Persistent Systems Ltd

NSE:PERSISTENT

Earnings Call Transcript 2023-Q3

[Operator]

Good evening, ladies and gentlemen. Good day, and welcome to the Persistent Systems Earnings Conference Call for the Third Quarter of Financial Year 2023 ended December 31, 2022.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; Mr. Saurabh Dwivedi, Head of Investor Relations; and Mr. Amit Atre, Company Secretary.Please note, all participants lines will be in the listen-only mode and there will be an opportunity for you to ask questions after management's opening remarks. Should you need assistance during the conference call, please raise hand from the participant's tab on the screen. While asking questions, request you to please identify yourself and your company name. Please note, this conference is being recorded.I now hand the confidence to Mr. Sandeep Kalra. Thank you and over to you, sir.

[Sandeep Kalra, executive]

Thank you, operator. Good evening, good morning, good afternoon to all of you, depending on where you are joining from. I would like to start by wishing everyone a very happy, healthy and prosperous new year 2023, and I hope the new year has started well for all of you.With this, let me come to the quarterly financials. We are happy to report yet another solid growth quarter across all major business and financial metrics despite a dynamic and rapidly evolving macroeconomic environment.The revenue for Q3 came in at USD 264.35 million, giving us a growth of 3.4% quarter-on-quarter and 32.8% on a year-on-year basis in dollar terms. On a constant currency basis, this translates into a sequential revenue growth of 3.5%. This information is also available in our analyst deck with prior quarter data available for comparison.In rupee terms, the growth came in at 5.9% quarter-on-quarter and 45.4% on a year-on-year basis, respectively. Our revenue growth in Q3, though impressive, was impacted by seasonal furloughs, less working days and certain client-specific ramp-downs in our top client.Coming to EBIT. Our EBIT for Q3 came in at 15.4%. This translates into an EBIT growth of 11.6% on a Q-on-Q basis and 60% on Y-on-Y basis. The EBIT margin expanded by 80 basis points on a sequential basis, aided by growth leverage, better lateral utilization, increased fresher availability, as well as positive currency impact. Sunil will provide more color on the EBIT margin in moment later in the call.Coming to the order book for the quarter. Q3 was a record high for us in order of TCV order wins. The total contract value for the quarter came in at USD 440.2 million, with new bookings TCV coming in at $239 million. This implies a robust growth in TCV of 20% on Q-on-Q and 30% plus on Y-on-Y basis.The annual contract value component of this TCV is of the order of $326.3 million, of which the new booking ACV component contributed to $143.8 million. We have surpassed the $400 million mark in our TCV bookings for the first time, reflecting robust pipeline conversion.Please note, as always, these TCV, ACV numbers include all bookings, small and large renewals, as well as new bookings across existing and new customers.Coming to the client engagement buckets. Let me give you some color on the client engagement size and the behavior we saw in the last quarter. Coming to the top 2 customers, our top customer contributed to revenue decline in this quarter per the planned ramp-down initiated on some programs in the last quarter.We are hopeful of reversing this trend and getting the top client back on the stable and growth trajectory over the next several quarters. Revenue from our second largest customer declined slightly on account of seasonal furloughs that happen every year.Outside of the top 2 customers, we saw a broad-based growth on our other customers in top 50. I'm pleased to note that in Q3 FY '23, the top 50 customers, other than the top 2, contributed to a very healthy 7.7% sequential quarter-on-quarter and 53.8% Y-on-Y growth.Also, it is very heartening to see the progression of our clients across important thresholds with 2 additional customers moving in the greater than $30 million and 3 customers in the $10 million to $20 million revenue bracket.In terms of the geography breakup, from a geographical perspective, we saw a 1.5% sequential growth in North America market, 12% in Europe and 10.4% in India. The lower growth during the quarter in North America during the quarter was predominantly on account of top customer decline and furloughs in couple of other large customers as spoken before.Coming to the people front. In Q3, we are happy to share that as a result of our significant investments in training on freshers over the past 4 to 6 months, we were able to deploy about 600-plus freshers. Just to remind everyone, we had brought onboard 3,000-plus pressures in H1 of FY '23.As a result of this, we were able to reduce our dependence on lateral hires, adding a net of 93 technical lateral hires, while balancing our talent pyramid. This was an important margin lever for us in Q3 and will continue to provide us tailwinds on the margin front over the next several quarters.Utilization for the quarter came in at 77.6% as against 79.9% in Q2. It should be noted that excluding freshers, our blended utilization came in at 83.3%, higher by 340 basis points quarter-on-quarter.The freshers were not included in utilization metric in Q1 and Q2 of FY '23 as they were still undergoing training. As already stated, going forward, the improvement in utilization of these trained freshers will