Sonata Software Ltd

NSE:SONATSOFTW

Earnings Call Analysis

Sonata Software's Growth Amid Global Challenges

Despite global tech spending slowdown, Sonata Software continued to thrive, aiming for $1.5 billion revenue by FY26 with low 20s EBITDA margins. Strategic efforts yielded 16 large deals, three of which in Q3 FY'24 are with Fortune 25 companies, and a 59% revenue increase in Cloud and Data services. Notably, AI is targeted to contribute to 20% of revenue in three years, supported by a $50 million+ pipeline. Finally, Q3 international revenue saw a 38.3% Y-on-Y increase and a 1.24 book-to-bill ratio, with significant client growth and a 16% overall growth in accretion for the quarter.

Robust Domestic Performance Amidst International Growth

The company's domestic business has exhibited a notable 25.8% year-on-year growth, which is particularly impressive considering it's during a typically weak quarter. Internationally, the focus on modernization and platform-specific solutions has led to revenue growth of 3.5% quarter-on-quarter and an impressive 38.3% year-on-year.

Acquisitions Outperform with Strong Synergy Revenue

Recent acquisitions Encore and Quant have not only met but exceeded expectations, contributing significant synergy revenue and driving a strong return on investment. Operating margins for the international business remain robust at 22.6% before foreign exchange and other income. The acquisitions have bolstered the quarterly performance by delivering exceptional outcomes and a remarkable increase in return on capital employed.

Optimism for Long-Term Growth Despite Current Headwinds

Despite challenges in the BFSI vertical and seasonal softness, management remains optimistic about long-term growth, expecting to stay within the top quartile for performance moving forward. Encouragingly, the company continues to secure large deals and engage new enterprise-grade clients, revealing the value proposition of their industry-led approach.

Quant and Encore Acquisition Performances Drive Additional Earnings

Quant is anticipated to grow revenues by 65% and EBITDA by 45% in the next year, outdoing estimated targets substantially. Encore has similarly outperformed with estimated revenues and EBITDA growth well above initial expectations. These stellar performances have led to an estimated additional earnout of $17.1 million for Quant and $3.9 million for Encore, showcasing the successful integration and performance of these acquisitions.

Consolidated Earnings Paint a Picture of Healthy Growth

The company's Profit After Tax (PAT) increased to INR 128.5 crores, reflecting a 3.5% quarter-on-quarter and 9.2% year-on-year growth, with a consolidated Earnings Per Share (EPS) before exceptional item being INR 4.60 per share. These numbers suggest a healthy underlying growth trajectory for the business.

Top Customer Concentration to Shift Towards Broader Client Base

The long-term goal is to reduce top 10 customer revenue concentration from the current 56-57% to low 50 percentages of overall revenue. This strategic shift points towards a diversification of revenue streams and reduced reliance on a narrow client base, which could increase the company's resilience and stability in revenue generation.

Technology Services Growth Fueled by AI and Data Investments

Investments in AI and data have been particularly rewarding for the TMT sector, propelling growth and enabling the company to leverage cutting-edge capabilities for its high-tech customers. Strong performance in this area signals that strategic bets on technology are beginning to yield tangible benefits.

Financial Management and Strategic Direction

Future interest and amortization costs are anticipated to decrease by half after near-term payouts in April and July. Management plans to target an EBITDA range of 20-22% over the medium term, unimpacted by other income and foreign exchange, showing a commitment to managing costs effectively and sustaining profitability. Temporary US short-term loans may be used for acquisitions while awaiting resolution of RBI issues, but this is expected to be a transitional measure.

Operational Efficiency and Deal Momentum

Despite some deal delays in the past, leading to bench time for certain employees, overall utilization rates are improving. The company is starting to close deals that were previously held up and is now ramping up AI space projects, reflecting positive operational dynamics and momentum in deal conversions.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to Sonata Software Limited Q3 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, operator. Good evening, everyone, and we thank you for joining us today. We appreciate your valuable time and support for Sonata. In today's call, we will discuss our strategy, the progress on our strategic plan and the financial results for the quarter ending December 31, 2023.

It is my pleasure to share our progress towards our vision and growth trajectory for Sonata despite the macroeconomic challenges and geopolitical issues, which are resulting in slowdown in tech spending across the globe. Our big bets and continued investments continue to deliver great outcomes for Sonata. First, let me give you an update on our strategic goals and the progress we have made Y-on-Y on those goals.

As we stated in our earlier calls, our objective continues to be one of the fastest-growing modernization engineering firms powered by our unique Platformation framework. We aspire to achieve revenue of $1.5 billion by the end of FY '26 at an international EBITDA levels of low 20s.

From a growth point of view, we've outlined a few critical bits that we are making. Number one, win multiple large deals consistently every quarter. Number two, over-delivering on our M&As. Number three, win new logos that can scale for Sonata to be the next large account for Sonata, leveraging our partnership with our key partners like Microsoft, AWS and other partners.

And we wanted to achieve these goals in 4 verticals that we have called out our strategic verticals, which is Healthcare/Life Sciences, Banking Financial Services and Insurance, Retail Manufacturing and TMT and the 5 geographies, which is North America, U.K., Europe, India and Australia. In the past 4 quarters -- I'll provide an update for the last 4 quarters together, we have won 16 large deals. We significantly overperformed in our Quant and Encore acquisitions.

We added 11 Fortune 500 clients in the last 4 quarters. Our Healthcare/Life Sciences business which was 9% of our revenue, same time last year, is now 12% of our revenue. So as the platform grew, we added 3% more in Healthcare/Life Sciences, which were a strategic bet for us.

Our BFSI business, which was 7% of our revenue, same time last year, is now about 18% of our revenue now. Our modernization engineering focus helped increase our Cloud and Data revenue contribution from 45% to 59%. Our teams have delivered these outcomes by sustaining an EBITDA in the 20s. We are very proud to drive our top quartile, both growth and EBITDA performance.

