Ladies and gentlemen, good day and welcome to the Persistent Systems earnings conference call for the third quarter of FY 2020, ending December 31, 2019. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded.
We have with us today on the call Dr. Anand Deshpande, Chairman and Managing Director; Mr. Christopher O'Connor, Executive Director and Chief Executive Officer; Mr. Sandeep Kalra, Executive Director and President, Technology Services; Mr. Sunil Sapre, Executive Director and Chief Financial Officer; Mr. Mukesh Agarwal, Chief Planning Officer; and Mr. Amit Atre, Company Secretary. I would now like to hand the conference over to Mr. Christopher O'Connor. Thank you. Over to you, sir.
Thank you and good evening. Welcome. I'll open up with a brief description. We'll enjoy talking about our business units. Sunil, our CFO, will follow up, and then we'll proceed on with general questions. Just to open up. Revenue, Q3 revenue was $129.43 million. That's a 3.1% growth quarter-on-quarter, 7.1% growth year-on-year. Margins, EBITDA stands at 13.3%, while EBIT stands at 8.7%, PAT is at 9.5%. We enjoyed and saw pure organic growth across the board this quarter. We added 53 new accounts to Persistent customer list, and it was highlighted by multiple marquee wins. A leading private bank in Asia Pacific employed us and enjoyed us to help build a digital bank with them. Another leading bank in the U.S. brought us in for our expertise around AI and machine learning to create the chatbot experience and personalization.
The largest aircraft manufacturer in the world enjoyed our business around industrial sector and added Persistent Systems to its list of certified vendors. A global pharma company created a roadmap for how they're going to enjoy rationalizing all their applications and moving to a digital persona and how they see the world and their future structures as an IT organization. The drop in our largest customer's revenue impacted our EBIT. We're cognizant of it, and we have a focused plan to get it back to where it was. We likewise had expense due to important events such as attending conferences like Dreamforce, which is the largest Salesforce conference in the world, and AWS experienced that, which is a similar extremely large conference for the Amazon ecosystem.
We invested more heavily in those conferences than we have in the past, that's a single large quarterly expense as well, which is yielding results in terms of opportunity pipeline growth, and conversion as we continue to expand organically the Persistent logo out into new accounts. From the unit overview, in the technology services unit, it was 6.4% quarter-on-quarter. Sandeep Kalra is with us and will provide details on the growth of that. The Alliance business had a degrowth of 2%. I'll now cover the Alliance business and talk in detail about that before turning it over to Sandeep. We had a leadership change in our Alliance Unit. We had to part ways with Mark Simpson, who was the President of the Alliance Unit. Jiani Zhang assumed the role of Acting President of the Alliance business.
Jiani joined Persistent in 2019 as our general manager of industrial sector. Prior to joining Persistent, Jiani worked in roles of engineering, software product management, and marketing at both AMD and later IBM. Jiani's formal education includes an MBA from UCLA and a Bachelor of Science from the University of California in electrical engineering and computer science. Jiani couldn't join this call today because of time zone differences. We'll include her in future calls. The revenue of our largest client and its declines surprised us. Our strategy to balance the variation in the largest client revenue is yielding results. We continue, as we've talked about in previous quarters, to grow our industrial sector business overall, growing that business 19% quarter-on-quarter.
Industrial sector revenue is approximately a quarter of the size of our total Alliance Unit revenue. Making a meaningful impact against shifts in that Alliance Unit revenue is still in front of us while we continue to enjoy growth in industrial sector. We continue to see good DSO flow in industrial sector and in our resell business associated with this, adding 23 new logos to the Persistent books and new clients and new registration of Persistent as a certified vendor to be able to have full access to those clients in terms of our business and our capabilities. We expanded in other areas at our largest client.
We continue to find that our largest client shift and their enjoyment of new software technologies around Red Hat opportunities for us to grow. We had some significant areas of advancement at Persistent overall. We launched our digital bank solution offering in conjunction with our major partners. This is a great assistant to banks and credit unions to fast-track their customer onboarding journey.
It's a pure cloud-based offering leveraging our partners such as Mambu, AWS, and others to help build a digital solution that truly is a bank in a box or a credit union in a box, depending on a customer's needs. We've built a healthy pipeline here led by events with some of our clients in the U.K. and the U.S. We continue to enjoy growth there. Our digital banking offering is now approved by Amazon and listed in the AWS Financial Services solution site.
