Persistent Systems Limited (PERSISTENT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Persistent Systems Earnings Conference call for the Fourth Quarter and Financial Year ended March 31, 2020. [Operator Instructions] Please note that this conference is being recorded. We have with us today on the call, Dr. Anand Deshpande, Chairman and Managing Director; Mr. Christopher O’Connor, Executive Director and Chief Executive Officer; Mr. Sandeep Kalra, Executive Director and President, Technology Services; Mr. Sunil Sapre, Executive Director and Chief Financial Officer; Mr. Mukesh Agarwal, Chief Planning Officer; Saurabh Dwivedi, Head of Investor Relations; and Mr. Amit Atre, Company Secretary. I would now like to hand the conference over to Mr. Christopher O'Connor. Thank you, and over to you, sir.

Thank you very much, and everybody, welcome to our hour to spend about our performance. We had a very productive year, this past year with a lot of dynamics, a lot of changes and growth. We crossed the $500 million mark for the first time. So $0.5 billion in our pocket at USD 501.61 million for the year. That in Indian rupees is a 5.9% growth rate, and we are solidly pleased with our performance. In terms of fourth quarter financial performance revenue, revenue was at USD 127.05 million. That was a contraction of 1.8% quarter-on-quarter. However, a growth of 7.1% (sic) [ 7.4% ] year-on-year. As for margins, EBITDA stands at 13.8%, while EBIT stands at 9.2% and PAT is at 9%, and we remain focused and have work to do in that area. For our full year performance, our revenue, as I stated, was USD 501 million, growth U.S. dollars, 4.3%; in INR, 5.9%. EBITDA at 13.8%, EBIT at 9.2% and PAT at 9.7% -- 9.5%, excuse me, and Sunil will cover more of these details at a much more granular level than I will here. As to the business and the focus on the business, in quarter, marquee wins continue to be a part of Persistent. We continue to grow inside of our large accounts. Likewise, we continued to find new business elsewhere adding several hundred new logos to the Persistent ranks as customers and clients of ours. We continue to do great work with Salesforce, building a COVID-19 care response solution for their health care systems. This was highlighted in work and articulation by the CEO of Salesforce, Marc Benioff. We continue to scale COVID-19 solutions or we scaled COVID-19 solutions as they became needed, delivering CDC compliant SaaS solutions for health care providers. And likewise, we build a patient engagement engine, sort of a digital front door with Salesforce at one of the largest pediatric health care providers in the United States. So our focus in our work around health care and our pivot, as COVID developed throughout the quarter, became a part of our business as well. We likewise in the pharmaceutical industry launched a patient relationship management solution, again using Salesforce as the base platform. We delivered in addition to that, other solutions and other types of tools as well into the industry. We delivered a new secure digital voice authentication mechanism for banks and credit unions, again, extending our digital reach into the industries. We used IBM ELM tools to give access to critical oil and gas data within hours instead of days in terms of being able to call less information and provide it in a useful format. And we provided work around cybersecurity products as well as multiple internal applications for a global leading supplier of semiconductors and infrastructure software products. So our client list continues to remain robust. Our focus across different industries such as health care and banking continues to be strong. We continue to find business with our alliance partner and continue to expand that scope. We did see a drop in our royalty revenue. And as we all know, a drop in royalty revenue goes straight to our bottom line in terms of how the margin looks. And that was a primary driver in some of the places where our margin is not where we want it to be. We focused on our plan to make this business more profitable. And I'll talk a little bit more about that in the Alliance section just below, when we cover that. Likewise, we've put a keen focus on margin levers. And we were in a year of transition this year would be probably one of the best things to state. We created and we knew we created a bubble of change, and a bubble of change does costed money, and that does hit on the bottom line. We are through that change. We have the management team, we want to have. We have the people, we want to have. We have the sales leaders, we want to have. We're done with the rebranding exercise, which was an endeavor that had real expense as well. And those are behind us, and we start the year in most spots in a positive position compared to 2020 and compared to 2019 from a total expense point of view in many of our categories that we're tracking. So we've got a strong pipeline in front of us. We've got a strong view of how to go after that pipeline. And we're in the middle of COVID-19, just like everybody else is. The units themselves, technology services grew strongly. And Sandeep will take you through the story of what's worked there and what hasn't worked there. It's a great story. We grew at 14.7% year-on-year. Sandeep will provide you all the details. In the Alliance business unit, we were in ups and downs. While we saw strong growth in certain categories and continue to grow in the reseller business, year-on-year, we saw a change in our royalty structures that continued to be something quarter-on-quarter that