It makes it special to drive this growth in this environment at a high EBITDA, which is almost in parallel at this point in time. Sonata Software was adjudged the fastest-growing IT service provider in the most recent quarter as per HFS Data Viewpoint 2023 report.

Now let me provide you an update on AI, which is a bet, an investment we have made in the course of the year. Sonata aims to lead the AI wave by modernizing tech and ops for our clients. We're helping our clients in 3 dimensions. Number one, leveraging AI to drive efficiencies for our clients. For example, our clients' blended automation and AI to drive intelligent content generation with workload to reduce manual effort.

The second dimension in which we're driving AI is by leveraging AI to drive higher consumer experience and modernized sales. As an example, our teams are delivering insights from [indiscernible] for a high-tech client to enable contact center sales staff to drive cross-sell and upsell opportunities.

And number 3 is driving innovative business models. For example, generating new content from existing content using AI. We expect 20% of our revenue from AI services in the next 3 years. We have over $50 million pipeline on AI across 90-plus clients and prospects.

In close collaboration with Microsoft, our teams are building solutions on Microsoft Fabric which is going to be infrastructure for AI as we move forward.

Harmoni.AI, enterprise platform for responsible GenAI adoption, got listed on Azure and AWS marketplace and is now acknowledged by partners, industry bodies and our clients.

With that, let me provide you an update on large deals and large deal pipeline. We are delighted to report that our large deal pipeline is now 48% of our total pipeline, which is a 3x jump in dollar terms over last year. We now have 40-plus large deals under pursuit in the company.

Let me provide you an update on the 3 large deals that we won in the quarter, most recent quarter. Two of the 3 deals are for Fortune 25 clients. Deal number one. This is a client in large home improvement retail corporation in United States. The client faced challenges in modernizing their core systems and generating efficiencies across their inbound and outbound supply chain due to nonperformance from an incumbent partner.

The client evaluated multiple prospective vendors and chose Sonata as a strategic partner for standardization and modernization. This is a 5-year tenure deal with continuous modernization to transform their supply chain operations.

Large deal number 2 is for an American multinational technology corporation. The client was looking to improve and expand their end consumer experience and success using their products and services and modern data using AI and ML. Sonata partnered with that customer to provide efficient solutions catering to the end user requirement leveraging strong domain and multilingual support for end customers.

Deal number 3. The client is an American transportation services company specializing in shipping. The client was looking for reliable partners who could help maintain their applications and infrastructure footprint across all lines of business. Sonata will provide development and modernization services on cutting-edge technologies and automation. We're truly delighted to have yet another quarter with 3 large deals.

With that, let me provide you an update on the new logo wins. During the quarter, we added marquee logos, which include a Fortune 20 client, a Fortune 22 client and a Fortune 150 client.

An update on scale. We're following a key bet to power us to scale up fast. Microsoft Fabric, which we outlined earlier, is a data analytics platform for the era of AI. It went in general availability by Microsoft during the most recent quarter. During the event, Sonata was the only Indian SI among 3 other global partners explicitly mentioned in Microsoft Azure -- by Microsoft Azure data CVP in the launch note.

Our team of over 300 data engineers enabled the client to leverage this new end-to-end analytics platform paradigm. We continue to witness significant pipeline build for fabric since its launch, and we now have over $50 million of pipeline across 100-plus clients.

Microsoft Dynamics for enterprises, as they go through digital transformation journey and attempting to revamp how they operate, support customers and create business opportunities, Sonata continues to aim to transform such enterprises by undertaking complex migration as part of our modernization services for F&O, CE, Power Apps and Power Platform.

Our joint GTMs with ecosystem partners and hyperscalers continue to make rapid progress. We are proud to share during the quarter some outstanding awards and accolades our team won in the quarter. I'm going to talk about 4 awards that we won in the course of the quarter.

Number one, we received the prestigious recognition in the form of most preferred workplaces for 2023 and '24 in IT and ITES by Team Marksmen. This award is a testament to our ongoing commitment to creating a people-centric workplace.

Number two. We were adjudged as the best governed company at the 23rd ICSI National Awards for Excellence in Corporate Governance.

Number three, Everest Group featured Sonata in their peak metric assessment for lending IT services for 2023, strengthening our BFSI presence in the marketplace.

HFS Research, featured Sonata in their HFS horizon for Generative AI enterprise life sciences and low code services for 2023.

We continue to scale our India's SITL business, S-I-T-L business, with a sharp focus on annuity revenue.

With that, let me provide an update on talent. Sonata is a people-focused and talent-conscious enterprise. We onboarded our engineer trainees for engineering campuses for FY 2024 in December '23. This batch consisted of 93% women engineers from campuses, just going on to show our commitment to D&I, diversity and inclusivity, in the company.

With that, let me provide an update on our quarter performance. In the most recent quarter, our international services revenue grew by 3.5% quarter-on-quarter, 38.3% Y-on-Y. In constant currency terms, we witnessed 3% quarter-on-quarter growth and 37% Y-on-Y growth.

In Q3, we had a strong order booking of 1.24 book-to-bill in the International Services business. We have over 40-plus large deals in pipeline and the large-deal pipeline continues to grow. We improved the utilization in the quarter by 1.6%. Our quarter-on-quarter headcount increased in international business by 42 people.

We now have 17 clients with over $3 million annual revenue at Sonata. Same time last year, this number was 9 clients. So almost doubled the number of clients with more than $3 million revenue now, in about a year's time.

In addition, we now have 12 clients with more than $5 million revenue run rate. Our overall accretion for the quarter stood at 16%. In the SITL, the domestic business, the gross contribution in domestic business grew 25.8% Y-on-Y, a very strong performance in a seasonally weak quarter in the SITL business.

Q3 consolidated PAT grew by 3.5% quarter-on-quarter. Operating margins for the international business were at 22.6% before FX and other income. As mentioned earlier, we are proud of the performance from our most recent acquisitions from both Encore and Quant. They both exceeded our expectations and really driven significant synergy revenue together.

