Persistent Systems Ltd

NSE:PERSISTENT

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Persistent Systems Earnings Conference Call for the Fourth Quarter of FY '23 ended March 31, 2023. We have with us today on the call, Dr. Anand Deshpande, Chairman and Managing Director; Mr. Sandeep Kalra, Executive Director and Chief Executive Officer; Mr. Sunil Sapre, Executive Director and Chief Financial Officer; and Mr. Saurabh Dwivedi, Head of Investor Relations.[Operator Instructions] Please note that 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 evening, good morning, and good afternoon to all of you depending on where you're joining from. As always, we would like to start this call by thanking each one of our 22,700 employees as Persistent team members and our customers for their support and continued interest. We are very happy to report yet another solid growth quarter across all major business and financial metrics despite the dynamic and rapidly evolving macroeconomic environment. This is the first financial year where we have crossed $1 billion in our revenue in our history.Before I and Sunil get into the further details of our quarterly and annual performance, I would like to invite our Founder and Chairman, Anand Deshpande, to say a few words on us achieving this important milestone. Over to you, Anand.

[Anand Deshpande, executive]

Thank you, Sandeep, for [Technical Difficulty]. It's a real pleasure and honor to be here at this great momentous occasion for the company as we completed a $1 billion year. I consider myself very fortunate that I have this opportunity to be a part of this 33-year journey in the company. And this kind of an achievement is only possible because of the hard work and dedication of the people involved and the support we got from our clients and other stakeholders. I'd like to thank all the 22,700 current employees and another [ 22,000 ] prior employees who have all contributed to this. I'd like to thank all the clients who have steadfastly supported us all through the early days, including now. And I would also like to thank all the investors for their support. We have been public since 2010 and I just thank all of you for your support as we -- through this journey. [ Maybe ] a milestone, the investors involved needs to be celebrated but having completed a $1 billion [Technical Difficulty] Sandeep will take it from here and explain to you what we have done so far this quarter and how we look at the next few years. Thank you, all.

[Sandeep Kalra, executive]

Thank you, Anand. Now let me get into the details of the quarterly and yearly performance. We are happy to report that the revenue for Q4 came in at USD274.55 million, giving us a growth of 3.9% quarter-on-quarter and 26.3% on a year-on-year basis. On a constant currency basis, this translates into a sequential revenue growth of 3.5%. In rupee terms, the growth came in at 3.9% quarter-on-quarter and 37.6% on a year-on-year basis. For the full year FY '23, we achieved a revenue of USD1,035.98 million, giving us a robust growth of 35.3% year-on-year.Coming to EBIT, our EBIT for Q4 came in at 15.4%. This translates into an EBIT growth of 4% on Q-on-Q basis and 50.7% on Y-on-Y basis. EBIT margin was consistent with Q3 on a sequential basis as the tailwind of higher pressure billing was largely neutralized by higher costs associated with business travel, events related to annual strategy planning, our annual employee event, amongst others. The impact of currency largely remained flat during the quarter.Coming to the EBIT for full financial year 2023. For full FY '23, we achieved EBIT margin of 14.9%, implying 100 basis points improvement year-on-year. This was on account of a combination of higher costs on travel, amortization, pressure intake as well as lower royalty revenue in FY '23, being offset by SG&A leverage, better pricing, lower accretion and favorable currency movement leading to this improvement. In absolute terms, EBIT rose by 57.4% year-on-year. Sunil will provide more color on the EBIT margin movement later in this call.Coming to the order book for the quarter. Q4 was a healthy set of order wins for us. The total contract rate value for the quarter came in at USD421.6 million with new bookings TCV coming in at USD250.3 million. This implies a healthy growth in TCV of 16.8% on year-on-year basis. The annual contract value of this TCV is of the order of USD310.4 million, of which the new bookings ACV component contributed to USD168.3 million. On a full year basis, our total TCV crossed USD1.6 billion. The ACV component of this is $1.17 billion. This translates into TCV growth of 32.8% and ACV growth of 24.1% for full year FY '23. 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 business.Coming to the customer engagement size. Let me give you some color on the various engagement sizes. To start with, we are pleased to announce that our top customer revenue saw a healthy growth of 30.6% Q-on-Q in USD terms. This is in line with expectations that we had shared with you in the last quarter's analysts call. This impressive sequential growth has to be seen in the context of the decline in top client's revenue by 23.2% during FY '23, which was primarily on account of ramp-downs we had witnessed over the previous 2 quarters. The ramp-downs in earlier quarters were on account of structured cost savings program undertaken by our top customer. Since then, we have partnered closely with them to help them achieve their objectives while also exploring meaningful win-win opportunities for long-term collaboration.Moderator, can you hear us?

[Operator]

Yes, sir. Now it's clear.