be an important lever for project ramp-ups and margin improvement.The trailing 12-month attrition for the quarter came in at 21.6% compared to 23.7% in Q2. The annualized attrition for Q3 is slowly reaching a level, which is in line with our long-term average. We believe that the TTM attrition will continue to moderate going forward, aided by better outcomes on our employee value related interventions and a general moderation of hiring across the sector.Moving on from operational metrics to certain strategic highlights for this quarter. Q3 is usually the quarter in which we declare the interim dividend, and I am pleased to share with you that the Board of Directors declared an interim dividend of INR 28 per share for FY '23 on the face value of INR 10 per share. This compares to last year interim dividend at INR 20 and total dividend for last year at INR 31.It is our endeavor to maintain a consistent dividend payout ratio while we augment growth through capability-led acquisitions.Coming to the culture initiative. About 9 months back, we had embarked on an important initiative to transform our culture in the light of the challenges associated with high growth in an environment of remote operations and work from anywhere. This involved engaging our colleagues across our multiple locations in India, Europe, Americas and embarking on a number of long-range initiatives, as a result of that aimed at strengthening our culture and overall employee engagement.I'm pleased to share that this exercise has brought together teams across locations and with diverse backgrounds to identify with the common cause of taking persistent to the next orbit of our growth. We are pretty enthused with the progress and we'll share more details on this in the coming months and quarters.Coming to planning and road map for our future. Building on our culture-related initiatives, we did a 2-week planning workshop in Pune and Goa called the Persistent Huddle 2023, in which 300 of our global leaders brainstormed about our FY '24 plan as well as the $1.2 billion road map.This further contributed to energizing the team and has brought clarity about our goals and the journey to our next milestone. We'll plan on doing an Investor Day in second half of calendar 2023 to share more details on our $2 billion road map with you.Coming to the addition of senior leadership. We are pleased to welcome Dr. Rajesh Gharpure, as the Chief Delivery Officer for Service Lines. Rajesh has over 27 years of experience in global delivery and operations, digital transformation, consulting and finance at LTI.He brings with him rich industry experience, running large global delivery organizations, building competencies, providing thought leadership to clients and leading various internal transformation initiatives for organizational growth and excellence.Coming to an update on our acquisitions. All our acquired businesses over the last 4 to 5 quarters have now been fully integrated, and each one of them has shown good growth, including contribution to our go-to-market and operational synergies. The teams have come together as One Persistent to win large deals in fintech, insurance, healthcare, consumer tech and retail sectors. We are hopeful we can repeat the same synergy led performance in the coming quarters and years.Given the fact that these acquisitions are panning out along expected lines, we are starting to get active once again on the M&A front. In line with our stated strategy, we continue to look for tuck-in acquisitions to expand our geographical markets and complement our current capabilities. We'll report progress on this over the next several quarters.Now coming to ESG and some other administrative updates. We continue to make good progress on the ESG front. Last quarter, we talked about our participation in Dow Jones Sustainability Indices survey.I'm pleased to share with you that Persistent has achieved a score of 47 in the Dow Jones Sustainability Indices survey this year. We have taken ambitious goals to take our score on this important metric up to 65 over the next 3 years. Also for the first time, we participated in the public disclosure category of the Carbon Disclosure Project.On the administration side, in Q3, we opened several new offices, including offices in Bangalore, Indore and London. In the month of January, we inaugurated a brand new 1,200 seater state-of-the-art, dedicated learning and development center in Hinjawadi.The center is in line with our commitment to constantly upskill our talent and deliver best-in-class capabilities to our customers in leading technology areas. And the center has been aptly named Ramanujan, per our employee suggestions, after the famous Indian mathematician.In the coming quarters, our expansion plans include locations such as Jaipur, Kochi, Chennai, Calcutta and New Jersey. Our endeavor is to provide world-class facilities to our employees in locations close to them and encourage them to work collaboratively from office a few days every week.In summary, we are pleased with our performance in Q3 FY '23 with continued healthy revenue growth, record high order wins across our focused industry segments, good pipeline and improving profitability despite the macro headwinds.Now I'll turn over the call to our CFO, Sunil Sapre, to give a detailed color commentary on quarterly financials and related matters. I'll come back after Sunil's comment to give you some more details on key client wins, analyst awards and other recognitions for the quarter.Sunil, over to you.