As you know, our acquisition premise was to drive synergy growth by leveraging deep Sonata offerings, our technical capabilities and resources, our corporate investments to accelerate growth. We are proud that both the Sonata Quant and Encore is better together.

And our combined teams have delivered exceptional outcomes. Due to this overperformance, both these acquisitions are now entitled for additional earnouts resulting in an exceptional item in our quarter P&L. Jagan will provide details shortly on these onetime exceptional items for Quant and Encore in the recent quarter.

In summary, we continue to remain optimistic about our long-term growth prospects. In the coming quarters, we will continue to have tailwinds and headwinds, the tailwinds for multiple large deals that we have announced, and we continue to win; and the headwinds in the short run due to softness in BFSI vertical, seasonally soft quarter for Quant and large deal delays that we are seeing in the last 1 or 2 months.

Our focus on modernization Engineering and Platformation at the core of, and our industry-led approach, is paying helping us win large deals and opening new enterprise grade logos. Overall, we expect to continue to stay in the top quartile performance, fueled by our strategic investments we continue to make in our business. We want to continue to drive this growth at the top end of the industry-leading EBITDA performance from Sonata.

Thank you. With that, let me turn it over to Jagan for his comments on the financial performance. Jagan?

[Jagannathan Narasimhan, executive]

Thank you, Samir, for the overview. Good morning, good afternoon, good evening, all. We had a very exciting quarter and delivered yet another quarter of industry-leading performance. It's my pleasure to present the Q3 financials along with covering the exceptional items.

As mentioned by Samir, we have acquired 2 entities, Quant Systems and Encore System. Both these acquisitions have outperformed in their performance than what was estimated by us last year. This has resulted in an exceptional situation for us, where the outperformance leads to revaluation of the acquisition cost, which has been as per the accounting standards that we routed through the P&L, if that covers the details of the same.

For Quant, the target revenue for calendar year '23, they had -- it is done on calendar year basis for them because we acquired them -- their financials are on calendar year. Calendar year '23 and calendar year '24, their revenue performance was expected to grow by 60 percentage and 36%, and EBITDA dollar -- EBITDA was supposed to grow by 32% and 33% in the 2 years.

However, the revenue performance was -- already happened in CY '23 was 64% with EBITDA performance of 127%. Our estimate in the current -- based on the current order book and the current year position, we expect them to grow by 65% in revenue for next year and 45 percentage in EBITDA for next year.

The revenue projection is -- has achieved 1.2x of the target over the period of 2 years, and EBITDA at 1.8x of the target estimate over 2 years. Against the initial valuation of $160 million, we are estimating additional earnout of $17.1 million due to significant overperformance in their revenue and EBITDA, enabled by the IP, work box IP has enabled this for Quant.

With regard to Encore, their target for revenue growth for 3 years, this -- just to recollect, this was the acquisition during COVID period and post-COVID their performance, they were expected to grow the revenue -- because it was acquired during COVID period -- their performance was expected to be -- revenue to be growing at 10.3%, 9.8% and 9.6 percentage for 3 years and EBITDA was supposed to grow by 9.8%, 10% and 9.4 percentage.

However, they have outperformed from the year 1. Year 1 revenue performance was 87.2% compared to 10.3%, the second year was 21.5% compared to 9.8% and the third year estimated 16.6% compared to 9.6% on revenue terms. And in EBITDA terms, they had an 89% growth compared to 9.8% and 34 percentage growth in second year compared to 10% and third year is 16.2% compared to 9.4%.

The revenue production for them has achieved 1.9x of the target achievement over the 3 years and EBITDA production is 2x of the target achievement over the 3 years. Against the initial valuation of $13.75 million, we are estimating additional payout of $3.9 million due to overperformance in revenue and EBITDA, enabled by the timing of attrition with post COVID [indiscernible]. With both these things, expected payout of $21 million is taken to P&L as an exceptional item as per the accounting standards.

Here, coming to the quarterly performance now. The revenue has grown by -- we had revenue for quarter 3 [ PAT ] and post exceptional item, although reported as negative, our PAT for the current quarter grew to INR 128.5 crores, which was again a very, very healthy 3.5 percentage quarter-on-quarter growth and 9.2 percentage year-on-year growth.

This Q3, International Services EBITDA before ForEx and other income, as Samir mentioned, is 22.6% against 23.1%. Revenue for the quarter, International Services, revenue grew by 3.5% quarter-on-quarter and 38.3% year-on-year. Rupee revenue grew by 4% quarter-on-quarter and 42.3 percentage year-on-year. In constant currency terms, the International Services revenue witnessed a 3 percentage quarter-on-quarter growth and 37% year-on-year.

The other metrics here is consolidated EPS post exceptional item was a negative for this quarter. However, the consolidated EPS in Q3 before the exceptional item was INR 4.60 per share. At consol level, ROCE has been very, very strong at 31.4 percentage for this quarter.

The domestic business has had a GC of INR 71.3 crores. It grew 14.2% quarter-on-quarter and 25.8 percentage year-on-year. The PAT grew by 5.3% quarter-on-quarter and 17.4 percentage year-on-year. The utilization for the quarter stood at 85.8%.

We have added 30 new customers. The top 10 customers' revenue has been 66% in this quarter compared to 61 percentage here last quarter. And in this current quarter, number of clients, more than $3 million, is 17 customers. As Samir mentioned, last year, it was 8 at the same time.

The TMT was 31% of our revenue, retail manufacturing is 34%, HLS was -- healthcare services where -- is 11% and banking financial services is 17%, emerging is 8% of that. We have also covered about the various go-to-market what [ we have achieved ]. Data is 24% for us, Dynamics is 23% and cloud is 36 percentage for us.

The order book is 1.24x of the revenue, just book-to-bill, what I covered in this. International DSO is 45 days and domestic DSO was around 35 days. The total headcount for the quarter is 6,494 in Q2 to [ 6,532 ] in Q3. We have an addition of about [ 42 ] employees in this quarter.