We are one of only five vendors that has an approved AWS financial services solution for sale and approved by Amazon in a very rare occurrence of being a small set of vendors with a leading solution in a financial sector that can have many people in it. We continue to build new offerings. We built new offerings in industrial sector, healthcare, and data. We signed up new partnerships across the category, and those are now yielding lift in the marketplace, both from a solutions point of view as well as a reference point of view. We expanded our presence at partner events. We were a groundbreaker sponsor at Dreamforce, our largest Salesforce event, or their largest Salesforce event in the world. We showcased Persistent's leading-edge industry solutions and capabilities.
We strengthened our relationships with both Salesforce and MuleSoft across various industry verticals, and we offered thought leadership through speaking sessions and customer appreciation events. We brought both our North American teams and our European team, our newly announced European Salesforce practice, to those events to help enjoy the customer excitement and the growth that Salesforce has brought by their journey. With our new chief marketing officer, we were for the first time putting programmatic lead qualification and opportunity conversion with rigorous pipeline progression procedures behind these conferences.
Likewise, in our attendance at the Amazon re:Invent conference, we showcased some of the Mist Systems capabilities in Amazon cloud. Again, enjoyed some of our largest pipeline growth that we've seen as a company, generating significant number of leads from the event throughout all of Q3. Overall, we are upbeat on the market opportunity. We continue to have relentless execution. We have focus on our bottom and our top line. It is very enjoyable to take you through these results. With that, I'm going to hand over to Sandeep, our President of the Technology Services Unit, to provide an update on that line of business. Sandeep?
Thanks, Chris. Good evening, good morning to you all. Technology Services Unit had a strong Q3 with a 6.4% sequential growth, which translates into 15.4% Y-on-Y growth, which was on the back of 3.5% growth on Q2. In Q3, we saw a strong growth across all verticals. The Banking Financial Services came in at 6.7%. ISV and emerging verticals are 6.4%.
Healthcare and life sciences are 7.9%. Similarly, we saw a strong growth in our service line, with data and Salesforce coming in at 9.3% and 7.9% Q-on-Q respectively. Our continued progress in Q3 shows the validation of our new sales strategy, with effective mining happening across our top 20 customers. If you look at our top 10 accounts, they grew by 5.3% Q-on-Q in Q3. The top 20 came in at 6.9% Q-on-Q growth. To give you some color on the deals won.
In BFSI, for a leading private bank in Asia Pacific, we were chosen as a primary systems integrator, helping them launch micro loans, savings, and insurance products via mobile apps. For a leading bank in the U.S., which is a top five bank in the U.S., we were awarded a deal to work on chatbots, providing enhanced web experience in retail banking, and home lending applications. For a top general insurance provider in India, we were chosen to provide and normalize key business applications based on a low-code/no-code platform. In healthcare and life sciences, we worked with a large pharma company, one of the top five globally, on application portfolio optimization and a digital roadmap, helping them go over the next years onto much more digital, cloud-based native applications.
We were chosen by a leading HMO health plan for end-to-end ownership of engineering, testing, system administration, and so on for their HMO plans. On the ISV and emerging vertical side, we were chosen by an AI-led education tech startup to build an AI-powered learning and score improvement plan. Overall, our pipeline looks healthy in the coming quarter, and so is the demand environment for our services. With this, I hand over to Sunil Sapre, our CFO.
Yeah. Hi, good evening and good morning to everyone, and wish you a very happy New Year as we talk first time in 2020. Thank you, Chris and Sandeep. They have talked about the business updates. Now I'll take you through the financial information for the quarter. At the outset, I would just like to explain to you that with respect to the financials, where we normally have a full audit done for the quarter, this time the quarter's accounts have been subjected to limited review by the statutory auditor. We had intimated the stock exchanges about the reason for the same being that we were transitioning to a new ERP, and some of the normal audit processes would have required a little longer time. We will be back to the normal cycle of full audit in scope.
On the revenue side, you have heard about $129.43 million revenues, which is a growth of 3.1% quarter-on-quarter and 7.1% year-on-year. Non-GAAP terms, revenue was $92.7 million, growth of 4.3% quarter-on-quarter and 6.8% year-on-year. On the composition of revenue, linear revenue grew at 4.9% quarter-on-quarter, while IP-led revenue declined by 3%. In terms of linear revenue, the increase in volume was 5.7%, while the billing rate declined by 0.8%. The offshore linear revenue grew by 5.1%, comprised of growth in volume by 5.5% and decrease in billing rate by 0.4%. Onsite linear revenue grew by 4.5%, constituted by increase in volume by 7% and decline in billing rate by 2.3%.
