Q2 24/25

Nov 6, 2024

Summary

International revenue rose 2.3% QoQ, supported by strong deal wins, while retail and manufacturing remained under pressure. Management expects H2 growth to exceed H1 and targets 20% EBITDA margin by end-Q4 or Q1 FY26.

Ladies and gentlemen, good day, and welcome to Sonata Software Limited Q2 FY 2025 investor conference call. 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. I now hand the conference over to the management from Sonata Software Limited. Thank you, and over to you, sir. Thank you, moderator. This is Samir here from Sonata Software, and I have the management team along with me on this call. We all welcome you to this conference. Today, we will share our strategy, the progress we have made in the recent quarters, our strategic plan, and the financial results for the quarter Q2 FY 2025 that ended on September 30, 2024. I thank you for joining us today. We appreciate your valuable time and support. It is my pleasure to share our progress regarding our vision and growth for Sonata. Despite the macroeconomic challenges and geopolitical issues which are resulting in a slowdown that takes spending across some of our verticals. I will update you on our strategic goals, and post that, we will discuss our progress in Q2 FY 2025. Let us talk about our goals and strategy first. As you know, our objective is to be one of the fastest-growing modernization engineering firms powered by our unique Platformation framework. We aim to achieve revenue of $1.5 billion by the end of FY 2027 for the international business at an EBITDA of low twenties. From a growth point of view, we outlined a few critical bets. Number one, we will continue to win multiple large deals, building on a successful track record. If you recall, in H1 of this fiscal year, we closed six large deals. We will deepen and diversify our partnerships with Microsoft and other partners and continue to build new logos, working alongside with them, and really create the next $10 million, $25 million, $50 million, $100 million clients for Sonata through that channel. Third, continue to scale the business through deeper capabilities, build out on delivering M&As, and diversify our client base by successfully integrating them. We want to achieve these goals in our four focus verticals, which is healthcare life sciences, Banking Financial Services, retail manufacturing distribution, and Technology Media and Telecom. In the five geographies which are North America, U.K., Europe, India, and Australia. Leveraging our differentiated Lightning tools, IP, and offerings, we are steadfast in our pursuit of our $1.5 billion goal, assuring our clients of our commitment to their modernization needs. With that, let me provide you update on the large deals first. Our large deal pursuits are a significant part of our strategy. With 49% of our active pipeline dedicated to these high-value opportunities across all our verticals. 36% of our large deal pipeline are with Fortune 500 clients. I'm delighted to share three significant wins we had in Q2 with all of you. The first one is with one of the top financial corporations in the U.S. Sonata has been chosen as a strategic partner to deliver its data modernization program, including migration from Netezza to Snowflake. This is a key multi-year data and cloud modernization program for this large U.S. bank, which is in the top 10 of the U.S. banks. The second large deal is with a U.S. technology giant. Sonata will enable an optimum global delivery model to deliver on AI, cloud, and data services from our global delivery centers, including in India, Mexico, and Malaysia. We are absolutely thrilled about this win. The third win is with a client who is a leader in personal facility and food safety systems. Sonata will be a strategic partner for designing, building, managing, and continuously modernizing their consumer-facing automation platform using a combination of Microsoft, Android, and iOS technologies. Apart from these three wins, we also had two strategic midsize deals, and I'm happy to share a summary of them. While they are midsize deals, they're also net new logos for Sonata. The first one is our client is an Australia-based wholesaler. We have been awarded a multi-year data modernization program as a strategic partner. To note, this is our largest TCV-based Microsoft Fabric win in the data transformation space to date. We're very excited about this one. The second midsize deal is for our client, which is a leading food service company in the U.S. Sonata has been awarded a multi-year ERP modernization and integration program. This is the second logo we closed in the quarter, which is also a midsize deal. We're excited that our differentiated capabilities are now helping us win new logos along with midsize deals. With that, let me provide you an update on AI, which is our strategic bet. If you recall, we had talked about the fact that 20% of our revenue will come from AI-enabled services by end of FY 2027. We have now $67 million of our pipeline across 110 customers and are very excited about the new wins that we have won in the quarter. Happy to share with you. We closed a very large pharma customer as a net new client using our GenAI capabilities in the course of the quarter. In addition, we exceeded our order booking AI in the quarter compared to Q1 quarter. We're enabling our clients to leverage AI in three ways. Number one, driving efficiencies for them. Number two, driving higher consumer experience and modernizing their sales platforms. Number three, driving innovative business models for them for better outreach for a larger number of consumers to increase their revenues. For one of the health tech clients, we're harnessing the power of AI to ensure comprehensive and representative demographic coverage in clinical trials. Our clients aim to eliminate bias from the sample of people covered during clinical trials. We're using AI to ensure regulatory compliance for the customer. Our Harmoni.AI infrastructure is critical to our recent deal wins and subsequent AI model implementations. By leveraging Harmoni.AI across multiple clients, we enable GenAI-driven engineering scale, and tech acceleration. Our teams are truly at the forefront of this technology revolution. With some of the healthcare life sciences and banking customers, we are making significant progress in implementing GenAI using small language models for cost efficiency, which also results in fine-tuning of their cloud spend. We are also implementing Agentic AI approach in these clients. We have invested in AI cross-functional org led by Sharmila Sherikar to drive AI across Sonata and partner with technology delivery