[Sandeep Kalra, executive]

Okay. Let me start from the engagement size once again. Apparently, the audio was disconnected for a bit. So let me give you a color on our client engagement size. We are pleased to report that our top customer revenue saw a healthy growth of 30.6% Q-on-Q in USD terms. This is in line with the expectations we had shared with you in the last quarter's analysts call. The sequential growth has to be seen in the context of the decline in top client's revenue by 23.2% during FY '23, which was primarily on account of ramp-downs we had witnessed over previous 2 quarters. These ramp-downs in earlier quarters were on account of the structured cost savings program undertaken by our top customer. Since then, we have partnered closely with them to help them achieve their objectives while also exploring meaningful win-win opportunities for long-term collaboration. This has led to the signing of couple of large strategic deals, cumulatively totaling USD200 million, our first for Persistent. We are hopeful of continuing with a stable and a gradually improving growth profile for our top client during FY '24.We also saw revenues from our second largest customer, recovered from the furlough impact during Q4 quarter, registering a sequential growth of 7.6%. While the overall portfolio of our top 50 customers grew by 4.7% in Q4, the growth was partially impacted by a ramp-down in a key hyperscaler relationship, which had a ramp-down of approximately $3 million for the quarter and approximately about $10 million on annualized basis. This was in line with this hyperscaler's overall cost management programs across [ vendor markets ]. We are expecting this hyperscaler account to resume growth for us over the next several quarters.The progression of our clients across multiple revenue threshold continues with 2 additional customers moving into the greater-than-$30-million-band from the greater-than-$20-million-band during the quarter and also scaling the number of greater-than-$5-million customers to 34 compared to a count of 25, 4 quarters back.Coming to the geographical breakup. From a geography perspective, we saw a healthy growth across most regions led by ramp-up of recent deals. North America grew 4.8% quarter-on-quarter in USD terms, aided by growth in our top [Technical Difficulty]. Europe revenue increased 19.7% quarter-on-quarter on account of ramp-up of multiple large deals signed in earlier quarters. India revenue declined 15.6% Q-on-Q due to the decline in IP revenue compared to Q3, which had an impact of a onetime large deal. The above growth has to be seen in the context of a much lower revenue base in Europe and India as compared to the U.S.Coming to the people and utilization. In Q4, we added 291 people on a net basis, taking our total employee headcount to 22,889. The utilization for the quarter came in at 77.3% as against 77.6% in Q3. The growth in our billed person months in Q4 came through a combination of existing experienced employees deployed on various services engagements, new lateral hires and incremental addition of our freshers to billable projects. You may be aware that we had hired 3,000-plus freshers at the start of this financial year. They have started entering the billable pool from Q3 onwards, All the remaining freshers became a part of this billable pool in Q4, which is reflected in the increase in billable person months and IP person months [ Technical Difficulty ]. The continued deployment of freshers on customer projects will be a good tailwind to our margins over the next several quarters.On the attrition front, we saw a moderation in attrition with a trailing 12-month attrition for the quarter coming in at 19.8% compared to 21.6% in Q3. We believe that the trailing 12-month attrition will continue to moderate going forward, aided by a general moderation of hiring across the sector and better outcomes on our employee [ project ] related interventions.Moving on from operational metrics to other highlights for the quarter. We are pleased to share with you that the Board of Directors declared a final dividend of INR12 per share for FY '23. Together with an interim dividend of INR28 per share, our total dividend for FY '23 stands at INR40 per share, which compares to the total dividend of INR31 per share in FY '22. Additionally, the Board has decided to declare a special dividend of INR10 per share to thank our shareholders for their support on our journey to the $1 billion milestone. This takes the total dividend for the year to INR50, including the special dividend. It continues to be our endeavor to maintain a consistent dividend payout ratio while we augment our growth through capability-led [Technical Difficulty].Coming to the update on acquisitions and strategic [Technical Difficulty]. As reported earlier, all our recently acquired businesses have been fully integrated and are coming together as One Persistent to win large deals across our focus [Technical Difficulty]. We have again become active on the M&A front. Consumer technology, cybersecurity, generative AI, European expansion and some key domains in financial services and healthcare are the ones that we are looking for in acquisition terms and a number of these, specifically consumer technology, cybersecurity and generative AI, are the ones that we have been incubating for the last several months.In particular, on the generative AI front, we are looking to invest in software labs and training our employees on things, including large language models, AI-paired programming such as [ GitHub Copilot ] and so on. We recently also announced an expansion of our existing Azure center of excellence with AI-based modern workplace solutions. We'll report progress on this front over the next several quarters.Coming on to the general administrative updates. On the administrative side, in Q4, we did a groundbreaking ceremony of our new Mihan plot in Nagpur. This will be a new campus for us in Nagpur. We also finalized a site for a 250-seater office in Kolkata as well as a new office in [ Jaipur ]. In the coming quarters, our expansion plans include locations such as Kochi and Chennai in India; Dallas, Texas; and Poland in Europe from a nearshore [Technical Difficulty] delivery center for [Technical Difficulty]. Our endeavor is to provide a world-class delivery network to our customers by providing best-in-class facilities to our employees in locations close to them and also to encourage them to work from office at least a few days in a week.In summary, we are pleased with our performance in Q4, with continued healthy revenue growth, strong order wins across focused industry segments, good pipeline and improving profitability despite the macro headwinds.Now I would like to invite Sunil, our CFO, to give a detailed color on the quarterly financials and related matters. I'll come back after Sunil's comments to give you some more details on key client wins, analyst awards and other recognitions for the [ quarter ]. Sunil, over to you.