[Sunil Sapre, executive]

Thank you. Thank you, Sandeep, and good evening and good day to all. I wish you a very Happy New Year, and thank you for the time that you're spending with us today.Sandeep has walked you through the market outlook and business performance. I will take you through the details of financial performance for the quarter ended December 31.The revenue for the quarter at $264.4 million, registers growth of 3.4% quarter-on-quarter and 32.8% year-on-year. Within this revenue, the services revenue grew by 3% quarter-on-quarter, while IP-led revenue grew by 8.6%. You will notice that our IP revenue continued to grow this quarter on the back of 18.1% Q-o-Q growth last quarter.As you're all aware, the quarter Q3 witnesses furloughs and lesser working days due to festival season due to which services revenue grew by 3% vis-a-vis 4.9% Q-o-Q last quarter.Our total revenue for first 9 months stood at $761.4 million with Y-o-Y growth of 38.9%, with services revenue registering growth of 47.3% and IP revenue showing decline of 17.6%.You will recall that last year's 9 months included royalty revenue from one of the contracts that was restructured at the end of Q3 of FY '22 and was converted into a T&M contract with a revised goal. Thus, IP revenue for 9 months of this year does not include any revenue from the restructured contract and the revenue build on T&M basis is included in services revenue.Coming to revenue in rupee terms, the revenue was INR 21,693.7 million, reflecting growth of 5.9% quarter-on-quarter and 45.4% year-on-year. And for 9 months, the revenue was INR 60,961.2 million with a growth of 49.7%.Coming to segmental growth for the quarter, BFSI grew 2.6%, Healthcare, 3.1% and Technology companies grew 4.2% quarter-on-quarter. In respect of linear revenue, the offshore linear revenue grew 3.3%, comprising of volume growth of 5% and billing rate decline of 1.6%.The on-site linear revenue grew 2.5% on account of volume growth of 4% and billing rate decline of 1.3%. The slight decline in the billing rate is also a result of our presence in nearshore centers in Costa Rica and Mexico, which get classified as on-site.As a result of fresher intake, as Sandeep mentioned in the earlier quarters, the net addition to lateral headcount this quarter was minimal. Improved utilization during the quarter, coupled with freshers getting progressively build, helped us in managing the costs. Additionally, favorable currency also helped margin by 60 basis points.The headwind to margin in Q3 included furloughs and lesser billing days, which was partially offset by higher IP revenue. And on the cost side, the headwind was in form of some increase in travel and facility costs.Overall, the EBITDA came in at 18.5% in Q3 as against 18% in the previous quarter and 16.8% in Q3 of last year. EBITDA for first 9 months of the year was at 18.1% as against 16.6% in the corresponding period last year.Total depreciation and amortization was 3.2% of revenue as compared to 3.4% of revenue in the previous quarter. And for the 9 months period, depreciation and amortization was 3.3% vis-a-vis 2.8% in the corresponding period of previous year.So you will notice that while we have done acquisitions, the impact of which is seen in amortization, the consistent growth in revenue has allowed us to manage the impact of amortization within a reasonable range. With this, EBIT came in at 15.4% as against 14.6% in the previous quarter and 14% in the corresponding quarter of last year. In terms of YTD 9 months, EBIT margin stood at 14.8% as against 13.8% for the corresponding period last year.Coming to items after EBIT. During the quarter, we have reversed export incentives both INR 297 million relating to earlier periods of 2015-'16 to '17-'18. The company believes that its services are eligible for export incentives and the dispute is purely an interpretation issue given the highly technical nature of this matter.With the intention of avoiding prolonged litigation and settling the dispute, the company has requested the relevant authorities for settlement of the case and has submitted an application before Settlement Commission on 29th December, 2022. While the hearing against this application is awaited, the company has recognized a provision of INR 297 million for the quarter ended 31st December.The treasury income was INR 87 million as against INR 60.8 million, mainly on account of increased interest rates and treasury size. ForEx gain was INR 105.4 million as against a loss of INR 91.3 million in the previous quarter.Profit before tax was INR 3,227.9 million at 14.9% as against 14.4% in the previous quarter. And so far as ETR is concerned, it was 26.3% as against 25.6% in the previous quarter. With this, the PAT for the quarter was INR 2,379.5 million at 11% of revenue as against INR 2,200 million in the previous quarter at 10.7% of revenue.For 9 months, the PAT was INR 6,696 million as against INR 4,894 million, reflecting growth of 36.8%. And in terms of percentage to revenue, PAT is 11% of revenue as compared to 12% in the corresponding period of previous year.EPS for the quarter was INR 31.9 as against INR 29.61 in the previous quarter. The growth in EPS is 7.7%, while growth in reported PAT was 8.2% quarter-on-quarter. As you know, for the purpose of EPS calculation, shares held by ESOP Trust are excluded.Coming to some other items. Firstly, the DSO, which came in at 67 days as against 60 days in the previous quarter. There are 3 key reasons for this increase. Firstly, in case of certain customers, there was a spillover of payments to first week of January due to holidays causing an impact of 2.5 days.In respect of certain IP deals we have in the Accelerite portfolio, we have deferred credit arrangements with certain large enterprise customers. This has an impact of 3.5 days on the DSO. While this will take a few quarters before this starts getting normalized, these are with very good customers of good credit quality.Other than this, for certain customers who have December as the fiscal year-end, the services for December also got converted into invoicing, which would normally -- which would in normal course pass through unbilled stage for a month. This is reflected in lower unbilled revenue and this had an impact of 1.1 days in billed DSO, while there is a decrease in unbilled DSO.Next item on the operational CapEx for the quarter was INR 292.4 million, and the cash on books is INR 16,907.9 million as compared to INR 15,719 million at the end of last quarter. Forward contracts outstanding as of 31st December was USD 214 million at an average rate of INR 81.55 per dollar.Thank you all, and I hand it back to Sandeep.

[Sandeep Kalra, executive]

Thank you, Sunil. I will now talk about the key deals for the Q3 quarter by industry segments. Starting with Software, Hi-Tech & Emerging Industries.Persistent was chosen by a leader in online retail in the U.S. to set up a dedicated global technology center across multiple technology tracks, including infrastructure and platforms, marketing technologies, search and recommendation and fintech and loyalty. This is one of the largest deals in our recent history with a TCV of about $70 million over 3 years and embodies the key tenets of our systematic large yield program.This is a proactive deal with scope for further growth on account of vendor consolidation, cross-functional collaboration between the various teams from acquired businesses, was a key to winning this deal with significant collaboration between our data and integration business as well as Google business unit since this online retailer has chosen Google Cloud as their predominant cloud.This also entails cost optimization play, leveraging globalization and vendor consolidation, as I mentioned earlier, of smaller vendors over time while driving enterprise digital transformation at scale.Persistent was chosen by a global technology leader that has some of the most well-known brands used by millions of people around the world. We would be partnering in the development of niche virtualization product of the company. This is a double-digit million deal spanning across 3 years.Coming to Banking, Financial Services and Insurance. We were chosen by a leading HR applications development platform company to support their next-generation HR applications development and enhance the quality of existing features for a leading platform.Persistent was chosen to transform the legacy check platform and enable cloud readiness to future-proof the business for one of the largest U.S. banks. This is another example of the synergy playing out with our payment business unit formed through our SCI acquisition.Coming to Healthcare & Life Sciences. Persistent was chosen by one of the largest global instrumentation companies to modernize its technology stack and streamline its customer order orchestration, financials and warehouse management platform. This is a double-digit million, multiyear deal, leveraging our low-code, no-code expertise.Persistent was chosen to leverage enterprise integration expertise to improve the quality and delivery of service for one of the largest multinational medical devices and healthcare company. This is again a multimillion, multiyear deal.Moving on to the awards and recognitions for the quarter. Q3 saw us get continued recognition from industry leading analyst firms and associations. To mention a few: Persistent was named a leader in Everest Group Software Product Engineering Services, PEAK Matrix 2023. For the 10th consecutive year, Persistent was identified in the leadership position in Zinnov Zones 2022 Engineering Research and Development Services ratings.Persistent was named as a leader in Agile Application Development Projects in ISG Provider Lens Next-Gen ADM Services for U.S. for 2022.In summary, we continue to deliver top-quartile revenue growth in Q3 FY '23, along with healthy profitability in spite of a difficult macroenvironment. We continue to see good traction for our services among our client base, along with new deal wins and new logo additions at scale.We remain watchful of the macroeconomic situation and are proactively staying close to our customers, aiding them in prioritizing their technology spend towards transformation and cost optimization and are optimistic about our growth momentum.With this, I would like to conclude the prepared comments and would like to request the operator to open the floor for questions.Operator, over to you.

