- 8/1/2023
#Q1WithBQ | #SonataSoftware’s June quarter revenue Up 5% but misses estimates.
Company’s CFO Jagannathan Chakravarthi talks about dealmaking and business strategy. #BQLive
Company’s CFO Jagannathan Chakravarthi talks about dealmaking and business strategy. #BQLive
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NewsTranscript
00:00 Hi, thanks so much for tuning in.
00:02 You are watching BQ Prime.
00:03 My name is Alex Mathew and this is an earnings conversation.
00:06 Now we have seen a host of IT results over the past few weeks and you could say that
00:11 it is a bit of a mixed bag.
00:14 A few analysts have called 2023 a transitional year for the IT sector here in India after
00:19 the pandemic boom that you saw.
00:22 Let us see what the management of Sonata Software has to say.
00:25 We are joined by Jagannathan Chakravartty, who is the Chief Financial Officer of Sonata
00:30 Software.
00:31 Mr. Chakravartty, thank you so much for taking the time.
00:34 Could you break down the numbers in the first quarter for us and then we will delve into
00:38 a little bit of the details.
00:41 You still managed to have large deal wins.
00:44 So I think that would be one of the headlines.
00:46 We had three large deals in this quarter.
00:51 From quarter two of last year, we have about nine large deal wins.
00:56 It includes a mega deal of 160 million also, which we announced last quarter.
01:01 So this quarter, if you see quarter on quarter, the dollar revenue has grown by 17.5% on constant
01:08 currency basis, 17.4%.
01:11 Our base business has grown by about 4% quarter on quarter, which is like a, it's one of the
01:17 top performing revenue growth in this quarter, considering just strain and stress in the
01:24 market.
01:25 And we have also explained that this quarter we had a salary increase, which had about
01:31 60 basis point impact on our EBITDA margin.
01:34 And also we have done investment of 1.6% of EBITDA towards the newer technologies, including
01:41 AI and Microsoft Fabric.
01:44 We have also, because of the large deal, three large deals are having a transition now, which
01:50 will be going on till the end of this year.
01:53 So we have invested about 150 basis point on the large deal where the transition is
01:59 happening.
02:00 So overall, the performance have been very, very strong in the revenue growth and very,
02:05 very stable on the margin trend.
02:08 Okay.
02:09 So thanks so much for that headline introduction.
02:13 And you admitted yourself in the answer that you just gave me that there is stress out
02:18 there because there are some of your peers that are stating that while there are deals
02:24 in the offing, execution is not to the mark where you would hope.
02:31 What is the kind of experience that you're seeing in the market?
02:33 Because seemingly you're moving at a steady state.
02:37 Yeah.
02:39 What is happening in the market is there is good and there is also stress.
02:44 So both are happening at the same time.
02:49 If you take high tech as a vertical, we are having some delays.
02:54 There are delays in closing of the deals and there are some cuts, there are some spas in
03:00 the investment that is coming in.
03:02 Because there are three elements in a high tech vertical.
03:05 One is they are managing the surplus capacity what they have built over the COVID year.
03:11 Second, they are also now exploring the options of AA.
03:15 What are the implications of AA for them and how they are going forward with the AA.
03:20 The third element is the VC investments have come down for them wherever the projects are
03:30 VC funded projects are there.
03:33 So all the three have resulted in high tech being a little slow in this space.
03:40 There are other verticals which are having opportunities.
03:42 There are some delays, but overall the market has still good opportunities and we are well
03:48 placed to exploit the current situation and then we are able to produce a bit industry
03:54 leading growth for this quarter also.
03:58 Could you take us through the contours of the mega deal that you announced?
04:04 What is the kind of recognition of revenue that will take place in the remainder of the
04:09 quarters and also it is a multi-year deal.
04:12 So how is this going to work?
04:13 This deal has three tracts of transition happening in this.
04:14 This is about 160 million over 10 years.
04:15 The three tracts of transition will happen in the first year.
04:16 So what the best of the accounting standards are saying is that the first year is going
04:17 to be a multi-year deal.
04:18 So the first year is going to be a multi-year deal.
04:19 So the first year is going to be a multi-year deal.
04:20 So the first year is going to be a multi-year deal.
04:21 So the first year is going to be a multi-year deal.
04:22 So the first year is going to be a multi-year deal.
04:23 So the first year is going to be a multi-year deal.
04:29 So the first year is going to be a multi-year deal.
04:30 So the first year is going to be a multi-year deal.
04:31 So the first year is going to be a multi-year deal.
