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Edited Transcript of MAJESCO.NSE earnings conference call or presentation 14-Aug-19 12:00pm GMT

Q1 2020 Majesco Ltd Earnings Call

NEW YORK Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Majesco Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Elster

Majesco Limited - CEO & Director

* Farid L. Kazani

Majesco Limited - MD & Group CFO

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Conference Call Participants

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* Amit Chandra

HDFC Securities Limited, Research Division - IT Analyst

* Apurv Kulkarni;Nine Rivers Capital;Analyst

* Manan Patel;Equirus Portfolio Management;Analyst

* Niteen S. Dharmawat

Aurum Capital - Co-Founder

* Rahul Jain

Dolat Capital Market Pvt. Ltd., Research Division - VP of Research

* Rohith Potti

* Asha Gupta

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Presentation

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Operator [1]

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Good day, ladies and gentlemen and a very warm welcome to the Majesco Limited of Q1 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Ms. Asha Gupta from Christensen IR. Thank you. And over to you, ma'am.

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Asha Gupta, [2]

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Thank you, Ali. Good evening to all of you who have logged in to this call. Welcome to Q1 FY '20 results of Majesco Limited for the quarter ended 30 June 2019. Please note that we have mailed out the results, and also you can view it on our website at www.majesco.com.

To take us through the results and to answer your questions today, we have with us Mr. Adam Elster, Chief Executive Officer of Majesco U.S.; and Mr. Farid Kazani, Managing Director and Group CFO of Majesco Limited.

We will start the call with brief overview of the quarter, which will be given by Mr. Adam, and then this will be followed by Mr. Farid, who will go into detailed financials. We will then throw open the floor to the Q&A session.

I would like to remind you that everything that is said on this call that reflects any outlook for the future or which can be construed as forward-looking statement must be viewed in conjunction with the risks and uncertainties that we face. These risks and uncertainties are included, but not limited to what we have mentioned in the prospectus filed with SEBI and the subsequent annual reports that you can find on the website.

With that said, I would now like to hand over the call to Mr. Adam. Over to you, sir.

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Adam Elster, Majesco Limited - CEO & Director [3]

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Thank you. Thank you very much, and thanks, everyone, for joining us. I'm pleased with the financial results we achieved in the FY '20 first quarter. It completely reinforces my excitement about our future. Our cloud-based product operating model is the most critical component of our value proposition, and it continues to resonate in the market.

Our results reflect the growing acceptance of our solution as first quarter operating revenue increased 12.9% over the same period a year ago. Cloud revenues represent 37.4% of our total revenue and more than 25% of our customer base. Majesco's profitability strength continues as adjusted EBITDA increased 44.6% over the same period for FY '19.

I am very encouraged by the growing acceptance of Majesco's products, which are resonating with current and potential customers. We had another strong new sales quarter, and our 12-month order backlog remains at almost $100 million.

The North American business is extremely solid with wins across all customer tiers and throughout our product portfolio. We were especially encouraged because 100% of the new deals in Q1 were cloud solutions. We are extremely focused on customer success, and for us, each successful implementation continues to amplify our credibility in the market with both our customers and potential customers.

In addition, the foundation of our subscription cloud revenue growth model is to land new customers, go live and drive adoption. We had 7 wins overall this quarter with 4 new logos, including one of the largest insurance brokers in the world who will deploy Majesco's full P&C suite in the cloud.

We had 13 go-lives, including 4 greenfield startup operations, and our very first integration with Digital1st Insurance. Two major data migrations delivered in record time; 3 legacy system replacements.

We also delivered an 11-week implementation for one of the world's largest reinsurers, a Forbes Global 2000 company that launched a new on-demand agro product for the retail market with Majesco's Digital1st and policy on P&C on Majesco CloudInsurer.

These are each great examples of how Majesco's technology can serve as a foundation to quickly launch and test new products and leverage new distribution channels to reach untapped risk pools.

Some other highlights of our super busy first quarter. In April we launched our brand website and vision for the future of insurance. We broke attendance records at our annual customer conference, Convergence. We announced 2 product releases: P&C Core Suite v11; and L&A Group Suite v11 (sic) [L&A and Group Core Suite v11].

In addition, we announced a partnership with DataRobot to bring AI and machine learning to insurance. We hired our new CFO, Wayne Locke, with Majesco U.S. And as many of you know, we hosted our annual Investor Analyst Day at the brand-new NASDAQ market site in New York, highlighting the company's growth strategy, product road maps and market opportunity. In addition, we hosted an Investor Analyst Day as well in India. Lastly, we announced that Majesco and Capgemini became alliance partners.

With regards to the Majesco Limited governance matter, the issue is now formally resolved, and I am pleased with the outcome. We have formed a Majesco U.S. Board Finance Committee with the authority to approve security or debt-related matters in conjunction the full U.S. Board.

I continue to see excellent alignment between our strategy and the market. I'm pleased by our momentum, and I look forward to continuing my active engagement with investors and shareholders and updating you on the company's future.

Now I'll turn the call over to Farid, to discuss the success of our financial drivers for the quarter. Farid?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [4]

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Thank you, Adam, and good evening to everyone on the call. I'm pleased to summarize the first quarter financials of fiscal 2020. This quarter's financial performance reflects consistent improvement in revenue and profitability, and we are pleased with the positive trends in the key performance metrics of the business.

Turning to specifics on the financials. First, on the revenue details. The operating revenue for the quarter stood at INR 259 crores, a growth of 12.9% year-on-year. The increased revenue was primarily due to the addition of new clients, footprint expansion within existing accounts, the addition of the Exaxe acquisition and the trends of the India business.

As compared to the previous quarter, Q4 FY '19, the revenues have grown by 0.5% in constant currency. While the Q1 FY '20 revenue has seen an impact of the reduction from the IBM/MetLife program linked to the project stage completion, but the same has been offset by the on-term license revenue from an existing customer, which was accounted for the full term in this quarter as per the new accounting revenue recognition standard, India's 115, similar to the ASC 606 standard under the U.S. GAAP.