sales to accelerate our GTM efforts across our partnership research and continuous strategy refinement in GenAI. Approximately 83% of our engineers are now GenAI trained, which is a significant increase from 67% that we shared with you last quarter. This improvement demonstrates our unwavering commitment to upskilling and the immense potential AI has across our operations and our customer operations. With that, let me provide you an update on the scale that we are building. For our investment verticals, which are healthcare, life sciences, and banking, they now contribute 32% of our revenue, which is up from 13% 10 quarters back. Let that sink in. HLS and BFSI are now contributing 32% of the revenue which was about 13% 10 quarters back. Our strategy to invest in these verticals has really paid dividends quite significantly for us in our growth journey. These verticals added nearly 18% of our client revenue, which did not exist 2 and a half years back. We expect our invest verticals of healthcare and life sciences and banking to reach together about $250 million revenue in 3 to 5 years from now. We are very excited about the growth that we are seeing in front of us in these two verticals. The following key bets are helping us scale our offerings in the modernization stack. Number one, on the cloud and data. We have continued to progress in the cloud and data pipeline, which is now 51% of our overall pipeline. To remind you, this pipeline was about 15% of our pipeline about 2 and a half years back. It is now jumped to 51% of our pipeline. We are seeing an increased demand for our data-driven deals. This has now grown more than 120% over the previous year. We had 120% increase in our order book in data-driven deals Y on Y. Our revenue from data modernization has grown up from 13% to 23% in the last 10 quarters. Very excited about the progress our teams are making in our growth journey from a data modernization perspective. Number two, Microsoft Fabric, which is a strategic bet we made working with Sonata, and we are a featured and launch partner for Microsoft Fabric from Microsoft perspective, which is the data analytics platform for the era of AI, and went to GA in November 2023. Since its launch, we have witnessed a significant pipeline build of our Fabric, which is now a $91 billion pipeline across 110 clients of Sonata. We are very excited again with the progress we are making on the Fabric platform working alongside with the partners. Microsoft Dynamics, which has been the core pillar of our growth for many, many years. In Q2 FY 2025, we won one large deal with a high-tech customer and one mid-size deal with a retailer. During the quarter, we witnessed continuous modernization success, and we now seeing green shoots in the CE space, Dynamics CE space, to take out the competing SaaS platforms and the Power Platform space to take out competing RPA platforms for our customers. We are very excited again on our growth in Dynamics CE and Power Platform combined. Our SITL business continues to deliver solid performance quarter-on-quarter, and in this quarter delivered an ROCE of 78.4% in Q2. On a normalized basis, it will be 45.2%, but we had some exceptional item in the quarter, so we got 78.4 ROCE in the quarter. Now coming to the awards. We were recognized as a major contender by Everest Group for our low-code application development area, and we were recognized by HFS as the fastest six service providers from a growth point of view in Q2 over FY 2024. Very excited about our progress and our capability build and the fact that we are the fastest growing company in the market today. Update on talent. Sonata University has been at the forefront of our capability build initiatives, and it saw increased usage of an acquisition of new skills such as GenAI. Our active headcount in the quarter increased to 6,900 people, which is compared to 6,619 a quarter before. So we added about 250 people net in the quarter. The trailing 12-month attrition was at 13%, and our gender diversity is at 31%. We continue to make good progress on our gender diversity initiatives. In the course of the quarter, we also implemented salary increase for our junior management effective July. We are planning to implement another increase for our mid and senior management effective Q3. In addition to that, we continue, even in these times, on our campus hiring programs and we onboarded 150 campus grads during the course of the quarter. Goes on to show that we are continuing to build our scale in the current environment as well. With that, let me provide you an update on the Q2 FY 2025 performance. The key outcomes for the Q2 FY 2025, despite the industry headwinds. For the international business, our revenue grew 2.3% quarter-on-quarter, much in line with our forecast that we gave at the beginning of the year of 1%-3% growth. We came in at 2.3%. We had a very strong order booking of 1.23 book-to-bill for the international business. In Q2 FY 2025, we won three large deals and six mid-size deals. We now have, and this is a very noticeable achievement, we now have eight clients which do more than $10 million revenue on a run rate basis annually for Sonata. That number was about four less than two years back. Our EBITDA remained at 18.2 in Q2. Our utilization remains steady at 87%. For the civil business, the domestic business, our growth contribution in the business grew 2.5%. Ladies and gentlemen, the line for the management has been disconnected. Please stay connected while we reconnect the management back. Ladies and gentlemen, we have the line for the management reconnected. Yes sir, please go ahead. Apologies for the snafu. I just want to conclude. I want to take this moment to thank all our Sonatians globally for their commitment, hard work, and the quality of outcomes they deliver to our clients day in and out. We are very proud of our team members. Thank you to Team Sonata. With that, let me turn it to Jagan for his comments on our financial performance. Jagan? Thank you, Samir, for the overview. Good morning, good afternoon, good evening, all. Let me start the update on international business services for Q2 2025. In international services, the dollar revenue was $84.6 million, with quarter-on-quarter it grew by 2.3% and year-on-year by 2.6%. In rupee terms, the revenue stood at INR 707.9 crores, which was 2.9% quarter-on-quarter growth and year-on-year 5.7%. In constant currency terms, revenue grew by 1.5% quarter-on-quarter and 3.7% year-on-year. Now the comment about the profitability in international business. The EBITDA before ForEx and other income stood at 18.2% against 18.7% in Q1 2025. The major reason for this was a salary