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    Newgen Software

    NEWGENGood
    Information Technology·15 Oct 2024
    Management Summary

    Newgen Software reported a strong Q2 FY25 with revenue growing 23% YoY to INR361 crores and PAT increasing 47% YoY to INR70 crores, driven by robust license sales (up 52% YoY) and strong performance in APAC (53% YoY growth). While emerging markets like APAC, EMEA, and India showed significant traction, the US market grew at a more muted 17% YoY, and annuity revenue growth slowed to 14% YoY due to longer execution cycles for large deals and a shift in US strategy. The company is actively investing in new verticals like insurance and government, aiming for them to collectively contribute around 40% of the business in the long term.

    Highlights

    9

    • Revenue of ₹361 crores, up 23% YoY.

    • Profit After Tax (PAT) of ₹70 crores, up 47% YoY.

    • Annuity Revenues of ₹205 crores, up 14% YoY.

    • License Sales grew 52% YoY.

    • APAC Revenue Growth was 53% YoY.

    • EMEA Revenue Growth was 21% YoY.

    • India Revenue Growth was 19% YoY.

    • US Revenue Growth was 17% YoY.

    • Net DSO stood at 117 days.

    Key financials

    Single quarter

    10 metrics
    1. 01Revenue₹361 Cr+23%YoY
    2. 02Profit After Tax₹70 Cr+47%YoY
    3. 03Annuity Revenues₹205 Cr+14.0%YoY
    4. 04License Sales Growth52%+52%YoY
    5. 05R&D Expenses9 % of revenues

    Segment breakdown

    EMEA
    21% Revenue Growth
    India
    19% Revenue Growth
    APAC
    53% Revenue Growth
    US
    17% Revenue Growth
    List

    Guidance & targets

    4
    CategoryTargetPriority
    Business Mix
    Government and Insurance contribution to total business
    around 40%
    		Medium
    Business Mix
    Insurance and Government contribution relative to Banking
    very close to banking, maybe they become -- both together become equal the size of banking
    		Medium
    Revenue
    Total Revenue
    USD500 million
    		Medium
    Client Acquisition
    New client additions per year
    20, 30 clients every year
    		Medium

    Risks & concerns

    3
    RiskSeverity

    Muted US Market Growth & Deal Velocity

    US revenue growth was 17% YoY, lower than other regions, with deal velocity described as 'slightly muted' and 'a bit slow' due to strategy shift and longer deal closure times. — Management acknowledged

    medium

    Softening Annuity Revenue Growth

    Annuity revenue grew 14% YoY, falling below the 20% mark after 10 quarters, attributed to closing small SaaS accounts in the US and stretched execution cycles for large deals. — Analyst acknowledged

    medium

    Longer Execution Cycles for Large Deals

    Large wins over the last five quarters are typically very long-tail businesses, and their execution cycles have stretched, limiting ATS revenue realization. — Management acknowledged

    medium

    Q&A highlights

    3

    “So, two factors, mature market sales, especially in the US on licenses which is slightly less than the run rate of our business and longer business and execution cycles, which have muted down ATS. We think it's a transient affair. It may last for one or two or three quarters, but I think we should -- the nature of the business is, it keeps on compounding annuity irrespective of what we do.”

    Addresses a key concern about the sustainability of recurring revenue growth, attributing it to US market strategy shift and longer execution cycles for large deals.

    asked by Ruchi Mukhija

    2 min read6 chapters

    Detailed Narrative

    01

    Q2 FY25 Financial Performance Overview

    Newgen Software reported a strong Q2 FY25, with total revenue reaching INR361 crores, marking a 23% year-over-year (YoY) growth. Profit after tax (PAT) saw an even more significant increase of 47% YoY, totaling INR70 crores. For the first half of FY25, revenues stood at INR676 crores (up 24% YoY) and PAT at INR118 crores (up 51% YoY). The company also highlighted a 52% YoY growth in license sales during the quarter, indicating robust product demand.

    02

    Geographic Revenue Dynamics and US Market Challenges

    The company's growth was primarily driven by strong performances in emerging markets. APAC region demonstrated exceptional growth of 53% YoY, while EMEA and India regions grew by 21% and 19% YoY, respectively. In contrast, the US region experienced a more modest 17% YoY growth. Management noted that the US market's deal velocity is 'slightly muted' and 'a bit slow,' attributing it to a restructured strategy focusing on larger accounts and longer deal closure cycles, with hopes for recovery in the next two quarters.

    03

    Annuity Revenue Deceleration and Execution Cycles

    Annuity revenues grew by 14% YoY to INR205 crores, a deceleration from historical levels, falling below the 20% mark after 10 quarters. Management attributed this to a shift in the US strategy, including closing smaller SaaS accounts, and stretched execution cycles for large, long-tail deals won over the past five quarters. They expect this to be a 'transient📎 affair,' with ATS revenues anticipated to recover and grow in the next one to three quarters as larger deals move into the realization phase.

    04

    Strategic Focus on New Verticals: Insurance & Government

    Newgen is actively diversifying its revenue streams by investing in the insurance and government sectors. The company aims for these two verticals combined to eventually contribute around 40% of its total business, potentially equaling the size of its banking segment within the next 3 to 4 years. Significant deals in insurance were closed in India (INR25 crores) and the Middle East, with pipelines being built in APAC, India, and the US for these new segments.

    05

    Product Innovation and AI/GenAI Integration

    The company continues to invest heavily in R&D (9% of revenues) and product innovation, including its LumYn GenAI product. LumYn, which uses traditional machine learning exposed through a generative UI, is being positioned for cross-selling and upselling in financial services, particularly in retail and collections. Management emphasized that AI and GenAI are integral to all new use cases, with customer demand driving their integration into digital transformation projects.

    06

    Long-term Vision and Growth Drivers

    Newgen maintains an aspirational target of reaching USD500 million in revenue within the next 3 to 4 years, contingent on successful execution. The company's growth strategy focuses on increasing average deal size, expanding cross-selling opportunities within its existing client base (30% of focus), and aggressive new logo acquisition (70% of focus), particularly in mature markets. They expect to add 20-30 new clients annually as they pivot towards larger deals.

    This is an AI-generated summary of a publicly available earnings call transcript. It is for informational purposes only and does not constitute investment advice, a recommendation, or an endorsement. inve.money is not a SEBI-registered investment advisor. Please consult a qualified financial advisor before making any investment decisions.