Sonata Software Ltd

NSE:SONATSOFTW

Earnings Call Analysis

Sonata Software Reports Robust Q1 Growth

Sonata Software celebrated a monumental Q1 with the integration of its historic Quant acquisition, which boosted revenue by 7.2% and EBITDA to 32%, enhancing its position in health care, life sciences, and BFSI. Additionally, a successful Gen AI initiative for a top-tier tech company was secured. Internationally, their business witnessed a noteworthy 17.5% quarter-on-quarter growth and 36.1% year-on-year, while domestic business revenue climbed 6.4% sequentially and 21.8% year-on-year. The burgeoning collaborations with hyperscalers and the aptly named Harmoni.AI launch poise Sonata for future advancements in AI, as they fortify their footing in cloud and data.

Sonata Software Earnings Illuminate Path to $1.5 Billion Revenue Goal

At the heart of Sonata Software's first quarter for the fiscal year '24 earnings call is the narrative of a technology company on a determined march towards ambitious growth targets. With the Platformation framework as their beacon, they've set eyes on reaching a staggering $1.5 billion in revenue with an EBITDA in the early 20s by the end of FY '26. Testament to their commitment, the company triumphantly crossed the annualized run rate of $300 million this quarter in international business, complemented by robust growth and unmatched ROCE in their India business.

Strategic Acquisitions and Large Deals Fuel Expansion

The acquisition of Quant Systems marked a historic milestone, granting Sonata a powerful launchpad in key verticals like healthcare, life sciences, and BFSI. That strategic move realized a 7.2% revenue growth quarter-on-quarter and a substantial EBITDA of 32%. Beyond mere numbers, the acquisition has seamlessly knitted Quant into Sonata's fabric, evident from a $100 million synergy pipeline and significant investments in sales and marketing to bolster Quant's market presence. Furthermore, the company celebrated the closure of two sizable deals over the quarter, adding to the luster of a previously announced mega-deal, ratcheting up the large deal pipeline to an impressive 40% of the total pipeline.

Investment Verticals Showcase Resilience and Innovation

Banking, Financial Services, and Healthcare segments continue to mature with Sonata's potent blend of sales acumen and domain expertise. Even as the BFSI industry encounters hitches in mortgage and lending, Sonata’s innovative solutions buoy consumer banking clients. The healthcare and life sciences domain, stimulated by the drift towards value-based care, exhibits a positive trajectory. Sonata's penetration into the core harvest verticals, encompassing Retail, Manufacturing, Distribution, and TMT, is made evident by its successes, such as their first Gen AI project win with a Fortune 25 company, a clear nod to their foray and foresight into the realm of AI and Generative AI innovations.

Cultivating Talent and Diversity with Sonata University

A focus on nurturing talent and employing a diverse workforce is central to Sonata’s strategy. Through Sonata University, employee enrollment surged by 45%, with 42% achieving certifications testament to their engineering proficiency. Striving towards global inclusivity, Sonata has set a target to achieve 35% gender diversity by FY'26, reflecting their earnest commitment to fostering a rich and varied talent pool.

Financial Performance and Growth Metrics Impress

The International Services segment of the company relished a 17.5% quarter-on-quarter growth which translates to 36.1% year-on-year, an enviable accomplishment in the industry. Moreover, the company's domestic grip strengthened with a 6.4% sequential gross contribution increase and an impressive clientele increment to 11 accounts each generating over $5 million annually. On a sequential basis, consolidated PAT grew moderately at 5.5%.

Sales Order Book Reveals Robust Business Health

Demonstrating transparency, Sonata Software initiated the practice of sharing its order book performance. The company reported a robust order booking of $186 million in the first quarter.

Outlook and Expectations: Balancing Tailwinds with TMT Sector Caution

Looking ahead, Sonata sees its large deal transactions and the Quant Systems acquisition as significant tailwinds that will likely spur its growth trajectory. There’s cautious optimism in the forecast as potential headwinds, such as softness observed in the TMT vertical, are taken into account. Nevertheless, the company is confident in maintaining top quartile performance and staying focused on modernization to win more large deals.

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day and welcome to Sonata Software Q1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Samir Dhir, CEO and Managing Director from Sonata Software Limited. Thank you, and over to you, sir.

[Samir Dhir, executive]