As Chris mentioned, IP-led revenue came in lower with a dip of 3% quarter-over-quarter, and largely attributed to lower than expected royalty revenue, which resulted in drop of gross margin by 140 basis points to 33.3% from 34.7% last quarter. As Sandeep talked about, TSE business had a very healthy growth across all the business lines. What we had in terms of S&A and G&A expenses, you will notice that both these items in absolute terms are more or less flat. S&A expenses actually came down a little bit because you will recall last quarter we had talked about certain one-time expenses in terms of carrying some overlap of sales people, plus some of the expenses we incurred on the branding last quarter. As a percentage of revenue, S&A expenses were 10.4% of revenue as against 11% of revenue last quarter.
G&A expenses in absolute terms were flat and as percentage of revenue came in at 9.1% as against 9.6% last quarter. We have provided INR 50 million towards IL&FS exposure, and the cumulative provisions stands at 382.5 million against an exposure of INR 430 million. The total SG&A expenses came in at 19.9% of revenue as compared to 21% last quarter. With the above, the EBITDA margin came in at 13.4% as against 13.8% in the last quarter. Eventually you will notice that the effect of lower royalty revenue at gross margin level got partially absorbed by lower SG&A expenses, and the reduction in EBITDA margin was to that extent mitigated. Depreciation and amortization was nearly at the same level in absolute terms and came at 4.7% of revenue as against 4.8% in the previous quarter.
The EBIT was INR 806 million at 8.7% of revenue as against 8.9% in the preceding quarter. On the treasury income, it was INR 232 million versus INR 226 million in the previous quarter. Foreign exchange gain was INR 102 million as compared to INR 138 million in the previous quarter. With this, profit before tax was INR 1,140 million at a margin of 12.4% as against 13.1% in the previous quarter. The effective tax rate for the quarter was 22.9% as compared to 25.5% in the previous quarter. The ETR was lower on account of R&D tax credits in certain overseas locations. The ETR on annual basis is expected to be in the range of 24%-25%.
As mentioned to you in the last call, we have decided to opt for the new corporate tax regime, which allows us to take the benefit of the reduction in corporate taxes. PAT for the quarter was INR 879 million at 9.5% as against 9.7% in the previous quarter. On the CapEx side, the operational CapEx for the quarter was INR 62 million. The cash and cash equivalents amounted to INR 1,3778 million at the end of December as compared to INR 1,261 million at the end of September.
The operational cash flow for the quarter was INR 1,019 million. The order contracts outstanding as on 31st December was $150 million at an average rate of 73.24 per dollar. As you would have seen from the press release, the board approved interim dividend of INR 9 per share. In the last year, we had an interim dividend of INR eight per share. With this, I thank everyone, and I hand it back to Chris.
Thank you. At this point in time, we'll move to questions and answers, and we'll both be looking online as well as taking questions. Let me ask the operator for assistance as well as we're starting to look inside of our team.
Sure. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask questions may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking questions. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, please press star and one. The first question is from the line of Sandeep Agarwal from Edelweiss. Please go ahead.
Hi, this is Abhishek Pathak here from Edelweiss. Just one question from my side. Could the management just walk us through their strategy in terms of which segments you are targeting specifically because IP-led businesses have been a little weak with the exception of last quarter. Is the new sales strategy specifically focused on enterprise and ISV and how should we look at the IP-led business going forward? Should we model in a flattish trajectory from here on or do you see some recovery coming there as well? Thank you.
Thank you. I'll handle that question. The business with our largest client is multifaceted. We have several components inside of it, and when we bring that number together, it's a combination of work that we do for them, which is enjoying new contracts and new work as they create their own shift with their technology to the cloud provider or the cloud capability with Red Hat. We see opportunity, we see the opportunity for growth, and we have a healthy pipeline with our largest client in terms of those types of opportunity. This is work we do for them, and we do that across dozens of products. As they shift to this cloud technology, we're one of the primary providers. Second, we also have a royalty business with our largest client.
The royalty business is where we're reliant on their cyclical cycles or their cycles, and that royalty business can go up and down in any given quarter based on really the dynamics of the IBM global sales team and the IBM global partners that move the product. In that is the difference or the surprise that we had this quarter. The third component that we do with our largest client is we actually go to market. We take their products to market. We sell them as well as we sell products of other vendors such as Systems in the same sales team. We are category leaders in industrial sector there, and we sell the IBM product as well as we sell others. That area enjoyed nearly 20% growth, and it's something that we've been growing quarter-on-quarter as a deliberate offset strategy to the royalty business.