[Operator]

Thank you very much, sir. We will now open the call for the Q&A session. [Operator Instructions] First question is from Abhishek Bhandari.

[Abhishek Bhandari, analyst]

Congrats on good results. Sandeep, I had 2 questions. First, in the TV interview today in the morning, you said, the top client seems to be bottoming out over the next few quarters. That coupled with the strong deal wins, should we assume we should go back towards 4% to 6% kind of growth what you were doing before Q3?

[Sandeep Kalra, executive]

So 2 parts to the answer. The first part about the top customer bottoming out, it is pretty much bottomed out. There may be a small bit of decline, maybe, and we will try to avoid that in the next quarter. And there are some very good discussions, which may also, over the next several quarters, bring the trajectory back to growth in the top customer as well. So that's the first part.Second, in terms of the growth, look, we don't give the forward-looking guidance, but the endeavor would be to reach whatever percentages you said.

[Abhishek Bhandari, analyst]

Thank you, Sandeep. Sandeepji second question is on your medium-term margin guidance or your margin aspiration rather, where you said you want to lift the EBITDA margin by almost 200 to 300 basis points over medium term. So if you could clarify what that medium term mean?And also, what are the big levers you have in terms of improving the margins significantly from here?

[Sandeep Kalra, executive]

Sure. So if you look at it, when we talk about the medium term, we're talking about the next 2 to 3 years. And if you look at our track record over the last 2 to 3 years, every quarter, we have attempted to stabilize and improve the margins. So our attempt would be to go up by 200 to 300 basis points over the next 2 to 3 years. Obviously, the levers in that are right from the scale of revenue. As we scale the revenues, some costs are not proportionately scaled with that.Second, if you look at it, we have brought in freshers at scale. We have trained them. We are deploying the freshers and building our own talent pipeline for the longer run. Building our own talent rather than going out and hiring people from the market. So that would be the second piece of it.Third piece of it, if you look at it, if you look at our client mining efforts. So even in this quarter, we have moved from greater than $5 million customers being 30 last quarter to 34 this quarter. So that is the other part of it, where we are trying to bring more service lines into the same customer, leverage our SG&A much more effectively.Last but not the least, our ability to do larger deals, longer-term deals, it also has an [ NVT ] component built up, which also reduces our start-stop effect of the bench that may be. And so there is a bunch of these and a few other operational things that we will do, including building more and more solutions and some amount of IP, not as in a product, but IP that can make us better, faster and more profitable in implementation of services. So hopefully, that gives you color.

[Operator]

The next question is from Mr. Bhavik Mehta.

[Bhavik Mehta, analyst]

So couple of questions. So, firstly, just on the margin bit again. You did 15.5% this quarter and assumption that without furlough you could have even touched 16%. So CY '23, FY '24, how should we look at margins? Where do you think is the sustainable level of margins, so given the growth that you are projecting? So that's one.And second is on hiring. So hiring has been slowing down over the last couple of quarters. Obviously, you want me to look at it is that you are increasing the fresher utilization and making them billable which helps. But given the kind of growth you'll see, given the deals which you have, do you think you will have to start ramping up hiring going ahead? Or is this the new number of hiring and the focus will be on just improving the utilization further from here on?

[Sandeep Kalra, executive]

Sounds good. So I'll briefly answer both of these. So as far as the margin is concerned, look, we have been working on improving our margin over the last several years, and we have made significant progress. Now we will endeavor to do incremental progress, but that will not be at the cost of growth. So we have to make sure that we have a pretty good growth even in whatever macroeconomic circumstances may exist today, a few quarters from now and so on. So that is our priority number one. Now we have already talked about the medium-term 2 to 3 year aspiration of taking it up by 200 to 300 basis points, and we'll stick to that. So we'll keep making progress on that.In terms of hiring, now, look, we have been saying very consistently over the last several quarters, we have hired 3,200 freshers over the last many quarters. And for the last 6 months, one of the biggest investments in Persistent has been in our learning and development investments, whether it is in terms of learning and development staff, our own delivery leaders and their teams getting involved in training our freshers, making sure that we are building the talent the way we need in different technology tracks, the software platforms, which offer online courses and so on.So there has been a significant investment right from hiring the people, training the people. Obviously, we are intending to deploy them. And the whole attempt is to create a longer-term cycle where we, not only for the last year, this year also, just to give you insights, we've already offered 1,200 freshers and this will come over the next several quarters. And I'm very proud to say we are among the only companies in India today who have hired 100% and given full credence to all the offers we have given and onboarded all the people.So from that perspective, rest assured, it is not lost on us that the growth has to be the priority, but we have to build our own talent for the longer run. And look, our engine, if we can hire 800 laterals to 1,200 to 1,500 laterals, we have that engine and we can activate that any day if we need to hire more laterals. And our focus for the next few quarters first is to take the inventory and then we will keep bringing whatever number of laterals we need to.

[Operator]

The next question is from Mr. Manik Taneja.

[Manik Taneja, analyst]

Congratulations for the resilient performance. Sandeep, I wanted to pick your brains around the comment that you made around top customer growing going forward. So this is a customer which, in absolute terms of revenues, has gone nowhere for us. We've had some down years. Last year, it grew and this year once again it has declined sharply.So if you could help us -- while I understand there is some element of the IP restructuring that we did in this customer account. But if you could help us understand what's happening from a services landscape at this customer? That was question number one.The second thing is, the industry essentially has seen significant tailwinds from price increases in the -- over the last couple of years. If I'm thinking now over the next 12 to 18 months' time frame, just wanted to understand how do you see the situation play out?

