Persistent Systems Ltd

NSE:PERSISTENT

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to Persistent Systems Earnings Conference Call for the first quarter of FY '24 ended on June 30, 2023. We have with us today on the call, Dr. Anand Deshpande, Chairman and Managing Director; Mr. Sandeep Kalra, Executive Director and Chief Executive Officer; Mr. Sunil Sapre, Executive Director and Chief Financial Officer; and Mr. Saurabh Dwivedi, Head of Investor Relations. [Operator Instructions]

Please note, this conference is being recorded. I now hand the conference over to Mr. Sandeep Kalra. Thank you, and over to you, sir.

[Sandeep Kalra, executive]

Thank you, moderator. Good evening, good afternoon, good morning to all of you, depending on where you're joining from. We would like to start this call by thanking each one of our customers, partners and investors as well as our 23,000-plus team members for their resilience and continued trust.

Let me now start with our quarterly financials. We are happy to report yet another good growth quarter across major business and financial metrics, even as the macroeconomic environment remained uncertain. The revenue for Q1 came in at USD 282.9 million, giving us a growth of 3% quarter-on-quarter and 17.1% on year-on-year basis. In rupee terms, the growth for the quarter came in at 3% quarter-on-quarter and 23.6% on year-on-year basis.

Coming to EBIT. Our EBIT for Q1 came in at 14.9%. This translates into a growth of 29% on Y-on-Y basis. On a Q-on-Q basis, the EBIT margin declined 50 basis points as the tailwind of revenue growth was offset by higher visa cost, higher amortization costs and doubtful debt provision. Sunil will provide more color on the EBIT margin movement later in the call.

We are happy to report that we have implemented salary increments for our global employees as per our regular cycle effective July 2023. We expect to offset most of the margin headwinds due to the wage increase through cost rationalization measures, which are being set in motion from Q2 onwards. We remain committed to our goal of improving EBIT margins over the million.

Now coming to the order book for the quarter. The total contract value for the quarter came in at USD 380.3 million, with new bookings TCV coming in at $237.2 million. The annual contract value component of this TCV is of the order of $271.9 million, of which the new booking ACV component contributed to $144.1 million. While the demand environment remains stable, there were a few instances of delays in customer's decision-making owing to which some deals got pushed out to subsequent quarters, and we are hopeful of closing these deals in Q2 and subsequent quarters. Please note that, as always, these TCV, ACV numbers include all bookings, small and large, renewals as well as new bookings across existing as well as new customers.

Coming to the client engagement size. Let me give you some color on our client engagement size. We are pleased to report that our top customer revenue saw a healthy growth of 13.4% Q-on-Q in USD terms. This was on the back of 30% plus growth in the previous quarter. We continue to partner closely with our top customer to help them achieve their digital transformation objectives, while also exploring meaningful opportunities for long-term connection. Our overall portfolio of top 50 customers grew by a robust 5.7% during Q1. As you would appreciate, our base of top 50 customers is a portfolio of our strongest relationships, and different customers are likely to take leadership in driving growth of this portfolio in different quarters.

We are excited to report that the progression of our clients across important revenue threshold continues with one additional customer moving into the $20 million to $30 million bank during the quarter, scaling up from the lower client renewal. The total count of $5 million to $10 million customers increased to 21 from 17. The total count of greater than $5 million customers is up to 38 compared with a count of 34 in the last quarter and 26 such customers in Q4 of FY '22. On the geography side, North America grew 4.9% Q-on-Q in USD terms, while India revenue grew by 1.5% Q-on-Q. Europe revenue declined 2.8% Q-on-Q on a smaller base.

Coming to the people front. In Q1, we added 241 colleagues on a net basis, taking our total head count to 23,130. We continue to increase the deployment of freshers on customer projects, though significant room still remains in improving fresher utilization, and this will be an important margin lever for us in the next few quarters. The blended utilization for the quarter came in at 78.3% as against 77.3% in Q4 FY '23, aided partly by increased fresher utilization.

On the trailing 12-month attrition, we saw the quarter come in at 15.5% compared to 19.8% in Q4. Attrition has come down to a more comfortable band compared with the last few quarters. The decline in attrition should nonetheless be seen in the context of general moderation of hiring across the sector and positive outcomes from our employee value-related interventions by our HR.

Moving on from operational metrics to certain strategic highlights for the quarter. A number of you have been inquiring about generative AI and our forays into the same. So let's start with that. As a pioneering digital engineering firm, Persistent has been committed to innovation and staying ahead of the curve across major technological developments. We have been working in the field of AI and related technology segments for last several years and have been working with several enterprise customers in their data transformation and AI programs as well as with technology companies in building the technology for the enterprises.

Our many AI practitioners, researchers and senior leaders have been closely following the generative AI developments and are enabling us to strategically adapt to these evolutions in the field of AI and meaningfully participate in the growing opportunities of generative AI. Over the last several quarters, we have been working on strengthening our partnerships with the leading hyperscalers, AWS, Microsoft and Google around their gen AI initiatives, as you would have noticed from our earnings presentation and such.

In the gen AI domain, our target is to train 16,000 of our employees over the next several quarters. We have developed playbooks to effectively use [indiscernible], such as AWS CodeWhisperer and Microsoft GitHub Copilot to systematically boost productivity of our engineers, while resolving the privacy and licensing challenges, working closely with our hyperscaler and other technology markets.

An advanced level training will focus on competencies, such as AI engineering, enterprise architecture, deep understanding of IP, data privacy, security, product liability, trust and identity considerations as we move deeper into generative AI. We have and will continue to train our architects and developers to build AI-infused applications from the get-go to ensure AI is embedded into our work culture.