Thank you, Aman, and good morning, everybody. My name is Samir. And a very warm welcome to all of you to this conference to discuss our strategy, our goals, and the financial results for the Q1 quarter ended June 30. Thank you for joining us today. I appreciate your valuable time and support. It is my pleasure to share our progress towards our vision for Sonata. We're excited to deliver yet another quarter of industry-leading growth despite the growing macroeconomic, geopolitical challenges that industry has talked about. Our big bets and continued investments are delivering and delivering well. The executive team remains committed to judiciously accelerate the growth curve and build scale, and scale in terms of large deals, markets, partnerships and talent.Let me cover an update on our strategic goals first. As you are aware, our objective is to be one of the fastest-growing modernization engineering company, powered by our unique Platformation framework. And our goal is to achieve revenue of $1.5 billion consolidated by end of FY '26 at an EBITDA of early 20s. We are very pleased to inform you that we have crossed $300 million mark annualized run rate in the most recent quarter for the international business. And our India business continues to deliver strong growth and industry-leading ROCE for the business.Let me provide you an update on the progress we're making on multiple fronts. First things first, Quant acquisition. As you know, Quant acquisition was historic for Sonata, and it provided us a strong foothold in our invest verticals of health care, life sciences and BFSI. We're very pleased that Quant delivered quarter-on-quarter 7.2% revenue growth at an EBITDA of 32%. As expected, in a short span of time, our teams have built a synergy pipeline of well over $100 million, including some large deals across top clients. During the past several months, we have invested in sales and marketing to scale Quant. As we had planned, Quant is now fully integrated into Sonata from a sales, delivery, operations and bench aspects. So at this point in time, Quant acquisition is fully integrated into Sonata.Let me provide a color on the large deals. As you recall, we had reported our largest-ever deal in Sonata with a total contract value of $160 million in Q4 last fiscal. That transition of the deal is progressing very well. This deal will fully get ramped up as planned during the course of this calendar year. In Q1, we're delighted to report that our teams have now won two new additional deals, large deals, within the quarter. The large deal pipeline is now 40% of our total pipeline. We're very pleased with the progress we're making to winning some large deals in the market.Let me provide a summary on the 2 large deals we've won in the most recent quarter. Number one is a transformation and modernization deal, which we closed in Europe. It is the largest deal for Sonata in the Europe geography to date. This deal will enable Sonata to transform and implement Microsoft Dynamics across all lines of business for our manufacturing clients across their 49 legal entities. The scope includes finance, supply chain management, production, and integration across their systems. The scope also includes application support post us completing the transformation program in the next couple of years. The second deal is building out a digital hub for a large tour operator in Europe. The scope includes cloud and data modernization, application modernization, and implementation of transformation programs and innovations through Sonata solution innovation hubs. These 2 exciting deals and the mega deal we announced last quarter are in different stages of transition now. These transitions are expected to be completed in the next 2 quarters.With that, let me move to our strategic updates on verticals and geos. On the vertical side, our invest verticals, which is Banking, Financial Services and Health care, we are continuing to invest in building our strong sales and delivery engine and domain capabilities in these verticals. In the recent times, BFSI industry has shown challenges in mortgage and lending segments while the technology spend on the consumer banking is stable, at least in our client base. We have delivered innovative solutions to leading financial institutions, including building out digital wallets, data privacy, cloud and data modernization platforms, which is helping our BFSI clients continue to transform their consumer banking areas. In the health care and life sciences industry, consumer and legal forces are requiring health care players to increase collaboration and partnership. The shift towards value-based care and technological advancements have led to the development of new treatments and medical equipment leading to overall positive outlook for health care, life science industry. We continue to remain bullish for health care, life sciences, and in the consumer space in Banking and Financial Services.On the harvest verticals, which have been the core strength of Sonata in the prior times, which is Retail, Manufacturing, Distribution and TMT, we will continue to leverage our strengths built over the many years and we're excited that our teams won our first Gen AI project for a Fortune 25 technology company to accelerate their ability to bring new products and features to the market and be right for time in a complex engineering environment. As I mentioned last quarter, we are seeing softness in high-tech industries for a few select clients, both large and mid-sized, where the growth rates have reduced. For TMT sector, we remain positive but are monitoring these decisioning delays that have hit us and the industry in general.Let me provide an update on scale. We're making significant bets in AI and Gen AI. Gen AI has the potential to transform the way companies interact with customers and drive business growth. However, business needs to adhere to regulations relevant to their respective industries and there are legal, financial and ethical implications in the content generated when it is inaccurate, inaccessible, hallucinating or offensive. Our clients are looking for a trusted way to use these technologies. As such, we have recently launched Harmoni.AI, a responsible first AI, offering with a bouquet of industry solutions, service delivery platforms and accelerators using Generative AI techniques. The Responsible by Design approach ensures uncompromising ethics, trust and privacy. Sonata has trained over 20% of its engineers to deliver tailored solutions to clients and services to its clients.Second, Microsoft Fabric. Sonata is Microsoft's only SI launch partner from India for their recently launched Microsoft Fabric. And the emphasis here is on only SI launch partner from India because we believe we're in a unique position and a pole position as they build out their Fabric infrastructure. Fabric is a data analytics platform for the era of AI. Our teams of over 300 data engineers, are enabling customers of Microsoft and ours together to leverage this new paradigm of end-to-end analytics-based SaaS platform. We are witnessing significant pipeline build in the area of Fabric.Third, joint go-to-market with hyperscalers, keeping large deals focus for Sonata. We are excited to take up relationship with leading hyperscalers like Microsoft and AWS, Snowflake and Salesforce to the next level. These joint GTMs are enabling Sonata to increase and strengthen our footprint across cloud, data and Generative AI. Our SITL business, the India business, it continue to scale our business with a sharp focus on annuity business. We're winning multi-cloud management deals in the region. We continue to hit above expectation in the region. We're delighted with the progress we're making. In the most recent HFS Horizon report, Sonata was rated as a disruptor for data modernization services.Let me provide an update on talent. Sonata University was launched a few quarters back and we witnessed 45% increase in enrollment and 42% employees are now Sonata Unified Engineer Program certified. To continue to build Sonata as a global firm, diversity and inclusion is a high focus area for us. Our Global D&I Council continues to drive towards the goals and to increase our gender diversity for Sonata and reach a goal of 35% gender diversity by FY '26, with a special focus, and I reiterate the special focus on increasing gender diversity in senior management roles. We have work to be done there.With that, let me provide an update on the quarter's performance. In Q1 FY '24, our International Services business grew 17.5% quarter-on-quarter, which is 36.1% Y-on-Y, and truly an industry-leading growth. Organically, 4% quarter-on-quarter and 15.8% Y-on-Y. In constant currency terms, we witnessed 17.4% quarter-on-quarter, 36.4% Y-on-Y. Organically, constant currency, 3.8% quarter-on-quarter and 16% Y-on-Y. Q1 '24 consolidated PAT grew at 5.5% sequentially. Operating margins before FX and other income for the international business were at 21.1%, and gross contribution from our domestic business grew 6.4% sequentially and 21.8% Y-on-Y. In Q1, we now have 11 clients generating more than $5 million revenue for Sonata. And that number is significant for us because that number stood at 5 clients more than $5 million same time last year. So we've added 6 clients with an annual run rate of more than $5 million for Sonata in the last 1 year. As promised, from this quarter onwards, we will share our order book performance. So in Q1, we had a strong order booking of 1.2 book-to-bill in the International Services revenue, and that is after normalizing the large deals. We felt if we add large deals, the book-to-bill ratio will look very high. So normalizing them, we did 1.2 factor of book-to-bill. We added 237 net headcount in the company in the course of the quarter.So in summary, we continue to remain optimistic about our long-term growth prospects. In FY '24, we will have 2 tailwinds and 1 potential headwind. The tailwind are multiple large deals, which are in transition now, will continue to accelerate Sonata. The Quant Systems acquisition will continue to propel our growth. The potential headwind, which is in the softness in TMT vertical in our some select clients will continue to be a headwind at least for now. All in, we expect to stay in the top 25 quartile performance, which is what we have promised to you, go forward as well. Our focus on modernization is enabling us to win large deals and opening enterprise-grade logos which enabled the $5 million revenue of large accounts to grow from 5 to 11. This is the Play Big Sonata. We're working judiciously towards our stated goals and very excited about it.Thank you. With that, let me turn it over to Jagan for his comments on our financial performance. Jagan?

