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Sonata Software Ltd
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Ladies and gentlemen, good day, and welcome to the Q1 FY '23 Earnings Conference Call of Sonata Software Limited. [Operator Instructions] Please note, this conference is being recorded.
I now hand the conference over to Mr. Srikar Reddy, Managing Director. Thank you, and over to you, sir.
Okay. We lost you in the middle, Vikram, but we'll go ahead. Okay. Good evening, everybody, and welcome to the analyst call post the announcement of our first quarter results for FY '23. Here with me, Mr. Samir Dhir;, the CEO of the company; Mr. P. V. S. N. Raju, the Chief Delivery Officer; Mr. Jagannathan, the Chief Financial Officer; Mr. Sujit Mohanty, the CEO and MD of our subsidiary Sonata Information Technology Limited; and Mr. Sathyanarayana, VP of Finance.
We have posted the results on the website and the press release. So I'll give a quick high-level summary of the quarter's performance and where we are and probably looking at the future before I hand it over to Mr. Jagannathan to take you through more detailed financial analysis for the quarter. I think overall, given the various factors, we had a good quarter.
Okay. All right. Yes. Okay. Sorry, we had some disturbance. But yes, so to continue, as I was saying that the performance was pretty good given the various factors across both our main businesses, the International Services and the India business.
Coming to the International Services business, I think we had about 4% growth quarter-on-quarter on the constant currency basis and about 6% on a rupee basis and about 2% on value currency basis. I think our fact has shown a pretty good quarter-on-quarter growth. We have seen, overall, I think growth across more segments, which I think have been reported in the investor deck, which has been shared with you.
Our Digital business continue to show steady growth. We continue to reuse Platformation to drive growth with our existing clients and generating new business. Overall, I think we see the demand situation still being quite steady, both with our existing clients and new clients. We had quite a healthy pipeline last quarter. I think we had some pretty good deal wins last quarter in the International Services, but there were some challenges on the supply side and some big projects. We could have probably had better numbers.
I do know we have got on board Samir Dhir as the CEO of the company at the beginning of last quarter. We also have announced and strengthened our management team with the induction of Roshan Shetty as the Chief Revenue Officer based out of London; Mr. Balaji Kumar as the Chief Human Resource Officer; and Mr. Hemant Bhardwaj as the Chief Marketing Officer. I believe that the team -- the new team has settled in under Samir, and we'll hear from him later on to some of your questions.
On the India business, as I said, I think we have seen tremendous performance continued from last quarter, both on the top line and bottom line. And the focus there is to become more of a rounded cloud service provider across all the 3 major cloud platforms and we are executing on that strategy.
So to sum up, I think as we speak, we do see the demand situation quite stable because of the rupee depreciation. I think we've been able to hold our margins and, of course, we've had these cross-currency headwinds last quarter, which had impacted the major U.S. dollar revenue business. But that's a high-level summary of where our business is.
I'll hand it over to Jagan to take you through the more detailed financial analysis of the quarter's performance.
Thank you, Srikar. Good evening, all. Thanks for joining for this investor call. Now I'll take you through the broad financial numbers.
The consolidated financial performance of -- has been steadily growing, very higher than the industry averages. We have a CAGR of 6% quarter-on-quarter for last 12 quarters. And the EBITDA margin and the PAT margin also has been growing roughly 3.5%, 4%. We have been continuing to do both in the International business and also the India business -- have been steadily growing every quarter.
The International business, the revenue has been, this quarter, we had a 2 percentage quarter-on-quarter dollar revenue growth and the constant currency is around 3.9%; in terms of rupees, 5.5% growth, very, very stable at this kind of currency -- cross-currency impact. We had a strong -- in spite of a cross-currency impact, our growth has been very, very stable and constant. We are -- as mentioned earlier, we will continue to focus on the growth and the performance will continue to be steadily growing.
In terms of our profit performance, thanks to rupee depreciation. We have been able to observe some of the costs for the salary increase, cost of vehicle as well as the senior management investment in this quarter. We continue to outperform in the profitability.
Domestic business has been doing really well. Consistent growth in their gross contribution and that profit element is continuing to grow. The revenue growth is also very, very strong with the new volume demand, which is continuing to be very, very strong across the market. We are very, very confident of performing well in volume terms as well as in the profitability terms in the coming quarters. This business has been doing steadily well.