While we continue to do work for IBM, we recognize that the royalty business has, I'll call it its cycles and ups and downs. To offset that, we have been embarked on, for about 18 months, a strategy to build out the industrial sector space. We're enjoying healthy double-digit growth there. It'll take several more quarters for that to make a significant dent around the size of our royalty business. There is a strategy we are executing. We've brought on board more sales personnel in North America to complement the sales team we have in Europe. We suspect, by the pipeline, we will continue to enjoy healthy growth out of that capability. Multifaceted business and then balancing it out will require growing all the solutions.
Thanks. That's it.
Thank you. The next question is from the line of Madhu Babu from Centrum Broking. Please go ahead.
Yeah. Hi, sir. Congrats on the strong growth in the services business. Just on the BFSI, which has seen a strong growth. Could you talk about more on the deal pipeline? Is it that the clients which we already are there, we are able to go and mine them with the more cross-sell just on the pipeline and your views on that?
The BFSI pipeline is healthy across both existing customers and new customers. We are able to sell more service lines to the existing customers, grow the wallet share in both. In addition to that, as we talked about, we have our offerings in digital banking that are picking up steam. We have our AI/ML platform development, which is picking up steam, and our low-code, no-code platforms-based application development, where we are also seeing the newer customer pipeline. It's both, a combination of both.
We talked of trying to build annuity streams through managed services and also once we get into the customer. What are the changes in the delivery engine we would need to make on that initiative?
Sir, good question. If you look at our growth, some of the deals we talked about in the earlier quarters, the multi-million dollar deals, et cetera, that we announced, and we continue to have those. Those are NBT-based deals. If you look at it, some of our existing deals were like that, but more and more, we are investing in our managed services part as well. While we will do cutting-edge platform development, so we will not just do development, we'll also endeavor to put in managed services around that as we work with our customers, and that is where we are reinforcing the delivery teams wherever required. We are adequately having that capability in-house at this point in time as well.
Okay. Yeah. Thanks a lot, sir. All the best.
Thank you. Before we take the next question, a reminder to participants that you may press star and one to join the question queue. The next question is from the line of Deepesh Mehta from SBI Capital Markets. Please go ahead.
Yes. Thanks for the opportunity. Just a couple of questions. First, about the cash generation, if we look at nine-month cash generation, it seems to be weak. If you can provide some perspective on how one should look at cash generation improvement going forward. Second question about the vertical guides. BFSI you touched upon, if you can provide some outlook about how one should look vertical growth rate and if you can provide some perspective deal intake. If you can share us a number, how it has changed in last couple of quarters, and deal pipeline, how it is tracking for us. On the IBM top line side, how one should look trajectory of business stability returning there, and what is the traction we are seeing on reselling part? Thank you.
Cash generation, you want to come in first?
Yeah. Let me take the question on cash generation. If you look at the cash generation in the first half of the year, that was particularly very weak on the back of lower operational profit and couple of other items that we explained in the last quarter. Which was one relating to the fact that we had advanced payments to suppliers, and the other which was with respect to certain payments that had to be made, which affected the cash flow at an operational level. These are in the nature of certain incentives that the government has contested and which are disclosed as contingent liability at the moment. The other item that affected the cash flow to the extent that we had certain reversal of employee benefits.
These employee benefit reversals would have helped the PAT or the margin, but it will take a while for us to get back the excess contribution deposited with LIC where we manage the retirement liability. Coming to the cash flow for this quarter. The cash flow is better than the profit generation for the quarter, partly for the reason that the supplier payment would get adjusted when we move to the normal operational quarter, and that's no longer the reason. Having said that, there is an increase in the DSO from 64 days to 68 days. The reasons for that are partly the fact that being holiday season, we had increase in DSO by a couple of days because collections spilling over to January.
Partly because of the fact that couple of customers have increased the payment terms from 60 days to 90 days, impacting DSOs by about three days. That is what I would say. If you have any more details, I think once you look at what we have done is while the accounts are being subjected to limited review, we will be putting all the financials on the website and we can talk on that later. On the vertical side, if you look at it, we talked about the banking financial services already. On healthcare and life sciences, if you look at the split of the vertical, there is the pharma side of it, the payer and the provider side of it. Those are the three broad categorizations.