04:32 So the first year is going to be a multi-year deal.
04:33 So the first year is going to be a multi-year deal.
04:34 So the first year is going to be a multi-year deal.
04:35 So the first year is going to be a multi-year deal.
04:36 So the first year is going to be a multi-year deal.
04:37 So the first year is going to be a multi-year deal.
04:38 So the first year is going to be a multi-year deal.
04:39 So the first year is going to be a multi-year deal.
04:40 So the first year is going to be a multi-year deal.
04:41 So the first year is going to be a multi-year deal.
05:05 So the first year is going to be a multi-year deal.
05:12 So the first year is going to be a multi-year deal.
05:16 So the first year is going to be a multi-year deal.
05:19 So the first year is going to be a multi-year deal.
05:21 So the first year is going to be a multi-year deal.
05:22 So the first year is going to be a multi-year deal.
05:23 So the first year is going to be a multi-year deal.
05:24 So the first year is going to be a multi-year deal.
05:25 So the first year is going to be a multi-year deal.
05:26 So the first year is going to be a multi-year deal.
05:27 So the first year is going to be a multi-year deal.
05:28 So the first year is going to be a multi-year deal.
05:29 So the first year is going to be a multi-year deal.
05:30 So the first year is going to be a multi-year deal.
05:35 So the first year is going to be a multi-year deal.
05:36 So the first year is going to be a multi-year deal.
05:37 So the first year is going to be a multi-year deal.
05:38 So the first year is going to be a multi-year deal.
05:39 So the first year is going to be a multi-year deal.
05:40 So the first year is going to be a multi-year deal.
05:41 So the first year is going to be a multi-year deal.
05:42 So the first year is going to be a multi-year deal.
05:43 So the first year is going to be a multi-year deal.
05:44 So the first year is going to be a multi-year deal.
05:45 So the first year is going to be a multi-year deal.
05:46 So the first year is going to be a multi-year deal.
05:47 So the first year is going to be a multi-year deal.
06:10 So the first year is going to be a multi-year deal.
06:35 So the first year is going to be a multi-year deal.
07:03 So the first year is going to be a multi-year deal.
07:06 So the first year is going to be a multi-year deal.
07:08 So the first year is going to be a multi-year deal.
07:10 So the first year is going to be a multi-year deal.
07:12 So the first year is going to be a multi-year deal.
07:14 So the first year is going to be a multi-year deal.
07:15 So the first year is going to be a multi-year deal.
07:16 So the first year is going to be a multi-year deal.
07:17 So the first year is going to be a multi-year deal.
07:18 So the first year is going to be a multi-year deal.
07:19 So the first year is going to be a multi-year deal.
07:20 So the first year is going to be a multi-year deal.
07:21 So the first year is going to be a multi-year deal.
07:22 So the first year is going to be a multi-year deal.
07:45 So the first year is going to be a multi-year deal.
08:11 So the first year is going to be a multi-year deal.
08:40 services business in the top 25 percentage of the industry levels of growth, always we will maintain,
08:48 but that will also bring some investments required for this. So this margin is going to be at
08:56 the lower 20s means 21, broadly between 21 to 22 is what we expect in the medium term
09:03 on the margin trend. On our domestic business, domestic business is basically
09:07 a low margin kind of a business, but with a high volume. They have been steadily doing
09:13 this business and the business has utilized a lesser amount of working capital, hence their
09:18 ROCE has been very, very strong. So the demand situation in India can moderate because it has
09:26 grown very, very fast in the last two years, can moderate, but it is very stable and continue to
09:33 perform well in our domestic market. Okay, fantastic. I'm glad that you gave
09:38 us that clarification, gave me that clarification. I'm speaking to you for the first time. So if I
09:44 look at your investor presentation, I look at the kind of profile of your clients as well,
09:50 I'm seeing a very large contribution by the top 10. Is that at all a concentration risk or do you
09:56 think that this is comfortable? Yeah, we had concentration risk earlier,
10:01 so we are taking steps to expand more logos, which are very large. So we are trying to bring in by
10:07 acquiring quant, we got two large logos which are coming to the top five for us. We will keep
10:12 focusing on large deals and the large logos, which will help us to reduce the risk in the coming
10:19 days. It will take another two years for us to complete, to reach a reasonable level of risk
10:26 management in this case. However, the risk on customer concentration or the impact of that
10:33 will continue to be there. We will take all measures to expand the new logos and continue
10:40 to get the large deals, which will help us to manage the risk to as much as possible.