increase given during this quarter had impact by about 1.1%. However, we were able to compensate that through the savings in operational improvements and also SG&A leverage what we got during this quarter. Hence our EBITDA came back top only by 50 basis points in this quarter. The PAT for international business stands at INR 62.2 crores. It had a 4.4% decrease quarter-on-quarter from the last quarter. The growth driven by the main top clients were Microsoft, Dell, SAP, and Quant customer. In international services, the Q2 ROCE stood at 20.3%. Q1 was and Q2, RONW stood at 23.5% compared to 21.6% last quarter. Now the update about the domestic business. Gross contribution in Q2 stands at INR 70.2 crores, grew by 2.5% quarter-on-quarter, 12.4% year-on-year. PAT for domestic business in Q2 was INR 47.3 crores, grew by 9.5% quarter-on-quarter and 9.5% year-on-year. The DSO for domestic business stood at 35 days, same as last quarter. The ROCE in domestic business is 45.2% compared to 44.6% last quarter. The reported ROCE was much higher due to one-time changes impact that happened during this quarter. The DSO of the international business continued to stand at 45 days. About comment about the consolidated business. PAT for consolidated business stood at ₹106.5 crores, growth of 0.8% quarter-on-quarter and 14.3% de-growth year-on-year. The consolidated EPS for the quarter stood at 3.84 per share compared to 3.81 per share last quarter. At console level, quarter-on-quarter 2024/2025, ROCE stood at 24.7% and RONW stood at 28.4%. Now the comment about the cash flow. This quarter, there were major movements on the cash payout. The first one was one of paid to Quant. The second payment to Quant after the acquisition, about ₹116 crores was paid on this. Onco, we paid the third year and final one-off payment of ₹59.4 crores. We also paid the incentive and the increments for the employees during this quarter. We paid the loan to the extent of ₹48.9 crores during this quarter. We also had the final dividend payout for the shareholders in this quarter. The benefit for us was, we had a decent amount of IT refund coming for us, which is the old assessment work was pending for us. Moving to some important operating metrics. The total headcount moved from 6,619 in quarter one to 6,908 in quarter two. Net headcount addition of 289. Utilization of Q2 stood at 87% compared to same level of Q1 2025. We have added eight new customers in Q2. Top ten clients contributed revenue share of 63% compared to 50% last quarter. Number of clients more than $3 million. Run rate in Q2 is 22 customers compared to 21 last quarter. The vertical mix for Q2 is as follow. TMT is 32%, retail manufacturer is 31%, HLS is 10%, BFSI is 22%, and emerging is 5%. Revenue by top go-to-market was data became 23%, Dynamics is 23%, and cloud is 41%. The Q2 order bookings stood at $104 million, which is 1.2x of the international services revenue. This is booked to bill. Our international services continue to have a good cash collection of about $86.7 million in this quarter. In summary, we continue to remain optimistic about the long-term growth prospects. Thank you all for attending this call. With this, I hand over the call to the moderator of the financial. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone phone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question comes from Rakesh Agarwal, from Rakesh Mangal & Company. Please go ahead. Yeah, good evening, sir. Am I audible? Yeah. Sir, what is the reason for de-growth in domestic business? This is 21% reduction. Quarter 1 is INR 1,849 crore, whereas quarter 2 is INR 1,461 crore. Yeah. We have always mentioned to you that domestic business you should not see the turnover. We should always consider the gross contribution. Gross contribution has actually grown from INR 68.5 crore to INR 70.2 crore this quarter. The turnover depends on the contract, what we sign and contract what we close. Some of these contracts may be large, some contracts may be less. So please don't see the revenue or turnover of this business. Just see metrics only about on the absolute amount of gross contribution. Okay. But sir, please, I don't follow it. Can you throw some light on why even if the revenue had been dropped, how this gross contribution has been increased? Oh, that part. It depends upon what is the kind of deals we have. In this quarter, we have a couple of deals where the gross contribution percentage was better for us. Average, we run between 3.9%-4.1% of the gross contribution as a percentage of revenue. But some of these deals, we had a higher gross contribution in this quarter. Hence, the gross contribution amount grew, but turnover need not grow for that. Okay. We will have a bumpy ride in terms of turnover. Got it. What is the revenue impact of these new three deals, major three deals we have entered or finalized this quarter and two major three deals and international three deals and two deals. What is the coming revenue impact? No, these deals are large deals for us and definitely these are all deals are normally all the large deals are between three to five-year time frame. So with the large deals coming in, we will have a good impact on the revenue growth in the coming quarter, but may not be immediately. All large deals will take a little time of transition because most of the deals have transition impact also. Once the transition is done, the revenue will become a normalized mode on the revenue transition. We cannot particularly give about a particular contract. We do not disclose that, but will have a positive impact on our revenue growth. Thanks, sir. When are we expecting this will impact our revenue? From which quarter? No, I have mentioned. It depends on each of these contracts and what is the tenure of the contract, what is the complexities of the deal and all these things. On a very large deal, mega deals that we generally give, how much impact will happen and which quarter the flow will happen, normalized revenue flow will happen. These are all large deals, regular large deals. There will be more and more large deals. Always we win three to four deals every quarter. Hence, I cannot specifically tell about how much impact this will happen. We will continue our process of winning the large deals, and it will continue to help us to grow the revenue quarter on quarter. Okay. Thank you, sir. Thank you. The next question comes from Mihir Manohar from Carnelian Asset Management. Please go ahead. Yeah. Hi, thanks for giving the opportunity. Am I audible? Yeah. Yeah, sure. I mean, something largely wanted to understand, I mean, the deal pipeline overall, which has been quite good. I mean, cloud data