Ladies and gentlemen, good day and welcome to the Persistent Systems Earnings Conference Call for the First Quarter of FY 2020, ended June 30th, 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 call, 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 on the call today, 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. Mark Simpson, President, IBM Alliance Business. 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 Dr. Anand Deshpande. Thank you, and over to you, Sir.
Thank you, Raymond. It's my pleasure to welcome all of you to this first quarter analyst call. Thank you all for joining us today. Very briefly, we had the annual general meeting of the company yesterday, Wednesday, July 24th . I'm happy to announce that all the items that were listed were approved unanimously. We had withdrawn the item regarding dividend, which Sunil will explain later in this conversation. It is my pleasure to welcome the new team that has taken over the reins of most of the company's operations. We have Chris O'Connor here in person in Pune today for this call. We also have Sandeep Kalra on the call today in person in Pune, and also Mark Simpson. All of us are here in Pune.
I'm going to hand this off to Chris to share the details of the performance of the company for the quarter. Over to you, Chris.
Thanks, Anand, thank you all on the call for joining. As you may know, this is my first full quarter in the company, in which I was able to fully see and understand and go through the operations. From a performance point of view in the first quarter, our revenues came in at $119.62 million. Other significant numbers are PAT was INR 824 crores. That kind of gives you some highlights of where we are. I think you all have our details for this will be the rest of the call. Some things that took place in the quarter just to kind of highlight that were also a part of the press release. We completed our share buyback program. That had been going on for some time. That program completed in June and is now over.
That is part of a just a standard process, a standard thing that we have been working for some time. In terms of business awards and highlights, we in this quarter currently announced the acquisition of the youperience Salesforce practice, which is based in Germany with a component in the U.K. as well, which highlights other things that we see taking place in our Salesforce as a growth mechanism for the future. We continue to be ranked well in other industry standards and in participative events that we play in in the industry. You can see several hackathons and gladiator events that we participate in from a technology point of view in terms of who we are.
I think a key point from a business indication point of view that I would like to celebrate is, during the quarter, we likewise crossed the 10,000 employee milestone, and we'll be celebrating that this coming weekend, planting 10,000 trees, one for every employee in the company that we have today. Crossing the 10,000 employee milestone is certainly an indication of health in terms of our ability to grow our hourly rates, which is at 1.2%, as well as our ability to continue to manage employment needs using a global team, balancing between offshore, offsite, and those that we have. It's an indication of strength that we see. If I look at the quarter itself, I'm going to let Sandeep and Mark talk about their areas effectively, but at my level, I see areas of strength emerging.
Salesforce comes across multiple times in our quarter as an area that is growth for us as well as our acquisition adds fundamental strength in Europe, a delivery capability in Europe that we didn't have before, particularly in Germany. The ability to take different concepts of how to collaborate and to advocate Salesforce as a practice to our customers beyond just straight install time and materials. So we gain richly from that. You'll see also in our key wins in the quarter that we have multiple Salesforce wins called out there. Second thing that I'd like to highlight, which Mark will talk to as well, will be our industrial sector catching on as a category that balances our traditional work with just our larger clients. The reason why this is important, and the wins are important is they are the Persistent brand
Leading out at the top line, the purchase of software from not only our largest client, but some of their collaborators in the industrial sector area as well. This is a key trend that we intend to highlight and further advance around the idea of value-added reseller. These are key indicators for me of the quarter that we can talk on, and as we get to the question and answer section, we will obviously go anyplace that you guys want to. For the next section of this, I am going to turn it over to Sandeep, our President and Executive Director of TS2, followed by Mark, and followed by Sunil, our CFO, who you know. Sandeep, let us go ahead and take everybody through the TS2 unit and your findings as a new member of the company.
Thank you, Chris. Good afternoon to you all, and good morning to those joining from the U.S. side of the house. This is my first interaction with you all. I would want to give you a little bit of background of what I've done in the past. I graduated from IIM Calcutta in 1995 and started my journey in software services with iGate Technologies in the U.S. in 1999. As a part of this, product engineering services, and I took on additional responsibilities over time, establishing new geographies, first within the U.S., then followed by Latin America and Canada. My last role within iGate Technologies was leading ARMA vertical in Americas. Subsequently, I joined a private equity company with a business very similar to Persistent, and that business was acquired by HARMAN, and subsequently by Samsung Electronics.
I'm very excited to be a part of Persistent, I'm looking forward to working with my colleagues to take our company forward. To give you an update, I have two areas. First, I'll talk about our Q1 business, then I'll talk about the initial observations, having completed my first three months in the company. First, on the Q1 side, we saw a number of significant wins. As Chris alluded to the Salesforce practice, I'll give you a color on some of the wins that we won in Banking Financial Services on Salesforce and otherwise. In India, we won with one of the largest Banking Financial Services company, a Salesforce implementation, which is an end-to-end outside of core banking, we will be involved in doing non-core banking applications migration over to Salesforce, also launching new products with them over the next three to five years.