we have to work about. Full year revenue is about 4.7% down from last year. And that -- as it continues to remain a work item for us. COVID-related. So everybody wants to know about COVID, and what it's doing to us. First, we brought 11,000 people home in a week. The last day of us bringing people home was the first day that India had its lockdown. So we saw this coming. We brought our people home, our clients were with us in bringing people home, and nearly across the board, all of our clients were in full support mode of their work continuing as we brought everybody home. We did have 1 or 2 cases in financial institutions where we had to make some adjustments and some fed, some regulatory compliance items. But for the most part, we brought all of our people home within a single 7-day period of time. We were done bringing our people home just as the lockdown in India started and everybody was at home with productive means of being able to do work on laptops that had been secured that have been joined to the networks and that have been approved by our clients in all of their situations. So we're home, we're safe and we're secure, and we're productive. We have very regular communications with our employees. We talk to our employees on a regular basis. We have started a coffee break for all 11,000 employees every day. And we all gather on a single channel to be able to just even share stories about how we're doing. COVID-19, while unfortunate and not something we want to see in the world has presented opportunities for us to be more together not alone, and we've engaged in that. These coffee breaks are fantastic as sometimes thousands of the employees and myself and Anand and the executive team gather to have coffee for 15 minutes every day on a virtual channel where we can share pictures and stories. It's kind of amazing to see. We are also in communication with, I would say just about everybody. One of the things that's a phenomena with COVID-19 is everybody wants to know what everybody else is thinking. And it's been a fantastic door opener and a fantastic opportunity to talk to analysts, to talk to consultants, to talk to our customers, in particular, and to talk to our peers in the industry and find out what are you doing, what do you see, what works and what doesn't work and what suggestions do you have. And so I would tell you one of the artifacts of COVID-19 is a tremendous door opening exercise. I, myself, my executive team, my sales team have never been more busy talking to clients. It's not always in a method of new work. Often, it is just in terms of sharing stories, but the opportunity to be a part of their environment, and for them to be a part of ours, has been absolutely fantastic. And we've built several models that go along that. We've built a model on a V-shaped recovery, an elongated V, a U-shape. We anticipate some degree of a U-shaped recovery in terms of how COVID is going to run. We think the quick down and up is behind us and not going to happen. It's going to be some degree of go down, bounce around the bottom for a short period of time, short period being several quarters and then come back up. The key question, I think, on everybody's mind is without a vaccine as well as will there be a second wave as countries, geographies and regions reopen slowly and figure out what reopening means. And we'll participate in that with everybody else. The good news is our clients want to stay home for the most part, our clients are going to follow governments and municipalities. So our clients are not restaurants, and our clients are not parks and things like that. So as those reopen, our clients will stay home, and in many cases, our clients are with us, and have told us, you guys stay home, too, stay productive. And we'll follow in the following weeks once we see what that does, once we know it's safe to come back. We do have customers at times asking us for a discount. We do have customers starting to ask us, in some cases, to delay new phases or second phases. And we are expecting there will be some impact on our business. We have not seen any large-scale degradation of our business, but we do have a rolling list of impacts that you would categorize in any individual one as small, but you add them up in aggregate, and there will be an impact. On the same token, we are finding new business. Sandeep will talk about this. I'll talk about it in the Alliance section, but we do see new business out there in the industry and that we are pursuing. We have found new business in the Alliance business unit. Likewise, we have found new business in TSU as well. Both new logos seeking our skills, health care provider, for example, that signed with us on April 1 in the middle of August, this absolutely needing our digital front door as a capability. And we have the examples also of existing clients asking us to do more, given their satisfaction rate with our services. So as we judge the quarter, we definitely have puts and takes, and we aggregate that together and to us not being panicked or not being overly concerned. However, there is concern. And we do have to watch this situation daily, and we do have to understand that the quarter is not over, and our clients have the capability of continuing to ask for things. But where we sit today is with a set of puts and takes that give us the belief that with management prudence that we can work as a team and be solidly through this. And we'll be able to see what the total is and whether that's a little up or a little down that remains to be seen as we work into the future. We are