pipeline or even on the MS Fabric and Dynamics side, the breakup is happening quite strong. You mentioned 51% of our pipeline is now cloud and data versus 13% before, let's say 2, 3 years back. But how should we see this particular part of the business translating into revenue growth? Should we see as you know the historical growth rate that we used to have, I mean, 3%-5% type of growth, which was like one of the top quartile growths among the industry. Should we see that growth coming back given the deals which are there in the pipeline, which you said? That was my first question. Sure. Do you want to answer this first, or do you want to complete all your questions? I mean, maybe, I'm okay with anything. Okay. Let's answer this first. There are two things happening in the market, Mihir. These deals that we are winning are helping us incrementally take our revenue up. If you recall, we had said when we had a degrowth quarter in Q4 that first half of the year we will see 1%-3% growth and the second half will be better than the first half. I think these deals are all adding up to us to deliver a better second half of the fiscal year compared to what we had in the first half of the year. That is point number one. Point number two, as you know, there are headwinds in the market right now, especially in the retail and manufacturing side, because that is about 30% of the business which is under pressure because of the industry headwinds. These deals are actually in some ways offsetting the pressure that is getting created help Sonata deliver higher than average industry growth rates that we are talking about. That is a two-way to think about it. Our second half will be better than the first half comparatively. Second, it is also offsetting us to take the headwinds from the retail and the manufacturing sector and offset that downstream. Sure. On the deals side, how should we see these deals from a margins perspective given the fact that this, I think, will be more on the discretionary side of the data cloud and everything. How should we see margins come there? If you think of the midsize deals, they are at par with our standard margins of the company. They are overall at par, and they will start at par, and they will stay at par. Some of the large deals while their overall margin profile in the term of three or five years will be at par with the company. For the first few quarters, there might be some impact because we are ramping up, et cetera. In general, there is not any negative had been expected from any of these large deals. The one that we announced in May, June time frame had an impact and we told you guys that will have an impact in Q2, Q3, and Q4, but that is already baked into our numbers right now. These things we do not expect to have any significant impact even in the short term. They will probably be at par or slightly accretive. Sure. My second question was on the finance cost. I mean, there has been a very good bifurcation of the finance cost in the presentation this time. I mean, if we can get an understanding as to how should one see each of these components of the finance cost for the balance part of the year. Because IBDB unwinding, we were expecting that unwinding to come down and even the interest on acquisition loan to come down. How should we see these three components for the balance part of the year? This unwinding has already come down. If you see the investor deck in slide number 24, we have given it. How much of the unwinding has come down compared to Q1 and last year, what was the Q2 number? It has come down already. The unwinding will get next year when the next payment happens, it will fully disappear there. Interest cost on acquisition, our loan, what we have, it is SOFR plus what we have taken with the margin from the bank. SOFR is a quarterly reset, hence it will come down from next quarter by 50 bps. Once it starts coming in, our interest cost also will start coming down. Okay. So when are we going to repay the loan which we have taken for acquisition? What is the exact timeline that we are looking at there? The loan we have taken till now will be repaid by FY 2026 ends. Okay. Just INR 10 crores, should we be looking INR 5 crores from next quarter onwards? It is already there. You are talking about interest cost, right? Interest on acquisition loans. Interest on acquisition loans is not five crores. It is the interest on deferred consideration that has come down by five crores from Q4 to Q1, and then Q2. It has already come down. Sure. Just last question was- Interest on loan will come down by 50 basis points, but that impact will happen from Q3. Okay. 50 basis points would be two and a half crore kind of a reduction, two and a half crore per quarter. 50 basis points on the loan amount. Loan amount was $77 million. We are repaying that. Whatever was outstanding on that interest cost will come down. It will not have a 50 basis point impact on profitability. I am talking about interest paid. SOFR plus margin, that SOFR is coming down by 50 basis points. Understood. Sure. My last question was on the annual quarterly variation. I understand that we are a small company when we see the international business. How is the quarterly variation for us across verticals and across segments, like say, TMT or retail from that matter is quite stark when we compare that to others. I mean, we have said 15% growth last quarter, this quarter 50% growth. Why is there such a stark variation which is there for us versus our big brother? Let me take that, Mihir. I think it is really a function of the deals that we are pursuing. On a small base, we close two mid or large deals, we see a very strong percentage jump. That is what is really happening, and I think that is part of the strategy we are building out because we want to build scale in these. If you look at a slightly longer duration, Mihir, which is what I shared earlier, our healthcare and banking business together were about 13% of our business 10 quarters back. They are about 22% of our business now. Over the last 10 quarters, as Sonata has grown, these businesses have grown faster than the rest of the Sonata, which just gives you the sense of how this business is looking like for us. That is why we are excited, and it was part of the strategy to diversify the business, because retail manufacturing was about 30%-35% of business, and that is pretty much flatlined for last four quarters. This is actually helping us offset that. On a secular basis, we think this business will continue to grow faster than the rest of Sonata. Sure. Just one last follow-up. You mentioned second half to be better than first half. Given the deal wins which are