[Sunil Sapre, executive]

Thank you, Sandeep and Anand, and good evening, good morning, everyone, and thank you for taking the time to join us today.While Sandeep has briefed you on the market outlook, how the quarter has shaped, let me take you through the details of financial performance for the quarter. So this was the quarter where, I mean, much awaited $1 billion milestone we crossed. The revenue for the quarter was $274.55 million, with a growth of 3.9% Q-o-Q and 26.3% Y-o-Y. You would have seen services revenue growing by 5.5% quarter-on-quarter and IP revenue decline by 14.6%, essentially due to the seasonality in this business.Our total revenue for FY '23 stood at $1.036 billion with Y-o-Y growth of 35.3% with services revenue registering growth of 42% and IP revenue showing a decline of [ 14.8% ]. You will recall that the IP revenue for last year included royalty revenue from one of the contracts that was restructured at the end of Q3 of FY '22 and was converted into a lesser [ smooth ] T&M contract. Thus, the IP revenue for this year does not include any revenue from that restructured contract. That is partly the reason for the decline in IP revenue.Revenue for the quarter in INR terms was INR22,544.7 million reflecting growth of 3.9% Q-o-Q and 37.6% Y-o-Y. The revenue for FY '23 was INR83,505.9 million with growth of 46.2% over FY '22.On the segmental growth, BFSI growth was 3.1%, healthcare life sciences grew by 4.4% quarter-on-quarter. Technology companies, that is the software high-tech grew by 4.1%. In respect of linear revenue, the offshore revenue -- offshore linear revenue grew by 9.6%, comprising of volume growth of 9.3% and growth in billing rate by [ 0.2% ]. The on-site linear revenue declined by 1.2%, majorly on account of decline in volume by 1.3%, while billing rate grew by [Technical Difficulty].Now let me walk you through the movement in key operating expenses and an impact on EBITDA or EBIT. The employee-related expenses increased only marginally in absolute terms, while as a percentage of revenue, it declined from 63.6% last quarter to 61.6%. This was on account of lesser net addition to technical headcount. We added 262 people as compared to 92 in the previous quarter, the technical talent. The freshers, as Sandeep mentioned, added to the talent pool about 3 quarters ago are now getting progressively deployed on projects. We have also deployed some freshers in the IP-led business, which is where you see certain increase in the IP-led person months. All freshers are now part of the billable talent pool, partly from mid of Q3 and balance from mid of Q4, which you will find reflecting in the utilization of [ members ].You might have noticed a increase in purchase royalty expense in this quarter. So let me give you details around that. So this particular item traditionally has item which is relating to IP revenue. So it has got a partner IP, which is in form of reseller kind of business, and it has also got royalty when we are working with some of the partners. However, in the recent deals, we have had licenses as part of delivery, which we are using for the purpose of the long-term projects, the revenue for which is reflected under services. So you will need to bear in mind the fact that the growth in the IP or the purchase royalty item is not directly linked to the IP-led revenue. In terms of the absolute amount that we have there, you may have seen a sudden bump which has happened, is because of the recent large deals, and this will, as a percentage, get moderated as we go along. We don't expect this absolute amount to increase, unless for the reseller deals that sometimes keep coming over the quarters.In terms of additional expenditure, as Sandeep mentioned, with respect to the annual planning event, it impacted margin by about 30 basis points. The currency was flat. So after accounting for movement in all these expenses, you will find that the overall cost as a percentage to revenue remain more or less in the same ballpark as the last quarter. And hence, EBITDA at 18.5% and EBIT at 15.4%, they're at the same level as the last. EBITDA for the full year was INR15,191.3 million, growing at 58.5% year-on-year. EBITDA margin for FY '23 was 18.2% as against 16.8% in FY '22. There is obviously higher expense in the form of amortization relating to the acquisitions we had done. So on a Y-o-Y basis, you will find that increase from 2.9% to 3.2%.EBIT for FY '23 was INR12,472.3 million, which grew by 57.4% year-on-year and EBIT margin came in at 14.9%, as against 13.9% in FY '22. The treasury income for the quarter was INR129.05 million as against [Technical Difficulty], mainly on account of increased interest rates and increase in treasury size. Forex loss was INR189.1 million as against a gain of INR105.4 million in the previous quarter. This was essentially due to the dollar weakness that we saw during January and February, which caused loss on the realization of receivables as compared to the rate of 31, December '22. On a full year basis, treasury income was INR366 million as compared to INR1,052 million in FY '22. The lower treasury income in FY '23 is partly due to lower treasury size post payout for acquisitions done in Q4 of last year and Q1 of this year, that is the acquisitions we did for Data Glove or MediaAgility, the interest on borrowing away for acquisition funding and elimination of interest income from ESOP Trust to the tune of INR195 million on consolidation of ESOP Trust starting 1 [ April ] '22. So these 3 factors led to the lower treasury income in FY '23.Profit before tax for the quarter was INR3,405.9 million at 15.1% as against 14.9% in the previous quarter. ETR was at 26.2% as against [ 26.3% ] in the previous quarter and will remain in this range. PAT for the quarter was INR2,515.1 million at 11.2% of revenue as against INR2,379.5 million in the previous quarter at 11%. PAT for the full year was INR9,211 million as compared to INR6,904 million reflecting growth of 33.4%. And in terms of PAT margin, it is 11% of revenue as compared to 12.1% in the previous year. EPS for the quarter was INR33.65 as against INR31.90 in the previous quarter. The growth in EPS is 5.5%, while growth in reported PAT was 5.7%.The Board of Directors, as Sandeep mentioned, have recommended final dividend of INR12 per share and special dividend of INR10 per share. The operational CapEx for the quarter was INR1,232 million. This includes increased facilities in our India locations. Total cash and investments are INR15,199 million as at 31 March, '23 as against INR15,139 million at the end of last quarter. The cash balance at the end of Q4 was partially after the dividend payout, I mean it is lower because of the dividend payout and facilitated costs [Technical Difficulty].Coming to DSO. The DSO came in at 68 days as against 67 days in the previous quarter. During the month of March, as a result of the crisis at Silicon Valley Bank, which is one of the banks we banked with, we requested our customers who were paying into our SVB account to redirect payments to our other bank accounts. Since there were 3 weeks in that particular month left before this change could be accommodated by the customers, there was some spillover of collections into April, which impacted DSO by 2 days. Forward contracts outstanding at the end of March were [ $2.3 ] million at an average rate of [Technical Difficulty].With that, thank you all again and hand it back to Sandeep.

