Persistent Systems Ltd

NSE:PERSISTENT

Earnings Call Analysis

Persistent Systems Reports Strong Growth

Persistent Systems reported another strong quarter in an uncertain economy, with revenue reaching $291.71 million, up 3.1% sequentially and 14.1% year-on-year. Despite a wage hike impacting EBIT margin by 120 basis points to 13.7%, the company is targeting margin improvements of 150 to 200 basis points over the next 2-3 years. The total contract value (TCV) was $479.3 million, with a new order book valued at $313.1 million. Headcount decreased slightly to 22,842, due to strategic performance management and a lower attrition rate of 13.5%. The company is enhancing productivity and time to market for its customers, such as reducing time requirements by up to 90% in streamlining clinical study protocols and accelerating application migration by 30% with their Gen AI-powered solutions.

Leadership’s Commitment in Uncertain Times

As Persistent Systems marks the completion of three years under the guidance of CEO Sandeep Kalra, there is a sense of gratitude and achievement amid an uncertain macroeconomic climate. Management recognizes the collective efforts of its global team that spans over 22,800 employees across 21 countries. This period has seen Persistent Systems emerge as a growth leader in the global IT services industry.

Consistent Revenue Growth and Adaptability

Persistent Systems reported encouraging financial results amidst a challenging environment, with a quarterly revenue of $291.71 million—a growth of 3.1% quarter-on-quarter and 14.1% year-on-year in U.S. dollars. In rupee terms, this reflects a growth of 3.9% quarter-on-quarter and 17.7% year-on-year. The company is proactively responding to the impacts of economic uncertainty by leveraging its strong client relationships and focusing on significant contract engagements to sustain its growth trajectory.

Maintaining Profitability Despite Pressure

Even with the necessary wage increases of 7% offshore and 3-4% onsite from July 1, 2023, the EBIT margin decreased by only 120 basis points quarter-on-quarter to 13.7%. Nevertheless, Persistent Systems remains committed to improving EBIT margins by 150 to 200 basis points over the next 2-3 years. This demonstrates the company’s capacity to manage costs effectively and strive towards enhanced profitability.

Robust Order Book Reflecting Strong Demand

Persistent Systems appears well-positioned to navigate the uncertain demand environment, with an impressive order book total contract value (TCV) of $479.3 million, of which new order book TCV accounted for $313.1 million. The commitment is clear: focus on maintaining healthy order bookings and a strong pipeline for large deals to fuel continued growth, evidenced by their detailed order book including various deal sizes and customer renewals.

Diversified Client Base and Geographical Expansion

The geographical diversification of revenue streams is adding to the stability of Persistent Systems, with North America witnessing a growth of 3.1% quarter-on-quarter. Other regions such as Europe and India are also contributing, albeit at differing rates, while the rest of the world showed a significant uptick in revenue with a 41.8% quarter-on-quarter increase.

Strategic Personnel Management and Innovation

Headcount optimization and employee utilization reflect the strategic human resource approach of Persistent Systems. The company reduced its total headcount by 282 FTEs, leading to improved utilization and aligning talent acquisitions to growth aspirations. Their focused approach on integrating generative AI and other intelligent solutions into their operations exhibits the company's commitment to innovation both internally and for their clients.

Investing in Leadership and Global Presence

Persistent Systems is reinforcing its leadership team with industry experts and expanding its geographical footprint with new offices in India. These strategic moves towards new markets and the company's aim for a $2 billion goal indicate a forward-thinking approach to global business and management practices.

Financial Prudence and Positive Outlook

The company delivered a strong earnings per share (EPS) of INR 35 for the quarter, compared to INR 30.5 in the previous quarter, as well as noted positive investments in infrastructure and employee appreciation initiatives. This financial prudence, alongside clear strategic investments and a focus on employee well-being, underscores a positive business outlook for Persistent Systems.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Persistent Systems Earnings Conference Call for the Second Quarter FY '24 ended September 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 the call. Please pardon my scratchy voice as I'm just coming off a viral infection.

I would like to start this quarter's call by sharing with you that I'll be completing 3 years as the Persistent CEO on 23rd October, 4 days from now during this auspicious days of Navaratri. I'm grateful for the responsibility that was entrusted into me by Anand and the Persistent Board of Directors and the support and guidance I've enjoyed from them during this period. Also, I would like to acknowledge the contribution of Sunil, our CFO, and entire leadership team as well as all our 22,800 plus employees in 21 countries around the world.

It has been a privilege to work with each one of them through a period which has seen Persistent grow from 1 pillar of strength to the other and emerge among the growth leaders in global IT services industry. I would also like to thank each one of you on the call as well as our broader investor base, customers, partners for their support and continued trust in us during this period.

With that, let me now start with our quarterly financials. We are pleased to report yet another quarter of healthy revenue growth despite an uncertain macroeconomic environment. The revenue for Q2 came in at USD 291.71 million, representing a growth of 3.1% quarter-on-quarter and 14.1% year-on-year in U.S. dollar terms. In rupee terms, this translates into a growth at 3.9% Q-o-Q and 17.7% on Y-on-Y basis.

Coming to EBIT. The EBIT for the quarter came in at 13.7%. The EBIT margin declined 120 basis points quarter-on-quarter owing primarily to the wage hike we awarded our employees from July 1, 2023. We gave an average hike of 7% offshore and 3% to 4% onsite. We were able to partly mitigate impact of the wage hike and higher SG&A investments through revenue growth leverage, higher utilization as well as lower visa costs. Sunil will provide much more color on the EBIT margin movement later in this call.

We remain committed to our goal of improving EBIT margins by 150 to 200 basis points over the next 2 to 3 years as we have stated prior to this. Coming to the order book for the quarter. The total contract value for the quarter came in at USD 479.3 million with new order book, TCV coming in at USD 313.1 million. The annual contract value component of this TCV is of the order of $315.9 million, of which the new ACV component contributed to $184.2 million. The order book number for the quarter includes some of the deals from the last quarter as we had alluded to in the last earnings call.