there, should we expect second half to be substantially better than first half? Well, it is a relative word, substantial, but we do expect second half to be better than first half. Look, let us not forget that we still have some headwinds in the business because of retail manufacturing, but I think it will be better than the first half. How better we will report back when we come to the next quarter, Mihir. Sure. That is it from my side. Thank you very much. Thank you. The next question comes from Dheeraj Dave from Samvad Financial Services LLP. Please go ahead. Yeah. Am I clear? Can you hear me? Yes. Yeah. One question. Basically, I am a retail investor for almost eight years with Sonata Software, and this is the first time when company is doing everything good, at least cash flow-wise, acquisition-wise. We have paid something which is incentive towards the companies which we acquired, we have paid to employees. But we find there is no dividend declaration. Is there any change in policy? Yeah. There is no change in policy as such, but the board have decided to evaluate the dividend payment in the coming quarter. The reason is because of our loan repayment and many other reasons are there, but the board is going to keep evaluating in the coming quarters. Even if it sounds something which is kind of when we were looking at acquisition funded by debt and we are paying incentive and we are paying increment when attrition rate is 13% to employees, which is fine. We are manpower company, we should pay more dividend to that part. We have liquidity and we are paying dividend. In fact, from the turnaround time, we have started paying two quarterly dividend. Today, we are in great shape and still deliberating. Are you looking at acquisition or something that you are needing to hold back the cash reserve? Otherwise, it is not making sense. No. Why change the policy? In fact, there was no communication. If you check discussion sometime back, quarter, last five, six quarterly discussion, I categorically asked there is any change in dividend payout policy. It was said, "No, it won't increase because we have done acquisition, but it would maintain." Basically, what happens is this gives discomfort to the investor community because we are used to certain kind of pattern with the company. If you are changing that, and without any communication, it's not fair, right? Sir, this is not a change in the policy and the capital- Yeah, there is no change. But the point is that you are doing backdated. See, you are paying every six months, and that was kind of You are CFO. Since how long Sonata has been paying six monthly dividend? It's almost five, six years. Everything is subjected to evaluation by the board, sir. We know that. Our strategic priorities, the decisions are taken, sir, at the board level. Yeah, but you please pass on the feedback that investors have concerns, and at least it should be communicated to the investors that henceforth you will be getting one dividend or whatever not, because IT companies generally have a tendency, good companies have a tendency. That's fine, your board have certain consideration. Second part is, I fail to understand that we did acquisition, we are paying incentive to acquisition company. We have IT refund, which is giving us a INR 10 crore of extra dollar other income in the kind of thing which was not there in last quarter. Despite that, we find IT revenues, means all this revenue growth and all that is coming. Why there is no cash flow or cash growth? In fact, you see the condition of company. We have INR 700 crore cash and marketable equivalent, which is reduced to INR 500 crore. Why that is happening? See, the growth, it's fine to talk about all these big numbers. Why you are not saying that we will be paying X amount of dividend, or we'll have a free cash flow target. Why to look at growth if growth is not remunerative? In fact, if you look at the 10 quarters result, the dividend has been paid remains same for last 10 quarters. It was INR 7.5 or something. It has remained that only. All this growth, while it makes sense for all the stakeholders, as a financial investor, it doesn't make sense for me. It is fine. We have to look at long-term growth. I appreciate all that. At the same time, you need to balance all stakeholders. Growth and cash flow distribution or free cash flow need to talk into consideration. You can't tell in isolation, okay, we'll grow 1.5 billion. What's the point? Your margins are coming under pressure. If you look at IT service business or engagement as to market, even that is the reason given by Samir that we have got 30% retail and manufacturing, which has a headwind. You got BFSI, which has increased by 6%, and healthcare also increased by that. Basically, what it means is that we have taken a lower margin business. Or we have some one-time cost in building up for this case. If that is the case, please explain that. What is the kind of one-time cost about the new deals which will help us out over a period of time? Because that will help us elaborating, because for last four quarters, we have been constantly getting that things will improve, things will improve, things will improve, but we don't find any kind of results. Yes, sir. We take your feedback. We have explained to you about the margin in the large deal, that three to four quarters impact will be there because we are doing an investment, and we have also done a rebadging of people on site. That impacts our margin. We also told about salary increase in this quarter because we are an employee-oriented company. We need to compensate our employees. Considering these two, we have and we told about the impact on margin till Q4 of this year. Secondly, when the acquisition happens, we disclose what is the total acquisition price and what is the amount we have to pay, and based on what is the performance. We have also given a clear clarity last December when they exceeded the performance against earn-out condition. We have given all the details of that. We are giving breakups of all these payouts in our investor deck every quarter. We have taken your input, sir. Thanks for your input. We will definitely take it up and discuss internally, sir. Thank you. The next question comes from Amit Chandra from HDFC Securities. Please go ahead. Yeah, sir. Thanks for the opportunity. My question is on the demand environment. You mentioned that we have won some large deals, three large deals in the quarter and the large deal pipeline continues to remain strong. We have also maintained our long-term FY 2027 target of $1.5 billion, $500 million for the IT services business. That actually assumes a significant acceleration in