[Sandeep Kalra, executive]

Thank you, Sunil. I'll now talk about the key deal wins for Q4 by industry segments. Coming to the software high-tech and emerging industries, Persistent was selected by a Fortune 50 technology company as the engineering partner for its data warehouse product suite as well as its mobile application development platform. This is a $100 million deal over a 5-year period and involves execution on a product road map as well as migration of end users to customers' next-generation platform, which we will also be involved with. Alongside supporting the current and forward-looking road map, as a part of the deal, we have licensed the source code for providing extended support for the earlier version of the product for enterprise customers who do not wish to [Technical Difficulty]. Persistent was selected by a leading marketing technology solutions company to provide engineering and infrastructure services for its platform. This is a large double-digit million TCV 5-year deal through our private equity go-to-market. Persistent was selected by a leading company in the supply chain analytics [Technical Difficulty] for product modernization and [Technical Difficulty].Coming to banking, financial services and insurance. Persistent was selected by a leading private equity organization to develop a procurement and contract solution for its procurement group as well as modernization of its enterprise data warehouse. Persistent was selected by a leading company in the fractional trading and embedded finance space to develop an integration platform for onboarding and servicing its local customers. On the insurance side, Persistent was selected by a leading company in property and casualty insurance to build a cloud-based data lake to support policy administration, claims analysis and prediction of risk levels for their underwriting process.On the healthcare and life sciences side, Persistent was selected by one of the largest pharma and diagnostics companies to build and integrate genomic workflow management tools for all of its acquired businesses, leading to significant increase in experimental throughputs. Persistent was selected by one of the largest companies in scientific instrumentation to build an enterprise data platform, to streamline governance and operations across multiple business units, including procurement, supply chain, finance and corporate. Persistent was selected by one of the largest global providers of kidney dialysis services to build a patient and experience management application to educate and improve patient satisfaction scores.Coming to the awards and recognitions for the quarter. Q4 saw us get continued recognition from industry-leading analyst firms and associations. To mention a few, Persistent was included in the Constellation ShortList for Innovation Services and Engineering for the first calendar of -- for the first quarter of calendar 2023. Persistent was named a leader in 2023 Zinnov Zones Intelligent Automation Services Ratings. Persistent won a number of awards from ISG, including being named as a Rising Star in ISG Provider Lens for U.S. 2022 for Google Cloud Partner Ecosystem, a Rising Star in ISG Provider Lens for AWS Ecosystem Partners for U.S. region for 2022, and winner in the 2022 ISG Digital Case Study Awards for its Federated Learning solution.In summary, we continue to deliver healthy revenue and profitability in Q4 despite an increasingly difficult macroeconomic environment.With this, I would like to conclude prepared comments and like to request the operator to open the queue for questions. Moderator?

[Operator]

[Operator Instructions] First question is from Abhishek Bhandari.

[Abhishek Bhandari, analyst]

Sandeep, I have 2 questions. The first question is on your growth outlook. You mentioned about good deal wins, what you're seeing in terms of ACV and TCV growth. Also finally, the growth returning to a top account. At the same time, you also mentioned about some bit of uncertainty, given the macro environment. Could you tell us when do you intend to go back to your 4% to 6% quarterly growth number in FY '24?

[Sandeep Kalra, executive]

So, Abhishek, we don't give forward-looking guidance, but let me give you a color on the [ trends ]. If you look at the trailing 12 months ACV bookings, if you look at the quarterly bookings, all of that has shown a healthy trend. So from that perspective, the bookings should translate into growing revenues over the quarters. In terms of the range, look, we have said, in good times, we have delivered up to 9% quarter-on-quarter as well. Here, we are looking at, in the subsequent quarters, anywhere between 3% to 5%, 4% to 6%. That is the range, and we'll plan [Technical Difficulty].

[Abhishek Bhandari, analyst]

Okay. Second question, Sandeep, is on your margin outlook. Bulk of the improvement, what we have seen in the last 12, 18 months is on back of SG&A. And finally, we have started seeing some bit of utilization play coming into the picture. Could you tell us, going forward on the margin side, key levers beyond improvement on utilization, which you think could help you on both gross margin and EBIT level?

[Sandeep Kalra, executive]

There are multiple levers, Abhishek. So if you look at it, whether it is scaling our existing accounts, we have been consistently scaling the existing accounts, that's one. We have taken freshers even today, a significant amount of freshers are not necessarily right. And they have been in the system anywhere between 9 to 12 months or even more [Technical Difficulty], that is the other one. If you look at the newer areas that we are getting in, whether it is generative AI, whether it is on the cloud side where we continue to grow expertise, those are areas where we are able to get better pricing than otherwise as well. So there are many different levers along with scale that are there. And we have said our aspiration is, over the next 2 to 3 years, to go back 200 to 300 basis points [Technical Difficulty].

[Operator]

Next question is from Sandeep Shah.