The total revenue for the quarter was INR 263.3 crores, a growth of 11.4% year-on-year. The total cloud revenue for Q1 FY '20 was INR 96.8 crores, representing 37.4% of the operating revenue as compared to INR 82.5 crores, representing 35.9% of the operating revenue during the same period last year, reflecting a growth of 17.4%.

The total cloud subscription grew -- revenue grew 36.7% from INR 22.2 crores in Q1 of last year to INR 30.3 crores in Q1 of this year. As a percentage of revenue, the cloud subscription now stands at 11.7% in Q1 FY '20 as compared to 9.7% in the Q1 of last year. The total number of cloud customer has now increased and stands at 58.

The total recurring revenue, after the reclassification of license revenue as nonrecurring, stood at INR 84.3 crores for Q1 FY '20, which increased by 30%, representing 32.5% of the operating revenue as compared to INR 64.8 crores, representing 28.2% of operating revenue of Q1 FY '19.

From a geographic standpoint, the North America, EMEA and APAC represented 88.3%, 6.3% and 5.4%, respectively, in Q1 FY '20 as compared to 88.2%, 4.2% and 7.6%, respectively, for Q1 FY '19.

In terms of business split, the P&C represented 77.2%, the L&A represented 22.2% and the noninsurance was 0.6% of the Q1 FY '20 as compared to 72.7%, 26.3% and 1%, respectively, in the Q1 of last year.

In terms of client concentration, the top 5 clients constituted 25.8%, and the top 10 constituted 39.6% for the Q1 FY '20 total revenue as compared to 30.5% and 45.3%, respectively, for the Q1 FY '19.

Turning on to the profitability and other expenses. Employee cost for Q1 FY '20 was at INR 169 crores at 65.3% of the operating revenue as compared to INR 174.4 crores at 66.7% of the Q4 FY '19. The reduction of INR 5.4 crores in Q1 as compared to the previous quarter is largely on account of Q4 having accounted for higher year-end incentive accrued for employees, roughly INR 4 crores, and the balance reduction was due to a better on-site/offshore mix of the head count in this quarter.

The product development expenditure -- expenses stood -- for the Q1 FY '20 was higher at INR 38 crores, which was 14.7% of the operating revenue as compared to 32.7%, which was 14.3% of the operating revenue in Q1 of FY '19. This was in line as a percentage of revenue year-on-year as we continue to invest in R&D to enhance our cloud and digital offering.

Depreciation costs are higher in Q1 FY '20 as compared to the previous quarter primarily due to the application of the new accounting standard 116 on lease accounting. The impact was roughly INR 2 crores, which had a positive impact on the adjusted EBITDA of Q1 FY '20 as compared to the Q4, that's the previous quarter, FY '19.

The adjusted EBITDA for the first quarter of Q1 FY '20 increased to INR 33.6 crores, that is 13% of the operating revenue as compared to the adjusted EBITDA of INR 23.2 crores, which was 10.1% of the operating revenue during the first quarter of June 30, 2018. Sequentially, also in Q4 FY '19, the adjusted EBITDA was higher by INR 5.4 crores, that is by approximately 220 basis points.

Net profit for Q1 FY '20 stood at INR 12 crores, which was higher by 13% as compared to INR 10.6 crores in the previous quarter, Q4 FY '19.

Turning on to the balance sheet. The balance sheet as of June 30, 2019, continues to reflect a debt-free company. The company continues to generate sufficient cash to fund operations within -- with its total cash, cash equivalents and short-term investment at INR 374.2 crores as of 30 June 2019. The June 2019 cash balance, however, is lower as compared to the March 31, 2019, primarily on account of the payout of the FY '19 full year incentives to employees, approximately $8 million.

The DSO was higher at 92 days at the end of June 30, 2019, due to a large receivable that was subsequently collected in early July 2019. Strong bookings in the first quarter ended 30 June 2019 reflected the continued momentum in the business. As mentioned by Adam, we had 7 new wins, including 4 new logos during the Q1 FY '20, and all of them were cloud deals. The 12-month executable order backlog increased to INR 681 crores or $98.7 million, which was 19.3% higher as compared to INR 571 crores, which was $83.4 million as of June 30, 2018.

I must mention that in terms of the deals that we typically get, the deal structures typically start with smaller deal sizes, but tends to grow, as Adam mentioned, once you have an -- land adopt-and-renew strategy. So this seems quite a few of our customers that would have come 2 years or 3 years ago have seen -- have now gone into the top 10 accounts.

Overall, the quarter reflected good performance across all key metrics, that is the revenue growth, customer acquisition, cloud-based metrics, margin expansion, order backlog and the strong operating cash flow.

This concludes our prepared remarks. I'll now pass it on to the operator to open the call for questions. Thank you very much all for joining the call, and we appreciate your continued interest in Majesco.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Niteen Dharmawat from Aurum Capital.

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Niteen S. Dharmawat, Aurum Capital - Co-Founder [2]

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Couple of questions. So what is the revenue growth if we remove the impact of acquisition? You mentioned that there was an acquisition as well. So if we remove that, what is the revenue growth?

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Adam Elster, Majesco Limited - CEO & Director [3]

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Yes. Of course, the acquisition revenue was less than 1%. It was about 1% of the growth, so take about 1% off the growth numbers for the acquisition.

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Niteen S. Dharmawat, Aurum Capital - Co-Founder [4]

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Got it. The second question is about the deal size. You mentioned that once the account matures, it becomes large and it becomes another top 10 account.

So when we are signing the deal, what is the average deal size? And when it gets mature, maybe a couple of years, 2, 3 years, what is the size of that account? It's an average I'm asking, sir, if you can share that number?