[Sandeep Kalra, executive]

Okay. Let me take the second one first. It's an easier question, and I can wrap it up quickly. So a little one in fact, for the last 12 to 18 months, we were at it in terms of price increases. And look, nobody has a crystal ball. But when the inflation was so high, the customers were amenable before the real cloud of macroeconomic, et cetera, started coming in.And thankfully, with respect to our customers operating with us, we had done good amount of price increases earlier itself. And that's also in a way to add to what I said earlier, been a margin lever for us. So that has panned out well.I don't think the market will be very ripe for doing a lot of price increases in the next 6 to 12 months. Maybe things will change after that. So we are well taken care of. As far as Persistent is concerned, we have done what we needed to do proactively. And that has been the thing for us. Proactive deals, proactive margin expansions, proactive fresher hiring, proactive training deployment. So that is what has helped us so far.Now coming to the top customer. Look, it was a very conscious decision. As you know well and for other investors on the call who don't know, there was a fairly large contract that we had with our top customer, which was not very profitable for us. And we requested to kind of terminate it at the culmination of a 5-year period of the contract. So that is where it also contributed to the top customer revenues coming down for us significantly. To the extent of roughly about $25 million to $30 million impact is just because of that contract itself in terms of the decline.Now the top customer of ours has been -- obviously, they have seen a CEO change. The company has done well over the last 12 to 18 months. If you look at their results and their performance, they are stabilizing and doing very well. So there are many discussions which are also aligned with their forward-looking path that we have. And we are confident, given our 18-plus years of history with this customer and the strong relationship we have across the leadership, that we should be able to go back in and grow over the next several quarters. I'll just leave it there.And I can say with pride, our relationships are fairly strong. Our revenues may have gone a little bit sideways for certain quarters. But as long as the relationship is strong, I'm confident that relationship will lead to revenue growth as well.

[Operator]

The next question is from Mr. Abhimanyu Kasliwal.

[Abhimanyu Kasliwal, analyst]

Sir, congratulations, wonderful performance this quarter. My question was regarding other income. I mean there was -- and not really speaking about operations, they are going brilliantly. But I'm curious, other income has jumped up this quarter Q-on-Q. Is this a sustainable increase? What does it consist of? Because the other income was a good percentage of the net profits, at least 10-ish or slightly more. So what would be your take on that?

[Sandeep Kalra, executive]

Sunil?

[Sunil Sapre, executive]

Yes. Abhimanyu, so if you are referring to other income, the way it appears in the newspaper advertisement, it has 2 components. One is the income on surplus funds, that is treasury income, and the other is the ForEx gain. So if you see the last quarter what happened was that, the appreciation in the dollar that led to loss on hedges that we had booked in the earlier year. Whereas in this quarter, the way hedges panned out, that loss was less, whereas the actual gain on realizations that when we collect the money from the customers, that came in at the spot rate, which had elevated to almost INR 82, INR 83 levels, as you know, during this quarter.So against a loss of INR 9 crores, what you call last quarter in terms of ForEx loss, this quarter there is a gain of INR 10 crores. So that's where you see almost like a INR 20 crores swing and that is what is leading to that number, what you are referring to as jump in other income. So I hope that helps you get a perspective on that.

[Operator]

The next question is from Mr. Vimal Gohil.

[Vimal Gohil, analyst]

Sir, my question on your acquisitions has already been answered. So another question that I had was on subcontracting costs. They've been unusually sticky despite the company has done -- has made a lot of efforts on opening up onshore centers. So just wanted to get a sense on that.And plus, it was quite -- I was surprised to see that particular element of our subcontracting costs not there, did not have a mention in your margin levers. And there -- probably we have one of the highest subcontracting costs as a percentage of our sales in the industry right now. So just wanted to get your sense on how will that pan out going forward?

[Sandeep Kalra, executive]

Sunil, you want to take it or should I take it?

[Sunil Sapre, executive]

No, I think what I would like to mention is subcontracting costs for us have been in the range of between 12% to 14%. And the way it has happened is that, if you look at the furlough impact in this quarter, what happens is, that you may have subcontractors who are continuing on these engagements and just the fact that revenues are not there. And in terms of that, that is why it reflects in a higher percentage to revenue. In terms of absolute levels at which we are operating with the subcontractors, yes, definitely, there is a reason and room to see how we can optimize this. But these are across geographies. And we will take the rightful approach to see how this can be consistently reduced, because it has to be sustainable, and that is where some of the challenges in the midst of people's willingness to move across zones within the U.S. also has been a challenge, and we have had to continue with some subcontractors. Sandeep, if you want to add anything?

[Sandeep Kalra, executive]

No, I think that's fair.

[Sunil Sapre, executive]

Sure.

[Vimal Gohil, analyst]

Fair enough, sir. Sir, just on macros plus how we are sort of reacting to it. Product R&D is relatively -- does it seem to be more insulated in terms of how the macro is panning out in the West.And the related question to that is, the reactions from enterprises versus ISVs. Enterprise product road map may have some delays while ISV may continue to spend on their existing bread-and-butter products, which will help us. So if you can just help us take through -- take us through how will these -- both of these segments for you sort of pan out? And how will it also impact our TCV and ACV deal wins going forward?