[Jagannathan Narasimhan, executive]

Thank you, Samir, and thanks for the overview. Good morning, good afternoon, good evening all. We had a very exciting quarter, delivered yet another industry-leading performance. It's my pleasure to present the Q1 financial performance. So in Q1, revenue grew -- dollar revenue grew by 17.5% and year-on-year -- this is quarter-on-quarter growth, and year-on-year was 36.1%. In rupee term, it was 18.8% quarter-on-quarter and 45.1% year-on-year. And in constant currency terms, we have witnessed 17.4% quarter-on-quarter growth and 36.4% year-on-year.Other metrics. Consolidated EPS in quarter 1 was [ INR 8.6 ] per share. In Q4, it was INR 8.2 per share, which grew 5.6% quarter-on-quarter and 11.3% year-on-year. At consol level, ROCE stood at 37% and return on net worth stood at 36.5%, both have increased respectively. Profitability. The consolidated profit grew quarter-on-quarter 5.5% and year-on-year 11.4%.And coming to the International Services, International Services, the EBITDA before ForEx and other income was 21.1% against 20.7% quarter-on-quarter. And there we have -- at present, in this quarter, we have also given because there were lot of movements in last quarter and current quarter, particularly with the acquisition costs involved to give a clarity, we have given a walk-through, both -- in PAT at the consolidated and international level. The exceptional headwinds related to M&As, full quarter net amortization impact was about INR 26 crores, including loan amortization and other things. And so that interest on loan will be -- will have to be reduced in 2, 3 quarters after the repayment comes in to play. The interest on deferred consideration will come down after the first payment in February of 2024.And coming to this international -- from international to domestic business, the domestic business continued to grow very, very strongly. The gross contribution has been INR 61.8 crores, which grew 6.4% quarter-on-quarter and 22% year-on-year. Domestic, the [ OAT ] business has grown 3% quarter-on-quarter and 26% year-on-year, the PAT growth. So utilization in the international business stood at 82.7%. We added 10 new customers. We added 20 -- client concentration improved to 69% in quarter 1 and 1 million to 3 million, we have 45 customers now, 3 million to 5 million is 5. As Samir mentioned, more than 5 million is about 11 customers. We have shared the details of all these things, including the headcount. Headcount, as Samir mentioned, is now 6,429 in Q4 to 6,666 in Q1. Net headcount addition of 237. Very, very -- this indicates a very strong growth in the coming days. We have 3 large deals that is going on. That large deals are in transition stage, and this transition is expected to get into a normal revenue growth mode in the couple of quarters coming now. So we have a very, very strong -- we have given the details of vertical mix -- revenue by vertical mix and revenue by go-to-market mix also in our presentation, which will be uploaded in our website in the coming days. We continue to do the good performance, industry-leading performance with our investments in the growth. And as mentioned by us, we continue to invest in the growth areas, particularly AI and other new areas that is coming in, Fabric, particularly, which is going to help us to continue to be having a -- in the top 25 percentile growth in the industry.Thank you. Handing over back for the questions.

[Operator]

[Operator Instructions] First question is from the line of Baidik Sarkar from Unifi Capital.

[Baidik Sarkar, analyst]

Samir, congrats on a fantastic quarter. Great numbers. Couple of questions. First up, Samir, you had mentioned the last time we've interacted that your ability to grow irrespective of the macros and purely a function of your bottom-up and that seems to be playing out to the fore. My question is, would you still stand by that statement as the macro stands today? What is your sense? And b, if you could give us a sense of what the large deal pipeline in our network looks like today? And the incremental conversations that you've had for them, does the direction of those conversations, in terms of closure and size in-house given what's happened in the last 90 days?

[Samir Dhir, executive]

Baidik, thank you. And I think, yes, I still stand by what we said earlier. I think clearly there are macroeconomic headwinds. But as you can see, even in the most recent quarter, organically also we have grown 4% quarter-on-quarter. And if you compare that to results across our competitors, we feel pretty happy about what we accomplished. And I think we believe, given the momentum that we've built on modernization, engineering, AI and large deals, we can continue to be in the top 25% quartile performance of the industry and keep getting better at it.As far as the question about large deals is concerned, our large deal pipeline now stands at about 40%. This number was in mid-teens same time last year. So we moved quite a significantly in that sense. And those deals that we have won are of different shades and sizes, Baidik. Some of the deals, like for example, the mega deal we announced is a 10-year deal. The large tour operator deal is about a 5-year deal. And the European largest deal ever that we just announced is of nearly a 2.5, 3-year deal. So these are multi-year contracts and they are -- the transition is going on right now. And like I said, in about 2 quarters or so, we think as the transition is completed, we'll start to see those numbers come in our revenue. And that's one of our significant vectors to really go against the industry grain because as we close these large deals, as a strategic thinking in with the generational companies, we believe we can take a wallet share aggressively, Baidik.