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Adam Elster, Majesco Limited - CEO & Director [5]

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Yes. I mean let me explain how the deals work in the subscription model. That'll probably help. And then I can give you a couple of examples of how the model would work.

So previously, with perpetual licenses and upfront on-premise deals, the way a licensing would work is if I'm a company, I would buy enough of the product upfront to cover my entire environment. So in the example of users, if I had 100 people using a system, when I bought it initially, I would buy the whole thing. I would buy 100 copies to cover everyone, and it would be a big upfront deal. So that's the previous software model that many people are used to, many of the ERP vendors worked them for years and years, and us including. Meaning if you were going to buy a core insurance system, you would buy enough to cover the entire environment.

The way the subscription business models works from a revenue and a booking perspective, and this is true for all cloud and SaaS companies that you've become familiar with over the last several years, is people want a subscription model that allows them to pay by the drink or grow over time. So rather than, in my example, buying 100 copies, you would say, "I believe in the product, but I'm going to buy 10 copies, make sure people are happy with them. And then I'll want to add on copies as we go."

So from a booking, as opposed to buying 100 copies, you buy 10 copies. And then as you drive adoption, people will add on, on a monthly or a quarterly or a yearly basis, additional copies.

So deals that we're previously used to looking at, that would be 5- to 7-year term agreements, that would be, let's say, $25 million-and-something, in that range, the way the deals work now is they're more in a $2.5 million range of booking. And what they do is they agree to a minimum revenue commitment, right?

So they say, "I'm putting in your system, and you still have to pay for implementation." And there's a big spike of implementation revenue, but the minimum revenue commitment, it's a lower level until you get the system up the running. And then the more business, direct written premium that's put on the system, the more revenue we get. So it's the gradual growth that's tied into the growth of those accounts.

So I know it's -- I gave a bit long answer, but I wanted to make sure you understand the context of how the model works for us. So the deals are smaller, and they're shorter term with fixed revenue commitment. And then the model works -- is the more business they put on our platform, the more revenue we get over time.

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Niteen S. Dharmawat, Aurum Capital - Co-Founder [6]

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I understood. I understand the cloud, the environment and [payers] you use kind of model. And of course, [it's] (inaudible) for you. I was just looking for when -- within the cloud environment, when you're signing a customer. And then after it's getting matured, it has the confidence in the product, then what is the average deal size. But I got your point. I understand it.

My final question is about U.S. business environment, especially in the BFSI sector. What are you hearing from the customers? Are there any signs of worry? Are they exuberant? Or what is the business environment? If you can throw some light on that, that's about it.

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Adam Elster, Majesco Limited - CEO & Director [7]

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In the U.S. -- business side in the U.S., I mean in the U.S., in general, the earnings numbers have been solid. I think people are confident in the market and the opportunity. Particularly in the insurance vertical for technology, there's been increased investments, which is good. I think the worry in the U.S. is still some of the macroeconomic factors related to the global economy. And you follow the news like I do on a daily basis, there's ups and downs. But at a macro level, I think people feel good about the growth in the market and the opportunity and things in general.

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Operator [8]

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Next question is from the line of Rohith Potti from [Marshmallow Capital].

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Rohith Potti, [9]

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My first question is on the cloud subscription revenues. I noticed -- I mean based on what you said, I would've expected the cloud subscription revenues to generally increase quarter-on-quarter. But what I see is a decline quarter-on-quarter this time. And I think even before that, 3Q versus 4Q, I think it was pretty flat. So why would the subscription numbers come down? With more implementation coming onstream, I would think it would go up, right?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [10]

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Yes. So as you're aware that within the cloud revenue, both in terms of implementation, and to a certain extent, in the subscription front, there's an IBM/MetLife component. Now to the extent that we have got nearing to completing the project, okay, stage of the IBM/MetLife deal, the implementation revenues have come down and so has the preproduction subscription because of the small component of subscription we get before it goes live. And to that extent, that has come down. What you would see going forward is once the program goes live, we will get a higher committed -- minimum committed subscription from that account. So the reason for the small shortfall that has been there in subscription revenue is primarily on account of that.

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Rohith Potti, [11]

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Okay. Understood. So that's helpful. So what -- so the next question was on IBM itself. So what mix can the IBM/MetLife deal -- it will be completed in this quarter and you will see these premiums coming onstream on the platform. Is exactly -- is that the next step in that deal?

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Adam Elster, Majesco Limited - CEO & Director [12]

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Sure. The way the model works, to Farid's point is we get the services revenue for doing the implementation. And then for us, a lot of that work has been completed. We're now at the point where they're deciding on their go-live dates, and that's something that Majesco can't announce. That's something that MetLife and IBM will announce. Once they go live, we start getting the subscription revenue, that kicks on, and MetLife starts writing business on the platform. We get our minimum revenue commitment, but to the extent they write more and more business on the platform and we get past our thresholds, we get increased revenues. So I wouldn't expect the increased revenue in the next quarter or 2, but we'd like to say that go-lives -- we start gaining the minimum revenue commitment. And then hopefully, as their business grows, the more business they put on the platform, we'll get past our minimum. So that's the way the business model works as far as the MetLife and the status of the project overall.

Again, it's something that -- as much as I think you and the other investors would love me to announce when the project's going live, I can assure you that my team and I and MetLife and IBM, we are way more focused on it going live than any investor. So I can assure you it has everyone's attention.

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Rohith Potti, [13]

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So going back to example you gave to the previous participant, Adam, I was just curious, you mentioned that with the model shifting from license to cloud, you see the deal size going from -- in your example, going from $25 million to $2.5 million in the -- as the initial implementation fee for Majesco it should have implementing the project.

So I was just curious, in -- I mean using the $2.5 million as a reference, could you give us an average minimum guaranteed amount in comparison to it going after it was implemented? So if $2.5 million is the implementation fee on average, what proportionate profit would be the minimum guaranteed amount that Majesco will accrue going forward if the premiums on the platform is not as high as you would expect?