We have also been leveraging gen AI technologies in our own internal landscape as a customer 0 and are unlocking significant productivity across several use cases across functions such as HR, marketing and IT programs. With all this, we are finding good momentum on the business side as well and are in discussions with over 50-plus clients on generative AI-related project opportunities. These are a combination of gen AI advisory, gen AI-powered payer programmer, legacy code-based migration, conversational AI enterprise search, enterprise data modernization, gen AI security as well as gen AI broader engagements to name a few.

We expect the adoption of gen AI to pick up significantly over the last -- over the next several quarters and years. As of this point in time, while the revenue from this may be smaller, but the adoption of this should significantly increase over the next 3 to 4 quarters in subsequent years.

Coming to the updates on the [ M&A ] side. At this point, all our earlier acquisitions are fully integrated. And we are proud to say we are winning deals jointly based on the joint capabilities, and these are fructifying through the combination of the Persistent and the acquired companies. We are once again active on the M&A front, and we'll report progress on this front over the next several quarters.

On the Board front, we welcome Dr. Ajit Ranade as an Independent Director to our Board of Directors. Dr. Ranade, a renowned academician and economist, brings to Persistent his impressive experience of 32-plus years to help guide our strategy and accelerate our growth journey. We are looking forward to working closely with him as well as our other Board members for the next phase of Persistent's growth. We have shared more details as a part of our Q1 earnings release for our investors' [ recognition ].

Coming to the updates from our AGM. We recently conducted our 33rd Annual General Meeting earlier this week on 18th July. I'm pleased to share that all the resolutions that were put to vote have been approved by our shareholders with the requisite majority. On behalf of all of us, I would like to take a moment to thank all our retail and institutional shareholders for their support in this regard.

Coming to the administrative updates. On the administrative side, we opened a new office in Jaipur, India, as our latest COE for Salesforce-related technologies, Kraków, Poland as an extension of our nearshore capabilities in Europe and Dallas, Texas as the latest hub for our private equity-related competency. In the coming months and quarters, our expansion plans include locations such as Kolkata, Kochi and Chennai. Our endeavor is to provide world-class facilities to our employees in locations close to them and encourage them to work from office a few days a week.

In summary, we are pleased with our performance in Q1 FY '24 in a challenging business environment.

I would now like to invite Sunil, our CFO, to give a detailed color on the quarterly financials and related matters. I'll come back after Sunil's comments to give you some more details on key client wins, analyst awards and other recognitions for the quarter.

Over to you, Sunil.

[Sunil Sapre, executive]

Thank you, Sandeep, and good evening and good day to all, and thank you for taking the time to join us today. Sandeep has given a detailed update on the business side and the market perspective. Let me now take you through the details of financial performance for the quarter.

Before I start detailing on the quarterly financials, I would like to call out some of the changes we have made to our quarterly disclosures, which most of you would have noticed. We have provided additional disclosures in the nature of revenue contribution from top 50 clients, the total client base with annualized revenue in excess of $250,000 per annum, effort mix between global delivery centers in India and return on capital employed.

At the same time, we are discontinuing certain data points, including metrics across services and IP business, such as the breakup between services and IP revenue, services and IP client base and person months. And as a result of that, breakup of direct cost between employee-related expenses, purchase royalty and project-related travel expenses. These details are, of course, available in the detailed financials. It's just not it is on the face of the fact sheet, it is not there.

As our business has become more complex, comprising of fixed price and managed services deals, the breakup across services and IP revenue is becoming less meaningful. And hence, the discontinuity of this disclosure. Moreover, you will also observe that post restructuring of one of the contracts with our top client some quarters ago, the IP-led revenue as a percentage of total revenue has been less than 10%. It has been ranging between 7% to 9%. In view of the same, going forward, we'll be reporting the total revenue.

This being the quarter of change in disclosure, I would like to share that our services revenue grew by 2.7% quarter-on-quarter and IP revenue grew by 8.8% quarter-on-quarter. A few other data points, which I mentioned above, which we are discontinuing, is about the revenue by delivery centers, the billed person months and on-site offshore utilization, while we continue to disclose blended utilization rate, including trainees.

As most of you are aware, we make the changes to our metrics at the start of a fiscal year. And we have made these changes, which I just called out, keeping in mind the industry practices and based on inputs we have received from the analyst community over a period of time.

Let me now share with you the details of financial performance. The revenue for the quarter came in at $282.9 million, with a growth of 3% quarter-on-quarter and 17.1% Y-o-Y in dollar terms. Revenue for the quarter in INR terms was INR 23,211.8 million, reflecting growth of 3% quarter-on-quarter and 23.6% Y-o-Y. As I mentioned, services revenue grew by 2.7%, while [ Iberia ] revenue grew by 8%.

Coming to sequential growth for the quarter. BFSI grew 6.2%, technology companies grew 3.3%, while Healthcare and Life Sciences degrew by 2.8% quarter-on-quarter. On the effort side, our blended utilization, including trainees, was 78.3% as compared to 77.3% last quarter, and the attrition was 15.5%, reducing from 19.8% last quarter.

As you all are aware, and as Sandeep mentioned, we achieved $1 billion in annual revenue in FY '23, and it was only possible because of continued support of our customers, partners and employees. We had organized events across the globe to commemorate our journey with them and express our gratitude for their support. These events were well participated. The total onetime expense for these events and employee gifts amounted to INR 486 million, which impacted the margin by 2.1%. As you are aware, the Board recommended a special dividend of INR 10 per share as a gesture of our appreciation of the support and continued trust by our shareholders.

