Manpower cost likely to increase in next 2 quarters: Virender Jeet, CEO, Newgen Software

Virender Jeet, CEO, Newgen Software, talks about Q3FY22 numbers, margin, acquisition of India-based Number Theory, expected growth in FY23 and performance of different verticals among others during a candid chat with Swati Khandelwal, Zee Business. Edited Excerpts:

Q: Your company’s revenue grew 9.2% QoQ, which is better than the street estimates. What led to this kind of growth and what is your outlook for FY23 considering the demand?

A: This year has been good for us in terms of revenue and has around 9% in this quarter while our growth in the last nine months has been around 16%. Globally, as you know a lot is being spent on digital initiatives and there is a movement in many markets as the pandemic has accelerated these things. Due to this, I think, every company in IT is getting a benefit of that and we are growing. Our company is a bit different as we are a product-based company, unlike the service industry. In our product-based company, a lot of sales depends upon new acquisition for which travel and marketing is a very important part of the business environment. Still, our growth is not restored to the normal rate because we are a faster-growing company. But we are seeing that as the market and pandemic settles next year should be a much higher growth rate and we expect to beat this year’s growth rate.

Q: The majority of IT companies are reporting falling or a flat margin this quarter due to wage hikes, however, your margin has increased. What factors contributed to this and is this level sustainable in FY23?

A: Our business, generally, is a high gross margin business. As a product company as I said 55% of our business is around product license, whose margin is quite high and is not related to any cost as it is a return on old investment. So, the company’s gross margin trends remain around 65%-68%. Compared to the last year, this year’s cost has surely increased and you have rightly said that due to demand, resources and attrition, the manpower cost is increasing. Even our manpower cost has increased by almost 20%, in fact, we assume that it will increase further in the fourth quarter. But since our business profile is still disconnected from a lot of resources due to which we are being able to deliver margins. We have not delivered the margins of the last year, last year it was slightly higher than this, so we have expanded the PAT but on the margin side as a percentage growth has not been that significant. So, next year as well, we are not foreseeing any challenge in the margin profile because it is a non-resource-based business, it is partly resource-based. Having said that, we are not unaffected by the current demand-supply issue and challenges of attrition and we are handling it in multiple ways. Talent is a very important part for us and it seems that the manpower cost will go further high in this quarter and the next. But as I have said our business is slightly disconnected with a lot of resources, so, the pressure of margin does not remain on a company like us.

Q: Newgen has acquired India-based Number Theory, an AI/ML data science platform company. What's the rationale behind the acquisition?

A: At present, the interest in analytics and machine learning across the world’s market is very high. So, its estimated growth rate for another five years is very high. We are a product platform company and a lot of technologies are used in the product platform. The need for analytics in huge cases will be quite high for our customers. We have also been investing in this area for the last four to five years and to accelerate the same, we have acquired this Number Theory, subject to the approvals we get. The company has created a very interesting unified platform for data science machine learning through which a lot of people can participate in machine learning or data sciences. It has democratised it a bit. And the theme of our company is Low Code, typically a company that without coding and cost-intensive work can work fast. From that aspect, we are quite synergetic with this platform.

Q: Can you help us understand the relative expected growth in FY23 across different strata of your revenues: annuity, subscription and SaaS revenue?  

A: Providing forward guidance is very difficult in today’s environment because of the pandemic. Even last year, I said that our first of all our target is to come around our historical growth rate of around 20% and then we can make things better from there as the market opens up. In our revenue streams, there are annuity-based revenue and subscription-based revenue because they are compounding therefore, we expect their growth rate higher than the rest. Whereas, in service lines, we want to do business through other partners and are doing business with GSIs. So, our revenue percentage will be less from the service stream but from license and subscription, our revenue stream will be grown. Currently, the Middle East and APEC have been strong markets for us while India has been weak for us and the US is still in a kind of recovering from last year jump, we had. So, next year, we are expecting higher growth from the matured markets and emerging markets but having said that the Middle East and APEC are the faster-growing markets for us. So, it is a broad-based growth for us. Subscription and annuity-based businesses will grow at the fastest pace.

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Q: You have said India is weak. By when do you expect that some action will be seen and what kind of contribution you are expecting from India in your overall growth in the FY23?

A: Even today, around 30-35% of our business comes from India. We have deep penetration in India in almost every bank, all insurance companies use our software platforms and our relations are quite deep with those. We have a good healthy account and there is a growth in big accounts even this year but our new acquisitions in India, especially the sectors like government have slowed completely in the last two years for us. So, there is a huge slowdown in government projects due to which there is a muted single-digit growth in the overall top line. If the pandemic situation settles, then India is a huge growing economy and the potential is huge, we cannot discount that but for the activity to translate on the ground there should be some betterment in the COVID situation and improvement in a business environment.

Q: On verticals, the Banking vertical contributes more than 60% to your business. How are you seeing this vertical's growth ahead and what are your other focus areas in terms of vertical?

A: Banking and financial services are the largest spenders of IT in the world, so, it is natural that a large percentage of our revenue comes from there. In fact, we are seeing a strong growth momentum in the banking and insurance sector. In the last nine months of this year, we have grown by more than 20% in that segment. In the rest of the segments, we have a strategy to go in other segments through our global system integrators and partners. So, our product is quite horizontal and is used in many segments across the industry. The investment we have made in the financial services, government, manufacturing and shared services, we are restricting in our direct sale strategies. We are an emerging partner strategy for the rest of the segments. As a partner as the partner share or GIS share business becomes bigger there will be a diversification of those segments. Till when it doesn’t pick up, financial services will continue to be a big part of our business.