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Adam Elster, Majesco Limited - CEO & Director [14]

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If I use a very simple example -- again, the $2.5 million is just an example. It's not an average deal size. It's an example. If I use the $2.5 million model, the way it would work is the customer would give us roughly $0.5 million a year over 5 years as a minimum revenue commitment, meaning that the customer said, "Hey, I've chosen Majesco. I'm going to run my business on your platform. I will guarantee you, and this is a contract -- I guarantee you $2.5 million the next 5 years paid at $500,000 a year as a minimum revenue guarantee." That -- meaning if they have -- I'll make it up, $100 million book of business, no matter what, if the business is anywhere from, let's say, $0 million to $20 million, I'll make it up, we still get $500,000. If they have $1 million on it, we get $500,000. If they get $19 million on it, we get $500,000.

Now when they get above the $20 million, then they have tiers of payments. So you have to pay me more money if you put, let's say, between $20 million and $30 million of business on it. And if you go from $30 million to $40 million and so on, up to a $100 million. And in some cases, it's not a linear model. There is volume, discount pricing, meaning we start getting more and more revenue, but the more volume they do, they get a better discount. And in some cases, the revenue on these accounts can go from $0.5 million over the course of the pending years, 3, 4 and 5, that run rate, depending on their business growth, could get to $1 million, $1.5 million. So we get the additional revenue with no additional work. Does that make sense?

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Rohith Potti, [15]

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Yes. That made sense. That was helpful. Lastly, can you...

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Adam Elster, Majesco Limited - CEO & Director [16]

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As you would expect for each contract, depending on the size of the business, the minimum revenue commitment payment from someone who's going to put $10 million on the platform versus someone who's going to guarantee me $100 million is bigger, right? And if you're going to go from $100 million direct written premium on the system to $200 million versus you're going to tell me you're going to go from $100 million to $1 billion on the platform, all of those factor in to how we do discounting and how their subscription license works.

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Rohith Potti, [17]

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Understood. Okay. That was helpful. And lastly, before I go back to the queue is -- I mean with the -- I mean with both L&A and P&C tied up with IBM and with the L&A tie-up with Capgemini, I understand you're probably targeting the larger insurers, the Tier 1, Tier 2 insurers. I was just curious, in comparison to the startup insuring -- insurer than the Tier 3, Tier 4, in comparison to Tier 1, Tier 2, is there a major difference in the sales cycle? Or it's pretty much the same, taking around 1 to 2 years across customer base?

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Adam Elster, Majesco Limited - CEO & Director [18]

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Ultimately, I find it's still taking pretty long, so still taking closer to 18 to 24 months. What we are finding is some examples where customers are starting new greenfield projects, taking less time, because their -- the speed to market is becoming a big factor. So we are seeing some pressure in that, but from my perspective, I still feel like it's taking too long. But with greenfield projects, we do see a slightly shorter sales cycle.

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Operator [19]

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(Operator Instructions) The next question is from the line of [Rohith Putt] from [Erabod Capital].

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Unidentified Analyst, [20]

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So in the context of you trying to build out your SaaS business, in the last 2 quarters, you've been quite flat on subscription revenues. And surprisingly, both customer support and maintenance as well as license revenue have grown.

So in that context, are you able to start seeing what your volume and revenue churn is on the SaaS business? And what is that looking like?

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Adam Elster, Majesco Limited - CEO & Director [21]

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Yes. We're feeling good about it. We do feel good about the business. From a revenue standpoint, it takes a little while to build up. I mean the key factors in the SaaS model is -- the signing of a new contract is clearly a very important milestone, right? You get a customer to commit, but the most important milestone in these projects is going live. So when you hear me talk about the business in general and some of the key factors and key performance indicators, as excited as I might be on our 4 new logos, I can assure you from a revenue perspective, I'm more excited about our go-lives. Because in the example of both MetLife and the deals we're talking about, it's important for me to get the minimum revenue commitment, but I don't get that until they go live. So you have a period of time where I sign a new contract -- and let's say I signed a new contract on April 1 of our fiscal year. If that project doesn't go live for 6 months, the revenue is very minimal from a subscription perspective until we go live.

So when you see the number of go lives, that to me is a much more interesting leading indicator because once I go live, I start receiving the minimum revenue commitment.

So when Farid's gives the example of MetLife. We have generated considerable revenue from the services to do the implementation, considerable subscription revenue in the preproduction. But until they go live, that minimum revenue commitment on the platform does not kick in. So we feel good about it, but as you are each modeling the business, you have to take into account that in many cases, while we've signed the contracts and we've started the implementation, the subscription revenue delays in appearing until we go live, and then we only get the minimum revenue commitment until they put more business on the platform.

So if you were to look at some of the charts that we put together for Investor Day, you'll see that we try to model examples of how that works. But we feel good. We're signing new logos. They're signing on the cloud platform during the implementation, but I recognize that for investors, it's much more enjoyable to see big pops of revenue upfront and see that month-by-month correlation, and that this model, there is a delay, which I understand is harder for you to model.

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Farid L. Kazani, Majesco Limited - MD & Group CFO [22]

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Yes. And just to kind of add on to the question that you had on the license, okay? As you have seen last year, our license was approximately 3% of our revenue. You've seen the spike in this quarter, to the extent of the details elaborated earlier, that we had an upgrade from an existing account where we got the license revenue upfront. And because of the accounting change, it has got accounted in this entire -- the entire license for the entire [channel] -- it's got accounted on this quarter. This is why you see the license as a percentage in this quarter much higher, as close to 10%, but that is obviously a onetime.

On the other hand, the maintenance support has remained between 18.5% to 19%. And that is grown in line with typically the implementations on the on-prem that was -- that's getting complete in the last 12 to 18 months, and that gets converted into a support maintenance. So that's why these 2 line items have moved in tandem to how we've seen in the business. And the cloud is clearly linked to, in terms of how we are building during the implementation for cloud customer and then encouraging customers to adopt on the platform.

