Newgen Software Technologies Limited (NEWGEN) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Newgen Software Technologies Limited Q1 FY '21 Earnings Conference Call, hosted by ICICI Securities Limited. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Ms. Deepti Mehra Chugh, Head, Investor Relations, Newgen Software Technologies Limited. Thank you, and over to you, ma'am.

Thank you. Good evening, everyone, and welcome to the Q1 FY '21 results of the company. I hope everyone is keeping safe. Connecting with me today from our management is Mr. Diwakar Nigam, Chairman and Managing Director; Mr. Varadarajan, Whole Time Director; Mr. Virender Jeet, Senior VP Sales and Marketing and Product; and Mr. Arun Kumar Gupta, the 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 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 announcements 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 further details, you may please refer to the Investor Relations section of our website. I would now hand over to Mr. Nigam for presentation of the results.

Good evening, everyone, and thank you for joining us at our Q1 FY '21 post results conference call. In the past 28 years as an organization, we have witnessed several difficult economic factors, which have made us more agile and resilient. As we end another tough quarter post COVID, we see ourselves better empowered as an organization to combat the ongoing situation and emerge stronger in the long term. During this quarter, we have achieved revenues of INR 132 crores. We continued to get business from our existing long-term customers emerge. They have enjoyed the benefits of digitization during this period and are keen to go for more and more digital processes. We have ensured full support to our customers, helping them in maintaining their mission-critical business operations smoothly. We have also commissioned many new solutions for them completely remotely. On the new front, we made 22 new customer addition during the quarter. Some of these are in EMEA region. We have undertaken a midsized project for a global leader in energy transportation business based in Qatar. In APAC region, we are executing a project for one of the largest and fastest-growing insurance companies in Philippines. In the U.S. region, we have added 15 new logos in banking and credit unions, offering PPP, this is Paycheck Protection Program, and Forgiveness solution. These solutions were installed and made operational in just 2 weeks. These have made lives of our customers really easy as they could use the workflow from office as well as home and achieved their urgent work very easily. Moreover, these opportunities are expected to help us in deeper penetration in the region. Currently, Newgen is in dialogue with many of these clients for our regular lending and account opening solution as well. The U.S. region witnessed revenue growth of 36% Y-o-Y during the quarter. As you are aware, COVID is bringing in a new kind of uncertainty to business environment. In this environment, SaaS-based workflow solutions are catching on and are becoming a new class of solution that are quick to start and have low entry barriers. Newgen, with the world-leading ECM and BPM platform, is uniquely positioned to garner a large market share in coming years. Coming to revenues. Our annuity revenues continued to remain strong and comprised 66% of the revenues and witnessed a growth of 11% Y-o-Y. Of this, cloud revenue continued to grow rapidly at the rate of 30% Y-o-Y. Cloud deployments are expected to accelerate faster in the coming quarters. In terms of vertical, banking and financial services and insurance verticals continue to be growth drivers during the quarter, with growth of 12% and 29%, respectively. Employee safety and customer service continues to be the forefront of our post COVID strategy. We have adopted effective practices and solutions to ensure safe and efficient remote working environment. We are successfully fulfilling our commitment through effective remote enablement measures. These include institutionalizing of new business processes and ways to work, thus leading to better collaboration, efficient delivery and enhanced productivity despite lack of travel and in-person interaction. We have successfully handled events, demos, architectural design sessions, pilots, supported deployments and customer operations. The quarter witnessed many projects going live and -- as well as ongoing rollouts, highlighting the organization's seamless adoption of the new normal. With our agility in operations, we have been able to maintain continuity of business for some of our long-term customers by successfully shifting from on-site to offshore model, leading to better economics for both, the customers and us. As an organization, we have always focused on profitable growth as a long-term strategy. Newgen's margin resilience and cash generation prowess becomes visible in the current quarter, where profit and margins have expanded even amidst this challenging market. We have made substantial cost rationalization efforts across all spears, including manpower costs and operational costs. We have optimized our execution capabilities, while continuing with long-term investment in R&D and sales and marketing. EBITDA was up by 101% at INR 16 crores, and profit after tax was up by 196% at INR 9 crores. Further optimization measures would continue in the coming quarters. We continue to extend our reach globally with our direct and indirect sales network. Newgen is focusing on strengthening its SI ecosystem, and we currently have ongoing engagement across geography with these SIs. We are maintaining our strategy of making continuous investments for future, organic growth and deploying capital for the right opportunity. We believe this would help us in strengthening the organization and making it more resilient. Our R&D expenditures during the year remained 10% of revenue, and sales and marketing efforts at 20% of revenue, keeping our long-term plans in mind. Our liquidity position continues to be healthy with net cash from operating activities at INR 55 crores during the quarter. Our net trade receivables as on March 31, 2020, are INR 221 crores, which resulted in a net DSO of 122 days. While there has been some slowness in collection in the last quarter, we believe that this is not the long-term phenomenon. While in short term, the environmental change -- challenges are expected to lead to some headwinds in our ability to close new logos, given the disruption in movement, we expect strong acceleration in demand and adoption of digital solutions across all verticals and regions in medium term. We will continue our focus on growing recurring revenue, profits and cash flows and building a resilient business model. We are carefully monitoring the situation and taking all necessary steps, including identifying and leveraging new opportunities for growth, implementing new and efficient ways of working and expanding margins. We are now open for Q&A. Thank you.