So coming back to this point, this overperformance of what we have acquired, this is a testament of the acquisition strategy to drive the synergy growth by leveraging the Sonata offerings and technical resources and corporate investments. This is very, very, very positive for us. This has led to a strong ROI and our payback period has halved during this quarter.

This is also is, in a way, increasing our return on capital employed continuously. This is a very appreciable as a CFO, I believe that. The payback period for this acquisition of Quant has actually halved. And last 2 acquisition has been very, very successful.

This reiterates our strategy and focus and drive. This quarter has been one of the best quarters for us. Again, this is the fifth quarter we are reporting industry-leading revenue growth and strong profitability. This has also helped us to get the -- our growth stories impact. And we are very, very confident of continuing to have the industry leading growth. Thank you.

[Operator]

[Operator Instructions] We have our first question from the line of Baidik Sarkar from Unifi Capital.

[Baidik Sarkar, analyst]

Congrats on a great quarter. Strong numbers overall. Congratulations to the whole team. A couple of questions. Anecdotally, it looks like ex of Quant and perhaps the large deal ramp up, the rest of the business perhaps grew at about 2% sequentially. Is that the right interpretation? And just angulating your opening remarks, Samir, is this a direction growth expected, say, in the next few quarters? And secondly, in terms of closure of large deals, Samir, are the timelines moderately better than what they were, say, in the previous 12 months? How are you reading this?

[Samir Dhir, executive]

Yes, Baidik, thanks, first of all. So the way to think about it is this. In our core business as well as acquisitions, we really have been working to create these large deals momentum. As you might have noted, I earlier mentioned about 40-plus large deals that we are chasing in pursuit right now. And in the last 1 year, we've closed close to about 16 large deals.

And that just is both organic side as well as the acquisition that we made. And it is becoming now more or less the muscle memory of Sonata to go create these deals and win those deals comprehensively against the competition. So yes, I think if you back out the large deals, the growth rate has been largely driven by the large deals in the course of the year, and that was our stated strategy that we -- in the year, which is rather muted, most of the competition has grown in single digit or low single digit, we have outperformed the market really on the back of the large deals. So I think that assessment is a fair assessment.

As far as the deal cycle is concerned. I think in the marketplace, it is quite unpredictable, Baidik. There's no real systemic pattern. So if you go back in time, I think we were seeing a good deal closure in Q1. We saw some slowdown in the beginning of Q2, but it picked back up in Q2 second half.

Then in Q3, the early part, it was pretty high. Then in Q3, later part and Q4 beginning part, it has been slow. It's been going a little bit like a sinusoidal curve, Baidik. So honestly, we don't see a trend, but the delays are about a couple of months, maybe 2.5 months. It's not indefinite delays, but you do see sometimes when you're ready to go, customers are delaying some of these deals by a month or 2. So that's been the general trend, and it happens once in a quarter here and there. I hope I answered the question, Baidik.

[Baidik Sarkar, analyst]

Yes. Is there anything you'd like to point out in the behavior, perhaps ramp up of our largest client, who's historically the largest client in high-tech? There has been some softness as we've got into this fiscal year. Any turnaround? What do your conversations [indiscernible]. And I'm sorry, in your opening remarks, did you say that we will continue to perhaps be acquisitive in the medium term?

[Samir Dhir, executive]

Yes. So let me cover both the questions. So I think from a high-tech industry, in general, we are beginning to see green shoots now. We're beginning to see the turnaround. If you noticed my comments, now we are seeing some softness in banking but the high-tech is back on the growth trajectory at this point in time, including the largest client.

I think in the second half of the year is much stronger growth compared to the first half. And at this point in time, we are in a ramp-up mode, so the revenue full quarter effect will probably be visible from the next quarter, which is end of Q4 or Q1. But yes, absolutely, the green shoots are visible, and we are in the ramp-up mode in the high tech side, including the largest client, Baidik.

As far as the acquisitions are concerned, if you recall, we've always maintained that we'll do acquisitions for the right reasons. We are not looking actively to acquire at this point in time. But if there is a right property that comes up, which has the right reasons, we'll not hesitate to make a decision, but our core motive continues to be to grow the business organically. And if something makes sense, along the way, we'll make those acquisitions, Baidik.

[Baidik Sarkar, analyst]

Just one last bookkeeping question, if I may. Jagan, in terms of margins, the last few quarters probably had an impact of ramp-up in MS Fabric and of course, monetization on that might be a few quarters away. As that perhaps comes into play in FY '25, is it fair to expect that operating margins will inch up? And I also understand that you had a few noncash charges in the P&L that were acquisition related. I reckon, they probably begin to come off this calendar year. Could you please quantify by how much and by when?

[Jagannathan Narasimhan, executive]

Okay. Baidik, on the operating margin trend, the large deals will have a benefit probably in -- the benefits may have -- may come in Q1 of next year. But as mentioned to you -- to all of you, we will continue to do our investments. In the medium term, we want to stick to the guidance of low 20s EBITDA margin without other income and ForEx.

We will continue to explore the opportunity for the growth. Hence, we need to continue to investment. That is my operating margin answer for that, to your question.

The second element is, yes, once the payout happens in this -- which is going to happen in the month of April, the next -- first quarter of next year, there will be a reduction in the interest cost, which is -- it is not a bank interest cost, an accounting interest, that amount will come down by roughly about half of it. So this is going to benefit -- will get a benefit because of that.

[Baidik Sarkar, analyst]

Okay. So our amortization run rate as we've reported will continue. There's no changes in that, right?

[Jagannathan Narasimhan, executive]

Amortization run rate will come down from first quarter of next year.

[Baidik Sarkar, analyst]

Sorry. So did you say both interest costs and amortization will come up by Q1 of '25?

[Jagannathan Narasimhan, executive]

There are 3 components in that. One is amortization. That is on all your intangibles, that should be an amortization that will continue.