maintaining a strong focus on our margin and our EBIT. As I mentioned, we had the goal to get all the team changes, all the work we wanted to do is onetime work, things like rebranding done last year, and we accomplished that goal. We have a set of levers that we've put in front of ourselves around EBIT. And some of those have been pulled and would have been pulled COVID or no COVID in terms of how we're going to do that. And we are maintaining a focus also on levers that we can pull around COVID. Myself, the Board, my senior executive team, have all taken a pay cut of between 25% and 20%. And likewise, we have cataloged and looked through our team in the rest of the world, and we do have levers in the rest of the world that can be utilized, and we have started to utilize those in certain geographies. These pay cuts would be temporary and obviously based on recovery-oriented scenarios as we do them. Likewise, we have scenarios and levers that we are pulling around how we manage the expense that we have in keeping people at home. Certainly, our travel goes to the positive side, but we do have increased IT costs. And so we're squeezing in all of those areas. And there's room to squeeze in all those areas as we look at the work that we do at the same time. We did our sales kickoff. We had all of us around the world, 300 people gathered on the phone, doing our sales kickoff virtually. It was an overwhelming success in terms of the way we did it. We did 1 day a week for about 4 weeks. And we gave homework assignments. We had salespeople shooting videos of themselves. We had McKinsey. We had other people come in and speak and provide us insights on what's going on. We got, I think, some of the best reviews off of the sales kickoff both in its nature. The fact that it was enduring over a 4- week period of time, and it really provided a degree of confidence and encouragement as well the ability to double down on our top accounts and make real account work sessions and opening sessions in the face of COVID to be able to go after business and new business. We remain strong in the areas that we advertised to you earlier around BFSI and health care life sciences. If you recall, we started showing those numbers. Those numbers remain strong. Sandeep will speak more of the strength in banking, in particular, as we go into his section. Jiani, our President and Leader for the Alliance business unit couldn't be here due to time zone differences. So I'm going to cover her section, right now. And in this next brief discussion, I'm going to talk about the Alliance business. The Alliance business continued to see some headwinds. We were able to push aggressively to try to make the business more profitable, and that work needs to continue. We did receive IBM Gold partner status, which given our size and our scope was a significant achievement. We are the #1 reseller in some of the product areas where we work with the royalty products, and we are the primary reseller or VAR, along with being the primary mechanism for that product being constructed. And that was a new milestone achieved this past year as well, and we had that as we entered the quarter. We are likewise continuing to balance the variation of how we do work with our largest clients. We are building more services revenue with them, and we are leveraging the IP relationships we have to be able to open more doors around the services business. Likewise, the skills and knowledge we have on some of these clients have let us open up doors with other ISVs and other systems providers. And we have announced an expanded partnership with Dassault Systemes. And you can see that press release happened in the last several days over in Europe. And so now we are Dassault Systemes provider of capabilities and service in both North America and in Europe, and we anticipate results out of that. Likewise, we continue to be a strong IBM partner, and we pivoted to focusing on Red Hat as well. Red Hat is very hot in the industry, a lot of need for their capabilities. And because we are building Red Hat capabilities for IBM products, it makes us have a prime capability to take those same skills and use them in the industry with IBM customers, which we have started to do. We have started to close deals in this past quarter around Red Hat expansion. And we think that is a theme of balance that we'll provide in the Alliance business unit, particularly as we look into 2021 as well. And quite frankly, it gives us the ability to come at cloud from a different point of view with a very solid capability that Red Hat is taking to market. So we, thus, are not only registered with IBM, but we are also registering with Red Hat now as a prime provider of service and working in that micro in that environment. We see a healthy pipeline there as we look at that and also IBM's clients striving to relive in a hybrid cloud environment. In other news, we, as a part of COVID-19, contributed INR 25 crore or USD 3.3 million to relief efforts that will be distributed around the world. We continue to pivot our business, and we're seeing recognition from analyst firms like ISG, like Constellation and like Zinnov. Sandeep will provide some more details on some of the work done with ISG and Zinnov, in particular. It's good to see the recognition, and it's good to be a part of those communities as we do our work. With that, I'm going to hand it over to Sandeep, our President of the Technology Services Unit, and he'll provide you an update on that business. And then after that, Mr. Sunil Sapre will speak on the overall financials. Sandeep?