Another significant win that we won in financial services was with a leading global investment firm based out of the U.S. This is a multi-million dollar, multi-year deal encompassing a re-generation of multiple critical applications related to different functions within the business, right from income tax return, entity lifecycle, capital call, compliance, and many more. Moving on to the healthcare life sciences segment, which is another large segment for us at Persistent. We continue to make progress winning multiple deals, including a deal with a managed service provider, a leading healthcare cloud computing company, where we will be working with them to provide managed services to them as well as their customers. Another win for us in the healthcare life sciences space was in medical devices. This is a leading medical devices firm on customer relationship analytics.
This is a Salesforce-based deal, again, a multi-year deal across sales, marketing, and services. Coming to the last segment within Technology Services. This is a technology company. We signed a product engineering deal with a leading encryption hardware-based manufacturer in the area of trust and security, IoT, and blockchain technologies. The next segment will be my first three months in the company. Over the last three months, I have met with customers, prospects, with some of our team members in sales and delivery. I'm pretty encouraged with the basic foundation that we as a company have and the kind of customer base that we have.
As a part of the changes going ahead, it is not lost on us that we have to accelerate revenue, and most of these changes that we are bringing in are building on our foundation and leading towards trying to get not just product business, but large entity-based business. We are also forming a large deal team which will be working with existing advisors and trying to get some of the RFPs from there, and also working with PE firms on their growth year opportunities. In addition to this, we'll double down on our existing and enhanced service offering through our growth solution organizations in our chosen market segments. All these initiatives, we believe over the quarters, will lead to larger deals and entity deals, which hopefully should see the acceleration that we all aspire for. With this, I hand over to my colleague, Mark Simpson.
Mark, take it from here.
Thank you, Sandeep. I'd also like to thank you for welcoming me. Good afternoon, good morning to everyone on the phone. Although I'm not new to Persistent, this is my first interaction with you on an earnings call, so I thought I'd take a quick second to introduce myself as well. I graduated from a small university in Texas in the United States called Sam Houston State University in 1984 with a degree in computer science, and I immediately started my professional career at IBM in software development as an engineer. I had many technical, managerial, executive roles at IBM over 30 years. I retired in 2016. In my last four years at IBM, I was actually a customer of Persistent. I didn't have to look far when I decided to retire.
I ended up at Persistent literally on the next day as part of the IBM Alliance unit, and now as of April 1, became the President of that unit. Just as Sandeep summarized for the Technology Service unit, I'll also give you an update on two aspects of my organization. Both the summary of Q1 and just a bit of a strategic look moving forward. In Q1, we saw an increase in both the volume and diversity of our pipeline, as well as our wins, which I'll talk about in a second. We acquired twice as many new logos in this past quarter than we've had any quarter since we started selling directly to the market in the ecosystem. There are a number of significant deals worth highlighting. In our continuous engineering practice we started less than 18 months ago, we had our first significant SaaS renewal direct to the market.
We had done the first deal 12 months ago, and we had a renewal. These are the types of deals that will start a foundation of building annuities through indirect with the clients of our partners. Also, in continuance engineering, we had another $1 million+ deal with a customer in the automotive industry. This is going to help us execute on our objective of consistent revenue quarter on quarter. In our PLM practice, also in the industrial sector, we acquired two net new logos. This is a part of our business that's been a bit flat, so this was a good shot in the arm in giving us some growth that we need. Finally, in IBM. With IBM, we in partnership with IBM, closed over a $2 million deal with the major, one of the largest healthcare companies in the United States.
Briefly looking forward, strategic direction, two things to highlight. IBM is our biggest client. They just completed the acquisition of Red Hat. That was significant for them, therefore significant for us. Our investments are tightly aligned to carry Persistent with IBM's strategy, and that includes helping them succeed with this acquisition of both them and their clients. The second thing that I'd like to highlight is it really supports our corporate direction just over a year ago on growth and solutions. The unit that I run is tightly aligned with the industrial sector, so we'll take the software reselling that we do and our own set of branded assets and align it tightly with the industrial sector to establish growth in that particular market. On that, with that, I'll turn it over to Sunil.
Yeah. Hi. Thank you, Mark, good afternoon and good morning to everyone on the call. Chris has given you a brief idea about the market updates and how we see the opportunities at Persistent. You heard Sandeep and Mark share their perspective and understanding on the Persistent business. Let me now take you through the financial information throughout the quarter ending June 30th . On the top line, we had the revenue of $119.62 million, growth of 1.1% QoQ, and decline of 3.2% YOY. The IP revenue this quarter was soft as compared to our internal expectation. In terms of YOY, there was a large reseller deal in last year's first quarter, which is the reason for the variation in IP revenue, and it is also reflecting in the purchase royalty cost that you see on YOY basis.