While the demand environment remains uncertain, our razor sharp focus on staying close to our customers and focus on large deals aided by our healthy order bookings in Q2 has remained steadfast in our growth journey. Please note that as always, this total contract value, annual contract value numbers include all bookings, small and large, renewals as well as new bookings across existing and new customers.

Coming to the client engagement size. We witnessed healthy growth among various client buckets with our top 5 customer revenue up 4.5% Q-on-Q; top 10, up 2.8% Q-on-Q; top 20, up 3.4% Q-on-Q; and top 50, up 3.7% Q-o-Q. As you would notice, our top 50 customers is a portfolio of our marquee relationships, delivering a secular growth quarter-on-quarter. In this quarter, the portfolio of the top 50 customers delivered 3.7%, which is better than the overall revenue growth of the company.

The progression of our customers across various engagement sizes continues with a total of 175 customers in the greater than $1 million bucket in Q2, an increase of 8 over Q1. I'm happy with the entry of new customers in the $1 million to $5 million and $10 million and $5 million buckets which are likely to scale up further in future quarters.

As you would notice, there's a growth in customer count in all categories other than greater than $20 million and less than $30 million bucket where the count reduced by 2 due to movement of one into the higher category and one into the lower category. This is normal given certain amount of project ramp-ups, ramp-downs across quarters.

In terms of geographical breakup, North America revenue grew in line with the company average at 3.1% Q-on-Q in USD terms, while India revenue grew by 1.3% Q-on-Q and Europe revenue came in at 0.3% Q-on-Q. Rest of the world revenue was up 41.8% Q-on-Q on a low revenue base.

Coming to the people front. In Q2, our total headcount stood at 22,842 as of September end. This is a decline of 282 FTEs from Q1. While we gave industry-leading wage hikes in FY '24, we also took suitable measures in line with our stated policies for the bottom performers within our employees. The gross hiring overall was a little lower than the total exit of employees in Q2, which led to the decline in employee head count, leading to better utilization.

We carry significant dry powder in terms of talent to be able to deliver to the growth that we aspire for and in line with the bookings that we have done. In terms of freshers, we onboarded 277 freshers in Q2, and we will focus on their deployment and existing bench while hiring for critical skills laterally based on project requirements over the next several quarters as we move ahead.

The blended utilization for the quarter came in substantially higher at 80.6% compared to 78.3% in Q2. This was aided by volume growth and decline in net headcount. We continue to focus on increasing utilization of our existing employee base while adding lateral hires to augment for critical skills. The trailing 12-month attrition for the quarter came in at 13.5% compared to 15.5% in Q1. The attrition has come down to a comfortable band compared to the last several quarters. The decline in attrition should nonetheless be seen in the context of general moderation hiring across the sector and positive outcomes from our employee value-related interventions.

Moving on from operational metrics to certain other strategic highlights for the quarter. First, on generative AI, as a testimony to the generative AI focus that we have had over the last several quarters and the various investments we have undertaken we today have some exciting Gen AI customer stories to share. To give you some examples, we work with a sports technology company that provides motion analysis and performance insights to athletes to an app-based biomechanics coach. This is aimed at providing personalized insights and recommending specific actions to the athletes. Persistent leverage the Gen AI technology stack, encompassing AWS Bedrock, Titan and LangChain to help analyze the unique and large database of 350 million baseball and golf swings data and give personalized insights, summarized for its user in an intuitive way, ultimately helping the user fine-tune their skills and become better at their game and analyze the game in real time. The solution will also allow our customer to expand their addressable market beyond elite athletes to mainstream users and unlock newer streams of revenue through tiered service offerings.

We recently engaged with a Fortune 200 molecular diagnostics and technology solutions provider to address the productivity challenges in writing clinical study protocols using historical protocol documents, other internal content and information available in public domain. The clinical study protocols for everyone's reference are comprehensive documents that outline detailed plan for conducting a clinical trial or a research study, and this work was currently being undertaken by 100-plus people team largely through a manual process, which was time consuming and also prone to errors. To address this issue, we leveraged Google Vertex based custom Gen AI solution using advanced natural level processing and information we take.

The solution is helping the customers streamline the protocol creation process and reducing the time requirement by up to 90%, thereby enhancing the productivity of the team, while at the same time, enhancing the quality and giving time to market benefit for the customer.

The quarter gone by, we also worked with a top-tier biotechnology firm, which was looking to modernize its image processing application that captures images from various kinds of medical instruments. Typically, in such scenarios, the development team would manually study the source code base and have experts translate that to target technology stack and test the application.

Persistent, using our WingMate accelerator, an innovative integrated development environment an IDE in technical terms, an extension that seamlessly merges traditional coding practices with the ground-breaking potential of Gen AI powered by Azure open AI was tuned to automatically understand the legacy source code, build a test suite and ultimately migrate the application in 30% less time compared to the manual approach.

This approach also helped our customers in derisking themselves from the labor shortage on legacy skills and open a wide array of possibilities to accelerate their modernization journey across various enterprise applications.

Coming to Persistent as a Gen AI customer 0 for ourselves. Embedding our commitment to innovation, we are integrating Gen AI through the various facets of our own organization, delivering new internal efficiencies and enhancing the employee experiences with intelligent solutions. Let me give you a brief overview of a few of these cases.

IBot, which is Persistent Intelligent Bot, is a digital assistant powered by Azure Cognitive Services and OpenAI that houses all company-related policies, processes and brings cumulative guidance to our global employee base based on the geographies they operate from. This platform provides a single window to all enterprise interactions like time sheets, leave management, internal service requests, personalized learning path suggestions, skill progression among others. This is geared towards enhancing employee experience while reducing the dependency on shared HR services and the likes. Leveraging this any Persistent employee can seamlessly access any information needed for their day-to-day working and attend several workflow actions without the need for any human intervention.

Moving on to another example. Smart QMS is our internal quality management platform powered by Gen AI and Azure Cognitive Switch, ACS. The Smart QMS enables our developers, project managers and architects to access engineering frameworks, Persistent proprietary tools and other processes and knowledge assets across the organization. This platform is currently being used by more than 5,000 employees to reuse 1,500-plus assets across the organization.