[Sandeep Shah, analyst]

Congrats for the good execution continuing quarter after quarter. Sandeep, the first question is some of your peers have started talking about project cancellation, project ramp-downs, delay in start of the projects as a whole. So does this worry you entering FY '24 where you believe the leakage of project completion within the revenue could be substantially higher versus FY '23 and that keeps you growing your order book higher and higher, otherwise, the growth may get impacted? Does that worry you?

[Sandeep Kalra, executive]

So look, there are times when the market was good and we were growing at a fairly significant clip, we have grown, at times, by quarters at 9%. The growth has moderated. And so that is partly a reflection of all what our peers are all sustaining and so on. So had there been things like ramp-downs, if you look at our own top customer, we saw the ramp-down happen a few quarters back, we've worked very hard to get it back. Like that, we talked about the hyperscaler where we have seen a certain amount of ramp-down even in this current quarter. But look, the endeavor that we have is -- this is a part of the game. We can't expect the market to be good to us all the time. We will have to learn to live with the [ uncertainties ] and even then grow the order book and deliver the best possible growth rates that are there. Rest assured, we are committed to that. And that's what we are working on.There will be puts and takes. So like, for example, this top customer that we had ramp-down on or the hyperscaler, we didn't have any forecast of that coming in. Those were order wins that we are there. But we have still grown -- if you look at our historic track record, we've grown despite this, and that's exactly what we are committed to. We'll keep bringing in more so that even if there is leakage, whatever best we can do, and it will be higher than the industry, and before you ask us what the industry growth is, everyone is talking between 7% to 10%, we will be higher than that -- much higher than that.

[Sandeep Shah, analyst]

Fine, fine. Just a follow-up, in one of the large deals which we have signed from European OEM, last week there was some M&A event, which has been announced where the controlling stake could be owned by a private equity. So does that worry you in terms of any change in the structure of the deal because that deal has started ramping up and might that client enter within your top 10 account base? And I have 2 follow-up with CFO as well.

[Sandeep Kalra, executive]

Sure. So Sandeep, it doesn't worry us because the same private equity had earlier done a [ pipe ], which is basically, if you look at the company records, so the private equity is not new to that company. Even when we made our deal, they were actively kind of there as investors. Second, the deal construct that we have, it is basically a fixed kind of a construct for the next 5 years. So that is where it is. And if the deal was to be restructured, there are obviously restructuring piece added to it. So I'm not worried and, again, it's a relationship thing if you have to open up contracts and it's a different ball game, but we are not worried about it. So the rest 2 questions, I'll let you ask.

[Sandeep Shah, analyst]

Yes. Just 2 bookkeeping questions to CFO. Sir, if I look at the gross block on the software, 9 months, it was INR12 crores and at the end of FY '23, it is INR51 crores. So almost INR38 crores, INR39 crores has been added in the gross block of software in the Q4 itself. So what is the nature of that? And second, in terms of your purchase and royalty costs, is it fair to assume the absolute amount may also decline on a Q-on-Q basis going forward?

[Sunil Sapre, executive]

Yes. So on the first item, the increase in software block is essentially significant investment that we have done in the cybersecurity area for Persistent as a company, right? So that is one important item. The amount in respect to purchase royalty, you're right, there is -- I mean, as a percentage to revenue, of course, it will moderate. In absolute terms, I mean there's slight decline. But as you know, this item has got multiple components, as I explained. So in absolute terms, it is hard to say because it will be deal-related, particularly on the resell side. But at steady state, yes, there will be slight moderation that way, but not a whole lot. In absolute terms, it would stay in this range little lower than this, but in percentage terms it will definitely reflect the market.

[Sandeep Shah, analyst]

And this cybersecurity software, we are capitalizing or any product development which is under the WIP?

[Sunil Sapre, executive]

That -- I don't know what you're referring to because this is third-party software, which is bought for our own business as investment in strengthening our own cybersecurity position.

[Operator]

The next question is from Karan Uppal. Okay. We'll take you back. Next question is from Mehta Bhavik.

[Bhavik Mehta, analyst]

So a couple of questions. Firstly, the headwind what you saw in the hyperscaler account, how is the portfolio trending on? Have you seen any ramp-downs or project deferrals in some other clients as well over the course of last quarter or maybe this month? And the second question is going back to the license, what you explained because of the large deals, is it possible to quantify the impact because this also sits in the revenue, so that will help us understand what was the real underlying growth outside of the license fee?

[Sandeep Kalra, executive]

Okay. So Bhavik, 2 parts to it. So first on the ramp-downs. Look, ramp-downs, there's no other significant ramp-downs. If it was, we would have called it out. We have been calling it out whether it was the top customer or even this particular case with the hyperscaler, we have actively called it out. There's no other significant material thing. There will be obviously projects at end, projects at start. So nothing to be worried about. Now as far as the large deal is concerned, look, the revenue from the large deal is all services. There are 2 parts to the services. One is the ongoing product development that we will be doing for the current product. Next-generation product -- migration from the current product to the next-generation product, so that is one part of it. Second is this customer does not want to provide services to the prior versions of the product, because they are more interested in investing in the next generation and in building their own [ bakehouse ] and so on.So we have taken the license, source code license and we are, because of that, starting to win large enterprise customers for the extended support of this product, people who do not want to wish or who don't want to wait for the next generation of the product, they want to possibly look at extending this for the next few years, of course, [ deciding on their sale ]. So overall services revenue, you should see significant increase and profitability. So keep in mind, this is -- we are not saying that this is a cause for profitability concern before you kind of think anything on those lines. And we are committed, as we said before. Over the next 2 to 3 years, we are committed to taking our profitability up systematically quarter-by-quarter and take it up by about 200, 300 basis points. I can answer any follow-ups.

