Persistent Systems Ltd

NSE:PERSISTENT

Earnings Call Analysis

Company Posts Steady Growth and Optimistic Outlook

The company reported a profit before tax of INR 3,893 million, at 15.6%, ticking up from 14.8% in the prior quarter, with a profit after tax (PAT) of INR 2,861.3 million at 11.5%. The year-to-date PAT for nine months was INR 7,782 million at 10.8%. They declared an interim dividend of INR 32 per share for FY '24, an improvement from last year's INR 28 per share, and have proposed a stock split from INR 10 to INR 5 per share, pending shareholder approval. The company also boasted total cash and investments of INR 18,472 million. Recent achievements include key deal wins with major players in remote work tools and recognition across four categories in the Star of Excellence Awards. Despite global uncertainty, the executives noted some 'green shoots' in discretionary spending but remain cautious, expecting most growth to stem from proactive strategies with existing and new customers.

Incremental Revenue Growth with Strong EBIT Margin Improvements

The company posted a robust financial performance in Q3, signalling a revenue growth of 3% sequentially and 13.7% year-over-year, reaching $300.55 million. This uptick in revenue translated into a 3.6% growth quarter-over-quarter in rupee terms, amounting to a 15.2% increase year-on-year. A key achievement in the quarter was crossing the $300 million revenue threshold. The EBIT margins presented a strong picture, expanding by 80 basis points sequentially to 14.5%, overcoming the adverse impact of furloughs through increased utilization, cost-optimization in the previous quarter, and reduced travel costs. The management maintained a commitment to improving EBIT margins by 200 to 300 basis points over the coming 2 to 3 years.

Expanding the Client Base with Notable Deal Wins

The company made significant strides in building its order book, achieving a total contract value (TCV) of $521.4 million, with new bookings accounting for $277.4 million. This marks the first time the company surpassed the $500 million TCV mark, highlighting the effective conversion of its pipeline. A substantial portion of the business, 79%, comes from North America, with the December quarter typically seeing a surge in renewals. The client engagement growth was particularly notable among the top 5 customers, indicating a positive trend in client relations and revenue concentration.

Diverse Geographical Performance and Growing Workforce

Revenue growth exhibited geographic variance, with North America outperforming the company average at 3.6% growth quarter-on-quarter, while revenues from India impressed with a 6.8% increase over the prior quarter. In contrast, Europe and the Rest of the World experienced declines. The overall headcount of the company increased to 23,336, marking an addition of 494 employees since the previous quarter, supporting the company's growth trajectory.

Strategic Focus on AI and Industry Recognition

Strategically, the company has made considerable advances in AI, specifically in GenAI. These efforts are fostering customer relationships and driving innovation in sectors like healthcare and financial services, with projects expected to contribute to multimillion, multiyear deals. Recognition by industry analysts such as being titled as a GenAI market leader and leader for talent readiness in next-gen IT services highlights the company's early adoption and expertise in these cutting-edge domains.

Senior Management Appointments and ESG Initiatives

To bolster growth, the company strengthened its leadership with two key hires: Dhanashree Bhat as Chief Operating Officer and Barath Narayanan as Head of Global BFSI Business and Europe Geography. Additionally, the company has taken substantial steps in enhancing its Environmental, Social, and Governance (ESG) profile, improving its Corporate Sustainability Assessment score and setting an ambitious goal of becoming carbon neutral by 2025.

Financial Resilience and Investment Highlights

A closer look at the financials reveals a continued focus on investment and operational efficiencies. Despite challenges such as furloughs and a seasonal decline in the BFSI sector, the company maintained its margin health, thanks to a margin-accretive IP revenue mix and proactive cost management. Attrition rates have also decreased, aligning with industry trends. The quarter's EBITDA margin stood at 17.7% compared to 16.8% in the prior quarter, and EBIT improved to 14.5% from 13.7%. Healthy cash flow and strategic investments in sales, marketing, and infrastructure are sustaining the company's forward momentum.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, good day and welcome to the Persistent Systems Earnings Conference Call for the Third Quarter of FY '24 Ended December 31, 2023. We have with us today on the call 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] And please note, this conference is being recorded. I now hand over the conference to Mr. Sandeep Kalra. Thank you, and over to you, sir.

[Sandeep Kalra, executive]

Thank you, moderator. Good morning and good evening to all of you depending on where you're joining from. I would like to start by wishing everyone a very happy new year 2024, and I hope the new year has started well for all of you. We sincerely appreciate your taking time with us despite today being a holiday for most of you.

Before discussing our financials, I would like to highlight 2 significant recognitions we received during this quarter. First, we were named the Most Promising Company of the year at CNBC-TV18's India Business Leadership Award. Second, Persistent was included in 3 major capital market indices: the MSCI India Index, S&P BSE 100 and S&P BSE SENSEX Next 50 indices. These recognitions are a testament to Persistent's strong fundamentals, growth potential and competitive edge in the global technology services market as well as an unwavering commitment to creating sustainable value for all stakeholders by maintaining high corporate governance standards. With this, let me now start the update on our quarterly financials.

I'm proud to share with you that we crossed the USD 300 million mark in revenues in Q3, [ clocking ] USD 300.55 million, representing a growth of 3% sequential quarter-on-quarter and 13.7% on year-on-year basis. In rupee terms, the growth for the quarter came in at 3.6% quarter-on-quarter and 15.2% on year-on-year basis. On a constant currency basis, this translates into a growth of 3.1% sequentially.

Coming to EBIT. Our EBIT margin for Q3 came in at 14.5%. The EBIT margin expanded 80 basis points quarter-on-quarter despite the impact of furloughs, aided by higher utilization, cost-optimization measures undertaken in Q2 and lower travel costs. Sunil will provide more color on the EBIT margin movement later in this call. We remain committed to our goal of improving EBIT margins by 200 to 300 basis points over the next 2 to 3 years.