[Baidik Sarkar, analyst]

Lovely. That's good to know. Just a couple of quick follow-ups. See, is there -- is it then fair to assume that the transition that's underway across most of our large deals, they may not be a significant part of this 4% that we have grown this quarter? Or would you caution saying against that?

[Samir Dhir, executive]

There is some revenue in this quarter, but they will progressively ramp up in Q2 and Q3, all the 3 deals, they will contribute and progressively ramp up, but there's some revenue in the current quarter as well.

[Baidik Sarkar, analyst]

So that basically means that even if we were to net off the softness coming from your TMT -- coming from your high-tech vertical, I mean, it would still not tinker materially with our systemic growth rates of the genre. Is that triangulation then right?

[Samir Dhir, executive]

That's how we're thinking about it, Baidik. The reason we think we can continue with the top 25% quartile is really at the back of the deals that we're winning, which are pretty substantive in nature. And we believe if there is any headwind, we can offset through our large deals, but we are watching the market closely. The market is rapidly changing. But that's really our belief right now, Baidik, and we feel very confident about where we're heading with this.

[Baidik Sarkar, analyst]

Sure. And I'm sorry, sir, I missed this in your opening remarks, but the new pivot in the domestic product business towards larger deals, could you please flesh out that TAM, could you please flesh out the opportunity again? My apologies if I've missed it in your opening comments.

[Samir Dhir, executive]

Yes. So I think we've talked about, we want to get into multi-cloud engagements in the domestic business. And Sujit and his team are really focused on building that capability out to help us pivot in that side, and that's a refresh of the strategy we did last year. But let me request Sujit to chime in on that. Sujit, if you can just add further color on that, please?

[Sujit Mohanty, executive]

Yes. Can you hear me, please?

[Samir Dhir, executive]

Yes, Sujit. Go ahead.

[Sujit Mohanty, executive]

Yes. So basically, as most of the business is now shifting to the cloud, if you have to get into the larger deals and make good profit out of it, what we need, it's larger consumption, because more the consumption, you get more money out of it and most of the large OEMs also try to incentivize on that. And that is the reason why we are, not only just selling the platform, we are also trying to get into the engagement with customers where we manage platforms. And while doing so, if you see the current market scenario, most of the enterprise customers, they're not only depending on one kind of cloud, they're going for multiple cloud platforms. And when they go for multiple cloud platforms, there is little bit of -- more challenge in terms of managing this whole cloud infrastructure, managing the cost structure, and making sure that the customer exactly know in which of the business areas, what kind of cost has been incurred in the cloud, how it is being managed. So this is something which most of the customers expect a good partner to work with this, and that is what the GTM currently we're working out. And that is one of the ways to get into the much larger deal, not only get into it, but also hold on to the deal for a longer time and manage it. Is that clear?

[Baidik Sarkar, analyst]

No, that sounds good. A great quarter and my best wishes ahead.

[Operator]

[Operator Instructions] The next question is from the line of Mohit Jain from Anand Rathi.

[Mohit Jain, analyst]

First is on the retail, CPG, manufacturing vertical. So we were hoping that the large deal, which you announced earlier, would ramp up and contribute significantly to this vertical. The $160 million I'm referring to. So is the ramp up complete there? And if yes, where do we see the movement in your vertical breakup there?

[Jagannathan Narasimhan, executive]

Mohit, as mentioned to -- mentioned by Samir, this is an ultra-large deal. So it will take couple of quarters for the ramping up -- full ramping up to happen. This quarter -- from quarter 4, there has been a transition going on. Three tracks of transitions are there. In that the first 2 tracks of transaction are going on in that. So the ramp up is going to take couple of quarters more. There is a revenue, as you mentioned, definitely there is a revenue from them. But the full ramp will start only after couple of quarters, hopefully. That is the reason why that retail has not seen the full impact of that.

[Mohit Jain, analyst]

Okay. And adjusted for that, whatever benefit you have got, how is the movement in retail and what is the outlook there?

[Jagannathan Narasimhan, executive]

See, we have not seen any major negative, Mohit, on that. We are going on because the retail sector is actually -- for us earlier had a lot of dynamics business in that. Couple of large projects have gotten over, so which is like an aberration. We will continue to do that because we are very, very strong in that area. We will continue to grow in that vertical. Not seeing any major negative at present.

[Mohit Jain, analyst]

Okay. And sir, second was on the margin front for IT services. There was this drop on a Y-o-Y basis, say, around 300 basis points on the IT services margins. Now, I am assuming wage hikes, et cetera, are behind us, given that we follow a little different method. So how should we see -- and is there a one-off this quarter, meaning in this quarter margins as well, as far as M&A integration costs are concerned? And how should we see the trajectory going forward?

[Jagannathan Narasimhan, executive]

Yes. Okay. So what is the movement in the -- at the EBITDA level for the international businesses, which I'll be uploading in the website soon is actually the merit salary increases had about 60 bps of impact. And there was a positive impact from last quarter's one-timers and incremental EBITDA growth. These 2 gave about 4.08% positive, and we had the large deals transition, whatever is that, 3 large deals that are going on now and their transition is happening, which had about 1.5% of impact for this quarter. And this may continue, as we mentioned, maybe continuing for the next couple of quarters. After that we will be recovering back these investment -- this large deal impact. And the strategic investment, we have announced our AI initiatives, as well as the Microsoft Fabric. So our investment on this is continuing. That had an impact of around 1.6% on this -- on our EBITDA movement. We will be uploading the details, Mohit, in the website. You can take it from there.

[Mohit Jain, analyst]

Right. So going ahead now, this is a new base for EBITDA and we will gradually improve from here? I am assuming AI investments will continue for some time, and...

[Jagannathan Narasimhan, executive]

Correct. AI and Fabric investment is going to continue for some time, but the large deal, after a couple of quarters will improve, will come back.

[Operator]

[Operator Instructions] The next question is from the line of [ Vishal ] from Incred Capital.

