Ladies and gentlemen, good day and welcome to the Persistent Systems Earnings Conference Call for the fourth quarter of FY 23, ended March 31, 2023. We have with us today on the call Dr. Anand Deshpande, Chairman and Managing Director. Mr. Sandeep Kalra, Executive Director and Chief Executive Officer. Mr. Sunil Sapre, Executive Director and Chief Financial Officer, and Mr. Saurabh Dwivedi, Head of Investor Relations. Please note all participants line will be in the listen-only mode. There will be an opportunity for you to ask questions after the management's opening remarks. Should you need assistance during the conference call, please raise hand from the Participants tab on the screen. While asking questions, requesting you to please identify yourselves and your company. Please note that this conference is being recorded. I now hand over the conference to Mr. Sandeep Kalra. Thank you. Over to you, sir.
Thank you, moderator. Good evening, good morning, and good afternoon, all of you, depending on where you're joining from. As always, we would like to start this call by thanking each one of our 22,750+ Persistent team members and our customers for their support and continued trust. We are very happy to report yet another solid growth quarter across all major business and financial metrics, despite a dynamic and rapidly evolving macroeconomic environment. This is the first financial year when we have crossed $1 billion in our revenue in our history. Before I and Sunil get into the further details of our quarterly and annual performance, I would like to invite our Founder and Chairman, Anand Deshpande, to say a few words on us achieving this important milestone. Over to you, Anand.
Thank you. Thank you, Sandeep, for inviting me here. It's a real pleasure and honor to be here at this big momentous occasion for the company as we complete a billion-dollar year. I consider myself very fortunate to have had this opportunity to be part of this 33-year journey of the company. This kind of an achievement is only possible because of the hard work and dedication of all the people involved, the support we got from the clients and other stakeholders. I would like to thank all the 22,700 current employees and another 20,000 prior employees who have all contributed to this journey. I'd like to thank all the clients who have steadfastly supported us all through the early days, including now. I would also like to thank all the investors for their support.
We have been public since 2010, I must thank all of you for your support as we do this journey. Reaching a milestone like this is important and needs to be celebrated. As we completed $1 billion, I'm sure we are looking for the next $1 billion. I'm going to hand it back to Sandeep to take it from here and explain to you what we have done so far this quarter and how we look at the next few years. Thank you.
Thank you, Anand. Let me get into the details of the quarterly and yearly performance. We are happy to report that the revenue for Q4 came in at $274.55 million, giving us a growth of 3.9% quarter-on-quarter and 26.3% on year-on-year basis. On a constant currency basis, this translates into a sequential revenue growth of 3.5%. In INR terms, the growth came in at 3.9% quarter-on-quarter and 37.6% on year-on-year basis. For the full year FY23, we achieved a revenue of $1,035.98 billion, giving us a robust growth of 35.3% year-on-year. Coming to EBIT. Our EBIT for Q4 came in at 15.4%.
This translates into an EBIT growth of 4% on Q on Q basis and 50.7% on Y o Y basis. EBIT margin was consistent with Q3 on a sequential basis, as the tailwind of higher fresher billing was largely neutralized by higher costs associated with business travel, events related to annual strategy planning, our annual employee event, amongst others. The impact of currency largely remained flat during the quarter. The EBIT for full financial year 2023. For full FY 2023, we achieved EBIT margin of 14.9%, implying 100 basis points improvement year on year. This was on account of a combination of higher costs on travel, amortization, fresher intake, as well as lower royalty revenue in FY 2023 being offset by SG&A leverage, better pricing, lower attrition, and favorable currency movement leading to this improvement.
In absolute terms, EBIT rose by 57.4% year-on-year. Sunil will provide more color on the EBIT margin movement later in this call. Coming to the order book for the quarter. Q4 was a healthy set of order wins for us. The total contract value for the quarter came in at $421.6 million, with new bookings TCV coming in at $250.9 million. This implies a healthy growth in TCV of 16.8% on year-on-year basis. The annual contract value of this TCV is of the order of $310.4 million, of which the new bookings ACV component contributed to $168.3 million. On a full year basis, our total TCV crossed $1.6 billion.
The ACV component of this is $1.17 billion. This translates into TCV growth of 32.8% and ACV growth of 24.1% for full year FY23. Please note that as always, these TCV and ACV numbers include all bookings, small and large, renewals, as well as new bookings across existing and new customers. Coming to the customer engagement size. Let me give you some color on the various engagement sizes. To start with, we are pleased to announce that our top customer revenue saw a healthy growth of 30.6% QoQ in USD terms.
This is in line with expectations that we had shared with you in the last quarters and this one. This impressive sequential growth has to be seen in the context of the decline in top clients revenue by 23.2% during FY 2023, which was primarily on account of ramp downs we had witnessed over the previous two quarters. The ramp downs in earlier quarters were on account of structured cost savings program undertaken by our top customer. Since then, we have partnered closely with them to help them achieve their objectives, while also explore meaningful win-win opportunities for long-term collaboration. Hello, Moderator, can you hear us?
Yes, sir. Now it's clear.
Okay. Let me start from the engagement size once again. Apparently the audio was disconnected for a bit. Let me give you a color on our client engagement size. We are pleased to report that our top customer revenue saw a healthy growth of 13.6% QoQ in USD terms. This is in line with the expectations we had shared with you in the last quarter's analyst call. The sequential growth has to be seen in the context of the decline in top clients revenue by 23.2% during FY23, which was primarily on account of ramp downs we had witnessed over previous two quarters. These ramp downs in earlier quarters were on account of the structured cost savings program undertaken by our top customer.