In the pharma/instrumentation space, we continue to be a very strong player, where we have pretty much the leading instrumentation companies in the pharma space as our customers for many, many years, and we continue to add those and we continue to mind those. The other side of it, if you look at the payer side of it, we have a pretty strong story on the Salesforce platform, where we enable the multiple parts of the patient engagement journey for a provider. In the payer side of the house, we've been working predominantly on building platforms. These can be AI, machine learning-based, cloud-native platforms for doing their in-house analytics or providing customer services and so on, so forth. We also see a lot of traction on the low-code, no-code platform on both the provider and the payer side.
On the ISV and emerging verticals, we are seeing traditionally our strength of CE/CLM play out well. We are working with them as they become more and more cloud-oriented. The last question that you had was on the deal pipeline. The deal pipeline continues to be healthy. Part of it is what is reflecting in the strong growth that we had in the services segment. We don't disclose the deal win values. With time, we'll look at that. Overall, our deal pipeline looks healthy. The market demand continues to be healthy. That's where, I hope I've answered your question. With that, I'll hand over to Chris for the IBM piece.
Yep. Abhi, and you asked about trajectory, and forward vision there. It'd be inappropriate to kind of give something that sounds like an exact forward trajectory. I think the right thing to say is, at this point in time, we don't see anything substantially different in the way that the work of our largest client takes place. As I mentioned, in adding to that top line, there's opportunities as they convert and their investment in Red Hat pays out and studies out, which seems to have very reasonable traction in the market by all indications. Not just IBM's, but our indications as well. We'll enjoy our position as being a significant supplier, provider in dozens of products that they have. We saw evidence of that this past quarter.
Likewise, in the work that we're doing to grow industrial sectors to be of significance in size, equal to BFSI and healthcare. We enjoyed healthy double-digit growth. It's just pushing a smaller number to be a bigger number. The last part is the royalty cycle, which has to do with the complexity of IBM sales. That is where we see some variance. We will be, with Jiani, introducing a set of capabilities or a set of interactions with IBM to get more accurate on that. That doesn't change our belief in the business or trajectory statements and our confidence in the investment that we're making around this. We will need to match cost to go along with that, and we are active in making sure that happens.
Sure. Lastly, about the reseller, the business which we added in last few quarters. If you can provide how that business is tracking for us.
Refiller is the industrial sector business. They're one and the same. That's the business that I mentioned grew at nearly 20%.
Thank you.
Thank you. Participants who wish to ask questions may press star and one on their touch-tone telephone. The next question is from the line of Madhu Babu from Centrum Broking. Please go ahead.
Yeah. Hi, sir. On the exit momentum, I'm assuming that quarter would be steady, so we would exit at a good rate for next year. Would that put us back to the 10% kind of organic growth on the overall revenue perspective and second on the margins, almost a 550 basis points year-over-year drop in margins. Obviously, the IP revenues have been weak this quarter, but trajectory on margins has been weak. Would we see the margins also swing back maybe from 1 Q FY 2021 as the growth leverage and all kicks in?
Yeah. On the margin trajectory, Madhu, basically the issue has been with respect to this quarter, the lower royalty revenue that came in. On the gross margin side, our idea is to get back to the trajectory of 35%+, which we were maintaining. A part of that is also attributed to the business portfolio that we run with the largest client and some of the work that we will do in that area to improve that profile.
On the SG&A side, most of the investments that have taken the front-loaded kind of a nature, which you saw last quarter with sales and marketing being at 11%, has now come down to 10.4%, and we will optimize there by virtue of the revenues going up. We're done with most of the additions to the sales team, the churn that made some of the overlap of costs remaining. With that, on the gross margin side, improvement of 1% to 1.5%, and on the SG&A side, optimization of about 1% to 1.5% is what is our target to get back the EBITDA margin to 15-plus level.
Exit revenue run rate.
On the revenue run rate.
Can you share how the momentum is going to play out with the kind of pipeline we are seeing?
I think it's little early at this juncture. We are just in the first month after the end of quarter, getting back with the updates from clients on their annual plans, we will come back to you as we get better clarity on that. The idea is, of course, we are seeing significant momentum on the services portfolio. We have to fix some things on the alliance with the largest unit, I mean largest client portfolio. In general, it is the idea is definitely to grow at three and half percent kind of run rate on a sustained basis.
If I may ask one more. On the enterprise side, obviously BFS and healthcare has been a forte for us. With the success we are seeing there now, any sub verticals in the newer areas are we trying to focus on investment? Any views on that?
I'll be part of this.