This is a broad financial number for your references, and this has been shared in your press release also. Some of the operational metrics for you to review. U.S. continue to be at a stable level of 57 percentage revenue and Europe continue to be at 21%, 22%. The rest of the world contributes the balance in terms of revenue. Our contribution of ISV has been stably at 32, 33 percentage, and that travel remains at the same level. Everything -- there is no major change that the industry contribution in this. Competency wise, we have again contributed by Microsoft Dynamic Services and the Microsoft Digital Platform Services have been drivers. Apart from this, data services for data and analytics which continues to remain at the same level.
The revenue mix on site that we have got a benefit of this coming down against the group percentage, which has benefited our profitability, and the utilization remains at the same level as last quarter.
Operational metrics for other things like top 1 million clients has been stably going up. We have our 5 million and 10 million customers we are holding on. And top 5 clients contributed 54% of revenue as stably as it was last quarter. We have added about net addition of 50 employees this quarter. Most of them are from the delivery side of it. And we have also invested in the G&A front also. But the headcount addition has been stable and is continuing to reflect on the demand scenario in our system.
There are supply side constraint continue to be here, but our acquisition for this quarter has come down to 24 percentage and the like for this quarter. This has been a good performance. We are very confident that in the coming quarters, it will improve further and we will be able to address the supply side constraint. We are confident of whatever is the guidance we gave at the beginning of the year. We're confident of achieving the same, and we are expecting a good, stable growth prospect with a good profitability.
With this, I conclude the update on Sonata's performance. I hand over back for the questions from the participants.
[Operator Instructions] We have a first question from the line of Mohit Jain from Anand Rathi.
Sir, 2 questions. One is on the cost side, like you said in your opening remarks. So should we assume bulk of the costs and hiring, both senior management and on the wage hike side, are now built into the 1Q numbers? Or do you think something may come through into 2Q or 3Q as well? So that was one, and then I have a follow-up on the...
What is the question, Mohit?
Sir, on the margin side, you spoke about costs and then rupee depreciation benefiting you in terms of absorption of those costs. So from senior management hiring perspective and also from wage hike, supply side constraints, et cetera, so the cost for FY '23. Now the 1Q cost number, when we look at it, is that a steady number or do you think there is some planned promotions, increments, et cetera, coming up in 2Q and 3Q?
Yes, as said we'll continue to invest on the leadership side throughout the year, so that will continue. And our wage revenue is in the January quarter, right? So that needs to come up for FY '23, right? So we do it in January and then April from middle management. So that will continue, Mohit.
Right. So June quarter includes that senior management appraisal, right, which was done during...
Wage hike in the next -- sorry?
So we are done from a 1Q perspective, because you just did it back to back in the quarter. So Q2 and Q3, there are no incremental costs, so to say?
There will be no more across the board wage hike, that's correct. But we'll continue to -- we have not completed our investment in talent, of the leadership talent, since this is -- as we said last time, we had opened up new development centers in Canada, Ireland, something in Mexico. I think those investments will come up in Q2, Q3.
Okay. And second was on the retail side, like what kind of environment? Because you have retail essential, nonessential commodity business, et cetera. So is there any impact that you guys are anticipating there ahead? Or do you think it is -- because you had a strong quarter? So from a deal pipeline perspective, do you think there is any slower growth anticipated through the year? Or do you think you guys can sort of maintain the current growth rate?
I'll say something and then I'll possibly hand it over to Samir to say something else. I think it's time we now combine both these essential and nonessential because that was a factor of the COVID where essential retail was okay and nonessential was not okay, because, I mean, they were not open and nobody wanted to consume it. But we combined it back because that segregation is gone. So as we said, based on the deal pipeline, that's a focal vertical for us and things are looking good. But as I said, I'll probably have Samir to add some more color to that.
Thanks, Srikar. Hi Mohit, this is Samir. So I think across the board in retail, we didn't see a good, strong momentum based on 3 factors, generally. Number one, because of footfall back in the traditional retail model, retailers -- they have continued to invest in the consumer experience side and actually very aggressive to take a bigger wallet share from that.