10:46 I believe the first leg of your journey that you have mapped is to that half a billion revenue for
10:54 the IT services business, but you've also talked about moving towards 1.5 billion.
10:59 I'm just curious about how you're going to achieve this in terms of organic versus inorganic,
11:06 because you've not been averse to having inorganic growth in the past and you're sitting on a
11:11 reasonably strong cash position as well. So how are you going to achieve that?
11:19 So what is that we have said is the domestic business will be a billion dollar
11:24 business and the international business will be half a billion dollar business in the next
11:27 three years time frame. We are very open to M&A as a strategy, we are open but we are not
11:35 desperate. What we are going to do is we will keep looking for opportunity which are in the best of
11:40 the position. If we get a good asset, a good opportunity in the M&A side, we will definitely
11:45 be open to it, we are not risk averse. However, we are not desperate, means we will not do something
11:51 for the sake of doing it and we are very very cautious. The governance around investment as
11:56 well as for the M&A is very strong. So we are carefully treading the line and we are not going
12:02 to do something for the sake of doing or something for the sake of getting a volume or for the size.
12:06 We have assumed that we are going to have organic growth and we will continue to invest for the
12:13 organic growth. However, we are always open for the opportunity that come to us.
12:17 Couple more points, one on the workforce, I believe you've had a net addition in this quarter as well.
12:24 What is the outlook for the year because I think again here some of your peers are being a little
12:29 cautious in terms of the fact that they're letting that attrition remove a little bit of the excesses
12:36 that built up in the system. What is your expectation on the workforce this year?
12:42 Okay, so the opportunity as I mentioned to you, the market is having both opportunity as well as
12:47 the stress in the market. Both co-exist and it depends on the vertical, particularly high-tech
12:52 vertical is a little slow compared to the other vertical. So what we are doing is we continue to
12:58 focus on the growth and we will continue to have a look on outlook on that. However,
13:03 it's not going to be something new or something dramatic, something different what we are going
13:09 to do now, do from what we have been doing in the last few quarters. We will continue to have it.
13:15 Apart from it, there is a performance management system and the performance management system will
13:20 continue to be effectively working on it. However, the total of all these things is that we are
13:27 focusing on growth and we will continue to do what we have been doing in the last few quarters.
13:32 Nothing differently we are doing it for the sake of growth. The number of people additions and
13:38 other things depends on the business requirement. Whatever is the business required, we will
13:43 accordingly act on that. Having said that, where is attrition level right now, sir?
13:47 Attrition level has improved a lot. We are around 12% attrition level for the last two quarters.
13:54 It has been consistently good. We do maintain a good record with people.
14:00 Fantastic. Okay, now to close out, could you give me a sense in terms of the initial feelers that
14:08 you are getting in terms of the pipeline that could build? You have already won big deals,
14:11 which as you said will be measured or will play out over the course of the remainder of the
14:18 financial year. But what is the pipeline looking like? Pipeline has been very strong. We have
14:24 started announcing the pipeline now and the pipeline is about 1.2 times book to bill now,
14:31 which is about $93 million of pipeline. We have moderated for the large deals actually,
14:37 because large deals, if I include the full value of the large deal, it may look very
14:41 obnoxious for the numbers what it comes out. So we have moderated for that too.
14:46 The revenue levels, what we are going to get from them. This at present, the pipeline is very,
14:52 very strong compared to what it is last year. Particularly the quality of pipeline has been
14:58 very good. Last year, the cloud and data pipeline was around 15%. This year, the cloud and data is
15:03 about 40%. We have moved the needle on the cloud and data focus and that has resulted in a very
15:09 good pipeline for us. So some people are calling this a transitional year for IT. Would you say
15:16 that it is not? It is business as usual for Sonata Software? This is transitional for Sonata
15:25 Software also in a way that this gives a lot of opportunity for players like us.
15:29 Okay. Interesting. So this also, this kind of a situation brings in a, you know, sometimes when
15:35 the market is stressed overall, a new player emerges. We want to be that. And we are very
15:42 confident we will be one of the new players who is emerging in this space.
15:46 All right, Mr. Jagannathan. We will touch base with you at the end of the current quarter as well
15:51 to see how things are panning out. But thank you so much for taking the time and for speaking to us.
15:55 Thank you. Thank you.
15:57 Right, viewers, there you have it. The IT sector as a whole, of course, it is like I said,
16:03 it is a mixed bag, but then you have quite a bit of confidence being shown by the management
16:09 of Sonata Software. Do stay tuned. Lots more coming up over the course of the day. This is BQ Prime.
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