[Operator]

Next question is from Manik Taneja.

[Manik Taneja, analyst]

Sandeep, I actually wanted to pick your brains around the commentary that we heard from some of your global peers in terms of saying that they are seeing -- that they expect a significant increase in offshoring from high-tech customer base, given the kind of cuts that they have done at their own organization level over the course of the last 6 to 9 months. That's question number one. And the second question was for Sunil. Basically, we've seen a significant reduction in our subcontracting expenses this quarter. How should we be thinking about this line item going forward?

[Sandeep Kalra, executive]

So on the high-tech thing, I would tend to agree. And this is what we have been saying for the last many, many months. Part of the ramp-ups that we have been seeing is by making sure that we are talking to the high-tech customers that we have and even -- for that matter, even enterprise customers. In the high-tech segment, specifically here is what is happening. You've seen whatever is happening on the hyperscaler side, whether it is Microsoft, whether it is AWS, whether it is Google and so on. Everyone has been laying off people, trying to restructure their cost base in line with the macroeconomic environment. There was a significant amount of hiring that happened in the post-COVID era and that is being kind of recalibrated.Now on the other side, in the market, if you look at it, there are mid-market companies that went public. These are companies that were private equity owned or were, more importantly, venture-funded owned, which went public at huge valuations. Now when the revenue growth is tapering off and they were earlier also, they were growing very fast, but they were not profitable. The profitability is coming under even more pressure. So with revenue growth tapering, profitability under pressure and a number of them not being globalized, that is the phenomena that is leading larger needs for people like us. And anyone who's differentiated on the engineering side will be a gainer of this trend. And we have been a big gainer of this trend. And so that will continue at least for the next few quarters, and we should definitely see more happening in terms of offshore.Now second question, Sunil, if you want to go ahead.

[Sunil Sapre, executive]

Yes, sure. So on the subcontracting side, Bhavik (sic) [ Manik ], essentially -- Manik, it is essentially the combination of 2 factors. One, of course, structurally, we have been trying to work on reducing the dependence on subcontractors as travel has opened and mobility has improved. So that is one aspect. The second is, of course, settling to the ramp-down we saw in one of the hyperscalers. So for this quarter, you may see the percentage significantly lower. But on a steady-state basis, we think that the way we are winning projects and required to ramp up sometimes, we do depend on subcontractors to fill in the skill gaps. So somewhere at 12%, 12.5% of revenue is something that we should factor for. And sometimes, it has gone up all the way to 13.5%, 14% during the times when travel was not easy. But that's what -- so currently, the percentage is up 11%. It may not be [indiscernible] that it will remain at that kind of a level. But the structural difference from 14% to 12% is what we are working on.

[Manik Taneja, analyst]

And if I can chip in with more, if you could share your thoughts around wage increments for FY '24? And when do you plan to implement that?

[Sunil Sapre, executive]

Yes. So wage increments are a function of the way outlook on inflation and things are. So currently, if you see, inflation moderation is happening, which is affecting in all the central banks reducing the commentary regarding further interest rate hikes and so on. So it would be a tad lower or maybe a couple of percentage points as compared to the last year, where in the range of, say, 8% to 9% for offshore and about 3% to 5% for on-site, but we are working on it still, our major hikes are effective as of July. We'll update you as we go along.

[Operator]

Next question is from [ Prashant Belur ]. Okay. Next question is from Pankaj Kapoor.

[Pankaj Kapoor, analyst]

My question is on the cash flows. If I look at this year, we had close to 50% revenue growth, but it is translating to just 13% growth in our operating cash flow. So it looks like your working capital has been under a lot of pressure. Maybe if you can just take us through what is causing this and how you're planning to improve things in the FY '24?

[Sunil Sapre, executive]

Yes. So Pankaj the way it panned out was that during the period of the pandemic, the release of cash that happened during the course of FY '21 and FY '22 led to a significant bump-up in the ratios with respect to cash flow. In FY '23, what has happened is that it has, to an extent, normalized on one side. There is a structural, you can say, situation we faced just because of the SVB prices in the last quarter. Had that not happened, cash flows would have looked a little better. And thirdly, we had announced in Q2 and Q3 that increase in DSOs, that had effect on levels of 60 to 67 last quarter. It was on account of deals in the IP area with large enterprise customers, which have a deeper credit arrangement.So this would take -- so there are no fresh deals in that bucket happening, but it would take some time before -- these are amortized payments, it's not -- so every quarter, we do receive some payments, and this will moderate over time. So structurally, we are not extending larger payment terms, except for some very, very large customers. So I don't think there is a working capital blocking that is happening in a significant manner. But we are conscious of this. We will work towards improving the cash flow and bringing down the gap between both, I mean, on the DSO side as well as the [ unbilled revenues ].

[Pankaj Kapoor, analyst]

Understood. So can you just tell us what kind of a DSO trajectory you are looking at in the next 3, 4 quarters? Do you expect it to remain flat or maybe improve by a couple of days as I believe you were hinting at the start of the call?

[Sunil Sapre, executive]

Yes, sure. So we would be working towards getting it back to kind of 68 or 65 kind of levels. That would be the level.

[Operator]

Next question is from Nitin Padmanabhan.