Second, the trend to modernize their IT state from a cloud perspective is also critical then. And the third is the adoption of data and building data acquisitions to utilize consumer data is also very prevalent. So I think across the board, we continue to see improvement at this point in time, good momentum across the retail sector.
So overall, is it fair to assume from your current deal win deal pipeline perspective, you guys are more likely to sort of continue running on the growth path that you are currently on?
Yes, I think it's a fair assumption at this point, yes.
Perfect, sir. And this is actually our first con call. I think you were not there in the last one. We'll keep interacting. And all the best for the coming quarters.
Thank you, Mohit, and I look forward to the relationship going forward.
[Operator Instructions] Your next question from the line of [ Dhwani Savla ], an investor.
My question is with regards to our headcount. I did notice that our sales and marketing headcount has pretty much remained stable. Are we expected to increase that on our work front and probably get more included? And is there a particular target headcount which we have by the end of the year in mind that we are going to achieve by end of this year?
Sorry, your -- the line is very weak, I couldn't understand your question. But from whatever I understood, you said that there was not too much of the headcount growth in the first quarter and is that the trend or whatever. I think the question was addressed by Mr. Raju last time, but maybe I'll ask him to address the question again in terms of the recruitment plans for the current year.
Yes. What we have seen in quarter 1, we had a net headcount of 70 digit number. That's because it will be -- in spite of that increase, the addition rate that has come down now. Going forward, this quarter, you can see a much, much higher headcount increase. We've also seen the [indiscernible] coming in. So next 2 quarters, we will see much, much larger numbers adding to our headcounts.
Is there any target for which we have in mind, which we want to have by the end of this year?
We don't have specific target, we don't give guidance on that. But we're adding the 600 campus hires in the next 2 quarters...
Okay. All the best for the coming quarters.
[Operator Instructions] We have next question from the line of NGN Puranik with ENAM.
Srikar, I want to understand about your Microsoft relationship. So in terms of how big is the relationship in terms of current revenue? And also in terms of the sales organization that's working with them and which are the groups that you're working with? You mentioned it worked with Dynamic. So you -- do you work on the power platform also and -- only dynamic or other groups also?
So Puranik, as we don't give out the numbers because we need Microsoft permission to give out the numbers, but there have been work place that have core groups in Microsoft. One is the Microsoft Product Engineering, which is mainly the -- as you mentioned, the VAX. So there, we work both across all the platforms, what they call as power app, power platform customer experience, et cetera. We work with the customer service function. There is support maybe that's also across the board, power platform, F&O and a whole lot of other...
You mean the CRM Dynamics part, is it where you are working?
Sorry, Puranik?
The CRM Dynamics?
Yes, yes. F&O, CRM, power platform and also non-Dynamics and the customer support. So the third is we do internal IT in both data analytics and Dynamics implementation.
That is not that this power platform or other than that?
Sorry, Puranik?
Is that the power platform or internal IT? You said analytics and internal IT. That is other than power platform?
There's a third group we work with, which is the internal IT where we do analytics and Dynamics implementation.
Dynamics implementation.
Yes. The fourth group we work with the consulting teams to serve the client there.
Is there a scope to mine the current relationship with various group and expand relationship to other groups in Microsoft?
That is Samir's favorite topic. I will hand over to Samir.
What did you say?
I said that is some Samir's favorite topic. I'm handing over to him to answer that question.
Yes. Each of these businesses are growing at 30%, 40%, 50%. That power platform is growing 60%, 70%. So I thought there would be a lot more scope for you to grow.
Yes. NGN, sorry, hope I am audible.
Hello?
NGN, can you hear me?
[Operator Instructions]
No, I was asking you, is there a scope to expand relationship by having...
Yes. I handed over that question to Samir. He is about to address that question about the scope and what we are trying to do there, yes.
Yes, absolutely. And I think we're in the process in more orders than one could, Puranik, to address that. So first of all, we had good growth in the last several quarters at Microsoft. We will continue to take market share from competition, the Microsoft relationship overall. But to your question, can you do more? I think the answer is -- the short answer is yes. Microsoft is just completing their annual plan process in June-July time frame. The recovery trend process will look to align our sales investment dollars with their plans. And that exercise is coming beyond.