Over time, the Smart QMS will not just bring our engineers better efficiency by leveraging AI assistance, but will also help them benchmark their own performance with similar cohorts across Persistent while anonymizing the data. We'll continue to take best practices that we learn from these internal projects to not only become more efficient ourselves and deliver better services to our customers, but to also take these assets into our client Gen AI endeavors.

On to management updates. In line with our growth aspirations, we continue to add muscle and fortify our management team with the inclusion of several well-respected industry leaders. We welcome Rajiv Sodhi as our Senior Vice President for hyperscaler business and strategic alliances, based out of Seattle and Ayon Banerjee as Chief Strategy and Growth Officer based out of Gurgaon. Rajiv joins us from Microsoft after spending 16-plus years in various leadership roles across U.S. and India. Rajiv will be responsible for managing our 360 degree relationship with Microsoft, Google and AWS as well as overseeing the strategic industry and technology alliances for us globally.

Ayon joins us from ANSR where he was a president, prior to which he was Managing Director and Partner at Boston Consulting Group, BCG leading their transformation practice within India. With more than 30 years of experience across consulting and operational roles in large enterprises, Ayon will drive Persistent strategy as we charter our journey towards our $2 billion goal and beyond.

On to strategic investments. At this point in time, all our earlier acquisitions are fully integrated and deal wins are also defined through the combined capabilities of Persistent and our acquired entities. We are once again active on M&A front, and we'll report progress on this front as we make significant progress over the next several quarters.

Coming on to the administrative side. On the administrative side, we inaugurated a 250-seater office in Kolkata, West Bengal in our continued efforts to reach out to locations where our employees are based. We are also in the process of opening new offices in Chennai and Kochi and also expanding our facilities in places like Noida and Hyderabad. Our endeavor is to provide world-class facilities to our employees in locations close to them and encourage them to work from office at least 2 to 3 days every week.

Let me now move to a unique achievement by Persistent, which all of us are very proud of and are excited to share. As Persistent crossed the $1 billion annual revenue milestone in FY '22, we decided to send a token of appreciation to our global employees for their contribution to our continued success. Among the choices given to our employees were an electronic audio device, travel accessories, bicycles and a few other alternatives. To our pleasant surprise, 9,000 plus of our employees opted for a bicycle, which prompted us to also initiate a Guinness world record attempt and further encourage the fitness journeys of our employees.

We are very proud to state we have received 3 Guinness world records that include: number one, creation of the company logo with 704 number of bicycles, which is the best-in-class, the world class for its group. Number two, Viewership of the cycling awareness tutorial live by 7,348 Persistent employees and their family members concurrently. Number three, an online video album of people riding by cycles with 5,098 individuals contributing to total. These achievements, though small, they clearly commemorate not just the $1 billion annual revenue milestone for us, but also reiterate our and our employees' commitment towards the environment and employees.

In summary, we are pleased with our performance in Q2 FY '24 in a challenging business environment. I'd like to now invite Sunil, our CFO, to give a detailed color on the quarterly financials and related matters. Saurabh will come after Sunil's comments to give you some color on the key deal wins, key client awards, analyst awards and other recognitions for the quarter. Sunil, over to you.

[Sunil Sapre, executive]

Thank you, Sandeep, and good evening, good day to all. Thank you for taking the time to join us here. Sandeep has walked us through the business outlook and a lot of details, including market perspective. Let me now walk you through the financial details of the quarter.

The revenue for the quarter at INR 291.71 and a Q-o-Q growth of 3.1% and 14.1% Y-o-Y. In rupee terms, the revenue was INR 24116.7 million reflecting growth of 3.9% quarter-on-quarter at 17.7% Y-o-Y. We closed H1 with total revenue of $574.61 million with a growth of 15.6% Y-o-Y, and in INR terms it translates to INR 47,328.5 million with a growth of 20.5% Y-o-Y.

Coming to sequential growth for the quarter in terms of segments, Healthcare and Life Sciences grew by 7% quarter-on-quarter. Hi-tech and emerging vertical grew by 3.8% quarter-on-quarter, while BFSI remained flat for the quarter. This quarter, we focused on improving utilization, and as Sandeep mentioned, the improvement was significant from 78.3% to 80.6%. Attrition declined to 13.5% from 15.5% in the previous quarter.

As you are aware, we have our regular pay hike cycle in Q2 every year, that's effective 1st July. And we have given pay hike to all our employees, which is about 7% to offshore employees and about 3% to 4% for onsite employees. The total impact of pay hike was about 2.7% on the margin, which was partially offset by improved utilization, currency benefit and the actions of visa costs.

We have continued our investments in sales and marketing. There were certain marketing events this quarter, such as Dreamforce, AWS Summit, which led to some one-off expenses in this quarter. Additionally, certain expenses were incurred on exited employees. Both these one-off expense items were offset by a corresponding one-off credit on account of reduction in liability towards performance-based earn-outs in one of our accounts.

With this, the EBITDA came in at 16.8% as against 18.2% in the previous quarter. Depreciation and amortization was which range at 3.1% as against 3.2% in the previous quarter. The EBIT came in at 13.7% as against 14.9% in the previous quarter. And for H1, the EBIT stands at 14.3% vis-a-vis 14.5% in last year's H1. And in absolute terms, the EBIT grew by 19.4% Y-o-Y.

Treasury income for the quarter was INR 166.28 million against INR 154.58 million, mainly on account of improved cash flow and higher interest rates. As you know, we paid final dividend of INR 22 per share during the quarter amounting to INR 1,703 million. This was paid in July '23.

ForEx gain amounted to INR 83.7 million as against ForEx loss of INR 64.1 million in the previous quarter. Profit before tax for the quarter was INR 3557.6 million at 14.8% as against 13.2% in the previous quarter. And this is essentially because of onetime expense we had in the previous quarter towards $1 billion celebration expense.