Since then, we have partnered closely with them to help them achieve their objectives while also exploring meaningful win-win opportunities for long-term collaboration. This has led to the signing of a couple of large strategic deals, cumulatively totaling 200 million TCV, our first focused . We are hopeful of continuing with a stable and a gradually improving growth profile for our top client during FY 2024. We also saw revenues from our second-largest customer recover from the furlough impact during Q4 quarter, registering a sequential growth of 7.6%. While the overall portfolio of our top 50 customers grew by 4.7% during Q4, the growth was partially impacted by a ramp down in a key hyperscaler relationship, which had a ramp down of approximately $3 million for the quarter and approximately about $10 million on annualized basis.
This was in line with this hyperscaler's overall cost management programs across vendor partners. We are expecting this hyperscaler account to resume growth for us over the next several quarters. The progression of our clients across multiple revenue thresholds continues, with two additional customers moving into the greater than $30 million band from the greater than $20 million band during the quarter. Also scaling the number of greater than $5 million customers to 34 compared to a count of 25 four quarters back. Coming to the geographical makeup. From a geography perspective, we saw a healthy growth across most regions, led by ramp up of recent deals. North America grew 4.8% quarter-over-quarter in USD terms, aided by growth in our top one customer.
Europe revenue increased 19.7% quarter-on-quarter on account of ramp up of multiple large deals signed in earlier quarters. India revenue declined 15.6% QoQ due to a decline in IP revenue compared to Q3, which had an impact of a one-time large deal. The above growth has to be seen in the context of a much lower revenue base in Europe and India as compared to the U.S. Coming to the people and utilization. In Q4, we added 291 people on a net basis, taking our total employee headcount to 22,889. The utilization for the quarter came in at 77.3% as against 77.6% in Q3.
The growth in our billed person months in Q4 came through a combination of existing experienced employees deployed on various services engagements, new lateral hires and incremental addition of our freshers pool to billable projects. You may be aware that we had hired 3,000 + freshers at the start of this financial year. They have started entering the billable pool from Q3 onwards. All the remaining freshers became a part of this billable pool in Q4, which is reflected in the increase in billable person months and IP person months in our fact sheet as well. A continued deployment of freshers on customer projects will be a good tailwind to our margins over the next several quarters.
On the attrition front, we saw a moderation in attrition with the trailing 12-month attrition for the quarter coming in at 19.8% compared to 21.6% in Q3. We believe that the trailing 12-month attrition will continue to moderate going forward, aided by a general moderation of hiring across the sector and better outcomes on our employee value proposition interventions. Moving on from operational metrics to other highlights for the quarter. We are pleased to share with you that the board of directors declared a final dividend of INR 12 per share for FY23. Together with the interim dividend of INR 28 per share, our total dividend for FY23 stands at INR 40 per share, which compares to the total dividend of INR 31 per share for FY22.
Additionally, the board has decided to declare a special dividend of INR 10 per share to thank our shareholders for their support on our journey to $1 billion milestone. This takes the total dividend for the year to INR 50, including the special dividend. It continues to be our endeavor to maintain a consistent dividend payout ratio while we augment our growth through capability-led acquisitions. Coming to the update on acquisitions and strategic investments. As reported earlier, all our recently acquired businesses have been fully integrated and are coming together as one Persistent to win large deals across our focused verticals. We have again become active on the M&A front. Consumer technology, cybersecurity, generative AI, European expansion, and some key domains in financial services and healthcare are the ones that we are looking for in acquisition terms.
A number of these, specifically consumer technology, cybersecurity, and generative AI, are the ones that we have been incubating for the past several quarters. In particular, on the generative AI front, we are looking to invest in software labs and training our employees on things including large language models, AI-paired programming such as GitHub Copilot, and so on. We recently also announced an expansion of our existing Azure Center of Excellence with AI-based modern workplace solutions. We'll report progress on this front over the next several quarters. Coming on to the general administrative updates. On the administrative side, in Q4, we did a groundbreaking ceremony of our new MIHAN plot in Nagpur. This will be a new campus for us in Nagpur. We also finalized the site for a 250-seater office in Calcutta, as well as a new office in Japan.
In the coming quarters, our expansion plans include locations such as Kochi and Chennai in India, Dallas, Texas, and Poland in Europe from a nearshore European delivery center for print perspective. Our endeavor is to provide a world-class delivery network to our customers by providing best-in-class facilities to our employees in locations close to them, and also to encourage them to work from office at least a few days a week. In summary, we are pleased with our performance in Q4 with continued healthy revenue growth, strong order wins across focused industry segments, good pipeline and improving profitability despite the macro headwinds. Now I would like to invite Sunil, our CFO, to give a detailed color on the quarterly financials and related matters. I'll come back after Sunil's comments to give you some more details on key client wins, analyst awards and other recognitions for the partners.
Sunil, over to you.
