NEWGEN — earnings call
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Prepared remarks
DIRECTOR, NEWGEN SOFTWARE TECHNOLOGIES · LIMITED
LIMITED MR. T.
S.
VARADARAJAN – WHOLE TIME DIRECTOR, NEWGEN SOFTWARE TECHNOLOGIES LIMITED MR. VIRENDER JEET – SENIOR VP (SALES, MARKETING AND PRODUCT), NEWGEN SOFTWARE
TECHNOLOGIES LIMITED · MR. ARUN KUMAR GUPTA – CHIEF FINANCIAL
MR. ARUN KUMAR GUPTA – CHIEF FINANCIAL
OFFICER, NEWGEN SOFTWARE TECHNOLOGIES · LIMITED
LIMITED MS. DEEPTI MEHRA CHUGH – HEAD, INVESTOR RELATIONS Newgen Software Technologies Limited October 22, 2019 Please note that the transcript has been edited for the purpose of clarity and accuracy.
Moderator · Conference Operator
Ladies and Gentlemen, Good Day and Welcome to the Newgen Software Technologies
Questions and answers
ala “Newgen Software Technologies Limited Q2 FY ‘20 Earnings Conference Call” October 22, 2019
Moderator · Conference Operator
Thank you very much.
Ladies and Gentlemen, we will now begin the question and answer session.
The first question is from the line of Nagraj Chandrasekar from Laburnum Capital.
Please go ahead.
Nagraj Chandrasekar
My first question is on the annuity revenue side after a sort of slight dip in the last quarter which you would attribute it to lower product license and sales, we now had two quarters of slightly lower license sales, but have seen annuities sort of inch up, is this sort of an annual normalized revenue run rate on which we should see growth going forward or whether any one Newgen Software Technologies Limited October 22, 2019 offs here?
My second question was on the increased step up in OPEX in both employee and non-employee OPEX, on the employee side where have we hired people in senior roles, what exact functions have we hired at and are there any one-offs here?
Virender Jeet
The first question, you are right, the annuity revenue part for H1 has grown roughly around 24% for this year.
While last year in the same period for Q1 and Q2 we did have lot of jerky sales in terms of license sales with typically four accounts contributing roughly Rs 45 crores, we did not get very large license deals this year though we got almost similar number of accounts and which all gave us license sales, but on the annuity side comprising of both cloud revenue as well as our accumulation of ATS revenue, there is always a higher growth rate, so I think going forward also this trend will continue, there will always be higher growth rate of annuity business, well that is what we are trying to do also in the cloud business and other business.
As far as your second question, I think at the beginning of year we do plan around our costs and I think we were not very off, we had planned cost growth around 17%, we are on track on that.
We did few additions on manpower, one is that we hired some very senior people in growth related areas.
We hired a senior person as VP Marketing, we hired a very senior person in managing our global delivery as well we had some sales leadership joining in, so predominantly these roles were created to look at the expansion of our businesses, so they are in a nature one-time.
On the other hand, last year we had an extreme high pressure on attrition so we had roughly more than 25% of attrition, so in a product company retaining key talent is important, so this year we were slightly more proactive in hiring in the last quarter of the previous financial year as well as increasing the salaries for our key people on our product side and service side, so those two things is where the costs have increased on the OPEX side.
Nagraj Chandrasekar
Just one question on the India part, revenues here as we know it is a tough market, so revenues have been flattish, but we made a loss at the EBIT level this quarter, have there been any large debtors that you have written off that have caused this loss?
Virender Jeet
Not really, the ECL provisioning is typically more consistently divided between EMEA and India predominantly, the India margins are a reflection of lack of top line growth as well as the reason that most of the costs are attributed to India even when they are global in nature, so generally on India P&L you will have costs getting factored, so as I told most of the increments and hiring would happen in India, so that is where the costs come out here, that is why there is an effect on the EBITDA side.
Nagraj Chandrasekar
Just our debtors have come down again sequentially, what would be our target to get them down by the end of the year, and secondly, are we holding onto our sort of earlier long-term guidance of 20% growth and 20% margin?
Newgen Software Technologies Limited October 22, 2019
Virender Jeet
On the debtor side, we are continuously working on ways to keep on reducing it and we had given a guidance that on an average we should be able to bring down eventually to 120-125 days, so we are clearly on track on that.
We may take few more quarters to reach there on the debtor side.