[Sandeep Kalra, executive]

I'll try and keep it brief, but please bear with me. So -- because this is a very philosophical and a bigger level question for us. So if you look at the enterprise side of the house, now there are multiple things that are happening there. On one side, the enterprises are trying to conserve cash while making sure that they are able to do the digital transformation that they had started.So a number of these exercises started about a year, 2 years back during the COVID period. So they are not going to be immediately stopped on anything. So they are trying to squeeze the business as usual cost and still keep the transformation going.Second part, when I talked about even if you look at the biggest deal that we announced, so what is happening there? So people are continuing on the transformation journey, but they're using more globalization. Earlier, people were willing to pay anything to get cloud, data, AI kind of technical talent here in the U.S., so that is now moving for saving cost -- all of that will move to offshore or a significant amount of that will move to offshore, nearshore and so on. What does that mean for the enterprises? It means cost saving. What does it mean for people like us? It means more business.Same way if you look at it, if the enterprise spend is going to be slightly squeezed or squeezed in different forms and shape, whether it is transformation or BAU on software vendors, the software vendors' revenue will go down. And we have talked about it on our earlier calls as well. As far as the enterprise software companies are concerned, they go by a rule of 40, which is basically your revenue growth and profitability growth as long as it's more than 40, you are golden. That's a very thumb metric.Now if the revenue growth is not going to happen because enterprises will try and squeeze the product vendors, maybe they'll spend lesser for the next 6 to 12 months or more. The enterprise software companies revenues will come down and their imperatives for, again, optimizing their profits will go up. And if they have to continue to be competitive and they have to be on their road map, they need to work with people like us and optimize their costs. And again, while they optimize, there's opportunity for us.So we have to be clearly seeing, yes, there's a cloud called the macro. There is a headwind. But there's a tailwind, the silver lining where we can help, whether it is enterprise or the enterprise software companies, optimize while delivering to their goals. I'm keeping it at a very high level, because we could go on this topic for long.But the headline news here is, if we are able to analyze the trends, if we are able to work with the enterprises or the enterprise software companies, there's enough for a company like Persistent to do. And we are very differentiated as far as it comes to enterprise software and taking the same tenants in terms of digital transformation to the enterprise. And that should hold us very well, along with the acquisitions that we have done over the last several quarters. Hopefully, that answers.

[Operator]

The next question is from Mr. Ravi Menon.

[Ravi Menon, analyst]

Great show this quarter. I wanted to ask you 2 things, Sandeep. One is on the enterprise side. In set up, you're seeing some -- more and more offshore for some of this. But are people cutting back on any programs at all? Are they putting some things in cold storage or shelving some of it when they're trying to conserve cash? Are there any programs that we should think about as discretionary at all or most of that kind of cutbacks have already happened as people worried about -- even entering, as they were going through CY '22.

[Sandeep Kalra, executive]

So Ravi, look, there is -- even in the digital transformation programs, these are not programs that are monolithic programs. Today, everyone does these programs in phases. It's all based on Agile development. So people are definitely prioritizing within the digital transformation itself. They -- mean, if they had a plan of spending, let's say, $100, they may spend, let's say, $85. Part of it may be functionality decrease, part of it may be more globalization and so on and so forth.So there is definitely -- I would be amiss if I was to say, no, everyone is doing 100% of the programs the way they had thought 1 year or 2 years back, there is a certain amount of rationalization that is happening there.There's a certain amount of support related rationalization that is happening, and that is happening even in the enterprise software side, where products that are not necessarily the biggest margin earners, there are certain things that are being reduced on those as well.So obviously, whether it is transformation or it is business as usual, there's reprioritization, reducing of dollars. And then within that dollars, seeing how much of that dollar can be shaved off by doing more globalization and outsourcing to people like us. So all of that is in the play as we speak.

[Ravi Menon, analyst]

And want to follow up on the deal that you won with vendor consolidation. So who are the sort of vendors that are getting consolidated? Are these local subcontracting outfits or people who are just skills providers who have slightly higher billing rates? And is this part of this move offshore that you mentioned?

[Sandeep Kalra, executive]

So it is both. It is -- so this deal, basically one of the largest system integrators in India, one of the largest peers for us was also involved. So part of the work is moving away from them. Part of the work is moving away from the niche vendors here in the U.S. It's a combination of both.

[Operator]

The next question is from Mr. Mohit Jain.

[Mohit Jain, analyst]

Sir, I have 3 questions. One is, is there a difference that you guys are seeing in, say, ACV versus TCV? ACV growth this quarter was slightly on the lower side. Should we read it as an aberration? Or is it more like people are more moving towards higher TCV and lower ACV kind of a setup for next year?Second was, I did not fully understand your remarks on receivable days, which is going up for us sharply. So should we expect it to sort of reverse? You guys are saying it is -- is it because of holidays, that's why 3Q numbers are high. And therefore, where should we expect it, let's say, on a recurring basis?And the third related question is also balance sheet related on the CapEx side. So you are also, as per the opening remark, opening various centers. And our CapEx for the last 2 years is -- and in fact, as an average in last 4 years its relatively on the higher side. So should we expect that CapEx to remain high for the next 2 years also? Or should we expect this to more or less converse to the industry as we move forward?

[Sandeep Kalra, executive]

Sounds good. So I'll take the ACV, TCV question, and I'll have Sunil answer the other 2. So on the ACV, TCV, I don't think you should read anything into it. The only thing, if I was you, I would read is -- look, all of you want us to do larger deals, [ NVT ] business and so on and so forth. And we are heads down on doing longer-term deals. The more longer-term deals we do, the TCV will be much higher than the ACV, and that's what is reflected in some of the quarters where we have had better longer-term deal wins.ACV-wise we are comfortable with the ACV that came in. I don't think there's any worry there or anything much to be read into that. Overall, it's a healthy pipeline conversion over time. Sunil?

[Sunil Sapre, executive]

Yes. On the -- Mohit, on the question on receivables, the situation is like this that you will see out of the 3 items that I spoke about, the spillover of collections and conversion of unbilled DSO into billed DSO. So these are not something that are recurring. And this is where we have the opportunity to reduce the DSO.So from a level of 67 in the near term, we would target to be around 65. The reason for the slight increase is, as I mentioned, about the third item, which is deferred credit deals, where it will take some time before they normalize and the repayments start coming in. So they may take a little longer time to come out. So the levels that we had seen earlier of 60 days around that, it will take a few quarters to get down to those levels.And on the question on CapEx, see there are 2 aspects playing out, that in certain locations we have CapEx incurred on our own. And in certain locations, we have plug-and-play kind of facilities being rented out. So the fit-outs are done by the service provider and that CapEx is not reflected in our books. And if you have anything else, you can connect -- I don't have exact details of that right away, but I can update you on that later.