Thank you, Sandeep and Avani, good evening, good morning, everyone, and thank you for taking the time to join us today. While Sandeep has briefed you on the market outlook of the quarter as shaped, let me take you through the details of financial performance for the quarter. This was the quarter where, I mean, much awaited $1 billion milestone we crossed. The revenue for the quarter was $274.55 million, with a growth of 3.9% QoQ and 26.3% YoY. You would have seen services revenue growing by 5.5% quarter-on-quarter and IP revenue declined by 14.6%, essentially due to the seasonality in this business.
Our total revenue for FY23 stood at $1.036 billion, with YoY growth of 35.3%, with services revenue registering growth of 42% and IP revenue showing decline of 14.86%. You will recall that the IP revenue for last year included royalty revenue from one of the contracts that was restructured at the end of Q3 of FY22 and was converted into a lesser scope T&M contract. Thus, the IP revenue for this year does not include any revenue from that restructure contract. That is partly the reason for the decline in IP revenue. Revenue for the quarter in INR terms was INR 22,544.7 million, reflecting growth of 3.9% QoQ and 37.6% YoY.
The revenue for FY 2023 was INR 83,505.9 million, with growth of 46.2% over FY 2022. On the segmental growth, BFSI growth was 3.1%. Healthcare and life sciences grew by 4.4% quarter on quarter. Technology companies, that is the software high tech, grew by 4.1%. In respect of linear revenue to offshore revenue, offshore linear revenue grew by 9.6%, comprising of volume growth of 9.3% and growth in billing rate by 0.6%. The onsite linear revenue declined by 1.2%, majorly on account of decline in volume by 1.3%, while billing rate grew by 0.6%. Let me walk you through the movement in key operating expenses and an impact on EBITDA.
The employee-related expenses increased only marginally in absolute terms, while as a percentage of revenue, it declined from 63.6% last quarter to 61.6% in Q4. This was on account of lesser net addition to technical headcount. We added 262 people as compared to 92 in the previous quarter to the technical talent. The freshers, as Sandeep mentioned, added to the talent pool about 3/4 ago are now getting progressively deployed on projects. We have also deployed some freshers in the IP-led business, which is where you see certain increase in the IP-led person months. All freshers are now part of the available talent pool, partly from mid of Q3 and balance from mid of Q4, which you will find reflecting in the utilization numbers.
You might have noticed an increase in purchase royalty expense in this quarter, so let me give you details around that. This particular item, traditionally has item which is relating to IP revenue. It has got partner IP, which is in form of reseller kind of business, and it has also got royalty when we are working with some of the partners. However, in the recent deals, we have had licenses as part of delivery, which we are using for the purpose of the long-term projects. The revenue for which is reflected under services. You will need to bear in mind the fact that the growth in the IP or the purchase royalty IP is not directly linked to the IP-led revenue.
In terms of the absolute amount that we have, that you may see sudden bump which has happened is because of the recent large deals, and this will as a % get moderated as we go along. We don't expect this absolute amount to increase, unless for the reseller deals that sometimes, you know, keep coming over the quarters. In terms of additional expenditure, as Sandeep mentioned, with respect to the annual planning event, it impacted margin by about 30 basis points. The currency was flat, after accounting for movement in all these expenses, you will find that the overall cost as % to revenue remained more or less in the same ballpark as the last quarter. EBITDA at 18.5% and EBIT at 15.4% were at same level as the last.
EBITDA for the full year was INR 15,191.3 million, growing at 58.5% year over. EBITDA margin for FY23 was 18.2% as against 16.8% in FY22. There is obviously higher expense in form of amortization relating to the acquisitions we had done. On a YoY basis, you will find that increase from 2.9%- 3.2%. EBIT for FY23 was INR 12,472.3 million, which grew at 57.4% year-on-year. EBIT margin came in at 14.9% as against 13.9% in FY22.
The treasury income for the quarter was INR 129.05 million as against INR 87.02 million, mainly on account of increased interest rates and increase in treasury size. Forex loss was INR 189.1 million as against gain of INR 105.4 million in the previous quarter. This was essentially due to the dollar weakness that we saw during January and February, which caused loss on the realization of receivables as compared to the rate on 31st December 2022. On the full year basis, treasury income was INR 366 million as compared to INR 1,052 million in FY 2022. The lower treasury income in FY 2023 is partly due to lower treasury size post payout for acquisitions done in Q4 of last year and Q1 of this year.
That is the acquisitions we did for Data Glove on MediaAgility. The interest from borrowing await for acquisition funding and elimination of interest income from ESOP trust to the tune of INR 195 million on consolidation of ESOP trust starting April 1, 2022. These three factors led to the lower treasury income in FY23. Profit before tax for the quarter was INR 3,405.9 million at 15.1% as against 14.9% in the previous quarter. ETR was at 26.2% as against 26.3% in the previous quarter and will remain in this range.
PAT for the quarter was INR 2,515.1 million at 11.2% of revenue as against INR 2,379.5 million in the previous quarter at 11% of revenue. PAT for the full year was INR 9,211 million as compared to INR 6,904 million, reflecting growth of 33.4%. In terms of PAT margin, it is 11% of revenue as compared to 12.1% in the previous year. EPS for the quarter was INR 33.65 as against INR 31.90 in the previous quarter. The growth in EPS is 5.5%, while growth in reported PAT was 5.7%.