[Operator]

We have our next question from the line of Mohit Jain from Anand Rathi.

[Mohit Jain, analyst]

First is a follow-up. So you are saying high tech growth, we should expect to continue in Q4 as well. Is that understanding correct?

[Samir Dhir, executive]

Yes. So Mohit, let me characterize it a little bit more. So as you know, first half of the fiscal year was soft on high tech. But in the second half, Q3, we closed deals. And in Q4, we had a ramp up mode. So yes, in the second half compared to first half, is going to be sequentially growth half. But we'll see a full quarter impact of it going into Q1 because we are right now on a ramp-up mode in high tech.

[Mohit Jain, analyst]

Okay. So that's good. The second was on BFSI. We saw this decline during the quarter. Now, is that something where, say, ramp-downs or project completions are behind that? Or should we expect that to continue in Q4 as well?

[Samir Dhir, executive]

I think from the current visibility, the news that we knew has been absorbed in the current run rate. But banking is soft at this point in time. We don't expect any further impact in the current quarter, but it's a dynamic environment, Mohit. We'll continue to monitor it closely.

[Mohit Jain, analyst]

Right. And as a follow-up, like the top 10 client revenue movement that we are seeing, is that -- the reasons are same like because of the BFSI and high tech, the same clients are showing up in top 10...

[Samir Dhir, executive]

Yes. I think the top 10 by and large continues to be the same. We are ramping up on a few clients, which will probably enter into the top 10, I would say, in a couple of quarters. There are some new clients that we have -- if you see my earlier comments, we mentioned there are some Fortune 20 companies, Fortune 100 companies that we recently acquired and they're in a ramp-up mode. So they will get fully ramped up by Q1 or early Q2. So they will break into our top 10, maybe 2 to 3 quarters from now.

[Mohit Jain, analyst]

So broadly, we are looking at similar kind of a growth outlook for next quarter, but then we are expecting some ramp-ups to happen in Q1 next year?

[Samir Dhir, executive]

Yes. So I think overall, the growth momentum is solid, but there is, like I said earlier, this is a seasonally soft quarter for Quant. While the Quant overall will do well in the calendar year, they run calendar year. But this is -- the current quarter is a seasonally soft quarter for Quant, but the rest of the business will be on the same trajectory. But for Quant alone, this will be a soft quarter, while the overall year will be fine.

[Mohit Jain, analyst]

Right. And sir, last, this is related to your opening remark. Did you say there is some delayed large deal ramp-ups or did you say large ramp-ups are on time for us?

[Samir Dhir, executive]

Seasoning delays. So deals that we are winning there are -- which were supposed to close in December are now getting closed in end of January. So we've seen [indiscernible] 45 days to 60 days, the same delays in some of the deals.

[Mohit Jain, analyst]

That is from TCV -- from pipeline to TCV or from TCV to revenue?

[Samir Dhir, executive]

Pipeline to TCV.

[Operator]

We have our next question from the line of Mihir Manohar from Carnelian Asset Management.

[Mihir Manohar, analyst]

Congratulations on good set of numbers. Quite wonderful numbers in this environment. Sir, largely, I wanted to understand on the TMT vertical. I mean you made a commentary that the ramp-ups are expected to continue and the 4Q and coming quarters will also be strong. Just wanted to understand what is driving the growth exactly over this -- over the large client, that would be helpful?

My second question was on the large retail deal. I mean we had $160 million deal, which was there last year. We were expecting a ramp-up to happen in 3Q. So what is the update over there? Because the retail number didn't move this quarter. So just wanted to get an understanding around that.

And the third question was around the cash outflow. So for the acquired entities, that has both Quant as well as the other company. I mean, when is the cash outflow going to happen? And should one consider any further increase in provisioning from here on? Or should one not consider that?

[Samir Dhir, executive]

Sure, Manohar. I'll take the first 2. I'll request Jagan to take the third one. So on the TMT side, really, it is a manifestation of the investments we're making in AI. I think a lot of turnaround we have seen in the TMT side is because of our investments in AI and data.

So the ramp-up that we're doing is essentially to leverage GenAI and AI capabilities for these high tech customers, including our largest high tech customer. So that's really helping us with the investment strategy that we outlined 2 to 3 quarters back is paying us dividend, and this business continues to ramp up from data and AI perspective, both. So that's really where the TMT question was, Manohar.

On the retail deal that we announced about a year back. Manohar, let me just give you a perspective on that. If you recall in Q1, we said we are in a ramp-up mode. Our Q1 margins in the current fiscal year were dropped because we ramped up fully, but the full revenue didn't come. In Q2, we fully ramped up the deal and some margin picked back up again because the staffing was done in Q1 and the revenue started picking up in Q2.

So that large deal, at this point in time, is fully ramped up and it's in the numbers. So in Q3, it was in a steady state. Of course, there will be some incremental revenue on that deal, but by and large, the deal is fully ramped up at this point in time.

The third question, I request, Jagan, to take.

[Jagannathan Narasimhan, executive]

Yes. Can you repeat the third question, please?

[Samir Dhir, executive]

Cash flow, is it fully absorbed.

[Jagannathan Narasimhan, executive]

Yes, the cash outflow for the acquired entities, that will happen in April of this year and then July of this coming year and same way in the April of 2025 and the July of 2025 for Quant. Encore will also be closed, and it will happen somewhere in July of coming years.

[Samir Dhir, executive]

The provision is fully done.

[Jagannathan Narasimhan, executive]

Provisions are all fully done. This is all done, completed, everything is done.

[Mihir Manohar, analyst]

Okay. So even if the performance, let say, goes up from here, there will be no further provision which will happen?

[Jagannathan Narasimhan, executive]

No further provision is required. We have considered all the performance and then made -- once for all, we have done for everything.

[Mihir Manohar, analyst]

Understood. Sure. And just a clarification, sir. You also made a comment that the payback period for Quant has gone half versus what you were estimating earlier. So is this after considering the increased payout or is it before that?