Let me now give you a walk-through of other details for the quarter. As you all know, this is a quarter where we do the H1B visa filings. So this cost came in this quarter and accounted for 40 basis points of impact. We have been encouraging all our employees to work from office at least 2 to 3 days a week. And during the last couple of years, in order to be closer to employees and also attract talent in various parts of the country, we have opened offices in Indore, Jaipur and Ahmedabad. And as you recall, with our acquisitions that we did about a year ago, we have now presence in NCR at Gurgaon and Noida. This coupled with expenses on food and transport due to increase in the employees in the offices had an impact on margin by about 20 basis points, with slight increase in the output debt provision of 10 basis points impact on the margin.

With the above, EBITDA for the quarter was at 18.2% as against 18.5% in the previous quarter. Depreciation and amortization expenses were at 3.3% as against 3.1% in the previous quarter. Last quarter, there was final allocation of purchase consideration for acquired entities, resulting in a credit of INR 40 million in amortization expense. In the normal course of business, there is an increase in amortization on account of investment in software tools for learning and development and for improved cybersecurity measures. As a result, in absolute terms, amortization, which was INR 434 million in Q3 and had declined to INR 404 million due to the credit, as I mentioned about, is currently at INR 476 million in this quarter.

With this, the operational EBIT for the quarter was at INR 3,466 million at 14.9% as against 15.4% in the previous quarter. Treasury income for the quarter was INR 154.58 million as against INR 129.05 million, mainly on account of increased interest rates and treasury size. ForEx loss was INR 64.1 million as against INR 189.1 million in the previous quarter.

Profit before tax for the quarter was INR 3,070.5 million at 13.2%. And if we adjust onetime expense for the $1 billion celebration expenses, the PBT comes to 15.3% as against 15.1% in the previous quarter. ETR was 25.5% as against 26.2% in the previous quarter. PAT for the quarter was INR 2,287.7 million at 9.9% from a margin perspective, adjusting for onetime expense, net of tax. Comparable PAT was INR 2,649.9 million before onetime expense, which is 11.4% of revenue as compared to INR 2,515.1 million in the previous quarter at 11.2% of revenue.

EPS for the quarter was INR 30.49. And adjusting for onetime expense, it would have been INR 35.32 as against INR 31.9 in the previous quarter. As I mentioned, we have disclosed ROCE for the quarter, which came in at 30% as against 28.8% in the previous quarter. Operational CapEx for the quarter was INR 140.4 million. Total cash and investments were INR 14,089 million as at 30th June '23 as compared to INR 15,991 million as at 31st March.

The cash balance at the end of Q1 was partially impacted by annual bonus payouts that happened in this quarter as well as [indiscernible] and health insurance premium, which is the seasonal item in this quarter. DSO came in at 67 days as against 68 days in the previous quarter. Due to long weekend in the U.S. coinciding with the quarter end, collections amounting to $9.8 million spilled over to first week of July. Otherwise, DSO could have come lower and, more importantly, it could have helped the cash. Forward contracts outstanding as at 30th June were $230 million at an average rate of INR 83.53 per dollar.

Let me explain the working capital movement and reasons for lower cash conversion during the quarter. As mentioned above, this quarter had payout of annual performance bonus to employees, which amounted to INR 1,886 million. Software license purchases and health insurance premium renewals amounted to INR 890 million. There was an increase in GST receivable primarily on account of the software licenses as mentioned above and purchase of furniture and fit-outs at our new learning and development center at Pune totaling INR 570 million.

The unbilled revenue went up this quarter due to delay in the receipt of POs from few customers, some of which have already been received in July and have been invoiced. As regards collections, as mentioned above, due to the long weekend, collections to the tune of INR 800 million came in the first 3 working days of July in the U.S.

All these factors cumulatively impacted cash conversion during the quarter. You will observe that first quarter of the year is seasonally lower for us in terms of cash conversion. But this time, higher spend on software purchases, increase in unbilled revenue and higher spillover of collections bunching together impacted the cash. This is under focus, and we expect the same to even out over the next couple of quarters.

With that, I thank you, everyone, and hand it back to Sandeep.

[Sandeep Kalra, executive]

Thank you, Sunil. I'll now talk about the key tailwinds for Q1 by industry segments. Starting with the Software, Hi-Tech and Emerging Industries. We were selected by a leading provider of a SaaS platform for customer service, sales and customer communication. This is a large deal for us spanning over 3 years, in which we will establish an offshore development center to undertake engineering on existing as well as new products of the customer.

Persistent was selected as a strategic partner by a multinational conglomerate in digital communications domain for engineering and support of its network services orchestration platform. This is a multiyear, multimillion dollar deal and involves vendor consolidation and transfer of work from on-site to offshore over a period of time.

Persistent was selected as a strategic partner by one of the leading hyperscalers to develop generative AI strategy and proof of concepts, database connectors, et cetera, for servers with their data integration.

Coming to Banking, Financial Services and Insurance. Persistent was selected by the financial services arm of a Fortune 500 automobile company to drive digital transformation of its customer acquisition platform, sales journey platform, customer service and contact center as well as marketing automation platform. This is a multimillion, muti-year team, encompassing implementation as well as [ management ].

Persistent was selected as a digital transformation partner by a leading U.S.-based financial software company to migrate applications from the environment of one of its acquired businesses to the customers' platform and provide managed services for such migrated applications. Persistent was selected by the U.S. subsidiary of a leading Japanese bank as a strategic IT services partner to develop data science platform for risk management, identity and access management applications as well as regulatory and compliance applications.

Coming to Healthcare & Life Sciences. Persistent was selected by one of the largest Fortune 500 company in the health care domain to undertake engineering on data and machine learning platforms of the company as well as to partner with them in innovation and transformation road map. This is a more than $50 million TCV deal for us, spanning across 3 years.

Persistent was selected by a large U.K.-based medical equipment manufacturing company for building and managing a unified data platform, encompassing supply chain, manufacturing, regulatory, product quality and finance functions.