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Unidentified Analyst, [23]

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And just on the SaaS business again, how much of your sales cost today are subscription-linked? And so are you able to say what your customer acquisition costs are? And what the volume churn will start looking like in the future or even today?

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Adam Elster, Majesco Limited - CEO & Director [24]

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All of the new deals are cloud deals and subscription. So that is our -- that's how we are selling. In some cases, we have a few customers who have asked for some other -- some language that creates some rev rec but all the deals are done on a subscription basis. And we are tracking every single account that we do. From a minimum revenue commit, direct-written premium, we're doing a very rigorous monthly cadence of tracking all that material moving forward.

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Unidentified Analyst, [25]

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And so all sales teams today are focused on the cloud?

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Adam Elster, Majesco Limited - CEO & Director [26]

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Yes. That's how we sell. That's the product we're selling. We're selling the CloudInsurer product, and we're selling it with subscription.

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Operator [27]

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The next question is from the line of Apurv Kulkarni from Nine Rivers Capital.

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Apurv Kulkarni;Nine Rivers Capital;Analyst, [28]

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I had two questions. One was that with your current existing on-prem-based clients, are you asking them to migrate to cloud or are they happy staying on-prem? Second was -- second question was that -- okay, if you can answer the first one.

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Adam Elster, Majesco Limited - CEO & Director [29]

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Yes. We are asking all of them. So to be clear, there isn't a customer we have who isn't either on an on-premise version or on an older version that we are not serious in discussions with them about migrating to the cloud and our latest versions. In many cases, they are open to it. In some cases, they are looking at customizations they've done on the on-premise version to understand what's the level of effort to move to our current version, and we certainly have some customers who want to leave it alone. So definitely have some group of customers who say, "We don't -- we're not interested in moving to the cloud right now. Our business is working fine. We don't want to change." But we are actively pursuing that with many customers.

And again, when I talk about some of the go-lives this quarter, I'm particularly proud of the couple of the go-lives because we had a few, 3 I think it was this quarter, who were on both old version and on-premise that have moved to the cloud. So as much as we were excited that 25% of our customers now are on cloud, we hope not only to add the new customers to our cloud environment, but we hope over time that more and more of our existing customers will migrate as well.

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Apurv Kulkarni;Nine Rivers Capital;Analyst, [30]

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Okay. Adam, just a follow-up on that. When an on-prem customer goes on cloud with your existing offering, he would have paid you a hefty licensing fee when he got on-prem. So how easy it is for him to grow further that and work on a slightly asset-light model, which is a cloud model?

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Adam Elster, Majesco Limited - CEO & Director [31]

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It's -- each customer is a little unique. So in many cases, these customers have built business processes around -- and integrations around some of their on-premise system. So this is not cookie cutter. This is not where every implementation is the same or works the same way. They are each unique. And to the extent that any technology vendor has done an on-premise implementation with customization, the more customizations you've done, the harder those migrations are. So I would tell you each one is unique. Some are -- for the lower-tier customers, it tends to be a little easier than some of the larger customers who tied many other systems in their environments to these core back-end systems.

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Apurv Kulkarni;Nine Rivers Capital;Analyst, [32]

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Okay. Just one last question. I sort of wanted to...

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Adam Elster, Majesco Limited - CEO & Director [33]

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I think we lost him.

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Operator [34]

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We'll move to the next question. (Operator Instructions) The next question is from the line of from [Amit Agarwal] from [Vendi Investments].

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Unidentified Analyst, [35]

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I would want to understand what is the breakup of the 12-month executable order book in terms of cloud and on-premise?

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Adam Elster, Majesco Limited - CEO & Director [36]

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100% cloud.

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Unidentified Analyst, [37]

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So in the 12-month executable book is for the cloud revenue?

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Adam Elster, Majesco Limited - CEO & Director [38]

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You mean the backlog itself?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [39]

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No, no. The backlog has roughly around close to 40% -- a little over 40% on the cloud right now, but at least is in line with the other streams of revenues that we have.

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Unidentified Analyst, [40]

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Okay. Understand. And does 12-month order executable -- order book includes service and maintenance revenue?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [41]

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Yes. But that also only when we find out on the number will be only for the 12-month revenue.

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Unidentified Analyst, [42]

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Understand. And can you also throw some light on total contract won during the quarter in Q1?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [43]

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We don't give that number specifically because that's something that is a competitive information.

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Operator [44]

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The next question is from the line of Manan Patel from Equirus Portfolio Management.

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Manan Patel;Equirus Portfolio Management;Analyst, [45]

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Sir, I wanted to understand we generally have -- you mentioned around 5-year contract. So at the end of 5 years, there's some customers want to switch, what are the kinds of switching costs does it involved in? What is the probability of that customer switching?

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Adam Elster, Majesco Limited - CEO & Director [46]

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So let me make sure I understood the question. In general, you said people have 5-year contract, and then your question is what is the switching cost at the end of the contract term, is that what you said?

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Manan Patel;Equirus Portfolio Management;Analyst, [47]

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So I wanted to understand if some customer wants to switch to a competitor's product after 5 years, how likely he -- is that customer would switch from Majesco...

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Adam Elster, Majesco Limited - CEO & Director [48]

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Very unlikely. So I mean in general, and this is true. It's true, as true as it is for Majesco, it is true for our competitors as well, right, that once you put in some of these core systems and writing your book of business on it, migrated from our legacy system to a provider system or migrating from an on-premise to a cloud or one or the other, these are pretty complex projects. The decisions take -- as you heard on the deal term, need decisions take anywhere from 18 to 24 months, and then the implementation to take -- can take 18 months as well. But if you're going to decide to move off within 5 years, you're likely just -- you have to make that decision right around when you have live. So we are not -- that's why I would say for us and other vendors of the sort, the business is pretty sticky. And once they make a decision that it's very rare for them not renew after the first contractual term.