The services revenue as a portfolio grew by 1.2% quarter-on-quarter and 4.5% on YOY basis. In terms of INR, the revenue was INR 8,32.1 million, which was flat on QoQ basis. Coming to the composition of revenue, the linear revenue grew by 1.2% quarter-on-quarter, while the IP revenue grew by 0.8%. In terms of linear revenue, there was an increase in volume by 1.8%, while billing rate declined by 0.5%. The offshore linear revenue grew by 3.2%, comprised of a growth in volume by 2.3% and increase in billing rate by 0.9%. The onsite linear revenue declined by 1.8%, constituted by a decline of 1.2% in volume and 0.6% in the billing rate. Overall, the gross margin came in at 34.7% as against 36.8% in the previous quarter.
The key reason for the lower gross margin is the softness in IP revenue, coupled with the fact that there has been increase in headcount and slightly lower utilization at 77.9% as against 79.7% in the earlier quarter. This utilization has an impact of 50 basis points on margin. We also had the seasonality in terms of the visa costs for H1B filings this quarter, which had an impact of 70 basis points. On the dollar rupee, the currency softness impacted margin by 30 basis points. The big EBITDA for the quarter was INR 1,202 million, or 14.4% as against 15.2% in the previous quarter. As you would have seen, we have made a provision of INR 100 million for this period towards the IL&FS, and the cumulative provision now stands at INR 282.5 million, which is 66% of the exposure.
Depreciation and amortization were 4.6% of revenue, as against 4.5% in the previous quarter. The EBIT was INR 8.6 million at 9.8% of revenue, as against 10.7% in the previous quarter. The treasury income for the quarter was INR 202 million, as against INR 283 million during the previous quarter. The income in the previous quarter was higher on account of the higher mark-to-market gain on certain treasury investments. The other part of the reason for lower other income was the fact that we utilized INR 1,670 million towards share buyback in Q1, thereby reducing the treasury size. The buyback was completed on June 27 , and we have bought back 3.575 million shares and extinguished the same by June 30th . On the foreign exchange side, the gain was INR 80 million as against a loss of INR 9 million in the previous quarter.
The PBT came in at INR 1,098 million at a margin of 13.2% as against 13.4% in the previous quarter. Effective tax rate for the quarter was at 24.9% as against 24.1% in the previous quarter. We expect the ETR for the whole year to be in the range of 26%-27%. PAT for the quarter was INR 825 million at 9.9% as against 10.2% in the previous quarter. The operational CapEx for the quarter was INR 172 million. The cash on books amounted to INR 1,340.1 million as of June 30th as compared to INR 1,290.5 million at the end of March 2019. The seller contracts outstanding at the end of June 30th was $105 million at an average rate of $73.36. Coming to the point Anand mentioned in the brief initial comments with respect to Deloitte.
We had proposed the reappointment of Deloitte Haskins & Sells LLP in our annual general meeting for a term of two years. Deloitte informed us on July 23rd that if the appointment is approved by the shareholders for a term of two years and not for five years, they will not be able to accept the same. The shareholders, while they have approved the appointment in the AGM through the process of e-voting, in view of this communication from Deloitte, the same will not be effective. We have started the search for suitable audit firms and have shortlisted a few, and we hope to make a decision in the next few days. We will approach the shareholders via an extraordinary general meeting to appoint the statutory auditors, and as per the relevant provisions, Deloitte will continue to be the auditors till appointment of new statutory auditors.
That's the update on the finance front, and thanks everyone again, and I hand it back to Chris.
Thanks, Sunil, and thank you, Sandeep. Thank you, Mark. Observations as my first quarter return, quarter results. It has been a fascinating quarter to watch the business run. If I look back through the quarter, I took the opportunity to meet many of our clients. I embarked on meeting all of the CEOs of all of our partners or their significant leadership teams, and used that as a way to judge the mettle of the business. I think as Sunil mentioned, we had a first quarter 2019 large customer deal. If you factor through that, what you see is a very consistently running business that has upward trajectory that continues to advance our employee billing, our accounts, and our ability to do business in the world.
This, by my own measure and my own experiences, is a healthy, stable business by the satisfaction of the clients, the returning clients, and the nature of how that work takes place and our ability to richly engage with it. If you ask me for where I would understand further work that we can do, our work has a nature of being very project-oriented, in its completeness, whether we're selling software or whether we're doing work with services. We are project-oriented in nature, which means that it has short durability or limited durability, and it must be renewed. In that, you see some of our business lumpiness.
I think as Sandeep and Mark have endeavored to point out, we see elements of work going on inside the company today where we are building longer-running business models and the ability to do more significant transactions, both in the way that we are building our industrial sector business to the highlights that Sandeep gave around Salesforce, BFSI, and healthcare life sciences as core industries where we emerge more as a leader than just a provider of work. We intend to capitalize on this and focus on how to ramp this up. We've executed our structural changes in terms of the management team as well as our management style, and we are through that process. As well as we have aligned process and procedures for how we will treat our segment-oriented businesses, which I've mentioned.