We were selected by a leading company specializing in the detection of early-stage cancers to reengineer its platforms for curation, analytics and laboratory information management as well as migration of its data lake platform to the cloud.

Coming to the awards and recognitions for the quarter. Q4 saw us get continued recognition from industry leading analyst firms and associations, to mention a few. Persistent was featured in Everest Group's 2023 PEAK Matrix Service Provider of the Year awards under the Top 10 ITS Challengers list. Persistent was named as a leader in the Everest PEAK Matrix on Payments IT Services 2023. We were recognized as a major contender in Everest Group's health care data and analytics services PEAK Matrix Assessment 2023.

We were awarded by the Times Power Brands 2023 under the Excellence in Talent Acquisition category. We also won several awards from ISG, including being named a Leader in ISG Provider Lens Digital Engineering Services Quadrant U.S. 2023, a leader in Salesforce Ecosystem Partners 2023 ISG Provider Lens Study, and last but not the least, Top 15 Sourcing Standout in the Q1 2023 ISG Global Index.

In summary, we continue to deliver top quartile revenue growth in Q1 FY '24 despite a challenging macro environment. We remain watchful of the macroeconomic situation and are proactively staying closer to our clients, aiding them in prioritizing their technology spend towards transformation as well as cost optimization, and we are cautiously optimistic about our growth momentum.

I would like to once again thank our management team and global team members who have persevered through these uncertain times and delivered yet another growth quarter for all of us. Our decision to go ahead with normal wage increase in this macro environment is a testament to our gratitude for the same.

With this, I would like to conclude the prepared comments, and I would like to request the operator to open the floor for questions. Moderator, over to you.

[Operator]

[Operator Instructions] Your first question is from Abhishek Bhandari.

[Abhishek Bhandari, analyst]

Sandeep, I have 2 questions. First is, you have been talking in the past of your aspirational growth number of 3% to 5% every quarter. Good to see you still doing around 3% this quarter. But if I heard you correctly in the CNBC interview today morning, you alluded to 2% to 4% to 3% to 5% depending on macroeconomics. I couldn't quite get it. Are you saying that if the macro remains uncertain, you could go below your 3% to 5% number?

[Sandeep Kalra, executive]

So look, we don't give the forward-looking guidance. But having said that, we have said it very clearly. In a good economy, we will be between 3% to 5%. In a bad economy, we may get to 2% to 4%. And we have persevered through it, even in the current macro. You have seen all our peer results. We have persevered, and we have delivered 3%. So our endeavor is to deliver the best growth we can, and we are at it. And our bookings, et cetera, if you look at our traditional bookings, although this quarter was a tad bit lower, a few things slipped over, not necessarily lost, but slipped over and have closed or are closing. So our endeavor is to do what we have said, and we'll go from there.

[Abhishek Bhandari, analyst]

Sure. The second question is on the margin part. Given that probably the growth is slowing down a bit for us, do we still believe that this year, we could have a margin expansion compared to last year? While I understand your medium term, you want to go up by 200 to 300. But more from our next 4 to 5 quarters, do you think -- what could be the upward bias on the margin? And what would be the levers driving that?

[Sandeep Kalra, executive]

Sure. So if you look at the overall front, not just margins, our first priority is to make sure that we have a healthy growth momentum carry forward. That is our first thing. And we are investing in our growth, whether it is on our sales and marketing side, whether it is on our capabilities on generative AI or other technologies that we are dabbling in, cloud, data, security, [ language ]. So that is the first priority.

Now we are not hung up on optimizing the margins in the next 2, 3 quarters. We have said our aspiration over the next 2 to 3 years is 200 to 300 basis points, and we are at it. In terms of the levers, we still have a significant amount of underutilization in the freshers that we took. There is 12 to 15 months that many people have spent with the company. They have been trained. They have been shadowing different programs. We have significant dry powder in terms of talent. So that is one lever obviously.

Then there are other things, whether it is our lateral utilization, which also, if you look at it today, we are in the range of 78%. If we move from 78% to the highest that we have seen in the range of 83% plus, every percentage of utilization gives us 30 basis points. And there are many others, including revenue increases and so on. So we have certain levers, but our first priority is to make sure we grow healthily and then we'll go from there.

[Abhishek Bhandari, analyst]

Got it. And maybe one small last follow-up. While you hinted at some of the AI-related initiatives, both from an internal and external perspective, but if you could give some idea about any large investments you're seeing would be needed to probably cure the service line. And if so, like is it going to be more in terms of acquisitions or how you're thinking about you bolstering your AI [ core capabilities ]?

[Sandeep Kalra, executive]

Sure. So Abhishek, I'm sure a lot of other people are also interested in this. So let me just spend a minute on this. So if you look at Persistent, right from the get-go, we have been working on data. The name Persistent also comes from the persistency of databases and Anand himself is a Ph.D. in databases. That's our genesis. Over the years, we have been a multitude of AI products related work, whether it is for technology companies building their technology. For the hyperscalers itself, we are working on their machine learning-related technologies, which is the underlying thing behind all this.

For enterprises in Healthcare & Life Sciences, we have worked with them on doing platforms for tracking the progression of renal diseases and predicting the newer patients' renal disease progression or diabetes progression, or in financial services, in trade finance and many, many, many use cases. So this is not new to us.

Now it doesn't make sense for us to go and acquire another services company because this field is pretty new. Our own capabilities are pretty good. We are working with our hyperscaler partners. We are very closely collaborating with people, like AWS, Microsoft and Google, to understand their foray. We are using ourselves as customer 0. If you look at press releases that we have done, we have collaborated with Microsoft to use Viva and OpenAI in our own environment. Today, for our HR, we are using that business case. Now for our own developer productivity, we have experimentation going on with AWS as well as with Microsoft.