On the guidance side, what is happening, as Mr. Nigam explained that there is a headwind in the financial services in India and also some part in the Middle East, so what has happened due to that is that lot of deals on the new logo side, which are typically the larger license deals, which affect our revenue in India and EMEA, have got affected this quarter as well as some effect was there in previous quarters.
We do not see the situation improving drastically in the next quarter in terms of large deals coming in, but in Q4, we think that we should be able to regain some amount of momentum both in other geographies as well as in India, so we will still work in terms of our guidance to keep on getting the momentum, but for the quarters where we have lost some opportunity, I do not think this is a year we can really regain that whole in Q3 and Q4, so on the margin side our costs are clearly at 17% to 18%, so if our growth momentum exceeds that 17% to 18% there has to be an organic margin expansion, so for this year we do see some challenges on the margin, but we have seen that momentum, it could be an ad hoc year or ad hoc quarter, but I think we are very much on track to keep on improving our margins in coming quarters in the medium term.
Moderator · Conference Operator
Thank you.
The next question is from the line of Arya Sen from Jefferies.
Please go ahead.
Arya Sen
Firstly, if you could talk a little bit about the US business because even there growth seems to have been slow in this quarter?
Virender Jeet
Thanks for the question, I think the US business in fact this quarter has been good on our deal wins as I said roughly we have got five to six deals on the cloud front and overall in US we have got around 12 new logos in H1, so I think in if you remember at the beginning of the year we said that we should project roughly around somewhere between 20 to 25 new logos in US that should help us, so on the H1 side we have got 12, but what is happening on the H1 side when you convert into numbers, you will not have any revenue because most of these are cloud deals where the revenue starts coming on beyond Q2, Q3 and onwards, so for Q1 deal, the Q2 or Q3 will be the start of the revenue and Q2 similarly, there is a quarter or two quarter lag between start of the deal, signing of the contract and actual revenue coming in.
On the deal side we have done well, but the revenue as you know it is back ended, there is going to be some pressure.
The other thing is last year in the same quarter we had a large license deal more than a $1 million license, so that increased the base of the quarter substantially.
This is one of the challenges not only in US but across other areas also.
Traditionally, if you look at all previous years, last four to five years data, our Q1-Q2 are very similar in numbers and margins are always in Q3, but last year was a unique year in which Q2 we had roughly around 40 crores of additional license sale on account of four orders and they were spread in US, EMEA, and India so the base has just got improved.
On the other hand the growth which is in the US is Newgen Software Technologies Limited October 22, 2019 not reflecting in the number yet, so I am sure in Q3 and Q4 the number will look much different.
Arya Sen
How do you see the demand environment in US, because you talked about issues in banking, is that relevant to the US market as well?
Virender Jeet
Not really, I think in US and APAC, we are not finding any demand challenges, in fact in both US and APAC, we expect to grow at a much higher rate than 20% and we do not see any headwinds out there.
Headwinds are predominantly coming in areas because banking and financial services is a very strong segment for us and unfortunately in Indian market and some part of the Middle East that has been really hit very hard, so most of our new logo acquisitions which were larger deals because of this merger between the banks and some issues with banks, they are just not happening or they have been pushed out and eventually losing four large deals makes huge differences on the quarterly number.
Arya Sen
How different would be your margins in US and APAC versus India and Middle East?
Virender Jeet
I think we discussed this sometime back, broadly most of the costs are added to India and most of the aggressive sales marketing costs are added to US, so at this time really I will not be able to comment on what is going to be the margins, but I think US since our billing rates in terms of both license the way we are able to hold on to license with lesser discounting and the quality of revenue and quality of discounts is far better in mature markets, so that way yes, the US, Europe which always show better margin profile, but right now it is unfortunate for India because most of the costs are loaded to India.
Arya Sen
A couple of bookkeeping questions, firstly what was your constant currency YOY growth for Q2 as well as 1H?
Deepti Mehra Chugh
Q2 was 3.5% and first half was 10.5%.
Arya Sen
You are not shifting to the new tax regime, right, how should we look at it?
Virender Jeet
Right now, we are not shifting because we are already taking some benefits of SEZ and we hope to continue those benefits in coming years, so we will not be shifting to any new regime.
Arya Sen
You are unlikely to shift in the foreseeable future?
Virender Jeet
Yes, we are unlikely to shift in the next three to four years.
Moderator · Conference Operator
Thank you.
The next question is from the line of Prasad Padala from SBI Mutual Fund.
Please go ahead.