our revenue growth from what we have been doing in the last two, three quarters. If you can explain how the large deals will help us in achieving that, and also your comments on post the U.S. elections is now behind, how demand environment is shaping up especially after the elections and in terms of the off-create for achieving the $1.5 billion. Is it totally organic or is there some inorganic component also into it? Yeah, let me take that. I think there are multiple parts to your question. Let's just talk about the macroeconomics. I think, like we said earlier, the industry that we service, four industries we service, it is a duality in those two regions. For example, healthcare and banking are doing well for us. Retail and manufacturing is not doing that well for us because of the current consumer spend-related discretionary spend slowdown that has had. High tech, while the large client has done well for us, but the other part of the high tech has not done that well for us. That's really two parts of the equation that we are balancing out right now. As far as the large deals, how they're helping us, really, like I said earlier, it's helping us offset some of the reductions that we're seeing in retail manufacturing side. These deals are helping us compensate and still deliver 2% plus type of growth that we just announced in this most recent quarter. That was the second part of the question. What's the third part of the question? Can you just go. I think I missed one part of the question. No. In terms of after the U.S. elections, do you see some changes that would help us? Look, it is very recent right now. But if you look at all the industry analyst forecasts, they are all talking about U.S. inflation will still be high go forward as well. Very early to say whether it will happen or not, but the pre-election results till yesterday, the messaging was that industry inflation will be high. So all consumer-facing industries, retail and manufacturing included, we do not think there will be any uptick for at least two, three quarters. But our diversification strategy to help grow in banking and healthcare really is offsetting that slowdown. Okay. On the margins part, obviously, we had the impact of wage hike. But there was also the impact of rebadging from the large deal that we won last quarter. If you can quantify the impact of what was the rebadging and has the rebadging been completed or is it still work in progress? Rebadging is fully baked in into our current quarter. So all rebadging is fully behind us. It is fully baked into the quarter numbers now. Okay. The margin aspirations, obviously, what we had is of low 20, and we are currently at 18.5%. The margin expansion mostly will happen with these large deals coming or is there some more headwinds that are still there in terms of margins? Also if you can also explain the Quant seasonality because the Quant is having better margins and in terms of seasonality, quarter 3 is the strongest quarter for Quant. So how to see the margins and the growth along with in the context of Quant? Yeah. Let's talk about the seasonality of Quant and I'll come to the margins right after that. The Quant is the current quarter. The Q3 quarter is one of their stronger quarters, and the Q4 is the weakest quarter of the year. So it's a tail or two cities. Q3 will be very strong for them and Q4 will be muted for them. So that's how we see the business, which is what we have shared with you earlier also and now we're reinforcing that point. We're not worried about the current quarter, but we do expect Q4 will be soft, but they will come back on track in Q1 again, which is our April, June quarter. That's how the revenue cycles work. The reason that the way it works that way is because they work largely in the banking space and the new year contracts generally take effect from January and they don't get signed till end of January, and then the ramp up for the new deals takes time. So really the full quarter impact comes in April timeframe. That's how the Quant business cycle works. I hope that answers the one part of the question. Second part of the question, from about 18.5 or so for EBITDA to getting to 20%, I think there are two levers at play, and we talked about it earlier also. We expect close to about half a percent to slightly more come back as we get over the large deal hump that we have invested in for the next two quarters. I think Devin talked about it earlier, that by end of Q4, we expect those large deal-related investments to come out of the business and we'll be back on track, maybe about 60 or 70 bps, coming back from the large deal impact. The second, the wage hike we have done has a cumulative effect of about a 1%, 1.1%, somewhere in that zone. That takes us typically about two quarters to recover that. So by end of quarter 4, early part of quarter 1, we should be able to get to our aspiration number that we have always talked to you guys about. Okay. Just to understand, obviously when we acquired Quant, it was a very high margin business. After we have seen very strong growth coming from Quant and most of the deals that we are winning is Quant-led. Despite that, the margins have come off significantly from, say, 22% to 18%. Is it fair to assume that the core margins which was ex Quant has actually come down quite substantially? Let me just qualify some of the statements you made. While Quant has been a significant growth driver, the deals that we announced even today, not all of them are Quant. In fact, a vast majority of them are not Quant related. The retail deal we just talked about, the Fabric deal we just talked about, the high tech deal we talked about, they are all in the organic business. Just to clarify that point first. Having said that, in the base business, the organic Sonata business, largely the wins are happening in the healthcare life sciences and the high tech space. We have not seen any big wins in the retail space after the mega deal we announced maybe a year and a half back. So that is on that point. On the margin side, if you go back, we had EBITDA of about 22%. We diluted the EBITDA by about 2%-3%, and we have hedged here with you guys because we want to invest in the newer capabilities. What are these newer capabilities? We invested in Fabric. We invested in AI. We invested in leadership in sales across the geographies. We invested in newer areas within Microsoft Stack, vis-à-vis Power Platform and within Dynamics also in the CE side. So we made some strategic bets to invest in these areas because the F&O space was working well for us, but we wanted to open up new doors from a growth investment perspective. So part of that 22% to dilution of 20% was a very planned dilution. The other 2% that we diluted was because of the large deal, which we expect fully to recover by Q4 and Q1 timeframe. Okay, sir. Thank you, and all the best for the coming quarter. Thank you. Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all the participants in the conference, please restrict your questions to two per participant. If you have follow-up questions, you can rejoin the queue. The next question comes from Suraj Malu from Catamaran. Please go ahead. Hello, sir. Sir, I just want to clarify one thing. Since there is a seasonality from Quant side, so the ideal way to look at the business is year-over-year, right? Because, for example, if I look at the revenue from top 10 clients, it has grown 29% quarter-over-quarter, but year-over-year it is 8%. So just want to confirm the right way to look at it. Yeah, no, I think your point is absolutely right, Suraj. The way to look at the business is year-over-year basis. Not only Quant, even for Sonata also. Okay. But I think on the top 10 clients, Suraj, keep in mind that the top 10 clients that we had last year are not the same this year. We have had new additions in that mix. So we have added new customers in that mix, and some of the older clients of Sonata are no longer in the top 10 because they have fallen off the run rate basis. If you recall, some time back, I just shared with you that about eight customers are more than $10 million in Sonata now on a run rate basis. So our mix of top 10 is changing. So the year-over-year is not a like-to-like comparison to what you are seeing year-over-year basis. It is not an apple-to-apple comparison because the base clients are different now. Got it. And one thing, just wanted to understand on the sharp increase in employee expense, because for the past two quarters it will look like it has jumped 10%, 11% quarter-over-quarter. So I just want to understand the split, like how much is due to wage hike, and what is the reason for such high jump. Look, I have explained to you the wage hike has impacted about 1.1% of the EBITDA level for us this quarter. Got it. And if you can explain why is that, in the absolute terms, the increase in employee expense. Oh, the absolute number, it is difficult to share details on this. This is confidential numbers, Suraj. What happened is it had a 1.1% EBITDA level for us. Normally, the total increase with junior management, mid management and senior management will be 1.6%-1.75% every year. This year, we have done only junior management, hence it is 1.1% of the EBITDA. The balance impact will be in the next quarter, as you had mentioned. Yeah. Balance impact will be in the next quarter. Exactly. Okay. Thank you, sir. Yeah. Thank you. The next question comes from Chirag Kacharia from Ashika Institutional Equities. Please go ahead. I have couple of questions. Hope I am audible to you. In second half, you mentioned your expectations to be better than H1. Which vertical do you think will drive better performance in comparison to H1? Second, what furlough impact are you expecting in third quarter? Yeah. Yeah, I will take the, Chirag, I will take the first part. Jagan will take the second part. On the vertical side, we are continuing to expect our healthcare business will grow. We are expecting the banking business to grow. Those are the two businesses from a vertical perspective we think the growth will come from. In addition, from a geography perspective, we think the U.S. geography will grow probably faster than the other geographies as well. That is the two ways to think about from a growth perspective. As far as the furloughs are concerned, Jagan will take it. The furlough will have a very minimal impact for us. We do have an impact, but it is not going to be a very substantial impact for us because most of our customers, except for one or two customers in the banking space, it is not expected to have much bigger impact on the other customers for us. From a capability perspective, as you mentioned, we are investing and there will be some margin price from the Q4 perspective. In H2, the margin press will on lower side or one should consider margin very similar to what we have witnessed in H1? I did not get your question. Can you repeat your question? What I am asking you, in H2, the margin band will remain in the same range like H1 or slightly better than H1? Q3 will have an impact of salary increase also. We will have some impact on the Q3, but definitely operational improvements will also come in there. We will have an improvement in the second half as a whole, compared to H1. But to reach back to the early 20 levels what we were mentioning, it may happen only by Q1 of next year. At console level, what basis point margin impact you are expecting due to wage hike in the third quarter? This quarter it was 1.1%. Normally, the total impact in a year will be about 1.6%-1.75% on the total increase on a normal year when the increments are given. This balance impact will come under Q3. We are yet to finalize the total number, but that means that around that number can happen. Okay. Thank you. All the best. For mid managers and senior managers. Yes. Perfect. Thank you. The next question comes from Harsh Chaurasia from Vallum Capital. Please go ahead. Hello. Am I audible? Yes. Thank you for giving me this opportunity. Sir, I have two, three questions. First is when I see your retail segment vertical, it has been degrowing for last couple of quarters. I know there is a business condition, but when you speak about your deal pipeline, can you give us some idea about what percentage of the deal pipeline is contributed by retail and manufacturing? What I am implying is, when the overall business condition improves, the adjacently in the Q1 growth will be much faster than our peers. This is my first question. My second question is basically from a margin perspective. Sorry, this is a clarification. When I see on a year-over-year basis, your cloud and IMS revenue has been the major contributor in the international business. Are we doing a lot of pass-through revenue type of deals which is impacting our margins? Third is basically when we say the 22%-20% margin dilution was planned. Can you give the breakup of 200 basis points which we have invested in business? Have we done investment on the large deal side and on the geographical expansion side from that perspective? Sure. Multiple parts to the question. On the retail large deals, they are pretty much in line with other verticals, Harsh. However, the difference in retail and other verticals is that we are seeing closures in other verticals. We are not seeing the closures come through in the retail vertical