Essentially, if you look at it, so far our growth has come from these verticals. Underneath, we are seeing some good traction in travel transportation and so on, but are we there yet in terms of announcing that? Not yet. That is why we classified that as well as industrial as emerging verticals. Industrial and travel transportation, et cetera, would be things we will look to see how the trends emerge. Industrial definitely we are seeing more light. Hopefully with time, we will call out more verticals as they emerge.
Okay, sir. Thanks.
Next question.
Thank you. Before we take the next question, a reminder once again to participants that you may press star and one to join the question queue. The next question is from the line of Mayur Parke ria from Wealth Managers. Please go ahead.
Good evening, sir. Thank you for taking my questions. Sir, if I understand the commentary till now what you mentioned about this is particular to the alliance segment. In terms of the impact which has happened, it gives a picture that this is just not one quarter issue or it's not going to come back in the next quarter or in a shorter period of time.
Are we looking at a situation where the kind of work which we plan to do and not only on the top line and hence improvement on the bottom line, this is a little bit medium-term in nature in terms of three, four, five quarters or is it just the fact that we'll be able to get back some of the revenues and the margins in the next two quarters? I know it's not a quarterly understanding, but I just want to directionally, is it a little bit larger timeframe we are looking at to get back to that or is it a more near-term?
It's a great question. In the Alliance segment, we exercise three different primary business models. One is we sell to our largest client and that model is where we do work for them. The second is we have a royalty-oriented business that's composed of several products that add up to that royalty business. Third, we have the reseller business or the work that's been described as industrial sector. In terms of alignment, in the sell to IBM, we see lots of opportunity quarter on quarter. We remain very bullish in the fact that IBM has made this investment commitment to Red Hat, and we will play a part in that. We saw evidence of that last quarter, and the evidence looks strong as we look forward.
As well. In the reseller or industrial sector business, as I mentioned, that enjoyed 20% growth on the back of 20% before that, on the back of 20% before that. We continue to show healthy growth there, adding both volume of new clients, key clients, such as the world's largest aircraft manufacturer, which now has approved Persistent as a vendor as a part of its process, and flat out growth.
This is a healthy business that then we must expand, conscious of the bottom line, to bring more of all of Persistent into these clients and expand out our base, not just live off the reseller alone, and we're executing that strategy. That remains very bullish in our thoughts as well. That's two of the three members that we add up to the Alliance member that you see. The Alliance, however, then has a royalty component.
The royalty component is a very profitable component. It's a large component. It also has cyclical variance or unitized variance. We have mapped out historically all the data we have on each of the royalty components. We are not out of cycle with any of the components as we've seen in any previous year. However, it wasn't the growth that we were expecting. In that, we don't have a forward view that says there's going to be a significant long-term gap.
It is consistent with the previous quarters that we've had. The predictability is something we have to work on. Commensurate with that is obviously the expense culture that goes with that, and we have Jiani now keenly focused on getting us to a more managed average as we look forward. Our view remains consistent that this is a healthy place to be, filled with new opportunity, as one of our largest clients has us in a primary position for much of the work that they do.
Trailing basis out of $150 million of Alliance revenue, how much would be this royalty part?
We have been-
And-
Because IP-led revenues as a portfolio, we don't disclose it at a unit level.
No. Okay. Directionally, will it be a substantial 50% kind of situation, or will it be lesser than that?
No, unfortunately, we are not allowed to share because of the confidentiality arrangement with the main customer. If you look at the IP-led portfolio, we have IPs across units, whether it is CET or Accelerite and Heavy N. It is all bundled into the IP-led. We disclose IP-led and services, so you know what is the linear revenue and what is the non-linear revenue.
Chris, just one more, small further understanding on this, if I may just. Does this royalty business impact is more to do with the fact that they are end-of-cycle products and unable to sell at new customers, and hence it's impacted? Or is it more to do with the environment? Just some color if you can add on that, sir.
The largest component of how that's put together is a leading-edge product in the industry, enjoyed by multiple industrial sector accounts that use this and their business relies on it, and their business would stop if this product was not maintained or did not continue forward. It continues to provide growth to us as well as to our largest client in terms of number of clients. There's not in this a component of an aged product syndrome. I believe your words of environmental is more of the right way to go with this whole discussion.
Okay. Thank you very much, and wish you all the best.
Thank you. The next question is from the line of Rahul Jain from Dolat Capital. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Sorry to be coming on the same issue. I wanted to ask, the change in the leadership in Alliance business, was it involuntary?
I think the best way to characterize this is, Mark and I enjoyed a significant difference in business beliefs. As a result, we parted ways.