As you probably know, Inspire happened on 19th of July, just a week back. And our teams are working hand with them to take a larger share of the pie from Microsoft from a sales perspective. So that's a short answer. And across the board, and power platform included, it's really a go-forward strategy to shore up business in the direction planning.
Will it help expanding relationship with more people? Or it would be important to work with other groups? I think these 2 groups itself has -- developing more opportunity.
Yes. It's not either/or, it's both. So we have to get bigger wallet share from the existing people that we have relationship with, and we continue to hunt into account to build a stronger relationship with other buyers that are not buyers of Sonata today. So both ways, Puranik. We're looking at those types of strategies.
Is there a low-code, no-code projects that you work with them?
Yes, we do. We are already part of that, and that's an increasing part of the focus of Microsoft. As you've probably heard, Sathya also talked about a big focus on the power platform and the low-code, no-code. I think that's an integral part of the go forward approach.
So that learning has been used in your project development, product development, various projects, the low-code, no-code.
I'll let Rajiv respond to that.
Yes, [indiscernible] Working on the power platform, both on the data side and also on the [indiscernible] side. We really worked with Microsoft with other customers. And I think a lot of things we're learning from that, of the 2 applications we are building and why our own frameworks to accelerate the [indiscernible].
It's interesting. And what are the typical project sizes, the deal wins when you get Microsoft deal? Typically, what size it is? And they are all must be real annuities?
What happens is the power platform [indiscernible] that the customers are going digital and want to get the digital processes and customize their applications, they're using the power platform. Really annually depends on and we have a team of [indiscernible] that's what we have for the customers. So each project is [indiscernible] and we had business that we are in.
And bulk of it is all offshore projects?
[indiscernible] some of the people [indiscernible] people need to be -- so it is not the [indiscernible].
Good. Interesting. So you're working on other groups also to looking at building relationships with other groups also?
Yes. I mean that's absolutely the strategy. Because power platform is not a singular vector, it is Microsoft. They're looking at it as a horizontal [ favorability ] across all units where we -- as we got our plans with them for the next fiscal, the interlock is happening in the speed and [indiscernible] all units.
Like Rajiv said, we are looking at not only doing it for Microsoft, but growth in Microsoft will do it for our other banks as well and generally taking the modest [indiscernible] because these are bespoke projects, because customers to do trying now. In other times, we look to [indiscernible] they do big fan. So if you set of the period, then we're getting the completion for a bigger place moving forward, and that's the part that we're looking this.
And that means hiring more client account partners.
That means, yes, exciting both on our sales and I think these reports because we have to mind what their relationships already there and also look for new relationships [indiscernible].
We have next question from the line of Baidik Sarkar with Unifi Capital.
Srikar, you recently left about 2%, 2.5% of revenues on the table in the previous quarter, Q4, given supply side issues we faced in Q4, right? And on the back of that, this quarter, you've reported about 4% in constant currency. Is this reflective of the revenue potential in its entirety? Because it looks like there has been a similar amount of backfill from the previous quarter. And adjusting for that 4%, it looks a very okay number. A, am I missing something? And b, should we expect a significant acceleration going forward in the next few quarters? .
And also while you're at that figure, if you could just comment on the [ deflation ] you've seen on Microsoft account. I think after several quarters of 7%, 10% kind of growth, I think the numbers this quarter has been slightly underwhelming. Any color on that?
Okay. I don't know what the second question that you already information from because we can publish it. No, I think...
Reported numbers on 3.3%, where the Microsoft digital is adapted 2.2%. And you reported sequential growth in Microsoft Dynamics was 0.70% [indiscernible]
No. This is nothing because of Microsoft in a contract. This is the overall services market, which includes what we sell to other customers or just Microsoft.
I'm aware of that, Srikar. Anyway, let's go sequentially. If you could just take the first question, and then I'll [indiscernible]
Yes. Like I said in the beginning of the call that the backlog effect will remain. So it's not that -- we can in the backlog in that on backlog [indiscernible]
Srikar, if you could please speak closer to the microphone. I'm afraid we can't hear anything at all.
So as I said, the backlog effect still remains and the backlog of the previous quarter was what was delivered this quarter and the beginning of the call that we still need to get that fully done. So that's the answer to your first question. I will ask Jagan to answer your second question.