The board of directors, as Sandeep mentioned, have recommended final dividend of INR 12 per share and special dividend of INR 10 per share. The operational CapEx for the quarter was INR 1,232 million. This includes increased facilities in India locations. Total cash and investments are INR 15,199 million as at 31st March 2023, as against INR 15,139 million at the end of last quarter. The cash balance at the end of Q4 was partially after the dividend payout, and it is lower because of the dividend payout and facility rental costs at Tirunelveli, as I mentioned. Coming to DSO, the DSO came in at 68 days as against 67 days in the previous quarter.
During the month of March, as a result of the crisis at Silicon Valley Bank, which was one of the banks we bank with, we requested our customers who were paying into our SVB account to redirect payments to our other bank accounts. There were 3 weeks in that particular month left before this change could be accommodated by the customers, there was some spillover of collections into April, which impacted DSO by 2 days. Forward contracts outstanding at the end of March are $230 million at an average rate of 82.83 per dollar. With that, I thank you all again and hand it back to Sandeep. Thank you, Sunil. I'll now talk about the key deal wins for Q4 by industries and regions. Coming to the software, high tech and emerging industries.
Persistent was selected by a Fortune 50 technology company as the engineering partner for its data warehouse product suite, as well as its mobile application development work.
This is a $100 million deal over a 5-year period and involves execution on a product roadmap as well as migration of end users to customer's next generation platform, which we will also be involved in. Alongside supporting the current and forward-looking roadmap, as a part of the deal, we have licensed the source code for providing extended support for the earlier version of the product for enterprise customers who do not wish to move to the next version. Persistent was selected by a leading marketing technologies solutions company to provide engineering and infrastructure services for its platform. This is a large double-digit million TCV 5-year deal through our private equity go-to-market. Persistent was selected by a leading company in the supply chain analytics domain for product modernization and Coming to banking, financial services, and insurance.
Persistent was selected by a leading private equity organization to develop a procurement and contract solution for its procurement group as well as modernization of its enterprise data warehouse. Persistent was selected by a leading company in the fractional trading and embedded finance domain to develop an integration platform for onboarding and servicing its global customers. On the insurance side, Persistent was selected by a leading company in property and casualty insurance support to build a cloud-based data lake to support policy administration, claims analysis, and prediction of risk levels for the underwriting process. On the healthcare and life sciences side, Persistent was selected by one of the largest pharma and diagnostics companies to build and integrate genomic workflow management tools for all of its acquired businesses, leading to significant increase in their experimental throughputs.
Persistent was selected by one of the largest companies in scientific instrumentation group to build an enterprise data platform to streamline governance and operations across multiple business groups, including procurement, supply chain, finance, and corporate. Persistent was selected by one of the largest global providers of kidney dialysis services to build a patient and experience management application to educate and improve patient satisfaction scores. Coming to the awards and recognitions for the quarter. Q4 saw us get continued recognition from industry-leading analyst firms and associations. To mention a few, Persistent was included in the Constellation ShortList for innovation services and engineering for the first quarter of calendar 2020. Persistent was named a leader in 2023 Zinnov Zones for Intelligent Automation Services.
Persistent won a number of awards from ISG, including being named as a Rising Star in ISG Provider Lens for U.S. 2022 for Google Cloud Partner Ecosystem. The Rising Star in ISG Provider Lens for AWS Ecosystem Partners for U.S. region for 2022. Winner in the 2022 ISG Digital Case Study Awards for its patented learning solution. In summary, we continue to deliver healthy revenue and profitability in Q4 despite an increasingly difficult macro environment. With this, I would like to conclude prepared comments and like to request the operator to open the floor for questions. Operator?
Thank you, sir. We will now open the call for the Q&A session. We request participants to restrict to 2 questions and then return to the queue for more questions. Please raise your hand from the Participants tab on the screen to ask a question. First question is from Abhishek Bhandari.
Yeah. Hi. Good evening, everyone. Sandeep, I have 2 questions. The first question is on your growth outlook. You mentioned about, you know, good deal wins, what you're seeing in terms of ACV and TCV growth. Also, finally, the growth returning to our top accounts. At the same time, you also mentioned about, you know, some bit of uncertainty given the macro environment. Could you know, could you tell us when do you know, intend to go back to your 4%-6%, you know, quarterly growth number, you know, in FY 2024?
We don't give forward-looking guidance, but let me give you a color on the range. If you look at the trailing 12 months ACV booking, if you look at the quarterly bookings, all of that has shown a healthy trend. From that perspective, you know, the bookings should translate into growing revenues over the quarters. In terms of the range, look, we have said in good times, we have delivered up to 9% quarter-over-quarter as well. Here we are looking at, in the subsequent quarters, anywhere between 3-5%, 4-6%. That is the range, and, you know, we'll try and surpass.
Got it. Second question, Sandeep, is on your margin outlook. You know, bulk of the improvement, what we have seen in last, you know, 12, 18 months is on back of SG&A. Finally, we have started now seeing, you know, some bit of utilization play, you know, coming into picture. Could you tell us, you know, going forward on the margin side, what are the key levers, you know, beyond improvement on utilization, which you think, you know, could help you on both gross margin and EBIT level?
There are multiple levers, Abhishek. If you look at it, whether it is scaling our existing accounts, we have been consistently scaling the existing accounts. We have taken freshers. Even today, a significant amount of freshers are not necessarily deployed, and they have been in the system anywhere between 9 to 10 months or even more in some cases. That is the other one. If you look at, you know, the newer areas that we are getting, whether it is generative AI, whether it is on the cloud side where we continue to grow expertise, those are areas where we are able to get better pricing than otherwise as well. There are many different levers along with scale that are there.