Similarly, in many of the customer environments, we are working on [ Bard ] or OpenAI or we are working closely with Google on their technology. So there's a significant investment that we are doing in putting a team together, which is basically going to evangelize this with our customers and even internally. And somewhere down the line in the next 2 to 3 quarters, we would have trained all our engineers on the different technologies, whether it is developer productivity, whether it is building these LLMs or foundation models or deploying them in an enterprise. We are not going to do acquisitions as of now in this because there's nothing to acquire. Everyone is learning, and we are ahead of them. So that is our foray, and we are putting investments into our own teams and their [ learnings ].

[Abhishek Bhandari, analyst]

Thank you, Sandeep, for the detailed answer, and all the best for the year.

[Operator]

The next question is from [ Siddharth ].

[Unknown Analyst]

Am I audible?

[Sandeep Kalra, executive]

Yes, you can speak a little louder, but you are audible.

[Unknown Analyst]

Sandeep, I have a couple of questions. During the quarter, one of our global peer released their guidance. So how are we reading that? And do we make any changes in our client strategy in order to mitigate such uncertainty, which can come [ throughout ] the year? Second, we opening offices in Tier 2 and Tier 3 towns to attract the talent and all. So does it give us a lever going forward that we will have a labor cost relatively lower to compared to what we get at Tier 1 cities and towns?

[Sandeep Kalra, executive]

So let me start with the first question. See, as far as our global peer is concerned, who reduced the guidance and so on. So look, every company is different. We can't manage other people's guidance. All we can do is perform well and within the hand that is delivered to us, whether it's a good macro or a bad macro, we are trying to do our best. And this is an economy in which we have to be proactive. We have to proactively -- based on our understanding of our customers and prospects, we have to take a cost optimization pitch and so on, and that's what we have been doing.

And we have -- this is the 13th sequential quarter for us for revenue increase and profit stabilization and increase. That should give you a proof point of we are at it. We can do better, obviously, and we will try and do whatever we can. But we are not giving any forward-looking guidance, reducing or increasing. We have delivered well, and we'll continue to execute.

Now as far as the Tier 2, Tier 3 cities are concerned, the basic rationale for us was, as the pandemic happened, a number of our employees also moved back to their hometowns. And some of these are Tier 2, Tier 3 cities that we have opened offices in wherever we saw clusters of our own employees moving back and we also saw clusters of talent availability.

And to your point, yes, it could be a margin lever for us as we go ahead because if we are taking our offices to where the talent is and not necessarily hiring in a high-cost location, like a Bangalore or Hyderabad or maybe even Pune, and we're diversifying our pool that we are getting the catchment area spread out to. That is the whole strategy, and we are also expecting this to not just expand the pool, but also reduce the attrition, both of which can be margin accretive.

[Operator]

[Operator Instructions] The next question is from Sandeep.

[Sunil Sapre, executive]

You can ask your question. If you're on mute, unmute and ask.

[Operator]

Can you unmute, Sandeep Shah?

[Unknown Analyst]

Yes. Can you hear me now?

[Sunil Sapre, executive]

Yes.

[Unknown Analyst]

The first question is, Sandeep, this time, the impact on the growth looks like it is more with the decaying buckets, not with maybe top clients, but set of clients. Whether this phenomena is correct and whether it is restricted to 1 or 2 verticals? Or is it broad-based? And second, the projects which are actually getting stopped and paused, do you believe it may come back or clients are actually rethinking in terms of not starting those projects and those may be actually canceled?

[Sandeep Kalra, executive]

So look, I wouldn't -- if one has to take a bigger picture view of things. At a uber level, it is not that everything is getting [ invested ]. There are different shades of customers. There are customers who are getting impacted in this macro a little more than others. And so we have seen some of these, including some of the strongest hyperscalers, take care of their own cost ahead of whatever it is. And so we had, for example, last quarter said, one of the largest hyperscalers. We had a ramp down of $3 million a quarter. And I can tell you, without naming anyone else, it's not just us, most of their [ service suppliers ] were dealt with the same [ hack ].

Now some of the weaker customers may postpone the deployment of capital, I don't think these are getting canceled. If there are any material things that get canceled, as we declared last quarter, openly, we will commence it. So there may be a little bit of a pushing out in terms of wrap-ups. There may be a little bit of spend pullback. What we are hearing from our customers is clearly the next 1 to 2 quarters are where it is tough, and then they are also expecting the market to open up for themselves. And hence, we are also hoping to see acceleration over the next 3, 4 quarters. That is where we are. Nothing that -- we can say this particular vertical, this particular customer set is suffering more than others.

[Operator]

Next question is from [ Prajay ].

[Unknown Analyst]

Hello. Am I audible?

[Sandeep Kalra, executive]

Yes, please.

[Unknown Analyst]

So I just have a small question. So when we are saying that it's a 200 basis points to 300 basis points of improvement, are we talking about PAT margin or EBIT margin? Just want clarification on this.

[Sandeep Kalra, executive]

So we are talking about the EBIT level.

[Operator]

The next question is from Dipesh Mehta.

[Dipesh Mehta, analyst]

Two questions. First of all, I just want to get some sense about the vertical. BFSI, I think most of peers indicated challenges in growth. We have very strong performance. HLS, we are seeing some weakness. If you can provide some sense how we look this 2 verticals and Hi-tech also. Second question is about the expenses side. Software license expenses have seen significant increase as a percentage of revenue over the last couple of quarters. So if you can provide some sense what is driving it and how one should model it?

[Sandeep Kalra, executive]

I'll answer the vertical-related question, and I'll have Sunil answer the software licenses-related question. Now if you look at the vertical side of it, while BFSI came in strong for us, from our customer conversations, we can see that the next few quarters are going to be a tad bit soft for BFSI. And we'll see how it pans out in actual execution.