How we will recapture some marketing to tell the stories of who we are and the types of things we can do for our clients. We have doubled down and restructured our sales focus inside of these teams. That work, that organization, and the structure for them is carried out, and we enjoy the art of learning and teaching ourselves the new processes that are now in place, and that is the work that's in front of us. We believe that work is the positive trajectory for Persistent as we look forward, and we're in the middle of that cycle right now. Those would be some of my observations as well. With that, I believe we're going to enter into the question and answer period. I'm going to go ahead and open up the phone for those questions to come forth.
Sure. Thank you very much. We will now begin with the question-and-answer session. Anyone who wishes to ask questions may press star one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star 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 questions, please press star one. The first question is from the line of Manik Taneja from Emkay Global . Please go ahead.
Hi, thank you for the opportunity. Just wanted to get some sense on the services side of the business. Apologies that I've not been following the fortunes of this company for some time, but from what I understand, the services business was both a composition of the business that you were doing with the technology companies, the software product companies, and over the last few years, we have focused on the enterprise side of the market. Sandeep, in that respect, now could you essentially help us understand from a go-forward strategy, where is our focus? That's number one. The other question was for Sunil in terms of medium to longer-term outlook on margins given the transition on the business side.
Sandeep. Sounds good. On a lighter note, this is Sandeep and not Sandeep.
Sorry.
No, that's fine. That's absolutely fine. With respect to the strategy, look, we at Persistent have had a very rich history of doing product development and doing platform development for companies. Today, if you look at the level playing field that has been set with the tenets of product development being very similar to modern application development and our investment in even modern application development platforms, whether it is Appian, OutSystems, coupled with the IP platforms and so on, our investments in SFDC, both on a CRM and a platform side. Today, those tenets are equally vibrant in the enterprise marketplace. That basically opens up a huge amount of addressable market for us, where we can compete with our bigger peers, whether they are Indian origin or they are global origin.
From our perspective, as we talk about growth and solutions, the teams, we have challenged them to put together solutions which can be long-range with the partners that we have at scale. If you look at even the smaller acquisitions that we have done, they are basically on a strategy of string of pearls, where we are reinforcing our capability. Even in SFDC space, if you look at it, we have the Sales Cloud, we have the Service Cloud, the company we acquired brings in the Marketing Cloud. Overall, our story is very relevant both from the elsewhere product company perspective and the enterprise market, which we are increasingly going to see at scale. That's why if you look at our segmental reporting, we've also started to report the segments in terms of BFSI, healthcare, technology, cybersecurity and emerging verticals. Hopefully that answers you.
We are bullish on it. Obviously, we have our work cut out, but that's where our energies are going to be going forward. Sunil.
On the question on margins, this quarter, the softness that you saw on the EBITDA margin, which came in at 14.2%. Primarily this was on the back of lower IP revenue. As you know, both in the Accelerite portfolio as well as in the IBM portfolio, the IP revenue has got more than proportionate impact on the margin. Structurally, we are keeping a very close control on costs. While we have on-boarded certain people, that utilization will come back, and we believe that if the IP revenues play out well, we will do fairly well on the margin trend. Far as H1, H2 of the part is concerned, as you know, the quarter coming is the quarter when we have the pay hike. Obviously you will find certain impact of the pay hike.
Typically, it has an impact of about 250-275 basis point on margin. It is expected that some of it is recouped through the growth in revenue, and of course, the fact that we have certain benefits coming in from the hedges that we hold for this period, which were taken at good rates in the earlier year. Overall, if you look at the investments that we are making, the kind of approach to the market in terms of deepening client relationships, as it plays out over a period of next few quarters, we should be having that convergence happening into the margin.
Sure.
Thank you, Sunil.
If I can chip in with one more question. Just wanted to understand if the usual seasonality of business on the IP side is expected to continue. In terms of the strategy on IP side, do you think we'll have to once again focus on some new IP acquisitions to drive growth or probably it will be more by selling the existing portfolio of IPs in this release?
To Manik, I think.
I'll address the last question first, which is, all our acquisitions are done as a part of strategy to grow in categories we think are rich in growth on their own. We add capability, we add people, and we add the geography reach through those. Our acquisitions are all meant as, they're not a primary mechanism for stabilization of people or stabilization of growth. We believe that they're part of the strategy we already see emerging in the market around how to create value with our customers, both in many of our technology solution areas, such as either security or data or cloud. Richly in the industry verticals that we possess a lot of expertise in, which would be BFSI, healthcare life sciences, and industrial sector at the same time. That is our strategy.
I suspect you'll see us continue to look for the right value in the right place that provides us extension of our current strategy and really accelerates growth that we think is in the market ready to be taken.
Yeah, Manik since you probably have not been in touch with us, you can reach out to us separately because we have a lot of questions from other callers.
Sure. Thank you, and on the list.
Thanks.
Thank you.
Thank you. The next question is from the line of Apurva Prasad from HDFC Securities. Please go ahead.