[Jagannathan Narasimhan, executive]

Yes. Yes. Yes. After considering the increased payout.

[Operator]

We have our next question from the line of Mayank Babla from Enam AMC.

[Mayank Babla, analyst]

My first question is towards Jagan, sir. Sir, in the beginning of the call, you had mentioned that the target for Quant was around 60% growth in CY '23 and 36% growth in CY '24, but it ended up -- the expectations are much better than what you had earlier targeted. So for CY '24, if I'm not mistaken, you said the target is 64% revenue growth?

[Jagannathan Narasimhan, executive]

Yes. CY '25 also, they were expect -- '24 also, they were expected to -- target was 36% growth, but the estimate of achievement is going to be 65%.

[Mayank Babla, analyst]

Okay. And in terms of EBITDA?

[Jagannathan Narasimhan, executive]

In terms of EBITDA, the target was supposed to be 33 percentage, but the expectation is 45 percentage achievement.

[Mayank Babla, analyst]

Got it, sir. And could you please give us the contribution of Quant so far in 9 months FY '24?

[Jagannathan Narasimhan, executive]

The contribution from Quant, right, you are expected?

[Mayank Babla, analyst]

Yes, yes.

[Jagannathan Narasimhan, executive]

That is actually completely integrated, Mayank. So we have a lot of synergy elements inside this. So we have not disclosed it separately.

[Mayank Babla, analyst]

Sure, sir. And my second question is to Mr. Samir. Sir, you earlier mentioned that the Fortune 20, Fortune 22 and Fortune 150 clients that are there in your kitty, they are expected to ramp up by Q1 of FY '25. So how would this -- and they will be added to the top 10 clients. So how will this change the client pyramid in terms of $3 million to $5 million and $5 million-plus clients, please?

[Samir Dhir, executive]

Yes. So Mayank, I think there are 2, 3 parts. So these clients that we are now winning will gradually ramp up, and like I said, in Q1, Q2 of next year, they will be fully ramped up for the business that we have won. And we're, of course, going to incrementally win business from here on because there's a pipeline behind these clients as well.

So our long-term goal is to have the top 10 contribute in low 50 percentage of our overall revenue. Today, that number is about 56% or 57%, Mayank. We think it will be about 52%, 53% even in 3 years out as we move forward. Now the name of the client will change because we are bringing in high-quality logos. But the contribution of the top 10 will be in the 52%, 53% range even in a couple of years out.

[Operator]

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

[Vipul Shah, analyst]

Congratulations for a very good set of numbers. So Jagan sir, would you repeat your comments regarding interest and depreciation for the coming years? I could not understand what will be the interest and amortization for the next 2 years?

[Jagannathan Narasimhan, executive]

Yes. We have explained this amortization and interest in our earlier slides also. We have given the details of it. What is that is there are 3 components were there. One is the bank loan interest amount, which is payable to the bank there. The second is because we have an earn-out payment for next 2 years, as per the accounting standard, you have to discount it and bring it to the percent value. The difference between present value and amount what you pay is accounted as an interest cost. .

The third element is amortization of intangible assets. So the amortization of intangible assets will continue to be there for 7 to 10 years -- next 7 to 10 years because of the -- that's how the life of the asset is. The interest component to the bank will continue, but interest on, which is the accounting entry for the payout -- this later payout, that portion will come down by half after the first year payout -- what we are going to do in the month of -- in April and July, once it is completed, the interest amortization amount will come down.

So that's what I said, at least it will come down by half. The detailed information of how much is amount, all this things, we have given in the presentation last quarter also. The details are available there.

[Operator]

We have our next question from the line of Sanjaya Satapathy from Ampersand.

[Sanjaya Satapathy, analyst]

Congratulations on putting 3.5% kind of growth, which is pretty commendable considering the circumstance. Sir, can you just tell me again that the margin decline in the international business on a sequential basis? Any -- what was the reason for that, sir?

[Jagannathan Narasimhan, executive]

This is a quarterly small changes. Last time, we had some benefits flowing through the utilization and the scaling up in the large deal. Samir was mentioning that last year that last quarter, the deal largely what we won in March, it started taking off in the last quarter. Hence, we got a benefit of that. .

It is -- that adjustment has come down in this quarter. Hence, the margin looks like it has dropped by 50, 60 basis points. What we have also mentioned is in the medium term, we will continue to focus to achieve the EBITDA without other income and ForEx at low 20s, low 20s is between 20 to 22, we will continue to achieve in the medium term. but we still are doing well. And compared to last quarter, there was one -- some benefit because of the large deal actually taking off last quarter.

[Sanjaya Satapathy, analyst]

Understood. And sir, my second question is that, one just clarification. You mentioned that this Quant business is slow in this quarter. You were talking about Q4 or Q3?

[Jagannathan Narasimhan, executive]

Q4, Q4.

[Sanjaya Satapathy, analyst]

Okay. Okay. So while Quant business will be slow because of your ramp-up in your this high tech vertical, you were confident of sustaining this kind of growth is what the guidance is. Is that correct, sir?

[Jagannathan Narasimhan, executive]

Yes, your understanding is right.

[Sanjaya Satapathy, analyst]

Okay. And sir, the last thing is that the payout -- the fair value changes that we have made. So essentially, you have given part of the benefit of achieving better growth in your acquisitions back to the guys who sold it to you. And you're saying that still the return, the payback has improved even after making this additional provision?

[Jagannathan Narasimhan, executive]

Payback period has come down by half. The EBITDA to the fair value of that was almost like 10 to 11 when we acquired. It has come down to 6 and the payback period has also come down to half.

[Sanjaya Satapathy, analyst]

Okay. So currently, it is 6x EBITDA?

[Jagannathan Narasimhan, executive]

Correct.

[Sanjaya Satapathy, analyst]

Understood. And sir, as far as the payments are concerned, you'll continue to do that through your bank loans, etc. There is -- you still have not received the permission to use your cash reserve out here to make the payment for the acquisition?