Which statements you are referring to, this is the analyst what we have now accrued to you now operating metrics.
Well, this is your reporting thing. I think this is on Page 22 of your reported -- on the reported deck. Okay. You know what, Jagannathan, I can take that offline. But if I can either request Samir or Srikar to comment on the quantum of acceleration we should expect going forward. That's more important.
Yes. That is Microsoft digital platform services alone, we are talking about. Where we have to combine the Microsoft [indiscernible] other areas are also there. It is one aspect of the Microsoft.
Sure. If I can get your comments on the quantum of acquisition going forward. And just to rehash in terms of guidance, was it a number we have guided closer to 20% for your core IT services at the beginning of the year?
We don't give it, right? We don't give a quantitative guidance, as we've said it many times.
Sure. But in terms of acceleration, just given the quantum of backfill that's still pending, just trying to expect that we have continued delivering at this run rate?
As I said, you can expect, given the current feasibility under the same case in the future, we can expect an acceleration for the future quarters.
Sure. That's very helpful, Srikar. And if I can just speak to Samir. Samir, welcome aboard and good to say hello. I hope this is a good journey for you. Could I perhaps ask you to quantify the direction of IT that was growth in the non-Microsoft part of the business, right? What are you seeing? What are you excited about? What is our right to win? And is there a number that you have in mind you'd like to hedge over the next 2, 3, 4 years?
Yes. Glad to meet you as well. I think very consistent as Srikar said. Demand pattern is very secular at this point in time. And in the industry that Sonata has invested in the past, whether the retail or manufacturing business, I think we continue to see a good demand pattern. I think at this point in time, as we know, the economic conditions are revolving around us all the time. But as we speak, the demand pattern is pretty secular. The question specifically was the trend outside of that. We continue to see the moving across our operating serves U.S., U.K., Singapore, Australia will continue to build momentum from a pipeline perspective. In the current environment, early supply constraints, and we're really working hard to get fully [indiscernible] at this point in time. We don't think the demand side of the equation is holding us, especially the commentary that we do, when do we expect the acceleration and the [indiscernible] talks about, comes in. We think that it gave us a further content supply pipe and then we start [indiscernible] in the coming quarters and [indiscernible]
[Operator Instructions] your next question from the line of Amit Chandra with HDFC Securities.
So my question is on the travel vertical. So if you can provide the constant currency growth for the car vertical. And also, I know that travel is coming back in the Europe and reporting 80% to 90% of their pre-COVID bookings turning back. So when can we see travel coming back because we are still at 50% of the COVID. If you can throw some light there, whether our engagement has not changed. Now allow it to [indiscernible] to do pre-COVID and what we're doing now.
Okay. I think -- Can you hear me? Yes. Okay. So yes, as I said last time, there are 2 growth patterns. One is where they're investing and building new technologies, and that's where we are engaging. So we're waiting for the business to fully come back for the investor on [indiscernible]. So we expect that to happen by Q3, and we can see that trend going upwards. As I also said last time, because of COVID there was a very big shift from onsite to offshore. But for sure, but for the people on site, I think now that people have come down to about [indiscernible] because people have come back. So that measurement of that revenue has to be [indiscernible] factor in, we would say that we can go back to where we were pre-COVID.
Okay. And in terms of the constant currency growth for travel vertical, if you can provide?
Constant growth for travel vertical, you're asking about this quarter?
Yes, this quarter.
This quarter, we -- it is in line with -- its same level. We see the revenue option have any numbers, but I can say [indiscernible] in line with the company [indiscernible] gap between companies and [indiscernible] vertical. [indiscernible] impact for that.
Okay. Sir, actually your voice is not very clear, it's breaking.
Okay. Amit, can you hear me now? Am I clear?
Yes, yes. Better. And sir, on the second part...
Can I update now? Are you okay now? Can you hear me?
Yes, yes, better. It's better.
Okay. Amit, the constant currency growth will be a little more than the more than the company level because there was a cross-currency impact was much, much bigger in the Europe revenue. I will -- I don't have the number ready made with me. I will have to take the number and update you separately.