Newgen Software Technologies Limited October 22, 2019
Prasad Padala
I joined the call a bit late, so in India and EMEA geographies I understand that there is a demand slowdown, so when do you expect this to recover or what gives you the confidence for recovery and subsequently flowing into your overall revenue growth guidance?
Virender Jeet
There are two-three things.
On the business side, we are slightly moving our sales energy to other segments - insurance is looking good out in India where we do not have the same challenges, similarly we are shifting a bit to manufacturing and what you call shared services captive and non-captive, so that is one thing as a part of planning which we are doing which will mitigate a part of that.
Second thing is in financial services the recent announcements of the merger and acquisitions about banks has affected roughly around 10-12 enterprises where we had some large deals going on in the pipeline, so our indication is that they will be able to resolve, take a quarter or so to resolve in terms of how they are going to do the order processing or which are the companies which will issue the orders, that should start getting us some of these large deals back on the table which have been pushed out and unfortunately they got pushed out at almost like the closure stages, so we do not see the macro situation changing drastically over the next few quarters, but we think the disruption which was caused with the recent announcement, I think that goes back and some more sales momentum we start shifting to other enterprises that have got less affected, I think we should be able to recover some amount of that momentum.
On the Middle East side again, it is more political, I think we have seen some tensions (Saudi/ Qatar), so that is just holding back.
Again, what our teams are telling us on the ground it is a temporary phenomenon, next couple of quarters it should settle down because that is what it takes.
On the business side what we are doing, we are trying to derisk by getting into other segments where we can build business while in the meantime we are hoping for things to stabilize.
Prasad Padala
What has been the license revenue growth in these geographies?
Virender Jeet
Overall, we did roughly around Rs 53 crores of license in H1 vis-a-vis roughly around Rs 70 crores last year, but Rs 70 crores had large three to four orders which were one-time kind of orders of around Rs 40 crores, so we have done well but I think last year the same quarter had an abrupt jump, so we are just fighting that jump, the percentages are just getting affected because of that, so broadly we have done roughly Rs 53 crores and I think as the second half is much larger for our license sales, so we hope to gain better momentum next half.
Moderator · Conference Operator
Thank you.
The next question is from the line of Aman Vij from Astute Investment.
Please go ahead.
Aman Vij
The first question is you have been talking about slowdown in insurance in banking specifically, but if we see our half yearly results and even Q1 results, banking has been growing well you see at least the segment which you have shown, it is the healthcare segment Newgen Software Technologies Limited October 22, 2019 and the Government PSU segment which is not growing, so in Government PSU sector, what is the clarification regarding this?
Virender Jeet
I think you are right, it is a good observation, but when we are looking at healthcare, if you are part of tracking the last quarter we clearly said, the healthcare growth last year was account of the large deals coming from existing customers which were not repeatable, so as a result our healthcare business as such is not growing, so most of our growth comes from segments like banking, Government, BPO, IT, so in that most of the growth expectations also come based on banking and Government, so when we had made our planning, we had factored in some amount of slowdown in Government because that was continuing for now many quarters, but we had expectations of large deals coming from banking, so we are not saying that the banking for us has not contributed, but the new logo acquisition where the large license sale is supposed to happen in banking, especially in India and EMEA that is what has got impacted, our numbers do not reflect the macro situation, but macro situation does reflect our decrease in license sales.
Aman Vij
On the other segment that has degrown significantly, so what customer type of segment or customers we did not get or?
Virender Jeet
Others is anything but those five segments, so it could be any ad hoc sales coming from partners, any of those things so I would not be able to comment.
Deepti Mehra Chugh
We have got 12 verticals which are clubbed into others, which include manufacturing, retail, telecom, etc., so that is a combination of all of them put together.
Aman Vij
Any particular segment that has degrown than others, my question was that?
Virender Jeet
No, we do not even track it segment wise but I think this we can send you exactly the data what were the large deals which came in others and what did not happen this year.
Aman Vij
The second question is on the 38 logos which we have won in H1, could you give the breakup that you did last few quarters greater than one crore and greater than 10 crores?
Deepti Mehra Chugh
This time we did not have many large size deals as such, the average size would be close to Rs 1 crore plus, so therefore we have not given a bifurcation this time, but I can get back to you with the division.
Virender Jeet
The average deal size for these logos is roughly around Rs 1.35 crores whereas the last year the same number of deals, the average deal size was Rs 1.6 crores and that growth was on account of four large deals, but we can send you the data and this is also so far the billing numbers and not the booking numbers.