[Nitin Padmanabhan, analyst]

A couple of questions. So one is, see, we have had these client-specific issues considering the environment, not surprising. But the way you see going forward, are you seeing things getting better or you see things getting worse? So that's the first one. The second one was, see, if you look at the deal wins, basically, we had $168 million of net new ACV. That includes the large deal as well of $100 million. Do you think that -- and I think it wasn't -- you didn't have such large deals in the prior quarter. So I just wondered, is it getting difficult in terms of the kind of sizes of deal wins overall in terms of the quantum that we have consistently booked? Do you see that getting tougher on a going forward basis? That's the second. And third, on the purchase and royalty costs, if it is a pass-through, then is there -- have the -- has there been an equivalent revenue booking? Or is there some revenue cost mismatch out there? All right, those are the 3 questions.

[Sandeep Kalra, executive]

Sure. So Nitin, I'll take part of the question and then I'll have Sunil answer the rest. So in terms of the environment, is it getting tougher? Yes, it is tougher. And if you look at the color commentary and the results from any of the peers who have announced so far, you'll figure that out. Now is it going to be tougher forever? We are expecting it to be tough for the next 1 to 2 quarters. And then it should kind of start getting better and so on. So -- and even in tougher environment, we are not saying there's lack of opportunities, there's good opportunity, and we will have to just be at it. The order books are a reflection of that. Now one correction I would do is the $100 million is the TCV on the deal, the ACV on that deal, obviously, is different, because it's $100 million over 5 years. So you can extrapolate that.Now in terms of order book/pipeline, there's a healthy pipeline. There are definitely deals that we would have liked to book last quarter, which didn't occur, the deals are taking a longer period of time. But there are opportunities even in a tougher market. And it is going to be tough for the next 1 to 2 quarters, and thereon, hopefully, it gets better and comes to a normal kind of a scenario. Sunil?

[Sunil Sapre, executive]

Yes. So Nitin, on the purchase royalty side, what you should look at is -- so this is not as such in a pass-through kind of a form. This is at normal margins that we would expect for the company to have on a large deal like this. The only thing that is happening is that out of this purchase royalty, I would say about 40%, 45% of the amount represents expense in form of purchase royalty which has corresponding revenue with adequate margin on the services side. So what you would find is there is a mismatch in that sense that while you may see this item reflected as -- we could have otherwise reported it as other direct expenses, so in the fact sheet, we don't presently have that kind of a category, it would have been very odd to mention it in that form. But that is the way you need to look at and there is no pass-through or without margin kind of [indiscernible]. I hope that helps you understand the statement.

[Nitin Padmanabhan, analyst]

Yes, sure. So basically, you're saying that whatever cost is there, there is an adequate margin in line with company model. And there is no really revenue mismatch for the quarter, which should come later. Fair understanding?

[Sunil Sapre, executive]

Absolutely.

[Sandeep Kalra, executive]

And Nitin, to add to that, when we are successful in scaling our support business for the extended support, this should be a significant margin enhancer. And we've already won our first deal in extended support. So as it builds up, this is a pretty good business model along with, obviously, the services revenue that we're getting on developing the next solution in migrations and so on.

[Operator]

Next question is from Mohit Jain.

[Mohit Jain, analyst]

Sir, 2 questions. One is the increase in IP-led person months I think after a long gap. Is there some change in thought process there? Or is it also related to the deal that you were explaining in the previous question? That's one. And a related part is, is it really part of billable when you calculate billable or these guys are separate who are not billable because they're part of IP?

[Sandeep Kalra, executive]

So IP business, we don't -- so IP business is IP business. It is not like a T&M that -- it is basically you can correlate the IP billable person months to that quarter's revenue, 100% directly. It doesn't work that way. So it is basically -- sometimes we are investing in [Technical Difficulty] in doing extensions of the existing products or in this particular case, it is both. We are working on developing extensions to whatever products we have, whether it was our [indiscernible] products or otherwise. And we have done a significant amount of investment in building a practice around Viva, which we also did a press release with Microsoft a few days back. And we are also integrating that with open AI. So that is our foray in terms of getting into the next-generation technologies and so on, whether it is on the employee productivity, whether it's on generative AI and so on. So that's where we put our money to work where we want to.

[Mohit Jain, analyst]

But is it also related to some product development? Like are you guys starting to develop some new products as well on the IP side?

[Sandeep Kalra, executive]

Yes. So see, the generative AI component and the Viva things that we have developed, these are like reusable components. These are not full-blown products, but they need people to be put on to a focused way of developing these and enhancing these. And that is how we will differentiate ourselves in the market. So these are not going to be full-blown products that are branded as full-blown products, but these are reusable components that we will take to accelerate our services go-to-market and even sometimes [Technical Difficulty].

[Mohit Jain, analyst]

Understood. And on the utilization, are they billable? And I'm assuming if they are not billable, then if you could give some number for employee addition FY '24.

[Sandeep Kalra, executive]

So -- okay. As far as the employee addition for FY '24 is concerned, look, that will directly be in line with the revenue growth that we expect to come. And since we don't give forward-looking guidance, and we have already talked about it earlier in the call, you can extrapolate. In terms of fresher hiring, I can give you a number, roughly about 850 to 1,000 freshers is what we will hire in the next quarter -- in the next year. So that is where it is. And from a billability perspective, yes, we do cost this, whatever we are putting in the IP side, as billable. Somewhere, we are putting that cost towards the product development/reusable component development.

[Mohit Jain, analyst]

800 to 1,000, is that the right number for fresher intake?