[Operator]

The next question is from Mr. [ Chirag Kacharia ].

[Unknown Analyst]

Congratulations on a good set of numbers in changing environment. Sir, I have 2 broad questions. One-off client through which we are facing the ramp-down in revenue growth, so as we have aspiration to reach $2 billion kind of revenue going forward, so what lessons you took from this experience, because it's a very old client, so to mitigate such incident going forward.And second, what's our expectation as a sector and as a company from this coming budget?

[Sandeep Kalra, executive]

So I'll answer the first part quickly. The second is more philosophical, and we will park that question if you have time, because we only have 12 minutes and there's a bunch of questions on the site as well. So if you look at the first part, the lessons learned and so on.Look, when you build a business, you are building a set of customers that you build over a period of time. If you look at our client concentration, right from Q4 of FY '21, if I was to give you a data point, our top 10 customers were 46.3% of our revenues. As of this point in time, they are 35%. So we have brought in far more vibrance as we have gone along, and this is an ongoing exercise.And if you look at the number of customers in the greater than $5 million revenue bucket, for the same period, Q4 FY '21, there were 17 customers in greater $5 million annual revenue. Today, we have doubled that to 34. So there's a lot of growth that is happening.And if you -- in logos, which are not among the top few, so if you look at my earlier comments, I have given the numbers of the growth between the top 3 to top 50. And that's a fairly good sequential growth, whether it is on a quarter-on-quarter basis or whether it is on a year-on-year basis.So quarter-on-quarter, top 3 to 50 grew 7.7% and 53.8% on a year-on-year basis. So there's a lot that's going on, and that's how good businesses are built. So we are comfortable. And at the same time, we are comfortable that our top customer will also start growing back over a period of time. So hopefully, that answers.On the budget question, we'll just park it, because there's many questions on the site panel as well. And operator, if we can take some of the questions that have come online and then go back to the queue, that will also be good.So let me answer a few of the questions here, and then we'll go back to the online -- the queue. So there's a question from [ Abhishek Sharda ], what is your view on attrition rate? Is lower headcount addition a sign of weakness in demand?So, Abhishek, the attrition rate is stabilizing, because if you look at it, there are multiple things panning out. One of the biggest things that is panning out is, the macro part for some other companies. Obviously, not every company is growing at the same rate. So for some other companies, there may be company-specific, client-specific or their own growth-related things and so on. So the demand for talent in several buckets, it's kind of moderating.Now is lower headcount addition sign of weakness in demand? For some sectors it may be, but for a company like ours, if you look at our order win, it is at an all-time high. So from our perspective, we are not seeing a moderation in demand, but I can also tell you this. The harder we work, the better the demand gets. And so we are added through proactive proposals and so on. So we don't see right now at a company level a lower headcount addition as a weakness. It is moderated between fresher deployment and laterals. And we have the engine to hire whatever we need to hire over a period of time.Now going back to the operator. So operator, if we can take some more questions, then we'll come back to the queue here as well.

[Operator]

The next question is for -- from Mr. Vibhor Singhal.

[Vibhor Singhal, analyst]

Yes. Congrats on great performance in a seasonally soft quarter. So I had a couple of questions. One is, of course, on the overall -- you mentioned about the top line bottoming out and probably even take up a growth trajectory going beyond. Just wanted some clarity on the top basis like [ Bangalore ] also we have probably seen some kind of run down. Is that also kind of close to bottoming out? And do we see that trajectory there as well?And overall, I just wanted to get your perspective on these 2 set of clients, basically the top client. As you mentioned, I mean, why it has bottomed out, what will our endeavor be going forward? Do we see as a percentage of its revenue come down over a period of time? Not necessarily because that client might decelerate, but because we -- the other parts of the company might grow stronger than the top line? Or do you think this top line could also start growing in a few quarters, and that is what we might be looking at?

[Sandeep Kalra, executive]

So number of questions there. So let me just start the reverse order. So as far as the top client is concerned, our endeavor is to grow the top client. We have fairly good relationships. We are confident we'll turn it around over the next several quarters in terms of bringing the growth back.Now the percentage part of it, so there was a time when this top customer used to be literally 25% or more of our revenues. Today, with the diversification that we have seen and the overall growth that we have seen in our customer base, for the last quarter, it was 7.4%. So our endeavor would be to make sure we grow the customer, we grow all other customers. And as someone asked before this, so there is always prudence in having client -- set of buckets so that there are times when different customers have different priorities. We are not overly dependent on any one or the other. So, hopefully, that gives you the answer on the top client part.And if you don't mind, we'll take your other questions in a little bit, because there's a queue and there are only 6, 7 minutes left. So we'll come back to your other questions in a bit.

[Operator]

The next question is for -- from Mr. Nitin Padmanabhan.

[Nitin Padmanabhan, analyst]

Congrats on quarter. So I just wanted your thoughts on Accelerite, how you are thinking about that business? And it looks like you had a decent wins and all of those things. Just wanted your thoughts on how that business is evolving? And obviously, with that business growing, obviously, it's an additional margin lever, so just wanted your thought there.The second thing I want to understand was, from an overall business perspective, this quarter, obviously, furloughed across the board. But on a going-forward basis, do you think all of -- most of that business is done with -- and at least on a sequential basis, things should start improving? Or are there continued headwinds one should expect even on a sequential basis? Those are 2 questions.