and manufacturing vertical. The clients are delaying the decisions and the cycles are longer. Our ability to close is limited, not because of our capabilities. That is just because the way the business cycles are with customers. They are delaying every quarter to the next quarter, the discretionary spend side of the equation. From a pipeline perspective, do we have the same pipeline as other verticals? The answer is yes from a large deal point of view. But are we seeing closures? The answer is no. Okay, that is the first part of the question. The second part of the question, where we have grown in the cloud, I think it is largely on the data on cloud. These are not pass-through deals. These are all data-enabled deals through the cloud platform which are hybrid deals, which has some component of cloud and some component of data inside it. But these are not pass-through deals by any measure. They are not the impact from a dilution perspective. The only dilution we have in the business from a gross margin perspective is because of the large deal we already shared with you guys. That will continue for 2, 3 quarters and then we will get normalized again. The third point of your question about from 22% to 20%, that investment was baked in, if you recall, even 2 years back, we shared with you. It is largely in the capability side of the company because we are trying to create new capabilities of GenAI, Fabric, newer sales team members in some of the geographies that we invested in, especially in Europe, especially in the banking and healthcare vertical, especially in the newer areas that we outlined to you as part of our strategy. That is where the investments of 2% has gone in from 22% to 20%, which is our target end state we want to get to from a margin point of view. Got it, sir. Thanks. Thank you very much. Thank you. The next question comes from Prolin Bharatanandu from Edelweiss Public Ads. Please go ahead. Yeah. Hi, team. Thank you for giving me this opportunity. A couple of questions and let me start with where the previous question ended on this 200 basis points investment that we had done two years back. Now, if I see, we have already won a mid-size or not a large deal, but a decent size deal in Microsoft Fabric as well. AI is something that we have been investing in. We have been winning deals in BFSI domain as well. So when do you think that this 200 basis points of investment we will recover? Would it be 2026 or when do you think we can plow back some of the margin, some of the investment that we have made? This is Jiren here. This investment will continue for two to three years, another at least three years time. The reason is because we have to bring in a scale for continuing the growth that can come in for the business. Secondly, there is a big technology changes and big opportunities are unfolding in front of us. Unless we invest and bring the scale to this, we may not be able to capture the opportunity for growth that can emerge in the market in the coming future. We have to continue to invest this 2% and at least for three years, we may not be able to recover this. Sure. Jiren, you mentioned on this technology change, right? What we have typically seen is that whenever technology changes happen, it happened at DevOps at that time. Whenever the implementation happened or whenever the benefits of that technology change percolated down to IT services company, it became more of a commodity, right? Everybody started doing it. Right now also the same thing is happening. Everybody's talking about AI in some sense and investment there and deal wins also happening. Do you think that this AI and we talk about Harmoni.AI, we talk about our very esteemed partnership with Microsoft. Do you think that that will give us an advantage and going forward when it comes to the GenAI service part of the GenAI thing, would it accrue to only a few players or all the service players will benefit and there how do we differentiate ourselves versus the rest of the pack? Let me take that. Look, for every time there's a technology change that has happened in the market, there are two, three companies which gain disproportionately. If you go back 15 years back, you can see when the digital came, few companies came from behind and took the marketplace. Of course, everybody got a part of it, but some companies benefited more from this than the others. What we are trying to do in the modernization space is exactly that. We're trying to capitalize that investment. It largely will depend upon how well we execute as a team and a company. From the excitement perspective and the opportunity perspective, it is in fact absolutely there, but we have to execute well. We made the investment, we're executing to our strategy, and some of these journeys are not very linear. Some quarters will be better than the others, some years will be better than the others, some years will be worse than the others. We are building a long-term business, and we believe what our teams are doing is really the right thing to do for building a long-term viable business out. As you know, Sonata has missed many waves of growth, and we really want to make sure that the AI wave that is in front of us, we capitalize on that as we move forward. Sure. Thank you. Just one last point. Just to conclude, our top quartile growth is something that we want to come back to in second half of FY 2025, and the margin that we were, let's say, before the start of this year, 20-odd percent, is something that we aspire to reach in Q1 FY 2026. Is that a fair conclusion on growth and margin? Let me just qualify a little bit. I think we will have a better second half than the first half. We will not end up in the top quartile just in the second half. It might be H1 of next fiscal year. Time will tell how we deliver to that. That's how our current calibration, but second half will be better than first half for sure from a growth perspective. As far as the margin is concerned, we can say it by end of Q4 or Q1 timeframe, we do expect to be 20% EBITDA company. Great. Thanks a lot, Samir, and all the very best. Thank you. Thank you. As there are no further questions from the participants, I now hand the conference over to the management for closing comments. Well, thank you all of you for joining us today and listening to the prepared comments from the management team and for your questions. We just thank you for your continuous support and cooperation with Team Sonata, and we take this opportunity to thank all the Sonatians globally for their untiring efforts to scale the company. Thank you all. Thank you. On behalf of Sonata Software Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.