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Manan Patel;Equirus Portfolio Management;Analyst, [49]

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And on this question, after 5 years, do you have escalation clause in terms of subscription -- minimum subscription revenues or something like that?

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Adam Elster, Majesco Limited - CEO & Director [50]

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Yes, we do.

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Manan Patel;Equirus Portfolio Management;Analyst, [51]

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Okay. And sir, my next...

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Adam Elster, Majesco Limited - CEO & Director [52]

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But honestly, that's not where you're going to make the money, right? So we definitely have that, right? So with any contract, as you can imagine, in end of term, there's price escalation. But that's an old way of thinking, right? That's actually old license model that says, "Hey, I got the money for 5 years and it's over, I get another bucket at a higher rate." The way to make more money in these contracts is the more direct-written premium, as put on this platform, we should be getting escalated revenues within the 5-year period, not just at the end. But you can assume that for all our contracts, there is rate escalators at the end of terms.

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Manan Patel;Equirus Portfolio Management;Analyst, [53]

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Understood, sir. And sir, my next question is, going forward and in your medium term or long-term vision around 5 to 7 years, what kind of revenue mix would be likely seen in terms of subscription revenues versus other streams?

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Adam Elster, Majesco Limited - CEO & Director [54]

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Look, right now at a macro level, our mix of business is as many of you're aware, is roughly 70% services to 30% product, and there's a mix of product revenue. We would like to see our balance of product to services get closer to a 50-50 model, and we would like to see a majority of the 50% that is product be recurring revenue. Recurring revenue would be a mix of subscription and some of the recurring maintenance. So that's long term. That's where we see the visions of the company.

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Operator [55]

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(Operator Instructions) The next question is from the line of [Dipen Shah], an individual investor.

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Unidentified Participant, [56]

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Congrats on a good set of numbers. I had a couple of questions. Firstly, maybe I missed the data, but we have seen a spike in the license revenues, and as Farid explained, it is probably a onetime some part of the (inaudible). Maybe let us know what's the onetime component. And the reduction in the subscription revenues is largely due to the IBM contract getting lower. Am I right on that?

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Adam Elster, Majesco Limited - CEO & Director [57]

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Yes. I mean literally, the spike is related to the accounting regulation of how you recognize the licensed revenue, it's essentially -- it's a timing issue on the revenues, so it's no fundamental change in our business model. And you're correct in some of the reflection of the subscription related to the IBM project. So you have that correct.

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Unidentified Participant, [58]

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Okay. Okay. So in terms of the subscription revenues, should we expect a further fall, maybe IBM contract got over in the middle of the quarter. So is there a further space for a reduction in subscription revenue because of IBM or this is the base which you should start working with?

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Adam Elster, Majesco Limited - CEO & Director [59]

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We're hoping, as you heard earlier, to the point of which the IBM project goes live, we start incurring the minimum revenue subscription commitment. So to the extent the project goes live in the near term, we're able to recognize that revenue.

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Unidentified Participant, [60]

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Okay. And lastly on the margin front, if you can just -- how do you model the margins for the company, say, 1 or 2 years down the line, once we reach the steady state or maybe the higher level of cloud revenues from -- for the company, like you just mentioned you're looking at a 50% split. So during that period, how should you model the margins? Because you're already at around 40% cloud subscription -- cloud revenues, and we are in the 10% to 12% range. So should we aim for higher margins going ahead on a stable steady state basis? If you can just give...

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Adam Elster, Majesco Limited - CEO & Director [61]

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At a high level, obviously, we don't give guidance on margin. But the way I would say to think about it is, as we discussed, we are looking to move the business more towards the product side and more subscription revenue, right? That revenue, particularly the incremental revenue that comes from adoption comes at a high margin. So to the extent over the next 3 to 5 years, our mix of business moves more towards product, and we get the growth from adoption of the subscription revenue, we believe that will drive a higher margin. In addition, when you look at the percentage with cloud revenue at the moment, a big percentage of that is cloud services for the implementations. And as all of you are aware, the larger the services component is whether at a macro level or even on the cloud, that comes at a lower margin than the product side. So we believe over the next 3 to 5 years, as we think about it, we are looking to be -- have more of our revenue come from the product, more of our revenue be subscription. And as you've seen, we've had a reduction in some of the revenue associated with on-premise. So that mix and blend of those revenue has a direct correlation to where the margin will be impacted over the next few years.

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Operator [62]

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The next question is from the line of Rahul Jain from Dolat Capital.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [63]

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Can you tell me the precise amount of the onetime license that you booked in this quarter? And why you don't think that similar incidents (inaudible) than any other client would do the same?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [64]

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Yes. So Rahul, we had close to $2-odd million of the onetime license in this quarter. And we're not presuming that such incidents of getting on-prem license either as an upgrade or new clients coming in. Because if you remember last year, we did have 1 on-prem client in North America. Out of the 15, 14 were cloud and 1 was on-prem. So we're not really that we will not have. There is a possibility that such incidents of revenues could happen in future. But since this is due to the accounting requirements, the entire amount is accounted in this quarter upfront. And that's what shows a positive from a license revenue perspective. It was better for us to clarify that.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [65]

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Right. So from an accounting perspective, are you trying to say all perpetual on-premise licenses or rather term-based licensing would now be accounted as perpetual by default?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [66]

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No, Rahul. Let me clarify. This is not perpetual license. It's basically -- the way it's structured is still -- it's still an annual license to the customer. It is invoiced on an annual basis, it is also paid by the customer on an annual basis. Let's say it is 3-year term, and you kind of charge the customer $100 each year, you would invoice the $100 each year and receive the money also in that 3-year term. But because under the 606 accounting and under the 115 accounting, there is no further obligation on this particular revenue stream. The revenue recognition norms require you to kind of account that entire revenue because there is no obligation left or there's no liability left of this revenue. This is why the entire $300 will get accounted at a point in time rather than a period of time. So it's the accounting changed, not the way it gets structured, still you charge to the client, let's say, on an annual basis as he is paying the annual fee.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [67]