ETR for the quarter was at 26% as against 25.5% in the previous quarter. PAT for the quarter was INR 2632.7 million at 10.9%. For H1, the PAT came in at INR 4,920.4 million at 10.4%. Excluding onetime expense in Q1 on $1 billion milestone celebration, the PAT for H1 was 11.2% vis-a-vis 11% in H1 of last year.

EPS for the quarter was INR 35 as against INR 30.5 in the previous quarter. ROCE for the quarter was 30.2% as against 30.4% in the previous quarter. The operational CapEx for the quarter was INR 355.63 million. We continue to invest in facilities as more employees are coming back as well as we also invested in IT systems for the company.

Cash conversion for the quarter was strong at 119% of EBITDA and for H1 OCF-to-EBITDA stands at 0.55 vis-à-vis 0.54 in H1 of the last year. We are working towards OCF-to-EBITDA 0.7 for the whole year. Total cash and investments were INR 15,683 million as at 30th September as compared to INR 14,093 million at the end of June. DSO came in at 66 days a 1-day reduction as against 67 days in the previous quarter. Forward contracts outstanding at the end of the quarter were $240 million at an average rate of $3.92 per dollar.

Thank you all. I wish you a happy festive Navaratri. And I now hand over to Saurabh, who will take you through key deal wins and awards and recognitions for the quarter.

[Saurabh Dwivedi, executive]

Thank you, Sunil. Let me begin with software, high-tech and emerging Industries, our largest vertical. Persistent was selected by one of the largest communications technology conglomerates to undertake product engineering and customer support for a cloud-based security platform that limits access to all applications based on endpoint device as well as user risk profile.

Persistent has been rewarded with engineering work on this 4 platforms based on its excellent performance in other tracks. Persistent was selected by a leading media technology company as a strategic product engineering partner for its order management platform, which is used by clients of this media company for outcome-based advertising. Persistent is also an exclusive partner for the data strategy and migration of customers' applications to Google Cloud.

Persistent was selected by a leading provider of engineering data and technology solutions company to establish a greenfield IT setup and provide managed services over a 5-year period. This entity is a newly formed organization as part of a carve-out done by a leading private equity firm from a leading global provider of business and financial information services company. This deal also involves Persistent leveraging its intelligent IT operations framework alongside components from hyperscalers and leading technology vendors.

Coming to Banking, Financial Services and Insurance. Persistent was selected by a U.S.-based multinational financial services and wealth management company to provide platform engineering and support services for its data stack, including big data, business intelligence reporting and data governance.

Persistent was selected by a leading U.S.-based insurance underwriter to build its InsurTech platform and be a strategic partner across technology initiatives such as data analytics, application development and support, business intelligence, business intelligence and DevOps.

Persistent was selected by a leading U.S.-based financial software company to modernize and manage its identity management platform, which will be used as a horizontal platform across all software products of the company to manage authentication, authorization, life cycle of users and their personal and contact information.

And finally, within our Healthcare and Life Sciences vertical. Persistent was selected by a leading Fortune 500 company in the health care domain to undertake modernization of its data road map across consumer applications in domains such as clinical solutions, medical networks, enterprise and pharmacy customer support, claims and payment integrity and revenue cycle management.

Persistent was selected by a leading company in the precision oncology domain to build laboratory information management system, as well as provide other product engineering services to enhance its existing cancer detection platform. Persistent was selected for the demonstrated experience in genomics, laboratory information systems and deep capabilities in data analytics domain.

Persistent was selected by a leading player in the radiology imaging services domain to build a cloud-based picture archiving and communications platform including a call center management system to transform patient engagement.

Persistent was selected on account of its intelligent digital engineering platform for code evaluation ExtenSURE as well as rich pedigree in product engineering, data, cloud and compliance-related expertise.

Moving on to the awards and recognitions for the quarter. Q2 saw us get continued recognition from industry leading analyst firms and associations. To mention a few, Persistent won the Golden Peacock Award for excellence in corporate governance for the year 2023. Persistent was named as a challenger in the 2023 Gartner Magic Quadrant for public cloud IT transformation services ahead of a number of large peers -- larger peers.

During the quarter, Persistent also achieved Premier Tier services partner status in the AWS Partner Network. In the low code and automation domain, Persistent was recognized as the top partner of the year 2022 by OutSystems and also honored by UiPath with a 2023 Americas Partner Award in the innovation category.

Persistent also won 2 awards from Constellation, including: first, listing on the 2023 Constellation shortlist for public cloud transformation services; and second, listing on the 2023 Constellation shortlist for AI services. Persistent was recognized in the Everest Group's 2023 Engineering Services PEAK Matrix Provider of the Year Awards. And finally, Persistent was listed as a breakthrough 15 provider in the 2Q 2023 ISG Global Index for the second consecutive quarter.

This completes the section on key wins and awards and recognitions for this quarter. Thank you, and back to you, Sandeep.

[Sandeep Kalra, executive]

Thanks, Saurabh. In summary, we have continued to deliver top quartile revenue growth and robust deal wins in Q2 despite a difficult macro environment. We are proactively staying closer to our clients, getting them in prioritizing their technology spend towards cost optimization and transformation.

I'd like to thank each one of our team members globally who have persevered through the uncertain macro conditions and delivered yet another good quarter for us. Our decision to continue with our normal wage increase cycle and pay out more than 100% in our corporate performance bonus across board in this environment is a testament to our gratitude to our employees for this effort.

With this, I would like to conclude the prepared comments. I would like to request the operator to open the floor for questions. Operator?

[Operator]

[Operator Instructions] The first question is from Sandeep Shah.

[Sandeep Shah, analyst]

Congratulations on a good quarter, very strong bookings and good execution. Just wanted to understand on BFSI, I do agree the flattish growth is on a base of good quarters earlier. But anything to read in terms of any further caution by any of your large clients or other clients in BFSI?

And Sandeep, recent conversation with any of your clients indicates any amount of green shoots because the kind of order book you have reported, it looks like the deal closures, especially outside the larger deals are happening better in 2Q versus what it used to be earlier.