Now from a Healthcare & Life Sciences perspective, the degrowth that we saw was particularly restricted to what we call Scientific Instruments and Medical Devices segment. There are 4 segments in Healthcare that we deal with. Scientific Instruments, Medical Devices, Payer, Provider and Pharma. Now when we look at the Scientific Instruments segment, there are a few of our customers who had seen a windfall in terms of their revenues because of their play in the COVID value chain, whether they were people who were providing reagents or test kits or equipment in the whole value chain. So that -- their revenues are now going down, and they are recalibrating to their new reality, and that includes some spend with us.

If you look at our bookings, from our bookings, the largest deal that we won in this quarter was with a payer and a tech company in the Healthcare segment. So if I look forward from what we know today, Healthcare & Life Sciences is going to be a good growth segment for us, while it may have seen 1 quarter dip.

Banking, Financial Services will be a little tepid. As far as technology is concerned, that is a segment where we have the strongest right to win and seat to the table. So that is going to be a good forte for us going ahead. Hopefully, that answers you, and Sunil will answer the question on software licensing.

Sunil, over to you.

[Sunil Sapre, executive]

Yes. So Dipesh, in terms of software licensing, there are basically, as you know, 2 items, one which is used in project deliveries for customer projects and the second for own use. So own use, basically, we have made, you can say, strengthen our own cybersecurity defense. We have also done some investments in learning and development related software. So these are 2 areas where you can see there is an increase in that type of expense. So as far as the delivery-related expenses are concerned, these are basically part of larger engagements where we use software of third parties, which are embedded in our deliveries. So that is the main reason for this.

[Operator]

The next question is from Ravi Menon.

[Ravi Menon, analyst]

Sandeep, just wanted your sense of are things slightly improving? Or what do you think will happen with client budgets? What we've heard from other people is that budgets stay allocated, but clients are just not ready to spend as if they're waiting for the macro to improve. So any improvement in the conversations over the last 3 months?

[Sandeep Kalra, executive]

Right. So I would say incrementally over the last several quarters, there has been a little more pullback than actually decision-making getting accelerated. People have the money, but they are all delaying their decisions. They are also like -- a number of you are worried about the macro, they are also worried about the macro. So there is definitely a delay in decision making, which is leading to a little bit of stress, if you may, on the sectors that we deal with and downstream the revenues that we get.

So even if we look at our own revenues, there was a time the last -- if I go back in 4 to 6 quarters, we were growing anywhere between 5% to 9%. Our growth today is 3%, and it's the direct reflection of the environment. While 3% in our sector today, I would be proud that we have delivered on the best. But obviously, that come down from the times where we were 4 to 6 quarters. And so from our conversations, we are clear, people are expecting this to be maybe around the bottom in the next 1 quarter, 2 quarters and then accelerate from there.

[Ravi Menon, analyst]

And do you think that -- your top customers seem to be all doing well. Is that expected to sustain? Are there any pockets of weakness outside this top 10 that you would want to call out that's a particular geographic segment or vertical?

[Sandeep Kalra, executive]

So look, if we knew anything that was material, we would have announced it on this call. So there is nothing that, as of today, that is known to us, which is a material negative impact on us. We are at it. We are working towards maximizing our revenues, delivering well on profitability. There's nothing that is known to us, which is a material impact, whether it is top customer or top 10 or top 50 and so on.

[Operator]

[Operator Instructions] The next question is from [ Vibhor Singhal ].

[Unknown Analyst]

I hope I'm audible. So my question is basically on the revenue composition. I think for the second consecutive quarter, we have seen the top line contributing significantly to our revenue. This quarter, our top clients formed 40% of our incremental revenue Q-on-Q. And last quarter, that number was almost 60%. So just want to -- and of course, in the preceding quarters before that, we, as a strategy, had kind of ramped that client down, and we were always talking about the share of business actually reducing in our overall composition.

So what is the kind of strategy that you're looking at in terms of top client? And also I know you don't share that details explicitly, but the revenues on the top client in terms of margin profile, is it any different from our overall company margin profile or pretty much similar as the other projects are?

[Sandeep Kalra, executive]

Okay. So there is a number of points out there. So if you look at it historically, we had ramped down one program with a customer, which was on the IT side, which was not profitable for us. But that was done nearly a year back. Two quarters back, we had got ramped down from them, and it had significantly decreased the revenue, and we worked with them to understand their priorities because everyone today is trying to optimize for their business [ conditions ]. They have a business to run. They had to optimize vendor spend, whether it was with us or others, and we could happily work with them based on our 18 years of working with them to craft out a win-win with them, and that's how we saw the revenue come back.

So now there are a number of programs. Some of them may be time bound, some of them may be longer term. So overall, from a top one customer perspective, I am not expecting, from what we know today, it to be a seesaw. It is going to be steady. There may be a certain addition, there may be certain deletion, depending on the programs we added or finishing and so on. But it will be a stable customer for us from what we know today and what we see. Now as far as other margin profile, et cetera, is concerned, for a customer at that size, it's a reasonably decent margin that we do with them. And we are happy where that margin is.

[Unknown Analyst]

Got it. And do you -- I mean, just to finish up on that part, do you expect this top client -- I mean -- and then being the last client, and of course, being one of the last vendors in the tech domain, could we actually, at some point of time, start to become a good -- a large partner to them in their endeavor of the overall tech modernization part, I mean, by increasing our share? Or do you think the scope of work with us for them is going to be limited in the size and interest?

[Sandeep Kalra, executive]

So look, there are multiple things that you do with any customers. Any of these -- and the top 1 is one of the technology giants. With them, we work on developing products for them, sustaining products for them, taking those products to market in terms of being professional services from them. And they are also dabbling into gen AI in a different [indiscernible].