[Jagannathan Narasimhan, executive]

Yes. But as mentioned to all of you during the acquisition, due to some operational procedural RBI issue reasons, we are not able to utilize our money, which is there in India majorly. So we have borrowed some money in U.S. So for that temporary purposes of this rollover, we may take a short-term loan in U.S. for the acquisition. But in the long -- in the medium term, once the RBI issue is fully resolved, we will be able to come out of that.

[Sanjaya Satapathy, analyst]

And very last question if at all -- if you can answer. So the Q3, was there any kind of furloughs or any such things because of the number of working days or anything, which were there and which will not be there in quarter 4? And when you're talking about that everything will fire basically in quarter 1. So are you definitely looking at a much better quarter 1 of FY '25, it seems?

[Samir Dhir, executive]

So the furloughs were not any significant numbers, Sanjay. I think the -- in our business, we don't see that much, candidly. However, having said that, last quarter, we did see distinct delays in some of the deals. So we did carry some people in the bench. But overall, our utilization has still moved in the right direction. And we believe that the momentum that we have not generated in TMT, we're still in ramp-up mode. And by March time, we should be fully ramp-up, and hence, we'll see an uptick on those numbers in Q1 quarter fully loaded.

[Operator]

We have our next question from the line of Abhishek Shindadkar from InCred Capital.

[Abhishek Shindadkar, analyst]

Congrats on a good quarter, sir. Just a clarification regarding the comments made earlier by Samir. You mentioned about green shoots in the high tech vertical and also for the large client. So just wanted to clarify, was there any challenge, especially that we are calling out as a green shoot because I remember in the last quarter, we had mentioned that because of the fiscal year-end for our large client, there was a delay in terms of the bookings and conversion?

[Samir Dhir, executive]

Yes. So Abhishek, first of all, thank you for complimenting us. I think in summary, we did see decision delays. And in Q2, we did not book the order book to our satisfaction in the TMT vertical. But going into Q3, we started closing the deals as per the norm that was earlier and the large client specifically started seeing some momentum. And what is heartening is that we are winning the new work in the AI space and that's what we are ramping up right now, which I alluded to earlier.

So it wasn't like a pause, but the decision delays were holding us up. We were in holding pattern for about, I would say, 1.5 quarters-or-so. That's behind us, and now we're in a ramp-up mode.

[Abhishek Shindadkar, analyst]

Perfect. That's helpful. Jagan, sir, if you can just clarify what you said about the payment challenges and because of which you are raising debt, that would be helpful?

[Jagannathan Narasimhan, executive]

You're asking about payment challenges, correct?

[Abhishek Shindadkar, analyst]

Yes.

[Jagannathan Narasimhan, executive]

Okay. There is -- as mentioned to all of you during the acquisition, we have some procedural RBI issue. So we are not able to remit the money what we have in the parent to the subsidiary for the acquisition. So we have borrowed money during the acquisition, and we may require to borrow money a little bit more for a project in short-term reasons. However, the net debt will be a positive. We'll have money in the parent book, and so that's what I was explaining to you.

Once the RBI issue is addressed and solved, we will be able to remit money from the parent to the subsidiary and the loans can be closed.

[Operator]

We have our next question from the line of Devang Bhatt from IDBI Capital.

[Devang Bhatt, analyst]

Congratulations on a good set of numbers. Just one bookkeeping question. Since you have increased your payout, so last year, your unwinding -- last quarter, your unwinding of interest was INR 11 crores. So now, since your payout has increased, what will be your increased unwinding of interest?

[Jagannathan Narasimhan, executive]

There is no increase in the unwinding of interest, Devang, because we have now taken route that has gone through the P&L fully. So there is no increase in that. After the amount is paid out in the quarter 1 in April and July of the coming year, the unwinding of interest will come down almost like by half, half.

[Operator]

We have our next question from the line of [ Tushar ] from InCred Capital.

[Unknown Analyst]

This question is regarding -- for Jagan, sir. So Jagan, sir, last year, we had a wage hike in Q4 and 1Q of FY '24. So any color regarding the wage hike for this fiscal or in this calendar year?

[Jagannathan Narasimhan, executive]

Yes. We are still evaluating [ Tushar ]. We are still evaluating and we will do whatever industry norm, definitely, we will consider and then take a measure in that direction. But we are still in the process of evaluating. And also, we are now trying to bring in a performance management system, which is industry -- benchmark for the industry. We are in the process of doing. Once the performance management is launched and completed, then we may be able to make it the -- consider the salary increment for the people. At present, we are still on the -- in process now.

[Unknown Analyst]

Okay. My next question is regarding the business in the European geography. Any color on that would be helpful?

[Jagannathan Narasimhan, executive]

The European customer?

[Unknown Analyst]

No, no. European geography revenue, we have seen weakness for the last 2 to 3 quarters. So any color on that will be helpful?

[Jagannathan Narasimhan, executive]

Nothing specific on that, [ Tushar ]. One of our leading customers, a couple of projects got over, this is an operation for a couple of quarters. Otherwise, the European geographies will start recovering from probably next quarter.

[Operator]

[Operator Instructions]

We'll take our next question from the line of [indiscernible], an individual investor.

[Unknown Attendee]

I have 2 questions. One is on Fabric and second is on our aspiration to have 20% of revenue coming from AI. So firstly, on Fabric, right? I mean I was reading the transcript of Microsoft and they are quite bullish, right? I mean they mentioned that with the one in terms of data store on Fabric lake, there is a 46% increase Y-o-Y. And in the past conference call, we have also mentioned that we have been working with them to help them build a product, right, within Fabric tool and test the product and so on and so forth.

So I just wanted to understand, as Microsoft has now made Fabric available, how will the ramp-up in revenue take place over the next few quarters? And which are some of the other products which we are working on with Microsoft, especially on this whole Microsoft focusing a lot on copilot and that being one of the key offerings when it comes to AI across their product suite. Do we have any play when it comes to copilot or any other product that you want to specifically call out on?