[Unknown Analyst]

So I have a couple of questions. So my first question is related to -- any color on the normalized book-to-bill? How it has grown as compared to last quarter and even on a Y-o-Y basis?And what is the benchmark related to the large deals? Any quantum will be great.And my third question is related to headwind on the TMT vertical. So is there -- sir, headwind specifically to high-tech vertical or does it also pertinent to media and telecommunications vertical also?And my last question is regarding Microsoft Dynamics. Sir, in this quarter, the sequential decline was pretty sharp it seems. So the weakness is ex retail, or is there anything more to happen?

[Samir Dhir, executive]

Yes. Thank you, Vishal. I think there are few points I'll make and turn over to Jagan to add additional. Sir, order book, as you know, it's the new framework we put in place in the company in the last couple of quarters and we don't have a reference point of our performance last year, because this is a full tracking we have put in place. This is a request from all of you. So we put that in place now. Now, we expect the order book to be in the zone of 1.2 to 1.3 even go forward. This quarter, we came in around 1.2, which I think is a pretty strong outcome for us. And we have normalized it for large deals because one large deal can skew that metric up quite significantly.To the second part of your question on TMT, yes, the short answer is the weakness we're seeing or the softness we're seeing in this thing related only in high-tech, not in media and telecom. I think our softness is primarily high-tech-oriented and that too centered in U.S.The third point on Dynamics, it's a seasonal effect. As you know, Microsoft financial year runs and completes in June end and then they start the new wave of investments in July. So what softness we've seen is on 2 counts. Number one, some of our large programs came to an end in Dynamics. And second, the new programs haven't really kicked off in last quarter. But the large deal we just announced in Europe, which is the largest European deal, is a Dynamics deal, and that will start to kick off in Q2 and Q3 timeframe. So, that will bring the numbers back up. So, it's a seasonal effect that you're seeing in Dynamics numbers, Vishal.Jagan, if you want to add anything?

[Jagannathan Narasimhan, executive]

See, the order book, as Samir mentioned, we have normalized for the large deals, means we have not included the entire amount, we have just taken the revenue equivalent of that and added. So it's the conservative methods of publishing the order book and we continue to do very well in that. We are one of the leading in that front. Compared to last quarter, which we had a track, we had a very, very strong presence in this quarter in spite of last quarter we're getting a large deal also. The few mega deal we got last quarter, still this quarter again, we have done well. On this Dynamics program, we are not concerned because the Dynamics is generally a good -- we are doing well there consistently for many quarters now. This quarter, we do large programs and ANZ got -- it's in -- towards the end of completion stage, projects are, since there seems to be a small change in that. We are very confident we will bounce back in that. We will do well.

[Operator]

The next question is from the line of Vipul Kumar Shah from Sumangal Investment.

[Vipul Shah, analyst]

Congratulations for very good set of numbers. Can you give the net debt at the end of the quarter?

[Jagannathan Narasimhan, executive]

What is that?

[Vipul Shah, analyst]

Net debt.

[Jagannathan Narasimhan, executive]

Net debt is around $52 million in U.S.

[Vipul Shah, analyst]

$52 million. So what should be the -- what should we pencil in steady state finance cost per quarter?

[Jagannathan Narasimhan, executive]

The finance cost -- there are 2 elements of finance cost is there. One is the loan -- interest on loan, which is about INR 5 crores per quarter. Okay? And we also have the accounting entry, that is for a deferred payment amount, which we are going to pay us an earn out in February of 2024 and February of 2025 and August of 2025, 3 payments are there. That amount, we have to accrue interest, because we have to discount that amount to the present value. That will also be shown as a interest cost for us. That amount is actually about INR 11 crores in that -- INR 10.5 crores, INR 11 crores was that. And amortization amount is there. Total, all put together is about INR 33 crores impact in PAT.

[Vipul Shah, analyst]

So this will steady per quarter going forward?

[Jagannathan Narasimhan, executive]

INR 33 crores steady till January of 2024. February of 2024, that quarter it will get -- from next year Q1, the interest on the deferred payment will come down, as well as the loan amount -- loan interest also will come down as we start paying -- repaying the loans.

[Vipul Shah, analyst]

And sir, I missed your margin WACC comments, that 300 basis point reduction in margins. So would you repeat the main factors -- main positive and negative factors which...

[Jagannathan Narasimhan, executive]

Yes. The WACC on EBITDA for international business, international business, we grew from 20.7% to 21.1%. The major headwinds were salary increase with 60 bps. We had large deals -- because of the large deals, there is a -- the revenue has not -- ramp cost we continue to incur, that is about 150 bps -- 1.5%. And our investment in AI and Microsoft Fabric is about 1.6%. This large deal in couple of quarters, it will get unwinded.

[Vipul Shah, analyst]

Okay. And sir, lastly, in absolute numbers what should be our investment in this Microsoft Fabric and Gen AI?

[Jagannathan Narasimhan, executive]

We will -- at least for some -- few quarters, our expectation is, at least this is going to continue for about 18 months. One quarter is over. Another 4 to 5 quarters of investment is going to continue in this space because there is a huge opportunity. What we believe is, both Gen AI, as well as Microsoft Fabric will be the next selling point after Dynamics for us.

[Vipul Shah, analyst]

No, what should be the total investment in rupees of crores, if you can quantify that figure, if it is possible?

[Jagannathan Narasimhan, executive]

We have already highlighted, it is going to continue to be 1.5% to 2% of EBITDA every -- quarter-on-quarter.

[Operator]

The next question is from the line of Amit Chandra from HDFC Securities.

[Amit Chandra, analyst]

Yes. If you can quantify the contribution from Quant in this quarter? Because if I calculate the revenue from Quant that we have in this quarter, so the run rate seems to be a little lower than the revenue run rate that we had for Quant. So that's the first question.Second is, sir, in terms of order book, some more clarity that is required is that how do we, like, define the order book. So based on the calculation, the order book is around $93 million. So is it the total TCV number which includes the renewal, plus the new deals? Or is it only the net move-ins that we are announcing? And as you have mentioned that we have like normalized the order book. So is it fair to assume that this is -- this number is equitable over the next 12 months?