We have said our aspirations is over the next two to three years to go up by 200 to 300 basis points and sustain it.
Got it. Thank you, Sandeep, and all the best.
Thank you.
Thank you. Next question is from Sandeep Shah.
Yeah. Thanks. Thanks for the opportunity, and congrats for the good execution continuing quarter after quarter. Sandeep, the first question is, some of your peers have started talking about project cancellation, project ramp downs, delaying start of the projects as a whole. Does this worry you entering FY24, where you believe the leakage of project completion within the revenue could be substantially higher versus FY23, and that keeps you growing your order book higher and higher, otherwise the growth may get impacted? Does that worry you?
Look, there are times when the market was good and we were growing at a fairly significant. We have grown at times 5 quarters at 9%. The growth has moderated, that is partly a reflection of all what our peers are also saying and so on. Have there been, you know, things like ramp downs? If you look at our own top customers, we saw the ramp down happen a few quarters back. We worked very hard to get it back. Like that, we talked about the hyperscaler, where we have seen a certain amount of ramp down even in this current quarter. Look, the endeavor that we have is this is par for the game. We can't expect the market to be good to us all the time.
We will have to learn to live with the uncertainties and even then grow the order book and deliver the best possible growth rates that are there. Rest assured, we are committed to that, and that's what we are working on. There will be percentages. Like for example, this top customer that we had ramped down on or the hyperscaler, we didn't, you know, have any forecast of that coming in. Those were order wins that were there earlier. We have still grown, if you look at our historic track record, grown despite this, and that's exactly what we are committed. We'll keep bringing in more so that even if there is leakage, whatever best we can do, and it'll be higher than the industry. Before you ask us what the industry growth is, everyone is talking between 7%-10%.
We'll be higher, much higher.
Thanks. Thanks. Just a follow-up. In one of the large deal which we have signed from warehouse, last week there is some M&A event which has been announced where the controlling stake could be owned by a private equity. So does that worry you in terms of any change in the structure of the deal? Because that deal has started ramping up, and might that client entered within your top 10 account list as a whole. I have to follow up with CFO as well.
Sure. Sandeep, it doesn't worry us because the same private equity had earlier done a PIPE, which is basically, you know, if you look at the company records. The private equity is not new that, to that company. Even when we hit that deal, they were actively kind of there as investors. Second, the deal construct that we have, it is basically a fixed kind of a construct for the next 5 years. That is where the things are.
Okay.
If the deal was to be restructured, there are obviously restructuring fees attached to it. I'm not worried. Again, it's a relationship thing. If you have to open the contracts it's a different ballgame. We are not worried at all. The rest two questions I'll leave to you, sir.
Just 2 bookkeeping question to CFO. Sir, if I look at the gross block on the software, 9 months it was INR 12 crores, and at the end of FY23 it is INR 51 crores. Almost INR 38-39 crores been added in the gross block of software in the Q4 itself. What is the nature of that? Second, in terms of your purchase and royalty costs, is it fair to assume the absolute amount may also decline on a Q on Q basis going forward?
Yeah. On the first item, the increase in software rev block is essentially significant investment that we have done in the cybersecurity area for Persistent as a company. Right? That is one important item. The amount in respect of purchase royalty, you're right, I mean, as a % to revenue, of course it will moderate. In absolute terms, there may be a slight decline. As you know, this item has got multiple components, as I explained. In absolute terms it is hard to say because there may be deal related, particularly on the resale side. As steady state, yes, there will be slight moderation that way, but not a whole lot. In absolute terms, it would stay in this range, little lower than this. In % terms it will definitely reflect the moderation.
The cybersecurity software we are capitalizing, in the product development which is under, WIP?
No, I don't know what you are referring to, because this is third-party software which is bought for our own business.
Okay.
as investment in strengthening our own, you know, cybersecurity posture.
Okay. Got it. Got it. I will come on the follow-up. All the best.
Sure. Thank you.
Thank you. Next question is from Karan Uppal. Karan. Yeah. You can go ahead, Karan. Okay, we'll take you back. Next question is from Mehta Bhavik.
Thank you. Couple of questions. Firstly, the headwind what you saw in the hyperscaler account, how is the rest of the portfolio trending? Have you seen any ramp downs or project referrals in some other clients as well over the course of last quarter or maybe this month?
Yeah.
The second question is going back to the license, with what you explained, because of the large deals, is it possible to quantify the impact? Because this also sits in the revenue, so that will help us understand, you know, what was the real underlying growth outside of the license fees. Thank you.
Okay. Bhavik, two parts to it. First on the ramp downs. Look, ramp downs, there's no other significant ramp down. If it was, we would have called it out. We have been calling it out, whether it was a top customer or even this particular case where the hyperscaler, we have proactively called it out. There's no other significant material thing. There will be, you know, obviously projects that end, projects that start, so nothing to be worried about. As far as the large deal is concerned, look, the revenue from the large deal is all services. There are two parts to the services revenue. One is the ongoing, you know, product development that we will be doing for the current product, next generation product, migration from the current product to the next generation product. That is one part of services.
