetrating the mature market. I think, you know, we cannot undermine the success we have already had in terms of, we have now almost 30% of our revenue coming from U.S., which is a big breakthrough for any Indian product company, say, in enterprise space. Now climbing from here to next step, predominantly, we have got multiple strategies in place, which is predominantly, you know, centered around our sales and marketing. There is of course product things going on with augmentation of AI/ ML. We are strengthening our capability, but our focus is gonna be on the sales and marketing.
Unless, you know, we are able to crack the results, I don't think our initiatives will make much sense to discuss out there. I think we are hopeful in next two, three years, we should be able to show a significant change in those.
Right. Thank you. That's it from my side and best of luck for the year ahead.
Thank you.
Thank you. Our next question is from the line of Saurabh Sadhwani from Sahasrar Capital. Please go ahead.
Hello. Congratulations for a profitable year. Am I audible?
Yeah. Thank you, sir.
Yeah. Can you please detail about other expenses. They have risen on your income statement. I was wondering why have they risen and what is contributing to it?
Just give me a sec to check it with the board. Let's see now.
Hello?
Oh, just, I'm trying to locate where are other expenses. Oh, okay. Here they are.
Yeah.
SG&A expenses. Yeah. SG&A expenses have gone slightly up, I think, on account of few things. I think some amount of investments in sales and marketing towards the later part of last year we did slightly more as the market opened up.
Okay.
Also some amount of office opening up has started back, so some office expenses have just opened up.
Travel also.
Travel has gone slightly up. I think that's nowhere near compared to what historically in the last quarter we had some travel on events and some business travel. I think across these three things it has gone back, yeah.
Yeah. Yeah. Travel is resuming, right?
Sorry?
Travel is resuming.
Yeah, travel is resumed. I think last quarter we had some travel. I think this quarter we have significant travel on sales and marketing front, on events and other stuff. I think we expect this year to be kind of a good traveling year, which will lead to better sales for us.
Okay. About the USA business, there has been a sharp decrease in the profit before taxes in the USA business. What is happening there?
U.S., if you look at last year, U.S., we had a one-time business which was Paycheck Protection Program. That was roughly around INR 25 crores of business. That was a one-time business which we did last year, and this year I think that has not been there, and the rest, most of the growth which has gone is to compensate that. The base sizes have gone up across people and other things. That's why there is some impact on the margin. I think the margin position is just the reflection of the top line not growing significantly out there.
Just one last question. About the Number Theory acquisition, are you planning a new product with the Number Theory AI/ML capabilities or are you planning to integrate into the current NewgenONE?
What we have got is a platform which is in sync with our philosophy of low-code. It's a platform to do AI/ ML modeling on a low-code approach. We are gonna use the platform to augment our current solutions, which is vertical solutions in banking and other areas, and also use the same technology to augment our horizontal products. This is gonna be a kind of a stack which will extend functionality in our existing products and also provide customer an additional horizontal product in the AI/ML space.
Okay. Yeah, I think just one more thing. About Gartner search and usage, when I go and search on Gartner about low-code application platforms, enterprise low-code application platforms, Newgen is placed a little lower in the search results, and I think it's because of by default, Gartner places the products which have more number of reviews at the top. Will improving the rankings on Gartner some way help the business?
Surely it helps, but the way you can improve it is organically by having better business in mature markets, because most of the inbound queries for products come in mature markets. It should happen as the revenue in U.S. market improves. We are also working parallelly with Gartner on many fronts to see how they can contribute and help us build how they can put us in a better position on their quadrants. It's an ongoing process. Job which will help is the growth in the U.S. region will really help us there.
Okay. Yeah. Thank you. That's all from myself. Best of luck.
Thank you very much.
Thank you. Our next question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.
Yeah, thanks for giving the follow-up. I wanted to understand that you mentioned about INR 35 crores kind of an impact, a one-time impact in the U.S. business last year. I mean, this will go on the revenue side, right? Maybe it is INR 35 crores last year on the revenue or on PBT.
This is INR 35 crore, it's, say, INR 25 crore, not INR 35 crore. INR 25 crores of revenue which we got out of Paycheck Protection Program last year, which was a one-time revenue coming from such accounts. This year, since that revenue was not there, the base was lower by INR 25. Whatever growth has gone into compensating that. Does that clarify?