[Samir Dhir, executive]

Yes, Amit, thanks for the question. There are multiple questions, let me go one by one. So as far as Quant is concerned, like we earlier said, Quant grew about 7.2% sequentially quarter-on-quarter, but there is a very important point to note there that the Quant accounts that are scaling up for us are being driven from a sales and marketing and delivery perspective by the Sonata teams now. So at this point in time, it's very hard for us to segregate the numbers between Quant and Sonata because, as you know, Quant had just one salesperson in the whole team. So we had to invest a lot of Sonata manpower into scaling that part of the business. And good thing is, we have seen, in the last 3 months or 4 months now, about $100 million pipeline build and some fairly large deals inside the $100 million as well, which I think is a good sign for us collectively. So at this point in time it's a truly integrated entity for Sonata from a go-forward perspective.As far as your point about order book is concerned, let me make sure we get this clear. So, this includes both renewals and net new business, Amit. What we have done is, the large deals, because we have closed 3 or 4 large deals recently and one of them is mega, they can skew the numbers in a positive way significantly. So the revenue expected from these deals is equal to order book, just so that we don't have an exceptional balloon going in the numbers. But apart from that it does include renewals, as well as net new business in the numbers that we're talking about.So hopefully that answers. Jagan, if you want to add something?

[Jagannathan Narasimhan, executive]

No, that Quant perspective, just to give a confirmation what we mentioned last quarter when we acquired was, they will have a yearly growth of more than 30%, annual growth, plus EBITDA of more than 30%. It continues to be there. No doubt about that.

[Amit Chandra, analyst]

Okay. And sir, like, one more question on the Microsoft Dynamics part. So notably the Microsoft, that renewals happen in the month of July. So, any color you can give on how the renewal cycle has been there? Because I think the -- in terms of their budgeting, it has already been done.

[Samir Dhir, executive]

Yes. So, Amit, let me take that again. I think the Microsoft Dynamics side, the process is actually happening as we speak. In July, when they announce their new fiscal year and the sales teams in Microsoft go through some changes. So by mid-August, that whole thing will settle down. And post that the contract, et cetera, will get accelerated from there on. So we are not worried, this is a seasonal cycle. It generally is Q1 soft for us. And in Q2 back half it sort of picks up the whole order book side. Like I said, in spite and despite of that the pipeline that we had with Microsoft already is also closing out. So the large deal we just announced in Europe is a Dynamics deal, which is the largest ever deal for Sonata. So it's a mixed bag. The net new pipeline addition is a back-to-back of a Q2 activity, but the pipeline we already had will continue to close as planned.

[Operator]

[Operator Instructions] The next question is from the line of Jay Daniel from Entropy Advisors.

[Jay Daniel, analyst]

Yes, sir. This is more of an accounting question. I kind of missed it. So in case of finance cost and depreciation, can you give a breakup of -- there are some accounting-related non-cash items that you're adding there. So if you could give us a breakup of what is there in finance cost and what is there in depreciation, please? Finance cost is INR 20.83 crores and your depreciation is INR 31 crores. I think there are some -- like your deferred revenue deferred payment, all these are non-cash and more of accounting. So if you could give us a breakup. And even in depreciation, I think there is some amortization also there.

[Jagannathan Narasimhan, executive]

Yes. Depreciation, it's a -- amortization of intangible is about INR 16.8 crores every quarter. Interest on acquisition loans, actual loan what we have taken last quarter. So that is about 6.5 million -- INR 6.5 crores, sorry, INR 6.5 crores.

[Jay Daniel, analyst]

Because you said INR 5 crores sometime back. So...

[Jagannathan Narasimhan, executive]

Yes. That interest on acquisition loan, actually, it has an impact of -- sorry for that number, it's INR 6.5 crores it is. INR 6.5 crores.

[Jay Daniel, analyst]

INR 6.5 crores. Okay.

[Jagannathan Narasimhan, executive]

And unwinding of interest on deferred consideration is INR 10.6 crores.

[Jay Daniel, analyst]

INR 10.6 crores. Okay.

[Jagannathan Narasimhan, executive]

So the total impact is INR 33.8 crores.

[Jay Daniel, analyst]

INR 33.8 crores is what? I mean, including both depreciation and finance costs?

[Jagannathan Narasimhan, executive]

Actually, you have to understand a little bit of accounting part of it in this. When we capitalize -- when we acquire a company, the net asset of the services company will be lower. So the balance amount, earlier used to be called as goodwill. Now, you can't call everything as a goodwill, you have to recognize the intangible assets which is lying there, including customer contracts, IPs and other things, whatever is there, because it's a valuation methodology, an external valuer does that and arrive at the intangible assets. That intangible assets have a life, so which the valuer gives to you. Based on that, you have to amortize over the life of that -- whatever he has given it. It has nothing to do with what we do, it's an external valuer's certificate. Apart from that...

[Jay Daniel, analyst]

So this INR 31 crores includes how much of that? INR 16.8 crores?

[Jagannathan Narasimhan, executive]

INR 16.8 crores, you are right.

[Jay Daniel, analyst]

Okay. And the balance is normal depreciation?

[Jagannathan Narasimhan, executive]

No, no, one second. The balance is, there is a loan interest...

[Jay Daniel, analyst]

So that will come in interest finance cost, no?

[Jagannathan Narasimhan, executive]

Finance cost. That will come as finance cost, INR 6.5 crores.

[Jay Daniel, analyst]

No, no, I'm talking of this INR 31.2 crores, as INR 16.8 crores of write-off of intangibles, right, amortization of intangibles?