[Sandeep Kalra, executive]

Sure. So I'll try and answer these questions in brief. So as far as the Accelerite business is concerned, so for people on the call who are not familiar what Accelerite means for us. It's basically the IP business that we have, the product business that we have.Now there is, obviously, growth in that, because we are able to give a road map to the customers using those products, and they are sticking more with us. And even as they grow, they're doing their true-up, so we get a revenue stream out of that. We are also able to sell in a few of our services customers these products as a part of our solutions, et cetera, that's a second stream.And third, we are trying to repurpose the IP. So there's definitely much more work going on to see how we can maximize the return from each part of our business, Accelerite being one of them as well.Now you talked about the furloughs, the weakness, et cetera, so I'll give just a macro answer to that, being respectful of time and there's only 5 minutes left in this call. So if you look at it, are there going to be headwinds going ahead? There are definitely going to be headwinds going ahead. There are headwinds even now. There were headwinds last quarter as well.So the way we are looking at it is, within these headwinds there are patterns. There are -- there's a good intersection of persistent capabilities and strengths and revenue pools that are available in the market. So if we can figure out the silver lining to the cloud of macro, and I've talked about it earlier as well, whether it is an enterprise, whether it is the software companies, I think there are deals to be had, which is a win-win for our customers and for us.And thankfully, our capabilities are pretty differentiated, especially on the digital transformation side, whether it is doing product development to support that or taking those products and doing professional services. So, look, there will be headwinds. Our task is to make sure that within that headwinds, we are proactive and we are growing to the best of our capabilities. So I'll just leave it there.

[Operator]

Next question is Madhu Babu.

[Madhu Babu, analyst]

Just on the portfolio, like, what percentage of portfolio you see as a higher risk to the macro, let us say, 15%, 20% of the portfolio, which you can assess internally?And second, even in a slowdown, can you say 3.5% to 4% kind of sequential growth can be maintained over the next 4, 5 quarters?

[Sandeep Kalra, executive]

So look, we keep doing our portfolio-related analysis, et cetera. I can't give you a percentage of this is more prone to macro and this is not. But all I can say is we are trying to be as close to our customers, trying to understand their thought process of how they are looking at the macro, how they are optimizing for the macro, how we can help them. At times, even if it is to cannibalize our own revenue in the short run to be able to do more with them in the longer run, we've even taken those steps.Now in terms of growth, our endeavor will be to deliver somewhat what you said. All I can commit to you and other investors here is, we are at it. We are proactively working with our customers, and we'll continue to grow in the top quartile of the industry. If it is X, we'll be at X plus sales tax, whatever is that X as an average in the industry.

[Operator]

Next question, Mr. Rishi Jhunjhunwala.

[Rishi Jhunjhunwala, analyst]

Sandeep, just one question on ACV, TCV, right. So in your experience in the past 3 years, have you seen any deviation of what you announced as ACV versus what eventually ends up being in terms of revenues? And the reason I also ask is that, even if you assume a 30% kind of attrition in your existing revenue book, based on your past 12 months' ACV when you should comfortably do more than 20% growth in the next 12 months.So just wanted to understand whether -- either the revenue conversion could potentially be different from what you'll initially end up announcing as ACV for any reason.

[Sandeep Kalra, executive]

Right. So Rishi, very valid points. So, yes, there is always a little bit of a difference that happens between the ACV that we announce and the actual revenue realization. And I'm pretty sure it's the same for every company.Now when we book a deal there is a time to ramp up. And at times, that may get delayed a little bit, at times, different program phases may get delayed a little bit. We typically get about 6% to 8% as the impact of that, especially when the macroeconomic conditions are a little bit iffy. When everything is good, then everyone is on the horse to do the ramp-ups as soon as possible. When the macroeconomic conditions are a little bit soft, there is about a 6% to 8% kind of leakage that can happen. And our endeavor has been to minimize this, but that is the realistic thing. Balance, about your 20% part, all the more power to you. From your ears to God's mouth and will deliver.

[Operator]

Last question from Mr. [ Anmol Garg ].

[Unknown Analyst]

So just one question on the Europe part. So we have seen very strong growth in Europe in this year as well as the last year. So what is the outlook over there going in the next year?And particularly within the deal wins, do you think that we have enough deal wins from the European side to grow European revenue similar as the company's average revenue for the next year as well?

[Sandeep Kalra, executive]

So in terms of the deal wins, some of the larger wins that we announced over the last several quarters were from Europe. And so from that perspective, yes, about 100 million-plus TCV over the last 3 quarters to 4 quarters has been won from Europe -- from big deals itself, forget the renewals and anything else. So definitely, there is a certain amount of focus that has come in, in Europe.We have invested in sales, sales leadership and otherwise as well in the geography. We will have to be a little bit cautious about the macro, how the Russia, Ukraine thing pans out. A lot of these things are also dependent on that, because it has downstream impacts on gas and other pricing in Europe and inflation in many other aspects. So we are watching it cautiously, but we are optimistic of having Europe grow at the company average.I think we are at enough time. So operator, if we can take one last question, then we'll stop here.

[Operator]

Last question, Mr. [ Sameer Dosani ].

[Unknown Analyst]

Any outlook on the second largest client, because that is one of the clients that you highlighted. What is the outlook? And if you can share what has been the journey over the last few quarters? And do you think growth will come back in this account?

[Sandeep Kalra, executive]

So for the second largest customer, it has been a stable customer. Except for the furloughs that were there in the last quarter, it has been a fairly decent customer in terms of the revenue size, the engagement, the kind of programs, et cetera, that we do. So no concerns there for the time being. And obviously, no one has seen the future, but good relationship, good thing going from the last -- I think we started the relationship about 2010, 2011 time frame. So it's been a fairly long relationship at multiple levels, multiple business units, fairly stable.So with that, we will stop. So let me once again thank our 22,500 plus team members, our customers, our partners and our investors, all of you, for your support in our growth journey.We remain optimistic in our prospects for FY '23 and beyond, even as we are very closely watching the macroeconomic developments and staying close to our key customers. We continue to aspire to maintain industry-leading revenue growth combined with heavy levels of profitability.Thank you for spending time with us on the call today. We wish you the best for the new year, and we look forward to connecting with you again in 3 months' time to provide an update on our ongoing process.Stay safe, stay healthy. 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.Thank you very much. Good night.