[Operator Instructions] We have the first question from the line of Hardik Sangani from ICICI Securities.

Hi, now am I audible?

You are, sir.

Yes. So the kind of what we have done on the PPP program on the U.S. side, so we already have a system and a business case in place. A similar thing has been happening in India itself. Government is giving small SME loan to -- or kind of a loan forgiveness or moration thing. So do we see an increased traction of offering a similar kind of product in India as well? And in this case then what would be the typical size, like which we can get?

Yes, Hardik, this is Jeet. I think for forgiveness or lending programs across globally, we have worked on multiple territories, including India. And in India also, we have lot of existing customers who are looking at some kind of programs which government is running. We are hopeful that in coming months, the momentum will pick up. Right now, we have worked with one of our existing customers on such cases, and we have 3, 4 more cases going on. But you can understand the size of U.S. market is very large in terms of number of institutions. In India, you have roughly around 80 to 100 target. And so far, 40, 50 are their existing customers. We do hope that in the next 2 quarters, there is going to be some momentum in India. But it may not be of the same size. In India, the average deal size for us can be anywhere between around INR 2 crores to INR 3 crores for such a program. And -- but right now, we don't have the same momentum as we have in U.S. to get that.

Okay. Okay. So just second question, even the margins, we have performed quite well compared to year-on-year. So last year because we planned the headcount and all our planning is done on the year start, so do we think in this year we would be able to recoup the margins, to not around FY '19 level, somewhere like closer to that?

Yes. So I think that this year, we are not upfront planning for a lot of manpower addition. So that's 1 optimization. But there are other optimizations also, which has to do with inner operations, in terms of travel optimization, in terms of the profile of work shifting from close to customers to offshore. So there are multiple optimizations built into the system. We do expect that -- the margin position to be better than the last year.

[Operator Instructions] We have next question from the line of Nagraj Chandrasekar from Laburnum Capital.

I hope the entire team is keeping safe and sound. Just wanted some color on the 15 logos we won this quarter, specifically majorly in the U.S. and also the Philippine logo, which you say is the larger logo. Would the U.S. logos be mostly SaaS-driven business wins? Just some color, I guess, to begin with, would be useful.