Thanks for taking my question. My question is more on the growth aspect. You talked about focusing more on large annuity deals as well as focus on large deals. Any milestones or targets that you can talk about how should we be tracking it for this year? Do you expect this to play out over a more long haul?
We expect this to play out over time, without a doubt. We look at both the composition of IP-led and services revenue as part of that discussion. We likewise are looking at the major industry verticals we expect those deals to come from. You'll find in our fact sheet, for the first time, some additional information on how those verticals.
Have been represented in there that each area, such as BFSI, continuing their uptick. We'll use those as milestones, certainly that we'll see as well as deal composition in deals that are synergistic of IT software and our own services are also great things that we'll be watching as well. That gives you an idea of how we feel about that. I think, Sandeep, let's just talk a little bit about large deal machine.
Sure. Apurva, discussing from your side, two things when we announced the deal win for this quarter as well, we talked about multimillion-dollar, multi-year deals. Both the deals that we talked about in financial services, the ones with the Indian bank, the ones with the private equity global firm/investment firm, both of them are three-to-five-year deals and they are decent sized deals. Our journey has started. If you look at the things that I talked about, setting up an RFP team, setting up a team to go after sourcing advisors, private equity firms, all these are initiatives in that direction. Obviously, as Chris pointed out, these are early days of these investments, of these teams coming together. We are hopeful with time we will progress, and we will progress with both RFP and we will have a few deals hopefully in the quarters to come.
I think Mark had an interesting point also, that's another indicator that we watch, which is, we pivoted around our largest customer to also be selling their software. Apurva had an interesting point that I want to make sure is drawn the line to where you made it, which is, we've engaged a sister company of our largest customer to also begin selling their software as well into industrial sector. This positions us in the category of industrial sector as a VAR, which is different than building for work, and it's different than just being a reseller or pass-through mechanism on software by itself. We brought these points up as well as Mark mentioned that we've been doubling the number of transactions we've been doing out of industrial sector.
These are all indicators of our ability to reach the customer in a bigger value way, and also position ourselves as the primary payer for the value of software that they're starting to implement, both to do the services as well as to do the software that our partners provide, as well as to provide our own IP underneath the covers at the same time. We intend to feed this model across the company.
Sure. That's helpful, Chris and Sandeep. Just another follow-up on the IBM piece. You see any opportunities coming out of, especially as Red Hat is complete now, any opportunities for Persistent coming out of that transaction there? Also, there was a decline in the top six to 10 accounts, so if you can explain that too.
Mark here. Absolutely. If I look at moving forward over the next year or so, our largest opportunity with our biggest customer is definitely helping them with that integration of Red Hat into IBM, obviously, but also, maybe even more importantly, is helping their clients. This is a very large market. It's going to be something that perhaps could be disruptive, but at the same time, is going to create tremendous opportunities. Outside of the push we have on industrial sector, this is the second most important thing that we'll be doing with this.
Thank you.
Please go ahead with the next question.
Yes. The next question is from the line of Madhu Babu from Centrum Broking. Please go ahead.
Yes, Sir. Hiring has been strong over the last four quarters, though our growth has not been that much. What is the profile of the hiring? Just wanted a view on the hiring momentum, which has been strong.
[Apurva], go ahead.
Well, on the hiring front, particularly last two quarters, you would have seen that we have added a fair amount of strength both on the offshore side in terms of freshers and very selective on the lateral front. We are also taking active, you can say, help of the Persistent University, which is an internal learning and development academy that we have. Wherein now that we have a, you can say, focus on both technology as well as the verticals. We are training people internally so that we can reduce the dependence on lateral hires. While we may have added people, in terms of the actual cost in absolute terms, it is not a very phenomenal number. On the U.S. side, the hiring has been very selective to meet the gaps in terms of skills and the locations that these people are required to deliver to clients.
Secondly, on the advisor-led deals which we plan to target. I understand we are strong on the Salesforce and EPM kind of implementation solutioning kind of. In the advisor-led deals, would it be like a end-to-end stack, which would include traditional services as well, as a part of the deal?
We would go selectively after the advisor-led deals. Nowadays, if you look at the trends, the advisor-led deals earlier used to be massive, INR 100 million, INR 200 million, INR 500 million, single deals, kind of encompassing all the different parts of the stack. Nowadays, what we are seeing is people are looking for niche providers or disruptors, if I may call so. They're looking at decoupling application development, which looks like fees like product development, analytics, platform development, because every company today is trying to become a platform/software-driven company. We are seeing enough appetite for the services that we have to offer with the sourcing advisory talent to be able to go and serve them to our strength. We'll go selectively, but we do see a good amount of market on those fronts.
Okay, Sir. Thanks. Come for a follow-up.
Thank you the next question is from the line of Rajiv Dudhia from Dudhia Rajiv Advisors. Please go ahead.