[Sandeep Kalra, executive]

850 to 1000 fresh hires. Laterals will be, obviously, as we need.

[Mohit Jain, analyst]

And you do not see much scope of increasing utilization. This will be in sync with the revenues -- revenue growth.

[Sandeep Kalra, executive]

Utilization, we have a good scope of -- that is definitely a lever for us. Right now, we are pretty much -- if you look at it, 77% or thereabouts offshore. We can, over a period of time, in a disciplined approach, there's enough to be done to take it to 82%, 83% offshore and even on-site, we have levers. Now obviously, keep in mind, these utilization figure that we are talking about includes the freshers that have been brought into the billable pool over the last quarter and earlier quarters. So as these freshers get to be productive, that's a significant margin lever for us and it will show up in the utilization. So there is definitely that inventory we are carrying, the new inventory we will build up over the year with the freshers we will have, and then whatever laterals we need to hire, we will hire, that should also give you the overall color commentary on what the total headcount addition for the next year.

[Operator]

[Operator Instructions] Next question is from Dipesh Mehta.

[Dipesh Mehta, analyst]

I just want to get a sense about the M&A. You've indicated now we are back proactive kind of thing. So the priority in terms of tuck-in versus scale acquisition and if you can provide some perspective. Last time, we have seen some bunch of [indiscernible] and some of the area earlier you highlighted, but if you give some sense about what we intend to do with the M&A from overall strategy perspective? Because in one of the things you highlighted from a strategic perspective, supersizing existing accounts. So if you can give some holistic answer.

[Sandeep Kalra, executive]

Sure. So look, we have always said we will acquire for capabilities and not for revenue. So in simple terms, we are looking at adding more capabilities, which we can take to our existing customers and build more revenue in those existing customers as well as through that, if we get more newer customers that we can mine for our capabilities, that would be a great [ outcome ]. That is what we have done earlier when we acquired companies on the Azure side, on the [ CCP ] side and so on. And just to give you a context, for example, we won a $70 million deal in the last quarter. That was a combination of our data integration capabilities, which was built on our capabilities along with the Capiot acquisition that we had done, it also had a significant amount of Google stack. So our MediaAgility acquisition that we have done, which is now our Google business unit, a combination of our Persistent capabilities in Google world and MediaAgility.So those 2, plus a few other combinations led to that $70 million-plus. So from that perspective, we are looking at a string of pearls in areas, whether it is consumer technology, cybersecurity, generative AI or in specific areas within healthcare or BFSI and from a geography perspective in Eastern Europe from a delivery perspective. That is the landscape. That is what we are looking at. And we will do a tuck-in acquisition wherever we get in the right capability over a period of time.

[Operator]

Next question is from Karan Uppal.

[Sandeep Kalra, executive]

Karan, we're not able to hear you.

[Karan Uppal, analyst]

[Technical Difficulty] in the very last 5 years. So how are you thinking in terms of capital allocation in medium term when the macro is tougher?

[Sandeep Kalra, executive]

So we lost the first part of your question, if you can repeat the question, please?

[Karan Uppal, analyst]

Yes. I was asking in terms of capital allocation. The payout has been quite handsome this year at 42% versus average of 28% in last 5 years. So how are you thinking in terms of payout for -- in the medium term when the market is tougher?

[Sandeep Kalra, executive]

So look, from our perspective, this year was a special year. So in our company's 33-year history, this is the first time we have hit $1 billion from an annual revenue perspective, and we wanted to thank our investors as well. So that is the reason the payout ratio is higher. We have a defined policy on payout ratios. And as we have said, we will do a good combination between providing dividends and doing tuck-in acquisitions for growth and that also should answer your question that is there on the chat. So from that perspective, rest assured, our focus is to bring in the right capital allocation towards acquisitions, which will aid our growth and which will also fuel, obviously, various different parameters [ furthermore ].

[Operator]

We will take one last question from Mr. Abhishek Shindadkar.

[Abhishek Shindadkar, analyst]

First, a clarification, the hyperscaler revenue, is it lost or it is delayed?

[Sandeep Kalra, executive]

So it is an existing project, which was ramped down. So it is lost in that balance. And there are -- at the same time, there are many other discussions where we have said very clearly over the next several quarters, we'll recoup that amount of revenue and maybe even more. That is where it is. So in simple terms, it's lost.

[Abhishek Shindadkar, analyst]

Okay. Got it. And on revenue growth, Sandeep, you mentioned that you expect the softness to last for 2 quarters. And then you also kind of highlighted a 3 to 5 kind of percent a growth. So if I reconcile those 2, are we looking at a back-ended growth with softness in H1? Or we are expecting consistent growth across all the 4 quarters?

[Sandeep Kalra, executive]

So a consistent and a growing trend is what I would say.

[Abhishek Shindadkar, analyst]

Okay. And just one follow-up on earlier question. It seemed like it is -- we are going back on the end of life cycle product investments, to the earlier question of Bhavik, if I'm correct. Is this a change in strategy that from a pure OPD focus that we were running for the past 2 years, are we going back to the end of life cycle product investment strategy?

[Sandeep Kalra, executive]

So from a strategy perspective, no. From an opportunistic perspective, if it is at a company profitability and better and gives us access to enterprise customers where we can go and mine and sell many other services, and it makes business sense for us and our stakeholders, absolutely, we will be opportunistic about it. But from a strategy perspective, no.

[Operator]

Thank you very much. Thank you very much to the Persistent management. Ladies and gentlemen, on the 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.