Okay. To continue on the same thoughts, from the profitability of the Alliance segment, do we see this to be waning now, given that the growth is more pronounced in the reseller business, which is possibly lower margin than the other pieces within the Alliance portfolio?
What is the first part of that question? Can you repeat the first part of the question again?
I'm saying, is it just that profitability within the large client would go down given that our traction is more under a reseller business rather than the other two pieces?
Yes, it could. We have to remain focused on not just the reseller component of this, but also the services component that we have the ability to sell as well. We have to focus on making this a complete discussion in terms of how we do this to just do resell 100% by itself could have an impact. We are focused, and we do have both a selling team and a delivery team focused on delivery of services, and a linear business-oriented model that goes along with that.
It needs continual focus as well as the capabilities that are in the Technology Services Unit are set to be exploited for the first time in these customers. We've put together a scheme to start to cross-sell TSU services into these clients as we grow the client list. We started off projecting that theoretically by math it could. Our work has to be to make sure it's complete and consistent, especially when we work with these clients. In addition, we just have a reseller discussion.
Right. When we say that the pipeline is pretty strong in that segment, can you say that the past growth would have been more impacted because of the Red Hat acquisition and the way things would have changed at their end in terms of what they want to work upon, and not more to do with the demand side of things? Or is it more of a competitive factor which is impacting our performance?
The component that's royalty-based is in large part led by the IBM or our largest client's sale of the product. While we play a role in selling that end, we are the largest reseller. We're a fraction of the total sales effort that goes in and around this. It's that focus that has different cycles. As our largest client shifts quarterly their own focus, which our data would say is a normal occurrence to them, it provides us the opportunity to play catch up in some of the quarters where their focus is elsewhere.
Okay. That's quite helpful. Thank you. That's it from my side.
Thank you. Participants who wish to ask questions may press star and one at this time. The next question is from the line of Neeraj Bila from Maybank. Please go ahead.
Thank you for the opportunity. I wanted to understand in terms of the deal sizes that you're looking at the moment and how this has changed. For example, the impact deal that you've done or the General Insurance deal or the Healthcare deal, what are the deal sizes and duration of these deals, and how has it changed over the last sort of this year?
If we look at the technology services part of it, which is the biggest services business that we have, the deal sizes, I would say the size has increased over the last eight, nine months that we have been focusing on effective mining of our customer base. And more and more, we are orienting our sales teams to go after multi-year kind of deal scenarios. Even if they are doing, let's say for the sake of argument, a Salesforce implementation, we are trying to bundle our support services along with it, because even if you do an application development, product engineering or Salesforce-related work or any of these, there's always a way to keep your leg in by bundling support or front support.
Those are the things that have effectively helped us, along with the fact that we are focused on investment in our service lines as well as the verticals. If you look at it in terms of quantifying, look at our deal wins. Most of the deal wins at the higher level that we are talking about are multi-year, multi-million kind of a deal set. I will not be able to discuss exact deal sizes, but that is where I would say we have seen a healthy uptick in the deal size.
Okay.
That's reflected in our growth. If you look at the growth, our quarter one was 81.8%, our quarter three is 90.3%.
Got that. In terms of the reseller, how should one look at the stability?
The business that we do in around the SME sector, deal sizes continue to increase. We landed in this quarter seven-figure deals as well as many deals that were just shy of that or in the middle of that. We do see deal size as something that can vary, but it is from the evidence we saw this quarter on the increase in terms of the size with larger deals occurring.
Great. Thank you.
Thank you. Participants who wish to ask questions, please press star and one. The next question is from the line of Girish Pai from Nirmal Bang. Please go ahead.
Chris, in the analyst meet many months back, you used the phrase revenue stacking as one of the key strategies going forward. Have you been able to implement this, and can you just illustrate using an example?
Sure. If I pull out one of the pieces of work that we did in our reseller business. In this piece of work, we enjoyed the reseller capability as well as we landed a services contract to do the implementation. A dual stack. In that resell of the same product, we collect a royalty because we advanced the overall number that adds into the royalty stream at the same time. That's a three-stack. It's a services component with a resell component that we enjoy, and we advance our own royalty payments because we sold the product there, we enjoy the royalty at the same time. That was one of our larger deals in the reseller or industrial sector group.
Likewise, if you look at some of the work that we're doing around digital banking, we have partnered up and digital banking is a Persistent solution composed of partner software and our own accelerators at the same time. Those solutions include talent material, they include partner software in cases where we are the reseller, and it includes, in some cases, Persistent IP adapters and connectors as well.