Yeah. Hi. Thanks for taking my question. My question first is, in the past, Company has talked about a growth rate, especially with the stack of around 15%-20%. In this call, we have not talked anything about the growth rate. Can we get some sense of what is it that we should be expecting in financial 2020, and maybe if you want to look even further than that? Just give a sense of what your assessment of the new management team's assessment is, and what you think is possible.
If you look at Persistent's performance through 2019 into our first quarter here, we clearly have a healthy running business, and we have a healthy set of clients. We've enjoyed selling to our clients in different capabilities as separate services, separate software, and working with our largest client. We have taken a deliberate strategy to work the integration of those capabilities towards the larger deals, and towards the total value discussion that we can have, either in our horizontal technology areas or to our larger vertical areas. We're teaming accordingly to go with that. That's involved some of the elite people you hear with me on the phone today, as well as some of the structural elements that I talked to you about around what we've done with our business leadership, our marketing focus, and inside sales.
With those changes cut through, we're in the quarter now of getting those changes to take hold. It's early to tell you what our immediate growth rate is going to be for this quarter or for the next quarter. It is probably early to tell you what a year would look like at this point in time. We've got a good measure of our client success. We've got a good measure of our client traction. We've got a great set of clients that continue to do repeat business with us. We have a strong hold inside of our largest customer, and they're now settled down to go do work on their own, which was a distraction. That has us optimistic that the business is there.
It also has us working hard to build patterns and structures around how we can sell and do repeat sell in these segments that we've described to you. We're doing that work, but it's early for us to give you numbers.
Got it. Is there expectation that over the medium or next few quarters you will be able to, or is it where you would not give guidance forward?
It's absolutely our expectation. We'll be very clear on how we're progressing.
Got it. We have been acquiring quite a few smallish companies around the field sales, the Appian and so on. Can you talk a little bit around the strategy around how those acquisitions have broadened our offering? How that fits in with the broader scheme. Obviously, there is one big client, and it seems like you are putting a lot of effort around that. On the side or on the separate trajectory, we are now building up these channel partners, and trying to work with some of the big vendors. Just talk a little bit about how you think that strategy plays in with a big client on the other side.
I think you got two questions in there. If I missed one, just please clarify with me. I heard one question around the acquisitions, and the second question I heard was around channel partners. First, I'll talk to the acquisitions. I'll be exemplary in my description. We just picked up, over in Germany, a company named youperience, a Salesforce practice, a boutique, well-known inside Germany, well-known by Salesforce themselves. Seen as a trendsetting leader of being able to work the business of the implementation of Marketing Cloud, as well as to do the implementation of Marketing Cloud. Which is a consultative capability that they've developed, as well as the ability to technically install Marketing Cloud at the same time. Why is that interesting to us?
It's interesting because it complements our acquisition of PARX, which we did a year earlier, and provides us a significant hold of Salesforce in Germany, which is a significant growth area for Salesforce itself. It secondarily complements our hold in Europe, which is small, but we intend to continue to progress forward on and gives us an in-country delivery capability that's already established. It brings us a selling team that speaks the natural language, that knows how to progress inside of one of the largest economies in the world. Third, it brings us the ability to take consultative capabilities and teach the rest of our Salesforce practice that we have, which is a top 20 practice as accounted to by Salesforce, and be able to teach them how to do consultative capabilities worldwide.
Teach our teams that are doing Salesforce today in Australia, in India, in the United States, how to do that at the same time. This is a great looking boutique for us because it brings richness to the table in terms of progressing so many of our agendas, and these are the types of things that we look for when we do this. I think the second question you asked was around partnering with our channel partners and what we see that's slightly different. When you move from looking at the channel partner who builds software, somebody that you can find on one of our partner web pages, to asking them for work, to trying to build value around them, you focus on category expertise where they're also trying to apply expertise.
Many of the companies, Sandeep mentioned, for example, are applying themselves in healthcare or in banking or applying themselves in industrial sector, Mark Simpson , one of them. They want to advance their business for you to advance yours. You construct the right value solution, and you gain the attribute of them being willing to take you to market. You gain the attribute of them seeing you different than somebody that just does work around install, and you gain the attribute of them providing marketing and list to you at the same time. This is something that I've enjoyed in my career of working with channel partners. Sandeep has the same experience, and Mark does as well.
It's part of what we bring to the table as a management team in terms of how we would like to see the value progression take place in Persistent, which is to provide lift for our partners, so they provide it back. It's a little bit of a different focus than just doing typical time and material from the way that we apply this pressure in the market. I can hopefully give you a picture of both of those two. I think I got to two questions, but if I missed something, let me know.
Okay. Thank you very much.
Thank you.
Thank you. Before we take the next question, we would like to inform participants that in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to one per participant. Should you have a follow-up question, we request you to rejoin the queue. The next question is from the line of Ravi Menon from Elara Securities. Please go ahead.