So there is definitely scope for us to do more. Obviously, they have to -- from a go-to-market perspective, they work with multiple different service providers because each one of us has our own niche. So there is definitely scope to do more. And today also, if you look at it, we are one of their most strategic partners from what we deliver inventory.

[Operator]

The next question is from Vimal.

[Vimal Gohil, analyst]

First question, I'm not sure if you've highlighted this. So my apologies in advance if I'm making you repeat it. The wage hikes are fully implemented this quarter? Or is there any spillover in Q2 that we might see? That's question number one.

And question number two, Sandeep, sir, you mentioned the CQGR growth that we're targeting of 2% to 3% in case the macro remains or the 2% to 4% in case the macro remains uncertain, that is in context after factoring in the possible slowdown in BFSI and a flattish sort of a TCV, ACV that you've seen? Or other decline of the TCV, ACV that we've seen in this quarter? We are factoring in both these facts, right?

[Sandeep Kalra, executive]

So let me answer both. So wage hikes, fully implemented. Our wage hike cycle is July 1. We have stuck to it. So we have given 7.5% wage hike on an average in India, 3.5% to 4% outside India. And obviously, this will vary on the individual, their experience, significantly get more or significantly get less, whatever it is. Now that is implemented. We have not deferred any wage hike. We have not deferred any joining. And we are very proud to say we gave 109% corporate performance bonus at the minimum for the whole company and more. So from that perspective, we have not optimized our margins by cutting into people's bonuses or their salary increases or deferring those. So let's be clear about that. We are not managing margins by that. So -- and we are very proud of it.

Second part of it, in terms of CQGR, yes, that is our endeavor. We don't give a forward-looking guidance. If we are put on the mat and you want to extract what we want to do, that is the aspiration that we have. Come a bad economy, come a good economy, we should be in a good healthy growth zone. And that's where our endeavor is, yes. We will try and deliver 2% to 4% in a bad economy, 3% to 5% in a good economy. Balance will set the time to come.

[Vimal Gohil, analyst]

Just one question here. We -- our strengths have always been in the product engineering. Our capabilities have always been very, very superior as far as product engineering is concerned. Do you think that in certain environment, probably product engineering gets more discretionary, and we might have to win more wallet share to continue growing at the pace at which we are versus for a pure IT services player, which is probably focusing on cost-cutting projects, et cetera?

[Sandeep Kalra, executive]

So look, we -- so when we talk about product engineering, we do product engineering for product companies. The same tenants we take it to the enterprise in terms of doing digital transformation, which we will be building a platform for internal or external customers and so on. Now cost reduction can be done in many different ways. Cost reduction is just not about internal IT. Cost reduction can be, if you're developing products, as a product company, can you do it by leveraging more nearshore, offshore, do the same and more at a reduced cost, that's cost reduction for them.

And similarly in the enterprise. So keeping long story short, I do think we'll have to have a different pitch for economy like this, and that's what we have been doing. That's where we have been developing our demand, and we have been delivering significantly. Now we'll have to continue on the execution front. In all this, it's about execution.

[Operator]

The next question is from Abhishek.

[Unknown Analyst]

Congrats on a good quarter. Just one question on your top customer reported earnings, they talked about a lot of AI in their call as well. What are we participating along with them? Any color would be really helpful. The second thing is, if I look at the Hi-Tech growth and you mentioned that the Hi-Tech growth would be one of the pillars. So ex-top customer, it appears to be a little soft. Now I know you would not dissect it this way, but just trying to understand that what are we trying to build for the non-top Hi-Tech customer? So those are the 2 questions.

[Sandeep Kalra, executive]

So look, I have to be cautious of our [ NDAs ] and I have to be cautious of time. So all I can say is with the top customers, we are working with them to understand how they are differentiating their gen AI strategy with respect to others. Now they were earlier on in this whole gen AI/AI game with what's the next, there's a different flavor that they want to bring to the enterprise. And we are collaborating with them to do proof of concepts for some of the enterprises, and we'll continue to go deeper than that.

Now as far as the ex top customer and top customer is concerned, look, we look at our entire portfolio of customers as a portfolio. Now there will be situations in a macroeconomic environment where some customers may perform better in a particular quarter versus others. And as long as we are focused, as long as we are feeding each part of the customer category for growth, we are good. And from -- and I'm not too worried about a slight slowdown in bookings. That's a timing issue more than an issue of not happy.

So I'm relatively confident each of the customer categories with time will show a healthy growth. And some of parts in any which ways at 3%, I'm very proud to say we have delivered among the best in the industry. I don't think anyone has delivered 3% sequential Q-on-Q and 17% plus in dollar terms and 23.6% in rupee terms. So we are on it in terms of execution, and we'll try to even do better as we go along.

[Unknown Analyst]

Really helpful and congrats on a great quarter.

[Operator]

The next question is from [indiscernible].

[Unknown Analyst]

So I just had a question around your ACV and TCV. While the trailing 12 months indicates continued robust growth, even if I assume leakages, what is your view on the deal pipeline? And how should we look at the next few quarters? Because for the growth for the next year after that, you might need to increase your ACV, TCV signing.

[Sandeep Kalra, executive]

Right. So look, this is an ongoing business. As we go along as the revenue increases, you are absolutely right, the ACV, TCV will have to increase. And we have talked about how we have increased our investment in SG&A. We have talked about how we are not looking to maximize profits in the shorter run. We are -- even now, growth and a sustained growth is the first priority, not maximization of profits at the cost of -- so we are investing in our sales and marketing. We are investing in our go-to-market partnerships, whether it's on gen AI or other technologies. We are hunkering down with our partners to take them and become our ecosystem orchestrator of choice for our customers. So that is where we are focused on. And I'm pretty sure the ACV, TCV should reflect it as we go along in terms of the increase in those metrics in line with the revenue growth that we want to see.