[Jagannathan Narasimhan, executive]

Yes. INR 16.8 crores is amortization, and there is an unwinding of interest on deferred consideration. That is INR 10.6 crores.

[Jay Daniel, analyst]

That is also included under depreciation?

[Jagannathan Narasimhan, executive]

That is also included in the amortization -- in the interest cost only. That comes under interest cost.

[Jay Daniel, analyst]

So in this INR 31.2 crores minus -- INR 16.8 crores is removed. So the balance is your normal depreciation. Correct?

[Jagannathan Narasimhan, executive]

Normal depreciation -- it will be a normal depreciation. I have to give you the breakup. I don't have the breakup with me. I've not seen the depreciation amount. But these are the costs just lying between interest and depreciation.

[Jay Daniel, analyst]

Okay. And in -- finance cost is INR 20.83 crores. You are saying actual interest is only INR 6.5 crores and the balance is deferred...

[Jagannathan Narasimhan, executive]

Deferred revenue, correct.

[Jay Daniel, analyst]

So only INR 6.5 crores is actual interest cost that you will have to pay out?

[Jagannathan Narasimhan, executive]

Correct. The depreciation amount what you said, may have amortization from our earlier acquisitions also. We have acquired Encore, we have acquired Scalable, and all these things, right? They also have amortizations coming in.

[Jay Daniel, analyst]

Correct.

[Jagannathan Narasimhan, executive]

Yes. So depreciation should be lesser than that. I can give the break breakup off-line for that.

[Operator]

[Operator Instructions] We have a follow-up question from the line of Jay Daniel from Entropy Advisors.

[Jay Daniel, analyst]

Sir, just a suggestion. I mean, if you could give this breakup as part of your presentation? Because it has a material impact on your PAT growth. So we could adjust it to find out actual PAT movement, if it's possible?

[Jagannathan Narasimhan, executive]

Sure, we can give that.

[Operator]

The next question is a follow-up question from the line of Vipul Kumar Shah from Sumangal Investments.

[Vipul Shah, analyst]

So you define large deals -- deal with more than $50 million, sir?

[Samir Dhir, executive]

No, it's -- we haven't, Vipul, defined the large deal threshold, because they range in shape and size and color. But generally speaking, they are multimillion-dollar -- multiyear contracts, multi-million dollar contracts. As you know, the largest one we announced of $160 million, but large single digits is really what you think of as a cut-off and as a large deal that we think about, but it could be anywhere between $5 million to $20 million to $50 million. They can all be different shapes and sizes, but they are essentially multiyear contracts.

[Vipul Shah, analyst]

And just for the sake of repetition, so these large deals, you have not considered in your -- this bill-to-book ratio, right, sir?

[Samir Dhir, executive]

We have considered only to the extent we expect revenue in the quarter, but the overall TCV is not taken into book-to-bill. Yes.

[Vipul Shah, analyst]

And the final question for Mr. Jagan. So I am little confused, because I'm not an accounting guy. So what will be the cash charge in the finance, means which will be debited to P&L and what will be non-cash per quarter?

[Jagannathan Narasimhan, executive]

No, there are multiple elements in the cash and non-cash elements. Okay? But if you ask the elements, what I called out, in that only the interest on bank loans, which will be about INR 6.5 crores, that is only cash element. The rest of the things are amortized, no accounting entry.

[Operator]

The next question is from the line of Mihir Manohar from Carnelian Asset Management.

[Mihir Manohar, analyst]

Congratulations on a good set of numbers. Sir, just largely, wanted to understand, I mean, on this amortization part. I mean, there are 3 details that you gave. One is the amortization of intangibles, which is INR 16.8 crores. The interest on loans INR 6.5 crores and unwinding of interest of INR 10.5 crores. So, I mean, if you can just clarify, you mentioned that till January '24 certain part of this cost will sit, and after January '24 a certain part will go out. So if you can provide just some clarity as to what part will sit for how much period that will be helpful?And the second question was on the M&A front. I mean, beyond acquiring -- after acquiring Quant Systems, what are the areas that we're looking to acquire capabilities that will really help? So just wanted to understand those 2 parts.

[Samir Dhir, executive]

Mihir, I'll take the second question, and I'll let Jagan respond to the first one. This is Samir. On the M&A side, our strategy is really straightforward. As you know, we're building a modernization engineering company as we move forward, which is essentially focused on app modernization, data and cloud modernization. So a core part of that look out is in that area. And second, we are looking also for companies who have clients in the invest verticals specifically, which is health care, life sciences and BFSI. And lastly, in the geographies of predominantly U.S., U.K. and Europe would be a predominant focus in those three access, Mihir.With that, let me turn it to Jagan for the first part of the question, Mihir.

[Jagannathan Narasimhan, executive]

There are 3 elements to these intangible assets that will take time to wind down, Mihir. So it is going to be like -- average age of these intangible assets will be somewhere between 7 to 10 years. So it will take time. Over a period of time, it will get unwind, but once the unwinding happen, after some state the amount of -- amount, which is deferred can also little modify -- get a little bit modified on this over a period of time, but it will continue to be there. Okay? Interest on -- the unwinding of the interest on deferred consideration, almost like a 50% of that will be paid in February '24. So this amount will start coming down from Q1 of next year by a decent amount of money. And once all the acquisition cost has been paid off, this amount will get completely unwinded. So this is question of 2 years for this to be unwinded. One major portion will get unwinded in this -- after Q1 -- in Q1 of the coming next year, in April '25, after that it will get unwinded, one major portion.On the interest on loan amount, as mentioned by us, we are planning to repay the loan between 12 to 15 months' time what we have taken initially for acquisition. That interest also will come down. Okay? But the cost of that will start coming down once we start repaying the loan.

[Operator]

The next question is from the line of Dipesh Mehta from Emkay Global.