[Sandeep Kalra, executive]

I'll take the things in the reverse order. So if you look at our deal wins for the Q1, that was a tad bit lower than the earlier quarter, and we had very clearly said some of the deal wins had moved or shifted over to the next quarter. And they have come in along with a very healthy Q2 as well. That is what contributed to the order wins and some of these deals are longer term deals. And that is what is the healthy part of it, the TCV to ACV ratio has improved significantly. That is as far as the deal wins for Q2 are concerned.

Now in terms of green shoots, our pipeline is healthy. This, again, October, November, December quarter is typically a smaller quarter because come December 15, things will start shutting down in our primary market which is the U.S. And so we'll let the quarter pan out. The pipeline is pretty healthy. And this pipeline, I can say, with pride is because of the proactive efforts of the Persistent team, not because of reactive RFP responses and so on. So we'll let the quarter pan out. The demand that we have generated for ourselves is reasonable.

[Sandeep Shah, analyst]

Okay. Okay. And just a few things. We were earlier indicating 2% to 4% Q-on-Q growth looks inside despite macro issue, do you stand by even for the second half for that number? And also, we were earlier indicating a flattish EBITDA margin for the full year of FY '24. How do you see that statement in post the Q2 result?

[Sandeep Kalra, executive]

So the guidance part is a very interesting part. We always said we don't give forward-looking guidance, and then we were boxed into 3 to 5, 4 to 6, whatever it is. Now from our perspective, we give among the richest data points in the industry. If you look at our data points, we are announcing the TCV wins, ACV wins, TCV new, so you can pretty much see what is our renewal. ACV new, you can see what the renewal is.

So if you do the mathematics, I don't think you should be asking us for any guidance. You can pretty much make the guidance based on that. And if you were to analyze the headcount trends as well, you can fairly figure out a net utilization of 80.6%. We have enough dry powder in our kitty to be able to execute to the order books we have.

So from here on, I would restrain ourselves from getting to the trap of giving any kind of a guidance. We never used to and then we were got into this whole thing by media and others. And a number of yourself have guided us not to give any kind of guidance. So we will refrain from giving guidance. All we'll say this is the 14th sequential quarter of strong growth. And if you look at our order wins, they are pretty good, and they should give you a good analysis if you were to analyze the ACV versus our revenue outflow. And I'll pause there.

[Sunil Sapre, executive]

As far as EBITDA, EBIT, et cetera, is concerned, look, our first order of business is to make sure that we come in at the same levels as the last year. Obviously, quarter-to-quarter, there are puts and takes. There are quarters where we give wage hikes. And when we give wage hikes, the margin comes down, then we, again, work through operational efficiencies and revenue growth to bring it back. And that is a historic track record. We have been able to do that. And we are reasonably confident we should be in that direction. Balance we'll let the performance pan out, whether it is our revenue, whether it's our profitability and you should look at our historic last 14 quarters plus. So that's where I...

[Sandeep Shah, analyst]

Okay. Just last thing, on furloughs, do you expect higher-than-normal furloughs because some of your peers have called out that?

[Sandeep Kalra, executive]

Yes, we are expecting furloughs to be in line with other year. Every other year, there are a few companies especially the larger ones on the banking side. There are a few others in BFSI. And then there are a few in tech segments which are known for these furlough trends. That is the trend that we are seeing this year. Even if it is a little bit here or there, that should not necessarily be beyond the seasonality whatever it is, but we'll again let the quarter back...

[Operator]

The next question is from Vibhor Singhal.

[Vibhor Singhal, analyst]

Congrats on the great set of numbers. So Sandeep, great performance again. I just wanted to get some points from you on the hi-tech vertical. I think the hi-tech vertical overall I mean for our competitors, I think -- I know our business is different from the competitors, but it has not been doing that great, maybe apart from one who's seen green shoots in the last 2 quarters. How are we seeing the hi-tech vertical of course been growing very steadily? How are we seeing the hi-tech vertical play out, let's say, in the next 2 to 3 quarters? And also many of the hyperscalers and hi-tech companies, do you believe the layoffs at them -- at their end, so we could be coming to an end for that and they themselves could be more confident of their overall business environment so as to be able to give us more business.

[Sandeep Kalra, executive]

So there are multiple things there. So as far as the hi-tech vertical is concerned, a number of our competitors are predominantly players in the IT segment. We have the biggest strength in our industry. I would tend to believe we are among the strongest in engineering in the hi-tech segment, which is the heart of that engine. And then we have developed good capabilities on the IT side as well.

So our growth, if you look at it, is a combination of furthering our inroads on the engineering side in our customers as well as winning a number of deals, especially in the hi-tech segment in terms of carve-outs, where we are becoming specialists in doing the standup of new carve-outs by large to midsized private equity from larger firms. So a combination of our progress and including the new tooling that we are doing on Gen AI, we are much ahead of our competition in this segment.

So I would tend to believe hi-tech will continue to be a good growth engine for Persistent for times to come compared to the competition. Now in terms of the hyperscaler side of it, look, I can't tell who is going to do what layoffs when and when they are going to stop. All we can say is the market overall, the hyperscalers are also trying to bring their own set of growth engines, whether it is their Gen AI forays and Gen AI -- look while people look at Gen AI and think of OpenAI or Bedrock or Titan, these are pinnacle activities. These are tip of the spear. But they drive a lot of pull-through in getting an enterprise ready from a data perspective. That also provides a lot of pull through from a cloud perspective.

So overall, these hyperscalers, they are on that journey, and I'm pretty sure that has spun off a good amount of work for people like us who are riding that wave with them and are ahead of the rest. So there is a good amount of work that can come over the next several quarters and years on that.

[Vibhor Singhal, analyst]

Got it. Just my second question on the top client. I think this quarter the top client again grew. But I think the contribution that we saw from the top client towards our overall growth was to a good surprise were much lower than what the high contribution that we had in the last 2 quarters. And prior to that, of course, we have been talking about gradually the top client ramping down. So is this quarter's performance in line with the road map that we have planned for the top client in terms of how they will grow and how will they become -- where will they end up being as part of our overall business?