Second is this customer does not want to, you know, provide services to the prior versions of the product, because they are more interested in investing in the next generation and in building their own warehouse and so on. We have taken the license, source code license, and we are, because of that, starting to win large enterprise customers for, you know, the extended support of this product. People who do not want to wish or who don't want to wait for the next generation of the product and want to, you know, possibly look at extending this for the next few years before deciding on their strategy. Overall, services revenue you should see significant increase and profitable increase. Keep in mind this is...
we are not saying that this is a cause for profitability concern before you kind of think anything on those lines. We are committed, as we said before, for the next 2-3 years, we are committed to taking our profitability up systematically quarter by quarter and take it up by about 200 basis points. I can answer any follow-ups.
No, thank you. That is helpful.
Thank you. Next question is from Manik Taneja.
Hey. Hi, good evening. Thank you for the opportunity, Sandeep. I actually wanted to pick your brains around the commentary that one heard from some of your global peers in terms of saying that they are seeing that they expect a significant increase in offshoring from high-tech customer base, given the kind of cuts that they have done at their own organization level over the course of last six to nine months. That's question number one. The second question was for Sunil. Basically, we've seen a significant reduction in our subcontracting expenses this quarter. How should we be thinking about this line item going forward?
On the high-tech thing, I would tend to agree, and this is what we have been saying for the last many, many quarters. Part of the ramp-ups that we have been seeing is by making sure that we are talking to the high-tech, you know, customers that we have and even for that matter, even enterprise customers. In the high-tech segment specifically, here is what has happened. You've seen whatever is happening on the hyperscaler side, whether it is Microsoft, whether it is AWS, whether it's Google and so on. Everyone has been laying off people, trying to restructure their cost base in line with the macroeconomic. There was a significant amount of hiring that happened in the post-COVID era, and that is being re-kind of calibrated. On the other side, in the market, if you look at it, there are mid-market companies that went public.
These are companies that were private equity owned or were like more importantly, venture funded owned, which went public at huge valuations. When the revenue growth is taking off, and they were earlier also, you know, they were growing very fast, but they were not profitable. The profitability is coming under even more pressure. With revenue growth tapering, profitability under pressure and a number of them not being globalized, that is the phenomenon that is leading to larger deals for people like us. You know, anyone who's differentiated on the engineering side will be a gainer of this trend. We have been a big gainer of this trend, and so that will continue at least for the next few quarters, and we should definitely see more happening in terms of offshore on that. Second question, Sunil, if you want to go ahead and address.
Yeah, sure. On the subcontracting side, Bhavik, essentially, Manik it is essentially the combination of two factors. One, of course, structurally, we have been trying to work on reducing the dependence on subcontractors as travel has opened and mobility has improved. That is one aspect. The second is of course, linked to the ramp down we saw in one of the hyperscalers. For this quarter you may see the percentage significantly lower. On a steady-state basis, we think that the way we are winning projects and required to ramp up sometimes we do depend on subcontractors to fill in the skill gaps. Somewhere at 12%, 12.5% of revenue is something that you should factor for, right?
Sometimes it has gone up all the way to 13.5, 14%, you know, during the times when travel was not easy. That's what. Currently the percentage is sub-11. It may not be appropriate to think that it will remain at that kind of a level, but the structural difference from 14%-12% is what we are working towards.
Sure.
I hope it helps you get a perspective.
If I can chip in with one more. If you could share your thoughts around wage increments for FY 2024 and when do you plan to implement it?
Wage increments are a function of the way outlook on inflation and things are. Currently, if you see inflation moderation is happening, which is reflecting in all the central banks reducing the commentary regarding further interest rate hikes and so on. It could be a tad lower, maybe couple of percentage points as compared to the last few years. We're in the range of, say, 8-9% for offshore and about 3-5% for onsite. We are working on it still 'cause our wage hikes are effective 1st of July. We'll update you as we go along.
Thank you. All the best for the future.
Thank you. Next question is from Prashant Bilur. Prashant, please unmute yourself. Okay. Next question is from Pankaj Kapoor. Pankaj, can you please unmute yourself?
Yeah. Hi. Thanks for the opportunity. My question is on the cash flows. If I look at this year, we had, close to 50% revenue growth, but it is translating to just 13% growth in our operating cash flow. Looks like your working capital has been under a lot of pressure. Maybe if you can just take us through what is causing this and how you're planning to improve things in the FY 2024.
Pankaj, the way it panned out was that during the period of the pandemic, the release of cash that happened during the course of FY 2021 and FY 2022 led to a significant bump up in the ratios with respect to cash. In FY 2023, what has happened is that it has, to an extent, normalized on one side. There is a structural, you can say, situation we faced is because of the SVB crisis in the last quarter. Had that not happened, cash flows would have looked a little better. Thirdly, we had announced in Q2 and Q3 that increase in DSOs that had affected from levels of 60 to 67 last quarter was on account of deals in the IP area with large enterprise customers which have a deferred credit arrangement. This would take...
There are no fresh deals in that bucket happening. It would take some time before these are amortized payments. It's not. Every quarter we do receive some payments and this will moderate over time. Structurally, we are not extending larger payment terms, except for some very, very large customers. I don't think there is a working capital blocking that is happening in a significant manner. We are conscious of this. We will work towards improving the cash flow and bringing down, you know, the gap between, both I mean, on the DSO side as well as the.