Now coming to the order book for the quarter. The total contract value for the quarter came in at USD 521.4 million with TCV of new bookings being $277.4 million. We crossed the $500 million TCV mark for the first time, reflecting a healthy pipeline conversion. The annual contract value component of this TCV is $392.1 million, of which the ACV from new bookings contributed to $182.9 million. As most of you may be aware, 79% of our business comes from North America, and we typically see higher quantum of renewals in the December quarter, leading to substantial increase in renewal ACV and TCV numbers in this quarter. This corresponds to the end of financial year for most of our customers in North America. While the demand environment remains fluid, our focus on account mining and large deals were key factors that aided our healthy order bookings in Q3. Please note that as always, these TCV and ACV numbers include all bookings, small and large, renewals as well as new bookings across existing and new customers.

Now coming to the client engagement size. Let me give you some color on our performance across client engagement size. We witnessed healthy growth among client buckets with our top 5 customer revenue up 2.1% sequential quarter-on-quarter; top 10, up 2.4% sequential quarter-on-quarter; top 20, up 4.7% Q-on-Q; and top 50, up 3.4% sequential quarter-on-quarter. Our top 50 customers, a portfolio of our marquee relationships, delivered a secular growth of 3.4% in Q3, which is better than the overall revenue growth of the company in the quarter and reflects our continued momentum. The progression of our customers across engagement size categories continues with a total of 176 customers in the greater than $1 million bucket in Q3. I'm happy to report the entry of new customers in the $1 million to $5 million and $20 million to $30 million buckets, which have the potential to scale up further in the upcoming quarters.

In terms of the geographical breakup of our revenues, from a geography perspective, North America revenue grew by a healthy 3.6% quarter-on-quarter in USD terms, ahead of the company average; while India revenue grew by 6.8% quarter-on-quarter. Europe revenue and Rest of the World revenue declined 2.8% and 15.1% quarter-on-quarter, respectively, although on a much lower revenue base.

Coming to the people front. At the end of quarter 3, our total headcount stood at 23,336, an increase of 494 from Q2. 75% of this headcount increase is attributable to increase in lateral headcount, while majority of the remainder is owing to the [ fresher ] hiring. We've added a total of roughly 400 [ fresh hires ] in Q2 and Q3 of this year. The blended utilization for the quarter came in higher at 81.5% as against 80.6% in Q1 -- in Q2 as we continue to focus on increasing utilization of our existing employee base while adding lateral hires to augment for critical [indiscernible]. The trailing 12-month attrition for the quarter came in at 11.9% compared to 13.5% in Q2. As you would notice, our attrition has come down with comfortable band over the past few quarters. Nonetheless, this decline should be seen in the context of general moderation in hiring across the sector, slowdown in sector growth over the past several quarters as also from the [indiscernible] positive outcomes from our employee value-related [ interventions ].

Now moving to the operation -- from operation metrics to certain strategic highlights from the quarter. A lot of you are interested in the progress that we've made on GenAI. But before I get to that, let me give you an update on how we have been playing in the overall AI [indiscernible] [ over the years ].

As you would remember, GenAI is just one form of advanced AI, and the market for AI and Persistent's capabilities in AI span across a longer duration of time and are much more expansive than just GenAI. Since its inception 3 decades ago, Persistent has been a front-runner in solving complex data challenges while navigating the evolving landscape of AI. Our journey with AI started in 1990s with our partnership with the then technology leaders on engineering database products and their implementations. Our early partnership with IBM Research labs and SPSS, a company later acquired by IBM, enabled us to work with the world's leading enterprises in solving their critical business challenges using the latest data and AI techniques. Our AI capabilities came to the full fruition in early 2000 with us setting up analytics centers of excellence for our marquee customers and taking our end-to-end responsibility across data integration, data profiling, data processing, model preparation and model maintenance and calibration.

As AI technologies kept unlocking newer possibilities, we continuously engage in niche projects, such as early detection of lung cancer and chronic kidney diseases, automation of sanction screening, processing trade finance, autonomous enterprise insights to just name a few. This paved the way for our deepening relationships with leading hyperscalers, such as Microsoft, AWS, Google; as well as data technology providers, such as Snowflake and Databricks, among others. In each evolutionary stage of AI, from descriptive to predictive and now generative AI, Persistent has gathered a treasure trove of insights and experiences and customer relationships while working with the technology leaders. Today, our data and AI business is pretty robust and is powered by over 3,000 data engineers and experts working across a range of mission-critical customers. With this background, let me also give you an update on the latest in GenAI ecosystem.

For the last 12 months plus, our team of AI practitioners, researchers and senior leaders have been strategically adapting and actively participating in the rapidly evolving GenAI space while being guided by industry thought leaders [ from their domain ]. While our current engagements in GenAI are modest from a revenue perspective, there's a clear indication from our customers that this trend is on the cusp of a significant shift. I'm excited to share that we are already witnessing the green shoots of large-scale opportunities at the convergence of AI, data, cloud computing and automotive.

Let me now share some examples of recent engagements under GenAI. In the BFSI sector, we are collaborating with a Fortune 500 financial services company facing challenges due to a complex collection of thousands of analytics reports developed over the years, leveraging their multitude of technology stacks. This complexity was a significant barrier to efficient data analysis and decision-making, not to mention the cost sprawl that happened due to the use of multiple technology stacks. Our team undertook a comprehensive migration project utilizing our proprietary GenAI-powered report migration tools. This innovative approach enabled us to transition these reports to a unified modern technology stack 30% faster and with significantly higher accuracy than traditional manual migration methods. It's not only streamlined operations but also allowed us to identify and rationalize news reports, reducing costs associated with legacy technology stacks. As a result, our client can now access and derive insights more efficiently and cost effectively.

Similarly, in the health care space, we are engaging with a global health care company that needs to revamp its data management and AI initiatives to become more agile and innovative. We are building a strategy along with a client that includes launching an internal marketplace for their users to consume and share information, establishing an AI center of excellence to explore new business use cases and automating data consumption and product development through expanded data fabric while propagating safe and ethical AI usage. These initiatives aim to unlock the full potential in data and AI and drive innovation and achieve strategic growth objectives across [ the organization ].

In keeping with that innovative spirit, we recently launched an innovative GenAI-powered open source [ maintenance ] service, a pioneering solution in our industry. This service targets both enterprise software as well as enterprise IT organization and utilizes advanced GenAI technologies to ensure that an organization's open source software remains current, incorporating all necessary patches, bug fixes and the latest software releases. Each of these engagements and offerings have the potential to be multimillion, multiyear deals, replicatable across organizations. We strongly believe that AI will be a driving force, driving significant productivity [ and engineering ] transformation and enterprise modernization. And this will also [ spawn off ] much more downstream work through the [ need for and through ] data [indiscernible].