There is also an unexecuted order book of these logos, so finally at Newgen Software Technologies Limited October 22, 2019 the end of the year that is the right time to look at the size of the account and the size of the deal because not everything in that order has got really billed.
Aman Vij
You have been talking that US is still doing well for us, so in terms of non-SaaS customers I think that has remained flattish or degrown little bit, some slowdown there also?
Virender Jeet
Our sales engine is all pursuing SaaS, so non-SaaS was relevant last year with a large deal coming through Health which is an existing client, so typically a Rs 10 crores- 11 crore license deal, so the slowdown which is visible is on account of that.
Non-SaaS is flat, so they have grown but not really grown, but most of the sales push is coming on our accounts which are SaaS-based accounts.
Aman Vij
The final question, there was a net additional write-off or provisions of 5 to 6 crores, any particular customer we have written off or any debt?
Deepti Mehra Chugh
That is based on the ECL provisioning wherein you take the 12 quarter trend and then based on that for each of the ageing bucket of debtors provide a percentage, so it is not relating to any particular debtors as such, it is basically an overall percentage applied to each of the buckets of receivables.
Aman Vij
Maybe you can give the receivables greater than 180 days?
Deepti Mehra Chugh
Yes, so receivables greater than 180 days would be roughly Rs 96 crores.
Moderator · Conference Operator
Thank you.
The next question is from the line of Nitin Mangal, an Individual Investor.
Please go ahead.
Nitin Mangal
I had two questions, firstly I would want to understand your debtors ageing schedule, so I believe in Q4 last year, that is, FY ‘19 you recognized revenue of Rs 204 crores while your debtors for 0 to three months was around Rs 195 crores gross amount and net amount would be Rs 190 crores, so that comes out to be 93%, so I just wanted to understand this kind of a number that 93% like can you throw some light?
Virender Jeet
Sorry, I could not understand your question fully, but I can give you the data, one thing is our Q4 is the largest quarter of sales with 35% to 40% of our annual sales happening in Q4, so at the end of Q4, you have a large debtor base getting created and also you have the three months and the six-month bucket debtors also coming into that.
If you look at historically quarter after quarter, typically the total debtors at the end of March between last year and this year has reduced substantially and also from comparing from September to September has reduced substantially, as on September 30, 2019, we were at debtors of Rs 236 crores.
Newgen Software Technologies Limited October 22, 2019
Nitin Mangal
My question was you recognized debtors, as on March 31, 2019, your debtors of 0 to 3 months which is 0 to 90 days was around 93% of your revenue recognized for that quarter?
Arun Kumar Gupta
I will explain, the major billing as far as the last quarter is happening is in the month of March.
The major license deals are closed in the last month and accordingly they are getting billed in the end of the month, and those become debtors and the collection happens in the next quarter, so that is why it is seen as lopsided because last quarter has major deal closures, the new logos happen in the last quarter majorly and those deals are getting billed in the last month itself, I hope I have answered your question.
Nitin Mangal
Another question regarding the same issue is about your weighted average loss rate, so last year as on March 31, 2018, your rate was 4.03% and as on March 31, 2019, it has come down to 2.85%, so any reason for that?
Deepti Mehra Chugh
That is based on the last 12 quarter trend, as the trend improves the percentage changes so we have seen in the past quarters improvement in that trend in terms of collection.
Nitin Mangal
So your collection has improved?
Deepti Mehra Chugh
Yes.
Nitin Mangal
My other question would be regarding your online versus off-line breakup of implementation of software, so can you just give me the breakup like the percentage of online versus off-line regarding the implementation of software?
Virender Jeet
Does that mean on-site and off-site?
Nitin Mangal
Yes, online as in it would be in-house implementation or using third-party such as you know Amazon or Google.
Virender Jeet
When you are talking of implementation revenue stream, most of it is, our own office development, so there is nothing external to that, the only thing is basically we have a payout for Amazon Services for cloud services which is a very small payout right now, it is not significant, almost $1 million or even less than that.
Moderator · Conference Operator
Ladies and Gentlemen, as there are no further questions from the participants, I would now like to hand the conference over to Ms. Deepti Mehra Chugh for closing comments, thank you and over to you, Madam.
Deepti Mehra Chugh
Thank you everyone for joining us on the call.
For any other queries, you can connect to us or go to our website for further details.
Thank you.
Newgen Software Technologies Limited October 22, 2019
Moderator · Conference Operator
Thank you very much.
Ladies and Gentlemen, on behalf of Newgen Software Technologies Limited, that concludes this conference.
Thank you for joining us and you may now disconnect your lines.