[Sandeep Kalra, executive]

We are very pleased with the way our relationship with the top client has panned out over the last many, many years. And even in the last several quarters, we went through a small hiccup, and we are back on it. But look, the top client is a top client by the virtue of the amount of business that we do with them, right? So at that clip, obviously, the growth rates can be different. It is like a portfolio of stocks at any of our buy-side guys foray. Not everything will grow at the same clip. So we are very happy having them where they are and the way they have grown and the company at times may grow much faster than the top client may grow. But at this point in time, we are very happy with the way the relationship has panned out, and it has contributed very well to our growth.

[Operator]

The next question is from Mohit Jain.

[Mohit Jain, analyst]

I've had 2 questions. One is a follow-up of the previous one. So what is our outlook in top client given that we had some fluctuations in the third quarter? So should we expect now that we are on a steady path or do we expect that fluctuation in the coming quarters, specifically from top client perspective?

And second is related to margins. So there is this sharp jump increase in S&M expenses over the last few quarters. And therefore, our margin expansion possibly is not happening in FY '24 versus '23. So what is your view from here on? Like should we assume steady convergence to industry margins? Or do you think for a few years, you can invest a little more in S&M and therefore, we may resume margin expansion after a gap of few quarters?

[Sandeep Kalra, executive]

Let me start with the margin part, and Sunil can give more color commentary later. So see, as far as we are concerned, look we've always said, we want to be having a steady revenue growth. That comes first. Margin expansion, we can always try and cut cost here, cut cost there and improve your margins. That is not where we are playing, right. We are seeing good demand for our services. We have added to our capabilities. Look at the recognitions we are getting from the Gartners of this world for our cloud services. Look at the kind of management bandwidth we are expanding by bringing the best-in-class talent to aid us continue our growth journey.

We have, over the last 14 quarters, whether it was COVID times, post-COVID times, deep macro or whatever it is, we have been in the journey of delivering industry-leading growth. That is our first forte. Margin expansion can come later. Having said that, we are still committed in the next 2 to 3 years, we'll expand our EBIT margins by 2% to 3%, and that should flow down.

Now as far as your other question about our client is concerned, there used to be a seasonality in certain quarters in the top line. Now we have gone away from our dependence on revenue sharing engagements in the top line. So that should partly answer your question.

And second, look, I would look at Persistent as a whole, as a portfolio of customers again small, top 2, top 10, top 50, top 100 and so on and so forth. If you look at the disclosures we give, our growth is pretty good across all segments, whether it is our top 1, top 5, top 10, top 30, 50 and so on and so forth. So I don't think anybody should worry. It is like if you are investing in a portfolio, the portfolio is doing very well. Sometimes one customer may do better than the other. That's okay. And not every customer will fire every quarter at the same time. So overall is my commentary.

[Mohit Jain, analyst]

Right. So sir, just for my understanding, so you're saying 3Q seasonality that we have seen in the past may not happen given that we have moved to a linear relationship with them?

[Sandeep Kalra, executive]

That's the right understanding.

[Operator]

The next question is from Dipesh Mehta.

[Dipesh Mehta, analyst]

Two questions. I just want to understand if you can provide some demand trend what we are witnessing in BFSI and Healthcare which obviously help us to get some business outlook also for those 2 verticals. And any subsegment, if you see area of strength and area of weakness in those 2 buckets, that would be helpful.

Second question is about deal win. Now we have a good deal win quarter. we partly benefited from some of the slippage, which we have seen in Q1. But if you can provide some quantification in terms of quality of deals and other things, that would be helpful.

[Sandeep Kalra, executive]

That's lot of questions in that, but let's try. So if you look at the segments like health care, so where we are seeing more traction over the last several quarters is the payer segment. And in the last quarter, we also saw a pretty good conversion in the scientific instruments and medical devices area. There are 4 segments that we deal with at Persistent. Payer, provider, pharma and scientific instruments medical devices. Now the payers are the large insurance companies and so on and so forth. So that's where we have had very good deal wins, and these are against the who's who Tier 1s, Indian origin, U.S. origin and so on so forth. We are actually being seen as a good disruptor with good capabilities, good agility, good solutioning and so on and so forth, and that's what is behind the quality of wins that we are seeing in this set of segments.

Now in terms of BFSI, again, the -- there are customers that we have in the Tier 1 banks, the Tier 2 banks and then there are other regional banks. Then we have financial services organizations, we have insurance companies, Insurtech and other fintech. Where we have seen a good amount of traction also is where people are looking a little fatigued with the Tier 1 providers. Wherever there are renewals coming up, and they are doing a rebate, we are being brought in as a disruptor. And I'm proud to say the small team Persistent a $1 billion company is winning against $10 billion, $20 billion, $30 billion companies and that's where we are gaining market share in newer customers and even in some of our existing customers.

I hope that gives you a color commentary. I would want to keep confidentiality of customers. That is where the wins are and our pipeline, again, continues to be good across these segments. Dipesh, hopefully, that answers it.

[Dipesh Mehta, analyst]

Yes. And second question about deal win, if you can give some qualitative comment about.

[Sandeep Kalra, executive]

Yes. So I was talking about deal wins as well. So overall, the deal wins, if you look at it, the spillover that happened was not necessarily the reason for the TCV being bigger. TCV is bigger because a number of these deals, let's say, for example, the payer segment deal win that I talked about. This is nearly in the range of $75 to $100 million TCV. The deal wins that we talked about in terms of carve-outs, these are carve-outs where we are standing up greenfield IT. There are multiple of these deal wins we have had. And these are the marquee logos that we have won against you know the who's who in terms of potential competition. The competition here was in one of the cases, multiple Tier 1 of our competitors. And these are deal wins where we are setting up the greenfield IT for organization and then managed services for our wins. So these are sometimes even run by the Gartners of this world and so on. So hopefully, that gives you enough color.