Now coming to the analyst recognitions related to GenAI. I'm pleased to share with you that Persistent has been recognized as GenAI market leader in the HFS Horizons: Generative Enterprise Services, 2023 report. This accolade is a testament to our rich heritage in digital engineering and data proficiency along with the early adoption and leadership in the domain of GenAI. It is a recognition of the clarity and boldness of our vision and the strong endorsement from our customers and hyperscaler partners.

We were recognized by Everest Group in their PEAK Matrix assessment as a leader for talent readiness in the next-generation IT services, reflecting our team's preparedness for next-gen technology challenges and our comprehensive learning and development initiatives focused on cutting-edge skills, including GenAI, cybersecurity and overall, the data domain. We were also named a leader in Everest Group's Data and Analytics Services for Mid-market Enterprises PEAK Matrix Assessment 2023, acknowledging our substantial investment in next-generation technologies, including dedicated AI labs and our strong partnerships that enhance cloud capabilities and our commitment to delivering business outcomes.

Now coming to the updates on our hyperscaler partnerships. Keeping up the momentum on our hyperscaler partnerships, we announced a strategic collaborative agreement with AWS earlier this quarter to accelerate GenAI adoption. Through this alliance, Persistent gains an early access to AWS GenAI resources to build proof of concepts to help clients achieve tangible business outcomes. Adam Selipsky, the CEO of AWS, spotlighted our achievements in his keynote at the annual AWS re:Invent conference, underscoring the strength of our partnership and our dedication to enhancing developer productivity.

Coming to our other investments in GenAI. To accelerate our co-innovation with our customers and partners, we marked a new milestone this quarter with the launch of state-of-art GenAI studios across U.S., U.K. and India. These innovation hubs serve as a playground for Persistent, our customers and our partners to lead at the forefront of AI technology and creativity while shaping the future of industries together.

Last but not the least, I'm excited to announce the appointment of Praveen Bhadada, one of our distinguished leaders and my current Chief of Staff, to spearhead our GenAI business portfolio company-wide effective immediately. In his new role, Praveen will unify our overall AI initiatives, including GenAI, across the organization under one umbrella, giving us the power to synergize across industries and will focus on propelling our growth trajectory in [ this area ]. With this strategic pivot towards AI-powered digital engineering and enterprise modernization, our endeavor is to be at the forefront of AI revolution and deliver unprecedented value to our customers across the industries that we service and also have a leapfrogging of our capabilities and service offerings powered by AI across our [ service lines ]. We'll continue to highlight the progress on this topic in the subsequent quarters.

Now coming to the management updates. In line with our growth aspirations, we continue to add muscle and fortify our management team. We welcomed Dhanashree Bhat as our Chief Operating Officer. With her over 28 years of experience, Dhanashree will further strengthen Persistent's operations to ensure client success. She'll be responsible for tenant supply chain, delivery excellence, learning and development, enterprise risk management, IT and facilities, among others. Prior to joining Persistent, Dhanashree was the Chief Delivery Officer of communication, media and telecom vertical at Tech Mahindra.

We also welcomed Barath Narayanan as our Head for Global BFSI business as well as our Europe [ geography head ]. Barath comes with over 24 years of experience and brings to us deep experience in managing large P&L units, shaping and winning large deals, managing consulting businesses and delivering complex programs that drive growth and profitability. Prior to joining Persistent, Barath was heading the digital and cloud business globally for Wipro.

Coming to the ESG and administrative updates. As we continue our journey on our commitment to be among the best-in-class for our ESG endeavors, I'm glad to report that our Corporate Sustainability Assessment S&P Global score has moved from 47 to 60. Under Scope 1 through Scope 2 emissions, our aspiration is to become carbon neutral by 2025. And towards this, we are working on sourcing 100% of our electricity consumption from renewable sources. Our efforts are now towards net zero carbon emissions, much ahead of the stipulated time line 2050 set by United Nations' Intergovernmental Panel on Climate Change. On the facility side, we inaugurated a new office in Kochi, Kerala in November 2023 as part of our continued efforts to [ reach out good ] locations where our employees are based. We also expanded our presence in our New Jersey office in the U.S.

In summary, we are pleased with our performance in Q3 FY '24 in a challenging business environment. I would now like to invite Sunil, our CFO, to give a detailed color on the quarterly financials and [indiscernible]. Sunil, over to you.

[Sunil Sapre, executive]

Thank you, Sandeep, and good morning, good day to all. Thank you for taking time to join us today. Wish you all a very happy 2024. Sandeep has shared some business outlook. Let me now walk you through the financial performance for the quarter ended 31st December '23.

The revenue for the quarter was $300.55 million, a growth of 3% quarter-on-quarter and 13.7% Y-o-Y. Revenue for the quarter in rupee terms was INR 24,982 million, reflecting growth of 3.6% quarter-on-quarter and 15.2% Y-o-Y. For the 9 months, the cumulative revenue is $875.2 million, which a growth of 14.9%. In rupee terms, the revenue for 9 months is INR 72,311 million, reflecting growth of 18.6%.

Coming to sequential growth for the quarter at segment level, health care and life sciences grew by 16.6% quarter-on-quarter, hi-tech and emerging verticals grew by 0.1% quarter-on-quarter, while BFSI declined by 0.7% mainly on account of furloughs. As you know, seasonally, Q3 of the year is impacted by furloughs. The overall impact on the margin was 60 basis points during the quarter due to the furloughs.

There is an increase in on-site effort mix which we'll observe, which is due to initial phase of deal ramp-up of the deals won in the previous quarter, which is also reflected in increase in subcon expenses. The impact on margins due to the higher on-site mix was about 60 basis points. So these margin headwinds were more than compensated by margin-accretive composition of IP revenue, which contributed 80 basis points; higher utilization; and lower travel expenses, each contributing 30 basis points; and SGA rationalization in Q3, coupled with benefit from headcount optimization undertaken in Q2, contributing the majority of remaining improvement in margin of 60 basis points.