[Unknown Analyst]

Got it. And should -- and how is your pipeline looking versus the previous quarters? Do you have a healthy pipeline? Or...

[Sandeep Kalra, executive]

Yes. So we don't give forward-looking guidance. I can't give you a number on the pipeline because it's as good as giving you forward-looking guidance on revenues. But from an overall perspective, the pipeline is good. But keep in mind that decision making is slow. Next 2 quarters are going to be tough, but the pipeline is really good, really good, and it is across the various segments that we deal.

[Operator]

The next question is from Rishi.

[Rishi Jhunjhunwala, analyst]

Yes. Can you hear me?

[Sandeep Kalra, executive]

Yes.

[Sunil Sapre, executive]

Yes.

[Rishi Jhunjhunwala, analyst]

Sandeep, just one thing. You mentioned about the condition of the macro today or basically in a bad macro, we'll grow 2% to 4% CQGR. And I guess 1Q also would be a part of that and we have done 3%. Now some of the -- your peer set, large and small, have also talked about potentially better second half in the anticipation that some of the deals that were there potentially would have gotten delayed in terms of ramp-up. For you, fiscal '24, do you see it to be a normal year where you end up growing largely at the same rate through the course of the year? Or do you also think there could potentially be some bit of acceleration in the second half of the year?

[Sandeep Kalra, executive]

As I said before, our customers, when we have discussions with them, they also believe the next 1 to 2 quarters are going to be tepid. Everyone will have to optimize for their own business. And then on they are also expecting the economy to recover. The interest rates, et cetera, all these hikes to be behind us, maybe even a different interest rate regime, et cetera, coming in and so on. So it is -- nobody has a crystal ball, but what we can see is the next few quarters are tough, but everyone is expecting the economy to come back, and that's what our peers, I'm sure, they have also been pointing out.

[Rishi Jhunjhunwala, analyst]

Right. And just secondly, on the margin side. You had seen a lot of growth in the last 2 years and a lot of incremental revenues you would have invested back into the business. If we look at FY '24, how much of margin sustenance or expansion, if at all, is predicated on the next amount of revenue growth that we end up getting versus some of the investments that you have done, which would anyway sweat out some of the margin levers that we would have basically materialized through the course of the year?

[Sandeep Kalra, executive]

We are nearly at the end of the call. I just keep it very brief. From our perspective, our first task of business is sustainable growth. As far as the margins are concerned, on the full year basis, don't worry about quarter-to-quarter, full year basis, adjusted for the spend that we did in giving gifts to our employees and doing customer events in the first quarter, if you adjust for that, the first thing is grow well and be at the EBIT levels that were there for the last year. Now as we go ahead and accelerate our business, as the economy comes back, we have enough levers to execute to get to the 200 to 300 basis points aspiration that we have in terms of EBIT expansion. And that's what we will execute.

[Operator]

The last question is from Anmol.

[Anmol Garg, analyst]

Yes. I hope that I am audible.

[Sandeep Kalra, executive]

Yes, please.

[Anmol Garg, analyst]

Yes. So just wanted to ask that what do you think about the pricing environment at this point in time, given that there is a lot of hypercompetition and enterprise are also having their own cost pressures. So are clients asking for the pricing discounts? And are we planning to give the same to win deals or the renew our existing ones?

[Sandeep Kalra, executive]

So look, there is some segments that we deal with, some of the largest customers that we deal with, there are multiple strategic partners. It becomes hypercompetitive out there. And in the last few years, we have been able to do price increases. I don't think in this environment, that will be the one where in the bigger customers, we can go in and have price increases.

As far as the newer bids are concerned, a number of our newer bids are pro rata bids, where we are coming up with ideas, where we can add value to the customer, whether it is cost optimization or otherwise, and that's where we have better pricing power. Based on the differentiation that we bring to the market, based on our capability to lead the customer in achieving their cost optimization initiatives. So it's about what business you go after, how you go after, how you execute your sales. At an uber level, I'm not too worried about the pricing pressure as of this point in time, except for a few large customers.

[Anmol Garg, analyst]

And just one last bit from my end is that, what is our hiring outlook for the next couple of quarters?

[Sandeep Kalra, executive]

So look, the hiring will be in line with the demand scenario. Plus, we have offered about 800 freshers who will join between August to December. We have no intent of delaying their joining. We will honor the offers the way we have given them and keep the timing. Having said that, if we need to optimize our own talent or nonperformance and others, that is part of the game. But otherwise, our hiring is going to be in line with our revenue projections. And please keep in mind, we have a significant amount of freshers to have been in our system for 12 to 15 months, who are fully trained, who have been shadowing projects. So we have a lot of dry powder from that perspective to be able to grow without necessarily going out and hiring a lot.

[Operator]

I now hand the conference over to Mr. Sandeep for closing remarks.

[Sandeep Kalra, executive]

Thank you. So we'll once again like to thank our 23,000-plus team members, our customers, our partners and our investors for their support in our growth journey. We are cautiously optimistic on our prospects for FY '24 and beyond, even as we [ merge ] the macroeconomic development and stay close to our key customers. We continue to aspire to maintain industry-leading revenue growth combined with healthy levels of profitability.

Thank you for spending time with us on the call today. We look forward to connecting with you again in 3 months' time to provide an update on our ongoing process, the progress. Please stay safe and stay healthy. Thank you.

[Sunil Sapre, executive]

Thank you.

[Saurabh Dwivedi, executive]

Thank you.

[Operator]

Thank you very much to the Persistent management. Ladies and gentlemen, on behalf of Persistent Systems Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines and exit the webinar.