[Samir Dhir, executive]

Yes. [indiscernible], the question, I think, let us pick the questions one by one. So on the Fabric side, we were deep in Microsoft on the engineering side and then testing their product in Sonata as a testware as well, about 1 year and 1.5 years back. So we really had an early mover advantage, and that's what we're capitalizing.

They've just launched the product in November. Their pipeline from a scale perspective is just beginning to build up because right when they announced the product in November end, then there was Christmas period in January that started.

However, having said that, we have built ourselves over $50 million worth of pipeline, and that's largely coming from the new logos that we are able to get in because it's a very differentiated offering and most of these larger clients are very interested to understand a fabric offering from our team specifically. So early days, candidly, to give a forward-looking view on this.

But we know, as Microsoft will scale, we will absolutely win the [ biz ] with them to maximize the revenue for Sonata. We'll continue to provide an update to all of you in every quarter as how the pipeline build is happening. And if you look at the commentary, I think about a quarter back, we probably had about 25 to 30 clients, that number has gone up to about 50.

But the scale is still in front of us. The beginning -- we're still in the process of building pipeline. Of course, we have had about 7 or 8 customers which have signed up and we started the work, but the POC work itself lasts about 8 to 10 weeks. So I think meaningful numbers will start to trickle into this in Q2, Q3 onwards of next fiscal year. That's on the first part of your question.

The second part of your question on copilot. The short answer is absolutely, yes. The green shoots that I talked about in TMT has largely come from our work in data and AI and copilot is an integral part of that. And all the work on data and AI one side, but even in traditional work on Dynamic side, whether it F&O or CE, we continue to leverage the power of copilot for our existing and new deals that we are winning on the Dynamic side as well.

As far as the new products that we're working with, we can't talk about it much because those are confidential products, but specifically the 2 that we can talk about, we'll discuss -- share the details with you.

[Unknown Attendee]

Great. That's very encouraging. The second question is on AI, right? And as you mentioned that overall, you won 24%, 25% of revenue from AI in 3 years' time. And one of the offering there is Harmoni.AI, right? And which is where we have built a bunch of services, RPA services, integration services, so on and so forth around the LLMs. And so just wanted to understand that -- and one of the unique selling points of Harmoni.AI is responsible AI or for that matter, privacy of customers' data.

So I mean, is that the only use case which we have in AI? And can you help us understand which are some of the other things which are like an overlay over the existing LLMs? And how do we ensure that some of these offerings are not in built in any of these LLM in the future, right, so that our offerings stay relevant for the market?

[Samir Dhir, executive]

Yes. So if you go back to the comments I made earlier, [indiscernible], I think there were 3 different dimensions of AI that I talked about earlier, just maybe quickly recap for you. The first was to drive efficiencies for our clients. And the example I quoted there was to use intelligent content generation with workflows to reduce manual effort. This is for automating a lot of manual effort that customers end up doing. The second dimension of this is to drive modernized sales and consumer experience.

And the example there is that where we use AI to glean information from [indiscernible] for a contact center implementation and then provided information so that the cross-sell and upsell can happen. And the third is to really generate newer business models for our customers, because now with GenAI specifically, you can generate new data from existing data.

So as an example, for one of the media clients, we are in conversation with, they can generate new books from existing books that they have. So those are some interesting use cases coming out of it, and we're leveraging the power of our Harmoni.AI using that.

Now our differentiation is not in building LLM, as we have talked about earlier. Our differentiation is to really build the wrapper services around LLMs, which continue to provide a responsible first framework from a customer data privacy standpoint, on one end.

Second, from a consumption and compute reduction, so that it is environment-friendly. Because, as you know, AI services can be quite heavy on the compute side, and hence, add to cost. That's the second side.

And then the third is really bring in industry flavored solutions from an AI point of view, whether it's a health care AI or banking AI or contact center AI, to really bring in domain specific flavor to those, is really what we are building out, and that's not a native LLM capability. That's the wrapper services, and that's why we're differentiating, [indiscernible].

[Unknown Attendee]

Sure. So just an add-on to it, right? I mean, in future, can some of these services we build in the core LLM and how do we ensure that our product then stays relevant even if that happens in the future?

[Samir Dhir, executive]

Well, I'll be guessing if I can give you an answer on the future, but I can tell you we'll have to continue to innovate. We think we have about a year ahead of the competition. We'll have, of course, wanted to push ourselves to continue to innovate. But some of these services might move to a different layer, which I can't predict, honestly. But right now, we believe over a year advantage over the competition. That's why we are winning in the TMT sector through the green shoot I talked about earlier, [indiscernible].

[Unknown Attendee]

Sure, sure. So just -- I mean what I was alluding to is that maybe a similar sort of a transition happened during this whole cloud from on-premise to cloud as well, right? Many of the services were in build in the package with some of the hyperscalers provided. So that's where I was coming from. But I take your answer that we need to continue to innovate. All the best.

[Samir Dhir, executive]

Thank you.

[Operator]

As there are no further questions, I now hand the conference over to management for closing comments. Over to you, sir.

[Samir Dhir, executive]

Thank you, operator. I want to just use this opportunity once again for your support and time for Sonata. We continue to be optimistic about our business. Like we've always said, our aspiration is to be the top quartile growth company. Of course, there will be some seasonal variations like we talked about in Quant coming up in this quarter. But in general, we are very optimistic about the future -- and if you can see the last 4 or 5 or 6 quarters now, we'll continue to hit in the top quarterly performance, both on the top line and what is endearing to us is that we are also maintaining our EBITDA line, which is also industry-leading.

So both on top and bottom line, we continue to be in the top quartile, and we're very proud of the achievements of our teams globally. So I use this opportunity to thank our team members globally as well for their outstanding work that they continue to do for us. And thank you to all of you.

[Jagannathan Narasimhan, executive]

Thank you, all. Thank you.

[Operator]

On behalf of Sonata Software Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.