Understood. Can you just tell us what kind of a DSO trajectory you're looking at in the next three, four quarters? Do you expect it to remain flat or maybe improve by a couple of days, as I believe you were hinting at the start of the call?
Yeah, sure. We would be working towards getting it back to 64, 65 kind of levels. That would be the
Got it. Thank you and wish you all the best.
Thank you. Next question is from Nitin Padmanabhan.
Hi, good evening, Sandeep, Sunil, Saurabh. Couple of questions. One is, see, we have had these client-specific issues, considering the environment, not surprising. The way you see going forward, are you seeing things getting better or you see things getting worse? That's the first one. The second one was, see, if you look at the deal wins, basically we had $168 million of net new ACV. That includes the last deal as well of $100 million. You think that, I think you didn't have such large deals in the prior quarter. Just what, is it getting difficult in terms of, the, kind of sizes of deal wins overall in terms of quantum that we have consistently booked?
Do you see that getting tougher on a going forward basis? That's the second. Third, on the purchase and royalty costs, if it is a pass-through, then, is there, has there been an equivalent revenue booking or, is there some revenue cost mismatch out there? Those are the three questions. Thank you so much.
Sure. Nitin, I'll take part of the question and then I'll have Sunil answer the rest. In terms of the environment, is it getting tougher? Yeah, it is tougher. If you look at the color commentary and the result from any of the peers who have announced so far, you will figure that out. Is it going to be tougher forever? You know, we are expecting it to be tough for the next one to two quarters. It should kind of start getting better and so on. Even in tougher environment, we are not saying there's lack of opportunities. There's good opportunities, and we will have just be at it. The order books are a reflection of that. One correction I would do is the $100 million is the TCV on that deal.
The ACV on that deal obviously is different because it's $100 million over 5 years. You can extrapolate that. In terms of order book slash pipeline, there's a healthy pipeline. There are definitely deals that we would have liked to book last quarter which spilled over. That deals are taking a longer period of time. There are opportunities even in a tougher market, and it is going to be tough for the next 1-2 quarters. Thereon, hopefully it gets better and comes to a normal kind of a scenario. Sunil. Yeah. Nitin on the purchase royalty side, what you should look at is, this is not as such in a pass-through kind of a form. This is at normal margins that we would expect, you know, for the company to have on a large deal like this.
Only thing that is happening is that out of this purchase royalty, I would say about 40%-45% of the amount presents expense in form of purchase royalty which has corresponding revenue with adequate margin on the services side. What you would find is there is a mismatch in that sense that while you may see this item reflected as we could have otherwise reported it as other direct expenses.
In the fact sheet, we don't presently have that kind of a category. It would have been very odd to mention it in that form. That is the, you know, way you need to look at, and there is no pass-through or without margin kind of item. I hope that helps you understand the structure.
Yeah, sure. Basically you're saying that, whatever cost is there's an adequate margin in line with company model S, and there is no really revenue cost mismatch for the quarter, which would come later. Fair understanding?
Absolutely. It's fair.
Nitin, to add to that, when we are successful in scaling our support business for the extended support, this should be a significant margin enhancer. We've already won our first deal in the extended support. As it builds up, this is a pretty good, you know, business model along with, you know, obviously the services revenue that we are getting on developing the next generation and migrations and so on, so forth.
Sure. Perfect. This is very helpful. Thank you so much and all the best.
Thank you. Next question is from Mohit Jain.
Sir, two questions. One is the increase in IP led person months, I think, after a long gap. Is there some change in thought process there or is it also related to the deals that you were explaining in the previous question? That's one. A related part is it really part of billable when you calculate billable or these guys are separate who are not billable because they are part of IP?
IP business is IP business. It is not like a T&M that, you know, it is basically you can correlate the IP billable person months to that quarter's revenue 100% directly. It doesn't work that way. It is basically sometimes we are investing in forward-looking IP, in doing extensions of the existing products or in this particular case, it is both. We are working on developing extensions to whatever products we have, whether it was our most likely selected products or otherwise. We have done a significant amount of investment in building a practice around Viva, which we also did a press release with Microsoft a few days back. We are also integrating that with OpenAI. That is our foray in terms of, you know, getting into the next generation technologies and so on.
Whether it is on the employee productivity, whether it is on generative AI and so on. That's where we put our money to work, where we want to.
Is it also related to some product development? Like, are you guys starting to develop some new product as well on the IP side?
See, the generative AI component and the Viva things that we have developed, these are like reusable components. These are not full-blown products, but they need people to be put onto a focused way of developing these and enhancing this, and that is how we will differentiate ourselves in the market. These are not going to be full-blown products that are branded as full-blown products, but these are reusable components that we will take to accelerate our services go-to-market and even sometimes charge people.
Understood. On the utilization, are they billable? I'm assuming if they are not billable, if you could give some number for employee addition FY 2024.
Okay. As far as the FY addition for FY 2024 is concerned, look, that will directly be in line with the revenue growth that we expect to come. Since we don't give forward-looking guidance, and we have already talked about it earlier in the call, you can extrapolate. In terms of fresher hiring, I can give you a number, roughly about 850 to 1,000 freshers is what we will hire in the next, you know, quarter, in the next year. That is where it is. From a billability perspective, yeah, we do cost this. Whatever we are putting in the IP side as billable, you know, somewhere we are putting that cost towards the product development slash reusable component development.