We have multiple advances in digital banking and we've got two-stack and three-stacks there to the evidence there as well. We continue to believe in the digital advance that's at stake in the entire industry. We see this as a leadership opportunity for Persistent, which is to compose solutions based on partner software and our own capabilities. Our own capabilities come in the form of accelerators, linear work, as well as engendering our partners to be our advocates for the movement of their software at the same time and collect reseller margin. We will push on that strategy throughout the entire business.
Second question is regarding the CE/CLM product on which you're supposed to get royalties where IBM is supposed to sell. I suppose that's what didn't work out in Q3. I'm deliberating on this. Would this now appear in Q4 or will this be delayed into FY 2021?
You were cracking for a minute there. Can you repeat the front part of the question? I heard CE/CLM. Could you repeat the rest?
Yeah. This was supposed to come through in a big way in the December quarter, which is not, from what I can see. Is this now going to come through in the March quarter or will it get pushed back into FY 2021?
I think the best way to characterize that is, we recognize that product as having thousands of clients around the world. It's recognized by industry analysts publicly as the leading product in its space. It is complementary to our partnership with Dassault Systèmes that we've struck up this past year. We have no indication to believe it is on any negative trajectory at all. I believe as we look forward, we will continue to sell healthily and continue on this trajectory as we've mapped the last four years of historical data. The historical data we looked at would indicate that we're within the parameters of what's normal for that product to operate.
Okay. Lastly, Persistent in the past has had issues with talent. I think a year or so back you had to drop some projects because you couldn't fill up the talent part on certain projects. How is that kind of panning out now and are you finding difficult to get talent in the U.S.?
As far as talent in the U.S. is concerned, obviously our business mostly is on the forward-looking technologies. It's always going to be a tough task getting talent in those technologies, but we are not seeing any incremental tightness and so on, so forth. We have a healthy way of tracking our pipeline and correlating that to our resource management, hiring proactively and so on, so forth. We are relatively okay at this point in time.
I think I'd characterize it as it's a continual focus across the entire company. We've put some dedicated leadership that we're quite happy with in terms of having that focus. I think in our tenure, we maintain the focus. It's a managed problem right now that the industry has. We don't see it in our top tier of problems that are bothering us, but we must maintain the focus and we must maintain the durability of how we manage the talent. That's keenly in our brains and something we watch on a weekly basis.
Okay. Thank you.
Thank you. Participants who wish to ask questions may press star and one. The next question is from the line of Mayur Parkeria from Wealth Managers. Please go ahead.
Thank you again for taking my question. Sandeep, this is for you. Earlier you had highlighted that we have opportunities of working with the PE players and their investee companies, given some of your background there. If you can add some, how is that panning out and what kind of wins, if you are seeing any and something on that side?
Sure. Very good question. We are seeing a good traction with the PE companies. As of this point in time, we are engaged with at least five different opportunities, which are with different portfolio companies from different PEs. These are in advanced stages and obviously as they become wins we'll announce those, but we are seeing a pretty healthy traction in that market. Is that answer you?
Yeah.
Yes.
Okay. Chris, something on the client side, the commentary and the qualitative comments are good. If you look at the number of clients in the bucket of $3 million and $1 million-$3 million, which we disclosed. They have remained around 75 put together over the last seven, eight quarters. Are you tracking that number? Because that remains a pretty constant number, irrespective of the fact that Q1, Q2 may have seen addition on the $3 million, when we look at that deal pipeline and the client moving up the deal curve, that's not visible, at least when we look at both together and over a longer period.
I think your comment is accurate. We're sitting around the same number, and so it's consistent. It didn't express any alarm to us other than our mission is obviously to move that number up. We agree with you. We are tracking it. We have a line on how that looks as we look forward. That is work that we're in progress on.
Likewise, our top 10 clients remain very consistent and healthy to us, as well as providing overall growth with significant deals in some of them, as we mentioned earlier. This is absolutely a focus, and it is absolutely a focus given the past quarters we've taken, which have been organic in nature, that we do deal expansion as well as duration expansion at the same time. I anticipate you'll see movement here, nothing to be worried at this point in time.
Okay. Thank you.
Thank you very much. That was the last question in queue. I would now like to hand the conference back to Mr. O'Connor for closing comments.
We've enjoyed your questions, and we are here, obviously, to take on more questions as you have them. You've got the numbers at your disposal. Should you have them, we remain available for you all. We've enjoyed this call and thank you very much.
Thank you very much. On behalf of Persistent Systems Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.