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But what happens to other term-based license? Why we won't do that to them as well?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [68]

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Yes. As long as the contract, whether it's a perpetual or annual license, as long the contract is very clearly that there is no further obligation on this particular revenue item, and there's nothing in the contract that allows the customer to ask for the money back, okay, you have to account it in line with the 606 or the 115 accounting practice.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [69]

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So -- which eventually means, even if you sign other term-based client, all the licenses will be apparently recognized?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [70]

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Yes. As per what I just told you in terms of the conditions are at end of the contract.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [71]

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Right. Right. Secondly, why we have seen a significant head count cut in the non-U. S. markets?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [72]

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So this is in the non-U. S. or U.S.?

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [73]

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Non-U. S. and in Asia and Europe?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [74]

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No. So let me clarify. So if you look at the numbers that we shared in the report, okay, we had a reduction in the Asia Pacific and the India, okay, by 92, which included 57 on account of separation linked to further project completion. And the balance 50-odd were transferred to other BUs and -- business units and delivery units. So it's a reclass that has been done in this quarter. The separations are only 57.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [75]

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So they moved to different [countries]?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [76]

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Yes. They moved to different business units and delivery units.

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Adam Elster, Majesco Limited - CEO & Director [77]

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Look, in general, as you think about our head count in general and as you think about our cost basis in general, what you've seen in the business is that we understand that as we're pivoting the model more and more towards cloud and subscription there, we still have an on-premise implementations that are wrapping up. As we wrap up these on-premise implementations, wherever they are around the world, we assess the skills of all of our employees and understand, are these individuals who will be able move to new cloud implementations? Are they the individuals who will be better suited doing product development or support work?

And as you can imagine, as we're pivoting the business, we're ensuring that we are using the right resources for the right projects and that we are nurturing and hiring the right employees. So I think what should you expect to see over the coming years is that we are on an ongoing basis transforming not only our business but making sure we're developing our employees to match our needs. And I think you will continue to see that some projects ramp down or some ramp up, but our employee base will have to adjust accordingly.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [78]

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Okay. Lastly, what is the services revenue as a percentage in this quarter? And what is the interest income for as SaaS has moved to the U.S. market?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [79]

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So when you talk about services, you're talking about the path, which is the professional services?

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [80]

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Yes. I just have to say yes.

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Farid L. Kazani, Majesco Limited - MD & Group CFO [81]

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Yes. So for the quarter, if you look at the total professional services was 31.6%, but on-premises 15%, the balance is the services part. And on your second question, we moved close to $32 million in terms of the rights issue, subscription to the Majesco U.S. shares in March of 2019. And to the extent of the amount that was sold -- that was paid for the Exaxe acquisitions, roughly around $7.3 million. And another $0.7 million that has got paid in 1st August of 2019, the balance amount was lying in deposits with the bank, and that's earning a roughly 2.7%.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [82]

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Okay. So the current quarter would represent the right [yield] for us or this should go down further?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [83]

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No. I think if you look at it to the extent of amount that has got utilized obviously the quantum would have reduced. But since we're generating cash flow, so I think you can assume the same number till the time we go down in our cash flow overall, yes.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [84]

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So yield is perfect, you mean to say, interest yield is perfect.

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Farid L. Kazani, Majesco Limited - MD & Group CFO [85]

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Yes.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [86]

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Okay. And -- sorry, I missed the number, you said 15% of paid professional is on-premise, [on-site] and rest is the [Exaxe]?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [87]

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That is right. Yes.

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Operator [88]

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(Operator Instructions) The next question is from the line of Amit Chandra from HDFC Securities.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [89]

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Sir, my question is related to the cloud customers. So we have 58 cloud customers as of now. So I just wanted to know how many are in the implementation phaseout of the 58, and how many actually have gone live. And out of the customers who are actually gone live, how much we are -- out of them, how much we are deriving the minimum subscription? Or is there any platform which are actually scaled up and actually have crossed the minimum subscription level?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [90]

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Amit, I don't have the specific details of the question that you asked, okay? But just to give you a flavor, there are quite a few of the customers that are on minimum committed revenue. However, there are some customers that have moved beyond that. So we get roughly around -- a little over 60% from top 10 customers in that cloud business, yes, cloud subscription.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [91]

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Okay. So out of 58, how many are still in the implementation phase?

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Farid L. Kazani, Majesco Limited - MD & Group CFO [92]

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I don't have the exact number. I don't want to just throw a number at you right now. I can come back to you.

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Operator [93]

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The next question is from the line of [Arvin Mania], an individual investor.

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Unidentified Participant, [94]

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I want to understand the new leases that has happened this quarter. So what is typically the upgrade path? Is it based on the customers or do you want to recommend it to them, the [day-to-day] functionality?

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Adam Elster, Majesco Limited - CEO & Director [95]

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Yes. I mean from the upgrade path for our existing customers, reality for our customers, as with other technology areas, right, many customers are running products from several years ago that have capability. But as they look at our new products, particularly the Version 10 and Version 11 of cloud insurer, they see all the digital capabilities. They see the ability to utilize APIs and be more digital and use mobility and big data. So for many of these customers, while they like the day-to-day functionality of what they're able to do to run their business, they want the enhanced digital capabilities. So for them, it's balancing fundamental nuts and bolts of running their business with their ability to take it to a more digital environment.

So each one has its unique challenges, but in general, they are all looking to do more with technology, more automation and they see the capabilities with our new products, and it's really that functionality, which is the biggest driver to them wanting new upgrades.