Yes. Thanks, Nagraj, and wishing you the same and keep good health. The U.S. is predominantly a SaaS business because when you're saying new logos, these are the contracts. We are right from the stage of closure to all the way to execution and go-live was done in a short period of time. So all these were done remotely using our cloud offering and our low-code development platform in which the U.S. forgiveness program of what you call Paycheck Protection Program, those were the processes implemented for these 15 banks. For other markets, we also have the traditional deals, which are also non-cloud in terms of more perpetual sales of licenses. In Philippines, we had license sales; in Middle East we have some customers; and also we have some customers in India. So even in those customers, on the traditional model, which are non-cloud, we are -- we have really worked out on the processes and we are able to really deploy on their in-premise installations as well as start the implementation for those. So both from cloud as well as non-cloud, we are able to execute, we are able to acquire customers as well as implement the solutions. But to talk about U.S. more, it's about banks predominantly, which are -- which onboarded in the first process as the forgiveness and the lending process. And in the future, we are looking at a larger tail of revenue coming from -- as they start doing other solutions on the same platform.

Got it. So these new logo wins wouldn't be the existing pool of bank customers we have in the U.S., these are customers that came on for this specific product, and we hope to cross-sell going forward. Just given that we have a sizable critical mask -- mass of U.S. customers now, how is the traction -- the pipeline looking like on the midsize, sub $2 billion asset banks that we're going after. How is the pipeline looking now, now that we have a good critical mass of cases to show potential customers? Should we target something like 10 to 15 new logo wins every quarter? Or what sort of run rate are you sort of internally looking to do this year? I'm assuming there's been no letup in ordering because of COVID by U.S. corporates -- by U.S. banks.

Yes. So I think I'll answer that -- try to answer -- there are multiple parts of this question. One is, I think the pipeline is looking very well. As part of this pursuit of these, what you call PPP based solutions, we have been able to access a very large customer base -- prospect base, where we expect to grow the funnel, grow the opportunity base over next 4 to -- 5 to 6 months. So overall funnel is very positive. And as Mr. Nigam presented in his call, overall traction for digital solutions, overall traction for solutions, which can be done on low-code and then fast, there's a momentum in the market. On the closure rate, we do target roughly around 20 to 25 banks in our traditional space every year. That's our target and goal. Why does the lending program does accelerate a lot of such origination cases, but we may not have the same momentum acquiring 15 to 20 clients every quarter. But our goal is to do at least on the normal non-lending, non-PPP base to get around 25 to 30 logos in a year. That's our target.

Understood. Just 1 question on the India pipeline. Given it's a mostly mature revenue pool, where we cross-sell new products to most existing customers, how does that pool of revenue now look like on the annuity side? Are banks still adding more products to the platform? Or are you seeing a bit -- assuming this year would be a bit weaker because of how the economy and how banks are likely to do going forward?

See, India is a bit challenging because of various things. Because our ability to get new logos, both in our government side as well as because of some mergers and consolidation of banks, there is a disruption, and there's an NBFC disruption also. So there's an impact. But on the existing accounts side, they continue to grow healthy because as we are expanding our solution funnel from lending to digital onboarding to multiple solutions in trade finance, our existing customers are still finding potential to keep on growing the platform across multiple business lines. So we still expect a very healthy business coming from our existing clients. But we do see some headwinds at least in the first 2 quarters in India around the normal -- new logo acquisition. Because the new logo acquisition, we are having some challenges because we got to build relationship with new customers. For that, travel and other things are also very essential. So there is going to be a element of challenge on the new logo. But on the existing accounts, we have a continuous need to expand those accounts. We have created solutions over last 1 or 2 years, where multiple banks are now using those products. Trade is one of the areas, which is really showing a lot of interest in these customers. Now even the programs like what Hardik was mentioning is the lending and the forgiveness programs, which are starting in India, slowly they are catching up momentum and I'm sure most of our customers will go with that solution using our systems.

Got it. Just 1 final question. We have -- we sort of budget and plan a cost increase at the beginning of every year. So what sort of cost increase are we looking at on our cost base in FY '21?