Attrition continued to decline in line with industry trends with TTM attrition at 11.9% as compared to 13.5% in the previous [indiscernible]. With this, the EBITDA margin for the quarter was 17.7% as against 16.8% in the previous quarter. EBITDA for 9 months period stands at 17.6% vis-à-vis 18.1% for the comparable period last year. Depreciation and amortization was 3.1%, same as in the previous quarter. The increase in amortization in absolute terms is due to amortization of software used for internal systems. We have been working on strengthening these to support the increased scale of operations. The EBIT came in at 14.5% as against 13.7% in the previous quarter. And EBIT for 9 months period stands at 14.4% vis-à-vis 14.8% for the comparable period last year. As I had mentioned in the earlier quarter, we have invested in sales and marketing, and there is an increase in G&A expenses due to more employees working from office.

The treasury income for the quarter was INR 181.08 million as against INR 166.28 million mainly on account of improved cash flow. ForEx gain was INR 80.9 million as compared to INR 83.7 million in the previous quarter. Profit before tax for the quarter was INR 3,893 million at 15.6% as against 14.8% in the previous quarter. ETR was 26.5% as compared to 26% in the previous quarter. PAT for the quarter was INR 2,861.3 million at 11.5%. YTD PAT for 9 months was INR 7,782 million at 10.8%. Excluding the onetime expense in Q1 on $1 billion milestone celebration, PAT was 11.3%. EPS for the quarter was INR 37.83 as against INR 35 in the previous quarter.

ROCE for the quarter was 29.3% as against 30.2% in the previous quarter. ROCE is based on trailing 12 months EBIT. The operational CapEx for the quarter was INR 321.32 million. Cash conversion for the quarter continued to be good at 101% of EBITDA. And [ OCF to ] EBITDA for 9-month period ending 31st December stands at 0.71 vis-à-vis 0.60 in the corresponding period last year. Total cash and investment on books is INR 18,472 million at the end of December as compared to INR [ 15,693 ] million at the end of September. The DSO came in at 66 days, same as in the previous quarter. Forward contracts outstanding at the end of December was [ $240 ] million at an average rate of INR 84.04 per dollar.

Couple of other updates for this quarter. As you know, Q3 is usually the quarter in which we declare interim dividend, and I'm pleased to share with you that the Board of Directors declared an interim dividend of INR 32 per share for FY '24 [ under ] face value of INR 10 per share. This compares to the last year's interim dividend of INR 28 per share. It's our endeavor to maintain consistent dividend payout ratio while we augment our growth through capability-led acquisitions. In order to make it more convenient for shareholders to participate in Persistent stock, the Board of Directors has also recommended to the shareholders the resolution to split the face value of shares from INR 10 per share to INR 5 per share. This will be subject to shareholders' approval, which will be processed [ in due course ]. Thank you, all, and now I hand it to Saurabh for covering deal wins and awards and recognitions. Saurabh?

[Saurabh Dwivedi, executive]

Thank you, Sunil. I will now talk about key deal wins for Q3 by industry segments. Let me begin with software, hi-tech and emerging industries, our largest vertical. Persistent was selected by one of the leading providers of remote work tools for collaboration and IT management to transform its Salesforce-based applications, connected factory and IT service management under a managed services model. This is a $50 million-plus TCV deal and is another major successful win for our private equity channel. Persistent was selected by a leading publisher 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 from a global media conglomerate. This is another case study of Persistent's established framework for carve-out transactions, which leverages Persistent's intelligent IT operations framework and components from hyperscalers and leading technology vendors.

Persistent was selected by 2 of the hyperscalers as a strategic partner for the development and support of their connected development programs. These deal wins are special because they provide us access and partnership with the next-generation tool development programs of these hyperscalers, including in the generative AI domain.

Coming to banking, financial services and insurance, Persistent was selected by one of the largest U.S. banks to develop and maintain its applications across domains, such as capital markets, payments, treasury and customer support. This is a 50-million-plus renewal deal where Persistent is also a beneficiary of vendor consolidation. Persistent was selected by a leading Canada-based provider of financial technology to credit unions for developing and supporting the core banking platform, which will be rolled out to more than 40 credit unions. As part of the engagement, Persistent would also manage the cloud and security operations of the customer. Persistent was selected by a large global financial conglomerate to modernize its security operations center for its American operations, including providing a holistic view of a security [ posture ] to the top management. This is a managed services engagement with complete ownership with Persistent and has the potential to be replicated in other geographies for the customer.

And finally, within our health care and life sciences vertical, Persistent was selected as a strategic partner by a leading analytical instrument company to engineer their key product suite, including building data analytics capabilities for their chromatography platform, instrument support solutions and algorithms for microarray images. This is a large renewal deal with one of the largest health care customers for us. Persistent was selected by a Fortune 500 scientific instrumentation company to undertake upgrade and migration of the database for its clinical research group while ensuring regulatory compliance in the U.S. and Japan. Persistent was selected by a leading pharma contract research, development and manufacturing organization for development of artificial intelligence-led drug discovery platform. This platform will accelerate drug discovery process from molecular design to preclinical candidate selection by creating a central reusable repository for quick decision-making for compound synthesis and biological evaluation.

Now moving on to the awards and recognitions for the quarter from leading analyst firms. Q3 saw us get continued recognition from industry-leading analyst firms and associations. To mention a few, Persistent was recognized as the only provider to win in 4 different categories in the Star of Excellence Awards based on voice of the customer. The ISG Star of Excellence Awards, part of the ISG Provider Lens research program, is the premier industry recognition program for the technology and business services industry. These awards recognize exceptional client service experience and serve as a benchmark for measuring client centricity in our industry.

Following were the categories in which Persistent was recognized. Persistent was recognized as ISG Star of Excellence Universal Industry. Persistent was recognized as ISG Star of Excellence BFSI industry. Persistent was recognized as ISG Star of Excellence Healthcare and Pharmaceuticals industry. And finally, Persistent was recognized as ISG Star of Excellence Cloud Native. Additionally, Persistent was recognized as a Breakthrough 15 provider in the Q3 2023 ISG Global Index for the second consecutive quarter.