800-1,000, is that the right number for fresher intake?
850.
Fresher hire. Yeah.
850-1,000 freshers. Laterals will be obviously as we need, we'll keep getting.
You do not see much scope of increasing utilization. This will be in sync with the revenues, revenue growth.
Utilization we have a good scope of. You know, that is definitely a lever for us. Right now we are pretty much, if you look at it, 77% or thereabouts offshore. We can, over a period of time, in a disciplined approach, there's enough to be done to take it to 80%-83% offshore and even on-site we have levers. Now, obviously, keep in mind the utilization figure that we are talking about includes the freshers that have been brought into the billable pool over the last quarter and earlier quarters. As these freshers get to be productive, that's a significant margin lever for us and it'll show up in the utilization metric. There is definitely that inventory we are carrying.
The new inventory we'll build up over the year with the freshers we will have, and then whatever laterals we need to hire, we will hire. That should also give you the overall color commentary on what would be the total headcount addition for the next year.
Perfect, sir. Thank you very much.
Thank you. As per time restriction, we request participants to ask one question at a time. Next question is from Dipesh Mehta.
Yeah. Thanks for the opportunity. I just want to get sense about the M&A. You indicated now we are back to active kind of thing. The priority in terms of tuck-in versus scale acquisition, and if you can provide some perspective. Last time we have seen some bunch-up kind of thing. Some of the area earlier you highlighted, but if you give some sense about what we intend to do with the M&A from overall strategy perspective. In one of the things you highlighted from strategy perspective, supersizing existing account. If you can give some holistic answer. Thanks.
Sure. Look, we've always said we will acquire for capabilities and not for revenue. In simple terms, we are looking at adding more capabilities which we can take to our existing customers and build more revenue in those existing customers. As well as, you know, through that if we get more newer customers that we can mine for our capabilities, that would be a great opportunity. That is what we have done earlier when we acquired companies on the Azure side, on the GCP side, and so on. Just to give you a context, for example, we won a $70 million deal in the last quarter. That was a combination of our data integration capabilities, which was built on our capabilities, along with the capital acquisition that we had done. It also had a significant amount of Google Stack.
Our MediaAgility acquisition that we had done, which is now our Google business unit. A combination of what Persistent capabilities in Google were and MediaAgility. Those two, plus a few other combinations led to that $70 million+ perspective, we are looking at a string of pearls in areas whether it is consumer technology, cybersecurity, generative AI, or in specific areas within healthcare or BFSI. From a geography perspective, in Eastern Europe from a delivery perspective. That is the landscape. That is what we are looking at. And, you know, we will do a tuck-in acquisition wherever we get in the right capability over a period of time.
Thank you. Next question is from Karan Uppal. Yes, Karan, go ahead. Okay.
Karan, we are not able to hear you.
last five years. How are you thinking in terms of capital allocation in medium term when the macro is tougher?
We lost the first part of your question. If you can repeat the question, please.
Yeah, I was asking in terms of capital allocation. The payout has been quite handsome this year at 42% versus average of 28% in last five years. How are you thinking in terms of payout for in the medium term when the macro is tougher?
Look, from our perspective, this year was a special year. In our company's 33-year history, this is the first time we have hit $1 billion from an annual revenue perspective, and we wanted to thank our investors as well. That is the reason the payout ratio is higher. We have a defined policy on payout ratios. As we have said, we will do a good combination between providing dividends and doing tuck-in acquisitions for growth. That also should answer a question that is there on the chat. From that perspective, rest assured our focus is to bring in the right capital allocation towards acquisitions, which will aid our growth and which will also fuel, you know, obviously various different parameters for the.
Okay. Thank you so much. Thank you. We will take one last question from Mr. Abhishek Shindadkar.
Hi. Thank you for the opportunity. First a clarification. The hyperscaler revenue, is it lost or it is, you know, delayed?
It is an existing project which was ramped down, so it is lost in that balance. There are, at the same time, there are newer discussions where we have said very clearly over the next several quarters we'll recoup that amount of revenue and maybe even more. That is where it is. In simple terms, it's lost.
Okay, got it. On revenue growth, Sandeep, you mentioned that you expect, you know, at least softness to last for 2 quarters. You also kind of highlighted a, you know, 3%-5% kind of a growth. If I reconcile those two, are we looking at a back-ended growth with softness in H1 or, you know, we are expecting a, you know, consistent growth across all the 4 quarters?
A consistent and a growing trend is what I would say.
Okay. Just one follow-up on, you know, earlier question. It seemed like, you know, it is, we are going back on the, you know, end of life cycle product investments to the earlier question of Bhavik, if I'm correct. Is this a change in strategy that, you know, from a pure OPD focus that we were running for the past two years, are we going back to, you know, the end of life cycle product investment strategy? Thanks.
From a strategy perspective, no. From an opportunistic perspective, if it is at a company profitability and better and gives us access to enterprise customers where we can go and mine and sell many other services and it makes business sense for us and our stakeholders, absolutely, we will be opportunistic about it. From a strategy perspective, no.
Thank you for taking my question and best wishes on a great quarter.
Thank you.
Thank you very much. Thank you very much to the Persistent management. Ladies and gentlemen, on the behalf of Persistent Systems Limited, that concludes today's conference. Thank you for joining us. You may now disconnect your lines and exit the webinar.
Thank you. Thank you.