[Operator]

The next question is from Rishi Jhunjhunwala.

[Rishi Jhunjhunwala, analyst]

Two, 3 questions. Firstly, over the past 12 months, as you've seen demand slowing down across the industry, just wanted to understand what has been your experience in terms of the ACV getting converted into revenues? Has that been complete 100%? Or have you seen delays in that? And the reason we're asking that is while you rightly mentioned that your disclosures on the ACV, TCV are among the best, it would just help us in understanding how the deviation could potentially be if the macro remains the way it is.

[Sandeep Kalra, executive]

You want to ask the others as well?

[Rishi Jhunjhunwala, analyst]

I can -- no, I'll do one by one.

[Sandeep Kalra, executive]

Okay. So Rishi, see you are right. There is a certain amount of delay that you would have noticed from even our other peers as well and everyone has a different dynamic. So I will not comment on their dynamic. In our case, we are seeing if the earlier leakage was less than 10% in terms of the full year conversion. Today, it is much more. It can be in the range of in some deals even 10% to 15% and in rare cases a little more than that. So there is definitely more leakage because there is a delay in terms of what is signed and what is actually getting delivered because of the customer own delays and so on so forth. So the ramp-up that you would see is a little bit more protracted as compared to earlier deal wins.

[Rishi Jhunjhunwala, analyst]

But it's only a matter of time and not the quantum getting reduced, right?

[Sandeep Kalra, executive]

Yes. So I want to be respectful of the time on this call. But when you talk of ACV at least in Persistent, we talk of the revenue conversion for the next 12 months. So if the ACV is $100 for the next 12 months and we are able to convert, let's say, 85, in our terms, 15% is leakage. It can shift whatever it is. But usually, that is the way we are looking at it, at least the way we are announcing it.

[Rishi Jhunjhunwala, analyst]

Understood. The second question is just on capacity or supply, right? I mean, our hiring has clearly slowed down. We are focused on improving utilization. So what level of utilization do you think from which we will start hiring back again in line with how our revenues are growing?

[Sandeep Kalra, executive]

So we are not going to be throttling hiring just to bring the utilization high. But in terms of an aspirational utilization, our aspirational utilization, is in the range of 83% to 84%. And we have done that in the past. And for every percentage of utilization, it creates an impact of 30 basis points to our PAT. So that is the equation, right.

[Rishi Jhunjhunwala, analyst]

Understood. And just quickly on just capital payout, right, capital return in terms of dividends and all, historically, our numbers or payout ratios have been lower or in the bottom half of where the industry has been. But we saw some increase in FY '23. With the kind of cash buildup that we are seeing and potentially large part of the acquisitions behind us, is there any intention to increase the payout ratios in this year and going forward?

[Sandeep Kalra, executive]

Yes. So Rishi, look at it this way, we are focused on the total shareholder return. The total shareholder return can come through the capital appreciation and the dividend payout and everything else. So if we grow at the top clip, that provides another way of value for our investors. So if we are not able to do further acquisitions over a period of time, we'll revisit this. But for now, our dividend policy remains what it is. We gave a onetime special dividend because of the $1 billion. We are committed to making sure we use the capital prudently towards enabling growth in areas where we need to build capability inorganically. That is where we'll use the excess cash. And if we are not, as I said earlier, we'll return it.

[Operator]

The next question is from Kawaljeet Saluja.

[Kawaljeet Saluja, analyst]

And congratulations on a reasonably good quarter. Couple of questions. First is that what direction gives you comfort on improvement in profitability, let's say, over the medium term beyond the fact that, let's say, in FY '24, you struggle to expand your margins. And the labor market and this year has been as benign as it can get. And you have also consumed a fair bit of the so-called [indiscernible]. So directionally what gives you that comfort on profitability improvements. That's the first question.

[Sandeep Kalra, executive]

Sure. So directionally if you look at it, this has been a year which is not a normal year. This has been a year where if we had to close $100 in bookings, we had to generate maybe $200 or more in pipeline. In a normal year, for $100 in bookings, maybe $150 in pipeline, qualified pipeline would have been good enough. So the amount of sales effort, the amount of sales and marketing effort that we have put in is far more. The choice was don't put that sales and marketing effort. Let it degrow. And that was not a choice as far as we are concerned at Persistent. We have worked very hard to bring a discipline to the growth engine. And that's where we have invested in the right places, whether it is our SG&A, whether it is anything related to our employee hikes, we can easily do the profitability improvement. Some of our peers have done it by deferring the employee increases, not paying corporate performance bonuses. We paid 107% corporate performance bonus at the least across the company. We paid 7% increase in India, 3% to 4% increase globally.

But any of these, we can improve profitability, and that would take away your question of the challenge of profitability improvement in this year. We could have a -- it doesn't make too much to cut cost. It takes a lot to let it go. So hopefully, Kawaljeet, that gives you the answer.

And as we keep growing and as the market stabilizes, maybe the SG&A level will come down. Maybe as the revenue goes up, that there is a certain amount of cost that gets deferred over a much bigger revenue base. There are other levers still at utilization, we are at 80.6%. If we are at 83.6%, the 3% yields, 1% right there, 90 basis points. I just said 30 basis points for every 1 basis point of utilization. So we are not done yet, and we are very inefficient as a company. We still have a lot of things to do. So rest assure when we say something...

[Kawaljeet Saluja, analyst]

Just indulge me a little bit, Sandeep over here. Let's say, you never get a perfect year. In every year, there's some challenge or the other, right. You never get a perfect year. I mean, it would have -- so -- I mean yes, there is the sales and marketing leverage, I take your point, but in your view is that enough?

[Sandeep Kalra, executive]

I want to be respectful of the time with 8 minutes on this call, and I'll be happy to have an off-line discussion with you. But I can tell you with confidence, if we correct our inefficiencies and if we keep growing the way we are going, there's enough to be done to improve the profitability, and we can and we will try and achieve that we have said.