Persistent -- moving on from the ISG awards, Persistent was recognized as a leader in IDC MarketScape's Worldwide Software Engineering Services 2023 Vendor Assessment. Persistent was recognized as a leader in the Zinnov Zones' ER&D Services and Digital Engineering Services 2023 Report for the 11th year in succession. Persistent was recognized as the Best Enterprise Services Vendor of 2023 by Constellation Research.

This completes the section on key wins and awards and recognitions. With this, I would like to conclude the prepared comments and would like to request the operator to open the floor for questions.

[Operator]

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

[Sandeep Shah, analyst]

Can you hear me?

[Unknown Executive]

Yes.

[Sandeep Shah, analyst]

Yes. Congrats on a good execution. Sandeep, just wanted to understand, entering into 2024, any signs of recovery in our discretionary small size [ past the ] converting deal wins in terms of client discussion, starting some of the projects which are put on hold in any of the verticals?

[Sandeep Kalra, executive]

Look, from our perspective, yeah, the discretionary spend, we are seeing some green shoots, but it is -- I wouldn't say that the environment is any significantly different from the last few quarters year.

Most of our growth if you see is coming from the proactive efforts that we've had in our existing customers and new. And these are longer-range deals that we are doing. So I wouldn't say necessarily that we are seeing too many green shoots. There are some green shoots, will let the time pan out and see how this goes from a discretionary perspective.

[Sandeep Shah, analyst]

Okay. And Sunil sir, looking at the margin walk, which you have provided with subcontracting costs and furloughs together impacting margin by close to around 120 bps, is it fair to assume furloughs may reverse in the fourth quarter and we can exit the fourth quarter with a 15% EBIT margin?

[Sunil Sapre, executive]

Yes. So as I mentioned, the increase in subcontractors is on account of the ramp-up in the recent deal wins. And this will continue for some time before the offshoring starts. So you're right in directionally this thing, we are working towards multiple levers to improve the EBIT margin, and that's the effort to continuously improve EBIT margin from here on.

[Operator]

The next question is from Manik Taneja.

[Manik Taneja, analyst]

I hope I'm audible.

[Sandeep Kalra, executive]

Yes.

[Manik Taneja, analyst]

A couple of clarification questions. Sunil, the first question is for you. When I look at our segmental performance, what we see is that through the course of last 3 or 4 quarters, our segmental margins on the Hi-tech side have been coming off with the exception of this particular quarter. So what is explaining the movements in terms of segmental margins, given the fact that in the past, we renegotiated the deal at the large customer, which was to step up the margins for the business?

And also, the second question is basically a clarification on this largely ramp-up. Is this largely to with the healthcare business, which was a deal that you won on the healthcare payer side in the prior quarter?

[Sunil Sapre, executive]

Yes, Manik. So the answer to the second question is, yes, that is what is -- but it is also not just that one deal. There are some other deals, as you would recall, we had announced in the earlier quarter which are also ramping up.

Coming to segment margins, what you mentioned about the Hi-tech margins, basically, it is a function of 3 areas. The Hi-Tech is an area where we have the larger ISB business, which includes a top customer. There are IP-related revenues that are coming over there, not just in the large customer, but also in our accelerate portfolio.

And there is also the recent trend where we are seeing carve-out kind of deals, right? There is also a certain portion of IP revenues over there. So the margin is a function of, if there are partner IP revenues coming in that, the margin conversion on that is lower. And in this quarter, particularly, we had good accretive -- our own IP revenues because of which the margin on the Hi-tech side is higher this quarter.

So it's a portfolio of customers we carry, and the deals in every quarter may have relevance to the way margins pan out. But overall, if you see the gross margin is steady and we have been able to improve the EBIT margins there.

[Operator]

The next question is from Ravi Menon.

[Ravi Menon, analyst]

Congratulations on a really good quarter. One question is on the healthcare side. If I look at your breakup of customers, it looks like areas now pharmaceutical companies, payers, providers and clinical research organizations, is this a change from the whole specific instruments in medical devices focus that you've had maybe 3 years back or most of these new customers?

[Sandeep Kalra, executive]

So Ravi, good observation. So if you look at our healthcare portfolio, we have had a good footprint in the scientific instruments, medical devices. That was the leading segment for us, which used to contribute lion share. We did have pharma customers, providers at scale, providers is where our CSO's business dominates in the U.S. compared to our competition.

What has happened is there have been some good accounts supersized in all these domains, and we have invested heavily in the payer domain. And some of the larger wins we are getting are additionally in the payer domain. So now it's a very well-balanced portfolio across scientific instruments, medical devices, pharma, where we play mostly on data analytics and the specialty pharma on the sales force front, providers where we are leaders based on sales force under the CSO initiatives and payers where our next-generation development capabilities as well as data analytics playing out well. So now, yes, it's more diversified and scaling in all of it.

[Ravi Menon, analyst]

I also see that you are beyond the top 10 customers, the traction continues. So can you explain also that you're seeing some wins from your private equity channel. Anything else that you could call out some of these customers? Is there a potential to take them to the top 10?

[Sandeep Kalra, executive]

Yes. So good question. So if you look at the mix of the wins that we have had. So as we have grown from being $500 million organization to $1 billion organization, as we have grown our capabilities significantly, along with the addition of leadership teams and so on, we are now being invited to the much bigger bids.

So today, if you look at the wins that we are having, they are against the top 5 in India, the big 5 across the globe and so on and so forth. So the revenue mix, the client mix is changing. And to your point, some of these customers have the propensity to absolutely become among our top 5, top 10 customers. And you will see the top 10 customer mix changing in terms of the names moving in there, the quality of customers moving in there over a period of time.

[Ravi Menon, analyst]

One last question on the SG&A side. You used to have about 20% of your revenues at SG&A, and now it's down to 16% or so. Do you think there is further leverage possible?

[Sandeep Kalra, executive]

Yes. So good point. Let me answer a few more things along with it. There have been a few questions alluding to the margin side of it before, and all of this comes together. So if you look at the sales and marketing side of it, if we look at our investments in sales and marketing, we have brought in a significant rigor to sales and marketing. We have over invested in sales and marketing as well. In absolute terms, if you look at it, if you look at year-on-year comparison, not just quarter-on-quarter comparison, we may be at a higher level in terms of SG&A from a year back.