Thank you, Chris. So good morning, good evening to you all. I hope you are all keeping safe. I'll just give you a brief commentary on the TSU Q4 and a little color on the current situation. So from a TSU perspective, the Q4 came in pretty strong, as Chris alluded to. We ended the year also on a high note. The Q4 highlights were the revenue being $93.7 million. This came as compared to $90.3 million for the last quarter, giving us a sequential growth of 3.7%, and this 3.7% comes on the back of a 6.4% growth in the quarter before. So that should show you the strength of the TSU business and the consistency of growth. On a yearly basis, we came at 14.7% growth compared to Q4 FY '19. For a full year comparison for FY '20 versus FY '19, we came in at 12.1%. Some of you track the digital revenues and services revenues, and we have said that we will stop reporting that from the next quarter. But for this quarter, if you were to look at the digital revenues, we grew sequentially at 7.1% quarter-on-quarter. And if you are looking at the COVID scenario and a lot of people talk about how in the COVID scenario, people would tend to become more digital. And in the post-COVID world, digital and all these forward-looking technologies will play a bigger role. That should give you some amount of color on our capability and our might to address the demand as it comes. From a Technology Services booking perspective, the quarter came in pretty healthy. We don't report the bookings numbers, but we can only tell you that over the last few quarters, this was one of the best quarters we had from a booking perspective. From an industry vertical performance, BFSI led the pack one more time. And our quarterly growth in BFSI came in at 5.5%. This was followed by software, which is basically the ISV business and Hi-tech with 5% growth. The Healthcare & Life Science segment came in relatively flat as compared to last quarter. And that's where the 3 verticals panned up from a horizontal service line perspective. On the service line side, Salesforce business that we have, the Salesforce service line, continued the growth momentum. We delivered 13% quarter-on-quarter. And we also saw a very strong traction in our cloud and infrastructure service line. We have a fairly strong pipeline in the cloud and infrastructure business as well. From a customers' quarterly performance perspective and the numbers that I'm going to talk about are TSU specific, so please correlate to that. The top customer in TSU grew by 3.9%, the top 5 grew by 4%, the top 10 by 2.28% and the top 20 by 3.84%. That should show you that there's a secular growth across the top 20 accounts. And the secular growth is built on the back of cross-selling, up selling all our services that we can provide to our customers. Increasingly, we are seeing wallet share in our customer base become higher. Based on the strong service lines that we have to build and the strong proposition that is built over the years. Chris talked about the deal wins in BFSI, health care, et cetera. And I will not talk much about that, but I can answer any questions in the question-and-answer session. From a large deal pipeline perspective, we have a fairly decent pipeline of large deals. And when I talk large deals, we're talking about multimillion dollar, multiyear kind of stuff. A number of these are also offshoots of our conversations on proactive proposals with our top customers. And a number of these are coming from different channels, whether it's our regular business development or sales team that we have or the private equity channel relationships that we have formed over the years or sourcing advisers that Chris alluded to. These include the likes of Zinnov, ISG and references from people like Constellation Research and many more. From an analyst recognition perspective, we saw Q4 reinforce our competitive positioning. We had ISG name us as the top 15 sourcing standout people in the U.S. It's basically the America's Booming 15 category. That is a validation of our pipeline builders of largely over the last year. ISG also recognized us as a Salesforce Leader category as compared to the Rising Star a year before. That reinforces our foray and our move forward in the Salesforce business. From a Zinnov perspective, we saw the Zinnov zones come out for engineering and R&D services. And we are proud to say that for the 7th consecutive year, we were rated as a leader in the engineering and R&D services, which basically talks about the might that we have. And as compared to some of even our larger peers, we were ranked much higher on our capability and expense. With this, I'll hand over to our CFO, Sunil Sapre, and we'll be happy to take any questions as we go on. Over to you, Sunil.