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Unidentified Participant, [96]

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Okay. So how is the interest so far has been? Are there any early indications to the [upgrades]?

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Adam Elster, Majesco Limited - CEO & Director [97]

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Very good. I mean the good news is the pipeline is growing. The cloud deals is what we're focused on. I think as I said in some of my prepared remarks, it's really the alignment, the strategy that we've launched as a company over the last several years is absolutely in line with the market. So whenever you look at your business and the market opportunity, I think the #1 challenge for any company is to say, what's your strategy and the digital line to the opportunity in the market. And what we are seeing from analyst and in the industry is that all of the insurance companies realize that they're probably 3 to 5 years behind financial services and other verticals in migrating to the cloud and using automation and AI and digital technology, so they realize the need to move. And I think that's aligned very well to our portfolio of capabilities. I know it's a matter of all of us recognizing these opportunities in the transformation. But I'm excited because no matter what report I read from an analyst or someone in the insurance industry, we are now starting to recognize that they need to have these capabilities and our platform can afford them that.

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Unidentified Participant, [98]

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Okay. So does it again come in at a higher price with respect to the upgrades for this 5-year [revised]?

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Adam Elster, Majesco Limited - CEO & Director [99]

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I didn't -- you broke up. I couldn't understand the question. Can you repeat it?

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Unidentified Participant, [100]

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So I'm just trying to understand if somebody is already on cloud, so on, say, a 3-year plan or a 5-year plan. So when they move to this new version, so how does the contract get [revised]?

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Adam Elster, Majesco Limited - CEO & Director [101]

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So how does that -- you're saying, if someone moves from their on-premise to a cloud, how does the contract work?

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Unidentified Participant, [102]

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(inaudible) then they move and then so yes, in the third year of their 5-year contract. So in the contract or...

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Adam Elster, Majesco Limited - CEO & Director [103]

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Yes. If you're on Version 10 on CloudInsurer, you can upgrade to Version 11. It's a cloud platform. It's completely seamlessly upgradable. There's no upcharge. There's no additional fee. You're able to do the upgrade. So if you're on a Version 10 on the cloud and you move to 11, while you might pay for some services, for some configuration or some reporting from a core platform, it's a seamless upgrade.

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Operator [104]

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Due to time constraints, we will take the last question from the line of [Ganesh Ati], an individual investor.

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Unidentified Participant, [105]

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Sir, as you see, there is a lot of opportunity for services as well as the product business in the insurance sector. Do you see substantial increase in sales and marketing expenses in the coming quarters' costs? And also please explain whether are you happy with your previous projection of your revenue growth and the profitability margins? Can you please throw some light on it?

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Adam Elster, Majesco Limited - CEO & Director [106]

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Say -- the second -- the first question, I understood. Can you repeat the second one? Again, you broke up.

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Unidentified Participant, [107]

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Yes. I just want to know whether the sales and marketing expenses are going to go up in the coming quarters due to the vast visibility of opportunities in insurance sector.

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Adam Elster, Majesco Limited - CEO & Director [108]

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Yes. I don't think from a market opportunity, I don't -- I think we're able to capture the amount of opportunity we're looking at right now. I don't see us making a spike of investment in go-to-market. We made investments in our Q4 and our Q1 related to marketing and the brand. And you'll can see more content come out every quarter relative to video content and other areas to reach the market. But I wouldn't expect to see some giant spike in go-to-market expenses at this time.

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Unidentified Participant, [109]

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Yes. And my second part was, when I am pricing this company quite a long time now, and the revenue growth has not been substantial as we projected during the last -- 3 years back. So can you see that volatility the markets can come up and our projection can go just behind our own expectation. Can you please throw some light on this, sir?

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Adam Elster, Majesco Limited - CEO & Director [110]

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Yes. I would tell you, and again, I realize several years back, there was a 3-year revenue projection in the business plan, but I understand that, that didn't necessarily meet the goals that we had communicated or people desired. I understand that. But that being said, as we move forward, we're building the company for long-term sustainable growth, right? So while past business models for both Majesco and other insurance technology companies would afford the ability to do very large transactions and recognize revenue upfront, which made for a very lumpy business model. But if you did it consistently, it will be high-growth. The new model for long-term sustainable growth, it will be much more predictable but won't come at the same spikes in revenue that you might be more historically used to from perpetual license models from ourself, from our competitors and other technology companies.

So I'm neither pleased or unpleased with the results from the last 4 years as we talk about our strategy, and you hear me express that business model for the revenue of moving forward, we believe to the extent we will land these customers, bring them go-live. They start building more and more of business on this platform, we believe it will be very sticky and we believe as their business grows, we will grow over time. And while it won't necessarily be as lumpy as people had experienced in the past with the big spikes, we believe that over the course of the next 3 to 5 years, it will be a consistent growth and more predictable. And we think that model is a beneficial not just for the customers, but for us to make sure we're making the right investments for the business moving forward.

With that said, I think, Farid, if I'm correct, that was the last question. And I'd like to -- I'd really like to thank everyone for joining us this evening on the call. As I said earlier, we're very happy with the results from this quarter. And we believe that our operating model is putting us in the right position to move forward. At the same time, as I said several times on the call, we believe that our strategy is absolutely in line with the market and what our customers are asking us to do. They want more and more cloud solutions that they can pay for in a subscription model. They want more solutions and go-to-market and go live faster, and they want more solutions that are upgradable with configuration versus a lot of manual custom code and our business model and we're focus-aligned to that. So I'm very encouraged by the business, we're growing acceptance of our products. And I look forward for Farid and I continuing the discussions with all of the shareholders and investors over the course of the year.

So Farid, thank you very much, and thank you to everyone for joining our call this evening.

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Farid L. Kazani, Majesco Limited - MD & Group CFO [111]

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Thank you very much.

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Operator [112]

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Thank you. Ladies and gentlemen, on behalf of Majesco Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.