And part of it, whether it is direct SG&A investments, part of it are investments which are enabling things which enable our sales to be much more productive, whether it is in our capability build around the private equity side, capability build around our AI and GenAI side, capability build more deeper into certain parts of our cloud infrastructure and security and so on. So all of them are enabling the growth and there is definitely further leverage on the SG&A side as we go on.

Now let me also take this opportunity to answer the broader margin question before everyone asks us the margin question in different forms and shapes. We have said very clearly we will increase our margin from 200 basis points to 300 basis points between now and the next 2 years to 3 years. And I do want to recognize a mistake on one of the earlier calls, I have had said 150 basis points to 200 basis points. Our intent is 200 basis points to 300 basis points. I want to clarify.

Now let me build it up for you before everyone ask the same question. If you look at our utilization, today, our utilization is at 81.5%. If you decide for that utilization into 2 distinct buckets, the laterals that we have and the people we hired from the campuses were yet to become productive, and these are -- I'm talking of the volume hiring that we had done 2 years back.

That hiring is yet to be productive more than 64% of what it was. Our laterals are running at 85%. So as a company, we have the propensity if we look forward to HR utilization up from 81.5% slowly up to 83%, 84%, 85%. For each percentage of utilization going up, there's 30 basis points of margin that we release at the back end. So keep that in mind. That's one part.

We talked about the SG&A leverage. So we have invested significantly in our SG&A and not only SG&A in terms of sales force, but if you look at the leadership hires that we have brought on board, in the last 1 to 2 quarters, those are leaders that will kick in, in high gear as we move along. They don't have the impact on the current quarters. They are just settling in. But as we move into the next financial year, we will have a leverage of it.

Then again, if you look at things like our facilities and so on and so forth. There is a certain amount of leverage that will come in because we invested in certain facilities. You would have seen many announcements in India and outside. And as we see our revenue growing, all of those is going to kick in. It is not going to necessarily increase in line with the revenue part. Not to mention the amortization that we have from the earlier M&A that we have done. As our revenue increases, that also gets defrayed over a larger thing.

So overall, from a margin perspective, we are reasonably sure, and we have initiatives inside the company where we will incrementally, whether it is next quarter or the next few years, move up. Now obviously, in certain years when the macro is soft, we will not press the trigger on margin improvement that hard.

If you look at the current year, we wanted to make sure we come in first on the top end of the growth quartile and then comes to the margin initiative. And as the economy stabilizes, the focus will move and it will always be cross balance with the growth being first priority.

So with that, back to you, moderator.

[Operator]

The next question is from Karan.

[Sandeep Kalra, executive]

Karan, we can't hear you.

[Karan Uppal, analyst]

Can you hear me now?

[Sandeep Kalra, executive]

Yes.

[Karan Uppal, analyst]

Okay. Great. Again, obviously, congratulations on a fantastic quarter. I'm looking forward to see what comes ahead. So I just wanted to dig a little bit into the GenAI pipelines and let me start with a basic question. I know you won't answer, but I'll try anyways. And then I'll ask just 1 or 2 sort of follow-up question to that, which is, is this possible to get to sort of $100 million of revenue from GenAI over the next 2 to 3 years, just in terms of size, scale and scope? Of course, there's no kind of firm guidance or anything, but just in terms of how big it can be.

And I guess as part of that, my question would be, can you add some color on just the size of the pipeline in the sense that how many of your 176 clients have some kind of POC-related to GenAI? And then related to that, what percentage of POCs are leading to production? We've seen surveys where, actually the vast majority, more than 50% of POCs will enter production. So actually, the technology works broadly. And I think everybody understands and realizes there's a lot of POCs out there, but they have an uncertainty around what that conversion rate will be. But the leading indicator seems very strong. So if you can just add some color there. I know a lot of questions there, but whatever you can, from those points.

[Sandeep Kalra, executive]

Sure. So the first question, can GenAI lead to a $100 million business over the next 2 to 3 years? Look, anything is possible. And so GenAI is one form of AI. And look, GenAI cannot be implemented beyond POCs, till the time you have an enterprise-wide, wherever use cases you are trying to put, clean data available to you in very simple terms. And if you have to do that, GenAI you should look at it as a tip of the sphere.

For us to be able to deliver any enterprise and for any enterprise to be successful on GenAI, it was part of many different initiatives, which will involve data engineering, data cleansing, and many other things.

So GenAI in absolute terms, just as a simple use case, we'll have many other things, we should put all those things together, can it lead to $100 million business for us over the next 3 years? Absolutely, the answer is yes.

Now will let the time pan out? And we are not going to get into that corundum of now report your GenAI revenues like people used to do digital revenues and so on. I think GenAI is going to be mainstream in everything that we do in the next 2 to 3 years. So keep that in mind as well.

Now second part. Of the 176 customers, how many POCs are we running? Today, if I was to look at overall at Persistent, there are more than 75-plus POCs that are running on GenAI in different formulations.

How much of those will get to production? We'll see how that flows in. Today, any Board room, whether it is ours or our customers, there are discussions on GenAI, and that spawns of initiatives and CIO organizations, GD organizations. The business leaders are given the mandate to go and experiment with GenAI in their own fields. And that's what is leading to those POCs. And that's what is also leading to the collaborative agreements that we have with the Amazon of this world, the Google of this world, Microsoft of this world to go and do more POCs. So that we can unlock the aperture and people look at different possibilities.

Very hard to say how much of those 50%, 100%, what will lead to production. But over a period of time, it will definitely lead to a good amount of revenue intake.

One last thing I'd say on this. Not everything will lead to GenAI. GenAI is one form of AI which is easy to use and so on, but also keep in mind, the bills on GenAI can very soon go up for enterprises. And there are alternate forms of AI which are available. Not everything needs to use GenAI as a use case. And we have been doing that for many years. That's why in my prepared comments also, I refer to.

So we are very positive about AI being there in every part of Persistent service lines, digital engineering to sales force implementations, to the cloud infrastructure security and so on. And you will see us announce many more initiatives in the next 3 to 6 months.