Hi. Thank you for the opportunity. Chris, if you look at the IP revenue, it's been a little soft this quarter, and that has a significant impact on the margins. Q1 is typically a very seasonally strong quarter for IBM revenues, as is Q3. Is it the IBM IP portfolio that was weak this quarter, or was it an Accelerite ? If it is IBM, how do you see that? Is this just a one-off this quarter or should we expect that this is kind of where the revenues will trend from now on?
We have IP revenue in a couple places. The specific area that was a weak point was our Accelerite business in IP revenue.
I agree. Could we expect that in Q3, the double seasonality for IBM should come through, and we should see a bump up in revenue by then?
I think the IBM business will continue to run in its normal seasonality that we've already talked about or talked about in prior sessions. I believe the Accelerite business will continue to be one where we'll be gaining the capabilities of that software and combining it more with our services going forward. We'll talk to you about that strategy as it evolves. Accelerite, to us, is selling software as a standalone brand, and our focus as we go forward, as we've talked about, is to build what I'll call combinational packages. Whether that's doing large, rich asset-associated services deals or deals that are designed around creating value in a certain industry, you'll find us applying Accelerite more to that than as a standalone software company.
We're expecting the growth that we project to come both from the work that Sandeep is doing and the work that Mark is doing.
Thank you. The next question is from the line of Rahul Jain from Dolat Capital. Please go ahead.
Yeah. Hi. First of all, if you could say, what are the current challenges and action plans to revive the digital business revenue? Secondly, if Chris or Mark, you could share your perspective in terms of how we could leverage our deep reach into IBM ecosystem to drive various business opportunity for Persistent going forward.
Sorry, if I could get a clarification on the first question, what ecosystem?
Digital.
If you look at the current digital number that we've got there, this to me is not yet as the way we track that number emerged as an indicator that's giving me a positive or a negative. I understand the way the number looks today, but I found digital elements along the business that we're doing. I found that we're advancing the cloud story or the cloud progression in a marked success in nearly every facet of our business. I don't put a negative into Persistent, in a digital business context or in a SaaS context. I actually see us richly engaged as we are offering that out across the board, whether that's an industrial sector to banking and finance, to data, to cloud, all working with partners that are wanting to advance digital business and us as a prime provider of that.
I'm bullish on our digital capabilities and on the total digital approach that I see. In fact, I see it in nearly every sector. I am not persuaded this company are not playing a heavy guidance one way or the other to that number that you may see on paper. It's just my current indication of where I am, and we could talk more on that as we go. In relationship to IBM, Mark, perhaps you want to talk about maybe two items, which is how we interlock with IBM in terms of their internal business, and then second, how we interlock with who we want to sell to from our own perspective.
Yeah, sure, Chris. From our kind of traditional business, working directly with the IBM teams, the big opportunity is around that. We've talked about that before. That's going to be something that we think we can do quite well in. The second area, which is around more the ecosystem, if you think of the long success we've had with IBM, starting with time and materials, innovative business models. We've innovated again, and we're selling directly to their ecosystem in the market in three or four ways. We did it on the back of where we already have a relationship and do work for them, especially our IP arrangements around royalty, where we have three significant elements to that. We resell their software, which gives us top-line revenue growth. We have top-line professional services revenue on top of that.
Finally, we're developing our own IP that's very complementary in that ecosystem. Chris likes to call that stacked revenue, where we get the product revenue from the royalty, we resell their software, we have top-line professional services, and very relevant IP.
This is the area you talked about that was driving the number five for the quarter.
That's exactly right, Chris. Hope that helps.
Yes. Thank you so much.
Thank you. The next question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.
Hi, Sandip here. Thanks to the management who give me an opportunity to ask a question. Couple of things. One, Christopher, you are already there for last few months. I am sure that you would have met most of the clients. What is the sense which you get when you meet the client? What is leading to we remaining little behind in the growth path compared to industry and in spite of our robust capability? Number one. Number two, how long do you see this pain to continue? I'm not asking for a specific guidance or outlook. I just want to try to understand that how much more time it will take before we return to our growth commensurate with our capability.
Two good questions. I've met with multiple clients. I'll be observational in this, and then I'll be somewhat quantitative at the same time. As I met with the clients, having embedded a rich career around software itself and projects, you learn how to listen for key indicators of success, and also lack of success. I've yet to have a lack of success call with any client, nor have I yet to have one of my teams come in the room and use the CEO as the backstop to save a client deal. While it's anecdotal in its nature, it is an expectation in the software industry that you will have work that you'll have to do around key projects and clients to make sure that they're satisfied.
Some of those are normal business as usual, well-measured corrective actions, and some of those are emergency procedures done in the urgency of dark at night. We are amazingly in control of our clients and our progress and the satisfaction that they have. Numerically, as I checked against that from my first visits, I found that our client base is rich and returning at a project level. This is a key phrase to use because they're coming back to us repeatedly for the next project and the next project, and we have a long list of clients that do repeat business with us and generally have come to regard us as their provider of help of choice.