We are not looking at any cost increase on that. We are looking -- in fact, we are looking at a bit of optimization on that cost because there's no preplanning of increase in your capacity of execution because we are able to get much better scale doing it remotely. The second is there's an automatic optimization of some operational costs in terms of your travel and other expenses. So we look at, in fact, the reduction in the overall cost.

[Operator Instructions] We have next question from the line of Hardik Sangani from ICICI Securities.

Sir, couple of questions. Sir, firstly, the question is, increasingly, we are getting more heavier on the banking and the insurance side. So in other verticals, do we have any specific plans, as such, to expand our -- like expand our customer base or improving on that part? Second is, like on the margin part that we observed right now. So in the last quarter -- so in this quarter, like I said the recouping of the margin part. Sir, currently, all other companies have started a lateral hiring as well. So on that part, do we see some cost increase on account of increased attrition or retaining of certain talent? And thirdly, so in this quarter, most of the U.S. banks have done most of their provisioning work and all that kind of stuff. So do we see any new normal business getting -- so -- is there any new -- coming back to normal on the U.S. part of the business?

Yes. So I think there are multiple questions, I think. See, one thing is true that banking and insurance is a substantial part of our business. And so far, even in mature markets, we are finding more and more growth in these 2 segments, and that's why they are becoming more heavier. We do have internal endeavors to really push [indiscernible] especially our, what you call, manufacturing, shared service and government. And I think there's a common pursuit to do that. But as of now, banking in this crisis point also is responding better because their needs of technology are having a much higher priority. So I do think, at least for some time, the banking and insurance will continue to be an important part of the revenue for us. While on the other hand, as we start growing further, we'll start opening other segments as well, and there's a continuous pursuit on that. On the margin side, I think, margin, as I said, the margin positions will keep on expanding for the whole part of the year compared to the last year. But yes, there is an element of seasonality in our cost basis also. I think, generally, our Q2 costs are slightly heavier on account as a lot of campus guys joining. Maybe this year, that cost may shift to Q3. And as the market does open up and the economy opens, we may start incrementally investing in some. But I don't think it's going to be a large difference in the cost base around that. So it may vary, and we may have some laterals coming in. We may have some campus guys joining in, but that will not lead to a substantial change. But Q3 costs on manpower will be surely higher than Q1, Q2 that's because of our campus people may be joining at that point in time. On account of -- sorry, your third question was about U.S. -- sorry, could you repeat that Hardik? Sorry, I misplaced your third question.

Yes. So a lot of provisioning and capital raising has been done in the first 3 months of the U.S. as well. The banks have raised capital, provided adequate provisioning. So are business coming back to normal and projects which were on hold like 3 months ago, do we see some restart in those kind of logos? So non-COVID part offerings, are they again gaining traction?

Yes. So what is happening, see, no business stopped -- ever stopped. I think it just got slowed down. What's happening, people are trying to live with this new normal, and they are not -- everybody is believing that this change is slightly more long term and permanent. So people are moving ahead with their opportunities bucket. So we have a lot of our traditional onboarding and CLOS solutions being pursued right now. We do think in the next few months customer will start reaching the decision-making cycles and start looking at closures also. And more and more, it's getting established that the remote working and remote deliveries are quite possible. They don't find any risk with that. But saying that has it returned to normal, or -- I don't think the answer for that is yes. There is some kind of a new normal, which is -- which will drive some demand. But we are still from that, the -- really the traditional demand that -- where we have a definitive answer that customers have a very definite buying cycles. These days, I think the last moment decision making is slow at all places. And U.S., Europe, we surely see the momentum of customers deciding is much faster than other markets. So there, we do expect in next quarter as well as coming quarters after that, the sales momentum continue.

[Operator Instructions] We have next question from the line of V.P. Rajesh from Banyan Capital.

My question is on Slide 16, where you have shown the revenue split by segments. So if you can -- and I'm new to the company, so I should preface my question with that. If you can just explain the ATS/AMC and how is it different from support bucket that you've shown here?

Yes. Rajesh, thank you, and welcome. So this is about Q1, the first pie chart. Is that right?