Back to you, moderator.

[Saurabh Dwivedi, executive]

So Sandeep, there is a question on the chat, a related one on GenAI where Gaurav Rateria is asking us, have you been part of discussion in helping clients save costs somewhere else by becoming more productive and channelizing those savings in these GenAI initiatives?

[Sandeep Kalra, executive]

Yes. So look, every enterprise or every enterprise software company, at the end of the day, their ability to spend, if I must say so, their expense budget or their part of gold is only limited.

So when a number of people are looking to forward-looking initiatives, and this is nothing new, this has been happening for a long. People look at where you can reduce the spend in business as usual and take that to more next-generation initiatives. In this case, it is GenAI.

And there are other ways also people are looking at us to have them, whether it is enterprise software companies or enterprises, right from developer productivity, now looking at their own implementations of developer productivity tools like Microsoft Copilot or AWS CodeWhisperer to many other things that we bring to bear with our IP, like the report rationalization tools and so on.

There are many things that are there on cost reduction and taking that money to see how we can impact the revenue side of it, our customer experience side of it using GenAI. So yes, there are many initiatives with this.

[Operator]

We'll take the next question from Abhishek.

[Unknown Analyst]

Congrats on a good quarter. Again, a related question to the topic we are discussing. So Sandeep, there was a comment about an increase in the cost of ownership of software products in one of the industry analyst call last week, related to GenAI spend.

So first question is on that topic is, are you seeing an increase in product engineering spend because you have a very strong relationship with software product companies?

And second, is there a trend in terms of, because of that spending, are we will see a moderation in non-AI-related spending, including cloud migration-related spends?

[Sandeep Kalra, executive]

Yes. So we are talking two different things here. See, the second part that you talked about, the cloud migration and so on. So that is much more relevant in the enterprise world because a number of enterprise software companies are today more and more cloud native in their new product development. And a number of them who are there from the past have already moved their legacy products to the cloud in one way or the other, are going to sense it.

Now as far as the spend on GenAI is concerned in enterprise software, is there more adoption of that, and broadly AI? Yes, it is. And everyone is trying to control their budgets, moving money from where they can squeeze on business as usual support side of it to doing feature enhancements using GenAI, doing Copilots to other things from a CX perspective, customer support perspective and enterprise software and so on. So yes, there's a movement, and we are gainers of that.

And it's early in the game. It's not just that today, GenAI is accounting for a majority of our growth. But GenAI and AI, over the next few years will definitely account for more and more revenues for us.

[Operator]

The next question is from Dipesh.

[Sandeep Kalra, executive]

Dipesh, we can't hear you yet.

[Dipesh Mehta, analyst]

Can you hear me now?

[Sandeep Kalra, executive]

Yes, please.

[Dipesh Mehta, analyst]

Can you hear me now?

[Sandeep Kalra, executive]

Yes.

[Dipesh Mehta, analyst]

Two questions. First, about the private equity GenAI. I think now last couple of quarters, we have seen a couple of success in private equity channel. So can you just help us understand what we are doing differently, which works well for us and any specific action we have taken, which drives the success?

Second question is about revenue composition change. We don't report service mix. So I just wanted to get a sense. I said 3 years back, kind of what we used to do, how it is evolved in 3 years? And if you can help us understand how you expect it to evolve in future?

[Sandeep Kalra, executive]

Yes. So I'll take the first question. Second, I let Sunil answer. So from a private equity channel, if you look at it, we have been developing this channel for the last 4-4.5 years. And we have hired people who understand this channel, and so our private equity channel is house with folks who have worked for private equity or worked in companies that have serviced private equity.

On one side, we are mapping to strategic private equity folks like accounts. So look at them as accounts we manage at the highest.

On the other side, the capability. At the end of the day, it's all about the capabilities that you bring to bear. So we understand what a private equity firm needs and what their portfolio companies do. So we are partnering with private equity right from the stage when they're evaluating deals. So we have certain tools, techniques, methodologies that we have perfected on that.

We help them analyze the companies, the platform. So right, using from our digital engineering capabilities to analyze the platforms that these companies that they are trying to acquire, the maturity of those, their hypothesis on engineering effectiveness, the capability to cost reduce using different levers and innovate using the forward-looking technology. So we are right there when they are evaluating deals to that time, the deals are brought in and there are, there is work to be done if it is a carve-out, we have more and more become a carve-out specialist where we have tools that needs methodologies to de-risk the transition services and so on.

So across the private equity spectrum right from pre-diligence, due diligence to the value realization once the company is acquired, to even the exit, we have a very clear set of service offerings, and those are well proven, along with the IP assets that we have built to deliver these. So that's what is differentiating us and increasingly making us the preferred partner for all these large private equities as they go to fee. And you have seen a number of our wins come from that.

Now I'll let Sunil to speak.

[Sunil Sapre, executive]

Yes, Dipesh, so in terms of the services and IP-led revenue composition, if you want to understand the growth profile, yes, both the parts of the business have been growing. And if you take a period of 3 years, the only thing that has moved is the large deal that we had, which we discontinued at the end of 2021. So that's the only period when the IP-led revenue had a bump-up because of that contract.

But otherwise, on our own, whatever accelerators, our own IPs in the accelerate portfolio, and the new work that we have been doing in multiple areas, where we are able to bundle our own solutions to customers.

[Dipesh Mehta, analyst]

Sunil, I was not looking for that service. I just broadly understand that in service composition of revenue, how we can change? Let's say, earlier, we used to have a very large sales force skewed kind of revenue. So over a period of time, how broad based that revenue mix is changing?

[Sandeep Kalra, executive]

Let me take that question, Dipesh. So if you look at our services mix, so, and I alluded to that earlier in the call as well. As we have grown from being a firm, which was $500 million to a firm that it's beyond $1 billion, now -- and we have also built capabilities, whether it was building more capabilities right from our cloud native and the digital engineering side where we are -- we've always been very differentiated, we have built on capabilities on those. We have added on application maintenance and support capabilities, the ASM part of it. We have built on the cloud part of it in terms of doing the next-generation infrastructure on that cloud, cloud ops and so on. We've built significant capabilities on data side.