To move to growth, to go into your second question, we need to progress into understanding their total business more and building total value for them more on how we can help them. Often, we see the total scope of where they're heading. We let them get to the point of telling us which projects they then want us to employ on, when we could get in often and consult and advise on appropriateness of how to go all the way through a total program or a total architecture or a total initiative. This is where the category expertise that you've heard myself, Mark, and Sandeep talking about developing and applying more applicable services.
We've hired business leaders who, inside of each of our traditional technology categories and our market industry categories, who are now addressing those areas we think are significant areas that we should be applying domain value and going for larger segments of the client's business, as well as more leadership, as well as more clients. As I mentioned, we've done the tooling for this in the past quarter. We're in what one of my colleagues will phrase as the stitching phase, which is now getting it to work and bringing up examples. We have examples in banking, we have examples in industrial sector, we have examples in Salesforce, where we see this taking hold today. Getting it to scale, that is the time that we're putting in.
I anticipate that over the coming quarters, you will see us bringing more incremental progress, more incremental examples, and those will affect our results as we go through the next several quarters as well.
Thank you. That's very helpful.
Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Yeah. Hi. Thanks for taking my question. Just wanted your thoughts on the margin profile, considering that the IP revenues have actually come down quite a bit as a percentage of revenue. Compared to what it was before, I think it's down 24%. In that context, do you think that the margin profile will sustainably be at a lower level than what it was in the past? Or do you think that there's significant room for IP revenue to grow from where it is today?
Yeah. Hi, Nitin. Far as the IP revenue stream is concerned, there are multiple nature of IP deals. One is the deals that we do on our own products where we have ownership of these products in the Accelerite pack, that has got a very significant impact on the margin because all costs are already baked in there. The second element is what we sell in terms of licenses with our partners. All the sell with business, whether it is on the IBM reseller ecosystem or with players like IBM, HP systems and so on, there is a license cost that is involved in the purchase. Currently what we find in terms of the YOY dip in IP revenue is because of the fact that last year in the first quarter, we had a significant reseller deal.
It was of the tune of almost $6.7 million , which was one lumpy deal that we had in the last year first quarter. What actually impacts margin is the business that we do on the non-reseller side, where it has got disproportionate impact on the margin. Your question is right, that yes, if the overall IP revenues are less, will it impact margin significantly? The answer to that is not significantly. It will only impact to the extent that reduction is on the significant margin conversion kind of IP business, which is not significant, but yes, we have to package the whole Accelerite portfolio in a better manner along with services and utilize those IPs in little more, you can say, comprehensive deals than rather selling just the licenses on Accelerite portfolio.
Thank you.
Thank you. Let's do maybe a couple more. In fact, this may be the last one. Go ahead.
The next question is from [Niral Dalal from ABAC]. Please go ahead.
Thanks for the opportunity. A couple of questions. One is that there was a decline in the top six to 10 clients, the revenues. Could you cite reasons for the same? Second is, if we could reconcile the IBM piece in the sense that as a client, IBM has increased, non-IBM has seen a decline. I just want your thoughts on that.
Can you repeat the question again?
Yeah.
There's no decline.
The top six to 10 clients has seen a decline, absolute decline in revenues QoQ. Your reason for that? There's a 22% YoY decline versus 21% QoQ decline.
Maybe we'll reach out to you separately because this may be some fact, detailed question.
We don't see a rationale to call.
Yeah.
We'll take it offline.
Sure. The other part is, in terms of Accelerite, should we now expect further decline in the Accelerite portfolio, the thing that we've seen in this quarter?
I think Accelerite.
How are you doing?
Yeah. Accelerite enjoys a stable set of clients. The numbers that you see are reflective of the stability of those clients. I think, as Sunil mentioned, and also as we mentioned earlier, Accelerite tends to provide, and we've noticed this when we looked at the patterns of when we've included it with our services, the Accelerite products when included with our services tend to provide a rich value, a more extensive value to our clients as a total package of software and services combined together than by themselves. The current number should be representative of the clients that we have, and we anticipate maintaining that base. The future trajectory will be to enjoy Accelerite as an asset combined with our services to provide what we think is a greater value to our clients.
That's a little bit of a pivot we're making, but it's not at the detriment of today's Accelerite numbers.
Right. Where I'm coming from is that the top client has increased. You've seen [ISE business] revenue being flat and the IP revenue being flat. This would mean that Accelerite has actually seen a $2 million-$3 million decline in revenues. That is where I was coming from.
Understood. Well, folks, I think we're at the end. I want to thank you for the quarterly call. You know how to reach us, should you have questions that you want to reach out and further gain advice or input on. We remain available to you in all those forms. Thank you very much.
We can reach out to Sarab.
Yeah, you can reach out to Sarab via the email, and he will help collect any questions you have. With that, we're going to close the call. Anand, thank you very much for kicking us off. Sandeep and Mark, thank you for joining us. Sunil, as always, thank you for all of the financial input. With that, we're signing off.
Thank you.
Sure. 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.