Sure. And sir, on the net of mix, obviously, we have seen shift to offshore. But now, things are reversing for some companies, onsite is actually better. But we have seen a significant increase in offshore revenue. So is it because of the change in engagement or because of travel, as you said, because a lot of the sold offshore. And the incremental growth is coming offshore? Or in any way it's helping our margins? But is it going to be a headwind like in the coming quarters mainly we can move faster.
I think that some of it has been driven by the inability to travel and these are regimes, et cetera, where I think that can be done also. But I think your point is correct. Once [indiscernible] revenues will increase on a percentage basis. But I think right now, there has been a very [indiscernible]. We are in a long line, 6-month rate period.
Okay. And also in terms of the domestic business, there, for the first time, we've seen another cloud company coming in town. So obviously, it is because things are reversing. But can that have an impact on our margins on the support or on the growth because last 2 years on for the domestic services business. So what is the normalized growth rate that we can expect from that business?
I think we are really growing the cloud component in the domestic business. [indiscernible] number from.
In terms of the percentage contribution, it has come back in this quarter.
Managed [ phone ] services.
Yes. So on the cloud piece, it was 78% from down to 76% number is 28 [ was given ] on cloud.
The quarterly number, that it's just a quarterly. Amit, there is no one way trends quarterly number. That's it.
Okay. So for the longer-term, 20% plus kind of growth is achievable in this, still in this business. And in terms of margin...
The line is very unclear. What's the question?
The gross margin.
Yes, I think the trend so far, I think that looks doable.
We have next question from the line of Dhiraj Dave with Samvad Financial Services.
So first of all, sir, I request, this time, the conference call, the way it has been organized. In fact, many -- since I was listening for last 40 minutes. I could listen all questions very clearly. But whatever answers we were coming from here said the it was kind of getting echo or I don't know, but there was -- basically, I didn't get what you answered almost 50% of the time. So we request you to take this and organize. When you listen this con call recording, you will realize what I'm saying. That was the first part.
Second part, basically, how you see your manpower supply constant and what are your plans? Because you indicated some kind of addition. In fact, that figure, I also missed out, although I was on call. So what is your plan to address the supply side and how it has affected our margin?
Okay. I'll ask Rajiv to answer that question. I hope you will hear it now.
So the supply rate, we were [indiscernible] result or the impact in the appointment. We started building capabilities in [indiscernible] Nobody [indiscernible] and Ireland, we also have [indiscernible] in Canada. Also, we're looking for hiring in U.S. and Australia last month. Secondly, [indiscernible], we are making 600 [indiscernible]. We already hired them. They're coming on board this quarter and next quarter. We also processed...
Yes, sorry, sir. The 600 would be for full year or just 2 quarters, right?
We are -- this is taken in 2 quarters, but we'll utilize them over 2-year period. But you're saying that will take something [indiscernible]
Okay. And how is the manpower part of [indiscernible] on margins?
We already in -- the compensation is already given now in January and April. So they might be a little spread but I don't think [indiscernible] on that part.
Okay. And the request, sir, basically, if you can organize conference call. This time, it was very, very difficult. I've been attending almost for 3 years. First time...
We're extremely sorry about the inconvenience caused to all of you. I think -- in the first call, we are also having difficulty in the office, so we'll go back to working from home next year.
That was better. I wish you all the best.
[Operator Instructions] We have next question from the line of S.A. Narayan with Capricorn Research.
An observation to the management. As a courtesy to the participants, could you please always use the handset. It's been impossible listening to you. It's frustrating, been participating for now 35, 40 minutes. It's a waste of time. If you don't use the handset, please don't invite the participants, please. Thank you. That's all I have for you.
[Operator Instructions] As there are no further questions from the participants, I would now like to hand the conference back over to Mr. Srikar Reddy for closing comments. Over to you, sir.
Yes. Thank you all very much for joining the call today, and we're extremely sorry for the inconvenience cause to all of you because of the audio of the call. As I said, that we're not doing this again from the office and using this technology, probably has not been used for some time, but sorry again. And hopefully, the transcript of the call would be made available to all of you, and that should be fair. And we've put it out on the website, and then we get to ensure that [indiscernible]. So thank you all for your support. And I look forward to seeing you all again the next time. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Sonata Software Limited, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.