[Dipesh Mehta, analyst]

Two, 3 questions. First, about the book-to-bill. You tried to give some explanation, but I'm yet not clear. So in book-to-bill, generally our overall order book is the numerator, and then the revenue you have is in denominator. You said you adjust quarterly revenue in terms of denominator. So similar quarter revenue you are separating from numerator, that's what you're trying to convey. In a way, you're doing ACV adjustment. That is right understanding? That is question 1.Question 2 is about, I think, we mentioned 10 mega account kind of focus and all those things. If you can help us understand what kind of investment which we are making in the account-related thing? So if you can provide, whichever way you can give some color about these 10 mega account focus and how we want to widen the number of accounts there?Third question is about large deal win. I think in one of the slides, you mentioned 7 large deals in flight. I'm not clear what it means, whether it means they are in pipeline, or if you can provide some color? And if they are in pipeline, if you can provide some sense about overall opportunity?

[Samir Dhir, executive]

Thank you, Dipesh. There's lot of questions, I'll partially answer that. So number one on the book-to-bill, your -- the way you described is exactly right, that's what we said earlier. We have normalized it for the order book, as well as the revenue lines. So both numerator and a denominator are normalized to that extent. So that we don't have a spike to show in the numbers, the book-to-bill will look more than 2 or 3, look very, very high. So that's first part.The second part on the 10 investment account, I think there are 2, 3 parts there. As you know, we changed significantly our top 10 accounts already this year because of the Quant acquisition. But beyond that, we have made investments in our sales and marketing, we've made investments in our partner relationships, and we've made investments in what Jagan talked about earlier, in AI and Fabric. So a combination of these factors will help us propel and change significantly our top 10 that we see today, to the top 10 that will be there next year, or in time to come. And that color has been changing in the last 12 months as well. We think we're on a trajectory, we'll continue to change that. And our expectation is that, in several quarters' time, as we scale the platform to be a $500 million platform, we have top 10 which are predominantly speaking, multibillion-dollar revenue companies in our top 10.And the last part on the large deal, you're absolutely right, the 7 large deals which are on horizon, they are pipeline deals, they are beyond the 3 deals we just talked about. So the 2 wins in this quarter and 1 mega deal are already won. The 7 as I mentioned in the document are in the pipeline stages. These deals are progressively win. Generally speaking, the large deal closure cycle is between 2.5 to 3 quarters. So over the next 2 to 3 quarters, we'll see some of these deals trickle in depending upon where they are in their cycle. Hopefully, that clarifies, Dipesh.

[Dipesh Mehta, analyst]

Yes. That clarifies. Just on the mega account and account-related thing. So if you can help us understand, because it appears we might have a change in account, which will happen over next few quarters before it stabilizes, when we are, let's say, have exposure to relatively large client and then it would be more steady kind of filing. That is right way to understand it?

[Samir Dhir, executive]

That's right. Correct. In short, yes.

[Dipesh Mehta, analyst]

Okay. And to achieve that, if you can help us, how we are expanding our service offering, because that is one crucial thing, if you can provide some maybe in short answer to that?

[Samir Dhir, executive]

Yes. So much like -- if you think of the core areas of Sonata today, Microsoft Technologies is a core part of our focus area. That's point number 1. Point number 2, we are very strong in AWS, which is what we are building out. Third and fourth in the same category is Snowflake and Salesforce.com. So those are the top 4 in that order. But beyond that, our capabilities in Gen AI and Fabric is what we are really excited about. As we move forward, we want to invest in them, so we can take disproportionate amount of market share in these areas.

[Operator]

The next question is from the line of Sameer Dosani from ICICI Prudential AMC.

[Sameer Dosani, analyst]

Just one thing to clarify. So if you look at the normalized margins last quarter, I think it was around 24.3% for international IT services business, and now we are operating at 19.3%. Correct me if I'm wrong. And if you can just clarify the breakup, 60 basis point is from salary hike, 140 -- 160 basis points is due to the investments. Can you just give us a break again for this 5% loss?

[Jagannathan Narasimhan, executive]

See, last quarter, our reported EBITDA was 20.7%, Sameer. From that, we had a salary increase, it had a 60 basis point impact, and strategic investment was 160 basis points, and mega large deals, which is in a transition stage, that had a 1.5% impact. The benefit what we have got out of this, the incremental revenue growth, that has given us 140 bps of -- plus, whatever the acquired entity all put together, it has given about 140 bps of benefit to us, that's a tailwind. And one-timer last time, we had an impact of 2.68%, one-timers we have mentioned last time. So if I -- that is a tailwind for us. So the total tailwind is about 4.08%, and total headwind is about 3.7%.

[Sameer Dosani, analyst]

Understood. And how should we think about the margins from here? I mean, we've in the past spoken about 20% to 23% margin band. Now, how should we think about this margin band?

[Jagannathan Narasimhan, executive]

Yes. The strategic investment is going to continue for about 5 to 6 quarters, Sameer. We have mentioned that earlier also, and we continue to invest because this is a great opportunity for us in both these areas, AI and Fabric. We'll continue to invest on that.And with regard to this large deal transition, it may be there for 2, 3 quarters. By end of this year, it will get unwinded or get into the benefit zone. So we may not have the impact after 2, 3 quarters on the large deals. So that's how it works.

[Operator]

Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference back to Mr. Samir Dhir for closing comments. Thank you, and over to you, sir.

[Samir Dhir, executive]

So, thank you. And really appreciate you all joining us today. Like I said earlier, we are very excited about what's in front of us. Clearly, the market, especially in the high-tech sector, has been -- there have been -- we're seeing delays, but beyond that, we continue to see good momentum in our business, really backed by the large deals that we're winning and excited about what the future holds for us. We expect to be in the top 25% quartile performance. Like we have maintained in the last 4 quarters, we believe that's where we will be in the course of this quarter. So once again thank you for your support, and we'll speak to in a quarter's time. Thank you.

[Operator]

Thank you very much. Ladies and gentlemen, on behalf of Sonata Software Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines. Thank you.