Yeah, sure. That clarifies. Also you mentioned, I mean, you know, with GSI, we will be able to do 20%+ kind of a growth. I wanted to understand that let's assume GSI traction doesn't build up to the extent that we are anticipating. What is the kind of organic growth that we are looking at for the next two years?
See, our historical growth rates, we have been able to push at 20%. You know, GSI is one of the plans. We have our own plans of expanding and going directly to the customers and meeting. We are in one or the other way. We are planning to expand this 20% growth rate, which has been a historical growth rate for us. You know, whether we can touch 25% or 35% depends on how successful we are in executing our plan.
Okay. Got it. Yes, sure. I have just two more follow-ups. I mean, one thing also, I mean, I saw your travel and convenience expenses. That particular line item was like INR 65 crore in FY 2019 and 2020, and which is close to 9%-10% of revenue. I mean, I don't see such a high number for other IT companies or even product companies for that matter. I mean, what all line items are there here? And what kind of savings can we have learned in sort of from the COVID period? I mean, 9%-10% of the revenue looks to be a quite big number in that context.
You're absolutely right. I think, you know, first of all, our travel predominant, large part of travel is sales and marketing related because lot of organization is about, you know, servicing Middle East, APAC, India, even part of Europe and U.S. is happening out of India, so the travel is based out from here. The second part is, you know, going back to 10% or 11% of revenue, I don't think that's practical. A lot of optimization in some part of travel is gonna be more permanent. I think the optimizations about, you know, POCs, demos, studies can be done very remotely. But some amount of travel in terms of events, business travel, face-to-face, closure meetings will keep on happening. We expect travel cost to go up here, but I don't think we expecting next two, three years them to ever touch 10%.
Sure. What percentage of revenue should we build for FY 2023 and 2024?
Just give me one sec.
Sorry?
Just give me one second, I'll let you know.
Yeah, sure. Sure.
It should be around 3%-4% of the revenue.
3%-4% of revenue?
Yeah.
Yeah, got it. Basically, this also includes the hosting, I mean, event hosting costs and all. Is that the case?
No. That's a marketing. That's a very separate.
Okay.
This is just travel for business.
Understood. Sure. Last thing, I mean, so if we are having cash on books of INR 460 crores, and we are having P/B ratio, dividend payout ratio of only 20%, I mean, what are the plans of usage of this INR 460 crores kind of cash? I mean, it looks quite a substantial number in that context.
We have been increasing the payout over the years now to 5%, not 20% this year. The other thing is our whole idea or purpose is deploying this cash for growth. We are looking at both inorganic and organic ways to use that. We think the current cash on books can be deployed better for business over next few years. In next, maybe next one year or two years, if we have further excess cash, then we can look at increasing the dividend payouts.
Sure. 2023, 2024, I mean, we should build in the same number?
I think next year that the board will decide at the end of the year. I will not be able to comment on that. I think we will be looking at the reserves to be deployed for growth of business and looking at also increasing the payout for our investors.
Sure. Got it. Yeah, sure. That's it from my side. Thank you.
Thank you. Our next question is from the line of Sanjay Awatramani from Envision Capital. Please go ahead.
Thank you for giving me a follow-up opportunity. My question was that, the previous participant asked that, you have some plans for using this INR 450 crore. In the opening remarks, you mentioned that, we'll be moving ahead with some acquisitions. Can you highlight, I mean, what is the amount of expense we are focusing on acquisitions and which are the geographies we'll focus more on?
Sorry. I never said acquisitions. I just said inorganic, and inorganic can be done in many ways. I think once we have any firm plans of acquisition, we'll come back to you. Right now, you're right. I think both, we are looking at using this cash to accelerate growth and we are finding ways. We have not drawn out any firm plans or we have got any firm company to acquire, so that I can't give you any exact number and measure of the cash. Once we have those plans, I think we'll surely come back and share with you.
Okay, sir. That's all from my side. Thank you so much.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments. Over to you, sir.
Thank you so much everyone, for participating in the call. For any further questions, you can connect with me or go to our website. Thank you. Have a good day.
Thank you, members of the management. Ladies and gentlemen, on behalf of ICICI Securities Limited, that concludes this conference.