So what all this brings together is when anyone is looking for at a one of the, let's say, Fortune 1000 companies looking at doing a RFP and wanting to bring 1 or 2 challengers in the mix as they look at their current providers, we are definitely being involved. And that is where if you look at some of the larger wins, we have won against the top 5 in India, the top 5 globally and so on and so forth. So the services mix is changing towards a lot of people think Persistent is discretionary. I would tend to believe Persistent is a lot more nondiscretionary today than what it was 3 to 4 years back.

So from that perspective, long-term deals across these segments, stickier revenue, annuity revenue, that is the kind of services mix that we have built over the last few years, and that's where we are going while not losing the sense -- those of making these differentiated, even our AMS, the application management support, we bring a lot of tools to bear. A lot of AI is what we are infusing in that. So it is the next-generation ops, the next generation development and so on. That is what is there, but the mix is definitely changing.

[Operator]

The next question is from Chirag.

[Unknown Analyst]

Congratulation on a good set of execution in challenging time. So Sandeep, what's our M&A outlook for the next 2 years?

[Sandeep Kalra, executive]

So if we look at our M&A strategy, it has been built on small tuck-in acquisitions, which are based on the capabilities that we want to enhance or a geographical footprint that we want to enhance.

So we keep evaluating deals. Obviously, we have to make sure that the deals have the right fit, both from a technology, cultural and the valuation standpoint.

From our next 1 to 2 years, we'll be focused on deals on the cusp of AI, cybersecurity, in terms of going into verticals, micro verticals within Banking Financial Services, Healthcare Life Sciences. And finally, from a geography perspective, tuck-in acquisition in Western Europe from our revenue/customer acquisition perspective, because Europe is one place where we do want to scale up in terms of our revenues, and a delivery in Eastern Europe. So those are the broad contours and we keep -- and we are on the lookout for good targets. And if anyone on the call has anything to refer to us, please let us know and Saurabh also, these are competitive.

[Unknown Analyst]

And just 1 follow-up, vertical-wise, in AI-based offering, which vertical you will get more revenue acceleration once clients look for more deals in [indiscernible]

[Sandeep Kalra, executive]

So our point of view is this is going to be a secular adoption of AI. Having said that, Healthcare Life Sciences has usually been a laggard in terms of adopting newer technologies. We do believe Healthcare Life Sciences followed by BFSI will be the way we will see the population, but we'll let the time pan on.

And then there are several use cases like contact center optimization using GenAI and so on, which are agnostic of all the verticals. So there are certain horizontal propositions and there are certain vertical propositions.

[Operator]

The next question is from Mohit Jain.

[Mohit Jain, analyst]

Sir, just one question on Hi-tech vertical, this quarter was a little slow. So if you could share your outlook on that vertical and if you could split it between, say, top client and the rest of the Hi-tech, how should we look at it going forward?

[Sandeep Kalra, executive]

So Mohit, as you would have seen, our top client declined a little bit in this quarter. And it was a planned decline based on a particular large program. It has a profile where we had a certain amount of revenue going up and then it has a certain depre, so that is what caused a little bit of [indiscernible] on the Hi-tech vertical.

And if you look at the Hi-tech vertical, that has been a very strong vertical for us for growth. And so small blips will come here and there because of 1 or 2 things. And somewhere being the quarter where there are furloughs, there were some minor things there as well. But nothing to worry there.

If you look at our overall growth, we've said that in the past, it will be led by Healthcare Life Sciences and Hi-tech followed by BFSI. So that's where it is.

[Operator]

The last and final question is from the [indiscernible]

[Unknown Analyst]

Am I audible?

[Sandeep Kalra, executive]

Yes, please.

[Unknown Analyst]

Sandeep, just one question from my side. You just mentioned AI cybersecurity is probably the focus areas for our M&A. But as you mentioned that if you look at a profile at more than $1 billion today, do you believe those traditional areas of, let's say, ERP or let's say, BPO, which are kind of wide spaces for us, would you also be looking to expand your portfolio with them as we come for services companies, and as you mentioned, we get attracted to more -- invited to more and more large deals?

Wouldn't our -- let's say, I mean, I wouldn't say inferior, but let's say, capability in those domains hampered our chances to win those deals? Any thoughts on that in terms of growth whether the organic or inorganic that you're looking at?

[Sandeep Kalra, executive]

Sure. So they are valid questions. But look at it this way. We are a $1 billion company in a much, much bigger mark. As far as the ERP side is concerned, number one, there are many more -- much more mature players in the market.

And second, I would tend to believe ERP basically plays the role of a system of record. There is much more that can be done on top of it in terms of systems of engagement, and that's where we play. So there is -- if I am giving $100 in investment, I wouldn't want to go after a reduction. I would want to build on our capabilities and there is enough and more market there.

Same for our BPO. Where we play in the BPO realms as we go and disrupt the BPOs. We go and disrupt the BPO using technology, using GenAI, AI and so on, making BPOs much more effective, reducing the OpEx on the BPOs using technology. And that's where we have enough and more to do.

Now in terms of larger deals, when you go to large enterprise customers, they don't usually go with 1 single provider. So they go with a mix of providers even if they're going with large or a bunch of disruptors. And so there is a way to partition the deals in a way where everyone brings their strength. And the biggest one that we have is on forward-looking technologies. And that is where there's a significant amount of addressable market for years and years.

So we'll stick to our knitting. We'll bring AI into it. We'll bring differentiated capabilities much ahead of our larger peers and mid-cap peers. So that's where our focus is at.

Let me try and close this call. The key message that I want to leave with our investors today is that we have delivered top quartile revenue growth for the last 15-plus quarters. Now we are looking at good deal bookings converting into revenues going ahead despite a difficult macro environment. We'll continue to operate as a strategic partner to our customers and enable them to drive their key business imperatives. We are positive on our growth prospects going forward, although we are cautiously optimistic on the macro environment. Nonetheless, we'll watch this macro developments and will ensure that we'll remain relevant to our customers.

We, once again, thank you for your participation, and we thank our 23,300-plus team members, customers and partners, for their support in our growth. We look forward to giving you an update in 3 months from now. Thank you.

[Sunil Sapre, executive]

Thank you.

[Saurabh Dwivedi, executive]

Thank you.