[Kawaljeet Saluja, analyst]

Fair enough. The second question is that next year, none of us know what's going to happen on the macro. But let's assume that with a recessionary environment, how do you think, let's say, if you're a CIO of a large organization, how would you go about prioritizing your spends? And what type of vendors will be prioritized as reprioritize. But more how would you prioritize your spend? So what goes to the funnel, what gets canned assuming it's for the next year?

[Sandeep Kalra, executive]

Yes. So look, assuming it's no year next year. Obviously, everyone would first try to see, which are the most critical projects that you need to do. The good to have projects will definitely be delayed or put on the back burner and so on. Second, on the keep the lights on, how much can you squeeze? How much can you get from there into the [indiscernible] of doing the projects that you wanted to do and the vendors that you want to have. Other people who can bring the next-generation technologies to be able to squeeze out wherever you want to squeeze and to be able to accelerate where you want to accelerate faster, better, cheaper than some of the vendors that you are fatigued with. And that's where you will possibly have more opportunities for a Persistent of this world to rise and shine as well. I can see the skepticism in your voice but we'll let the time pan out.

[Operator]

[Operator Instructions] The next question is from Gaurav [indiscernible].

[Unknown Analyst]

My question is regarding the generative AI, you kind of provided very unique use cases. Just want to understand that how do these engagements really play out in terms of becoming larger project sizes because these are pretty small projects that you talked about. Secondly, a related question is that some of the platforms that you talked about internally using, what we can do to our own software development efforts to kind of really drive productivity there? And would it not be sort of cannibalizing our own revenues? Or how do you kind of foresee that playing out?

[Sandeep Kalra, executive]

So there's bunch of good questions there. So let me start with the projects versus bigger engagements. Now if you were to look at it, the way we are looking at Gen AI is this. Right now, we are engaging our customers in as many discussions as we can because that's also a learning ground for us in different use cases in different industries and not just us even our customers are experimenting with it.

While we are doing that, we are also experimenting in-house with building tools, we're building things that are rinse and repeat at scale. These may be things like, for example, doing a Teradata to a Snowflake migration or taking something from a Tableau to another one or taking -- consolidating reporting tools to Power BI and so on, using Gen AI, which will be not necessarily people-based projects, but these are -- because we are building IP, because we are using some of these models to speed up things. There's a secret sauce that we are building as Persistent secret sauce, using Gen AI, we'll be able to monetize it at scale, make it rinse and repeat.

And the other part would be where there are customer specific, segment specific things that we will create IP on. And there are then custom projects that we will do. So all of this is going to flow through, but there's a good think tank of 100, 150 engineers in Persistent, which are working on Persistent specific secret sauce that will enable us to differentiate in Gen AI and not become commoditized even in Gen AI.

Now on the software developer productivity. Look, we have tie-ups with AWS big time, where we are working with their engineering team or even evaluating things before they are released to the market. We are embracing those technologies in our landscape, taking it to our customers, same for Microsoft Copilot, we are working with them as well. And it's not just about these tools. It's about modern application development, modern product development and the entire tool chain. So these are just a few.

And then there's a full pipeline related tool chain that we are experimenting. And if we can provide productivity benefits to our customers, we'll absolutely do that. Because if we do that, we'll again be seen as disruptors. If Persistent today has 23,000 employees, I'm pretty sure our biggest U.S.-based competitors, India-based competitors are 20, 30x our size. If we can disrupt ourselves, the market for us is huge. So we are not worried about disrupting ourselves. We are worried about providing the right value to our customers and bringing them the latest and greatest. If we do that, I'm pretty sure, for a small company that we are, we'll keep growing and we'll healthily outbeat our nearest competition and the farthest commitment. Hopefully, that gives you enough answer.

[Operator]

The next question is from Abhishek.

[Unknown Analyst]

I just want to probe a little bit more on BFS and hi-tech. So our advantage in hi-tech offerings is clear. But for BFS too it is a vertical which is currently extremely shy of spending on technology. I mean in this light, what is our right to win versus, let's say, a bigger peer with, let's say, a better offering in terms of cost optimization if at all. So any clarity on that will be helpful, yes.

[Sandeep Kalra, executive]

So Abhishek, inbuilt in that question is an assumption that a bigger peer by the size of being bigger can provide a better service to a customer. This market is huge, and there's a lot of fatigue with the bigger peers of ours in many, many of our customers and prospects. The refreshing change for them is when we are able to bring automation, when we are able to bring the latest tools, the approach that we bring to them is refreshing and it is not just bringing more people to solve the problem.

So there is enough revenues and a number of our deal wins are where we are replacing the so-called bigger peers of ours or competitors of ours. I don't think that size matters beyond a point in time. And today at $1 billion, we are at a critical mass where we are clearly large enough to scale, but at the same time, kind of management retention, the technology solutions that we are bringing are good enough for people to give us the bids that we need. And we are increasingly in competitive landscape with the bigger winners. So I'll keep it short. We're out of time on the call, but happy to have an offline discussion if needed.

[Operator]

The last question will from Bhavik.

[Unknown Analyst]

Just 1 question, you talked about the delays in the conversions in terms of revenues, but are there -- is there also a delay in conversion of the deals itself in terms of decision making by clients, which could have pushed out deals to further quarters as well? Or do you find one?

[Sandeep Kalra, executive]

Yes, so that is exactly what happened. And even in your note, you have mentioned that. So if you look at it, that is exactly what is happening. When I said in response to Kawaljeet also. If we needed $100 conversion, earlier if we needed 150, 160 in pipeline, today, we need 200. That's because the deals are taking more time. Sometimes they are getting delayed even as the last minute. So yes, in short, that is happening. But that's where we have to double down more and keep our heads straight and work.

Just last comment from my side and then you can close the call. So from our perspective, look, the quarter gone by was a fairly strong quarter. We are optimistic about our prospects even in this uncertain environment. As we walk the uncertain environment, we are staying close to our customers. We aspire to maintain the industry-leading revenue growth. And with Navaratri and Diwali round the corner, we would like to wish everyone on this call and their families a safe and happy festival season. We look forward to connecting with you again in 3 months' time. 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.