Yes. Thank you, Sandeep, and Chris, and good evening, good morning to all of you. And hope you're all safe and doing fine in these difficult times. Now that you have heard the business updates from Chris and Sandeep, let me take you through the margin movement and the financial performance for the quarter and the year. Before we just get there with the financial details, I just wanted to mention that as a result of the outbreak of this pandemic and the lockdown, and furthermore, we also had new auditors appointed during the year. We needed some more time to complete the financials and the audit. And hence, the audit-related part of the Board meeting, which we had on 23rd to 25th was postponed to 5th of May, and which was concluded yesterday. So let's now move to the financial part, and I'm glad to mention about the fact that we crossed the much-awaited milestone of $0.5 billion during FY '20. The total revenue came in at $501.61 million, with a growth of 4.3% in dollar terms and 5.9% in rupee terms. As you know, the fourth quarter for us is seasonally soft in terms of IP revenues. So while you see good growth on the services revenues, the drop in IP revenues resulted in a Q-o-Q decline of 1.8%, at $127.05 million in the fourth quarter, which was a growth of 7.4% on Y-o-Y basis. In rupee terms, the revenues were INR 9,264 million, a growth of 0.4%, helped by the currency on a Q-o-Q basis and 11.4% on Y-o-Y basis. The linear revenue grew by 4.2% quarter-on-quarter. The fact that Q3 is a seasonally strong quarter, and Q4 is a seasonally weak quarter, reflects in the decline that you see in the IP-led revenue, which is declined by 24.3%. This also has an element of the reseller portfolio, which had an impact, particularly during the month of March, as we know most of the new license deals happened during the month of March or the third month of any quarter. We had some setback over there because of the COVID-19 situation. On the linear revenue, the offshore linear revenue grew by 5.1% comprised of growth in volume by 4.9% and billing rate increased by 0.2%. While the on-site linear revenue grew by 0.8%, constituted by an increase in billing rate by 3.1%, while there was a decline in volume by 0.2%. In terms of the units, as Sandeep mentioned, the growth in Technology Services during the quarter was 3.7%, while for the whole year, the growth of 12.1%. And he has dealt with the comments with respect to the growth in different verticals during the year. The sales and marketing expenses came in lower this quarter by 1% as we had few exits during the end of last quarter, and some of the effects of adjustments that Chris talked about in his opening comments. The G&A expenses remained in the same range as last quarter, except that, as you know, we have also to factor the expected credit loss in the context of COVID-19 situation, and we have made a provision, particularly in respect of small customers who may face liquidity crunch and the extent of this provision made in the books is about INR 30 million. You will recall that we have deposits of INR 430 million with IL&FS. And we have provided about 8% of that till the previous quarter. We have now provided the balance amount of INR 48.5 million, taking the provision to 100%. So we now fully provided for this exposure. The EBITDA came in at INR 1,277 million with an increase of 3.4% over previous quarter. The EBITDA margin was 13.8% as against 13.4% in the previous quarter and the currency benefit during the quarter was 50 basis points. The full year EBITDA was INR 4,930 million at 13.8% of revenue as against 17.2% in the previous year. So if you look at EBITDA split between direct costs and SG&A, you will find an increase of 2.4% in the direct costs, and that must dip in the gross profit and about 1% increase in the SG&A, and that contributes to the dip in EBITDA. Some of the investments made in sales and marketing, which Chris talked about, had significantly higher sales and marketing expenses in the first half of the year. But these are now got optimized, and we have that change behind us. The depreciation, amortization was nearly at the same level and came in at 4.5% of revenue as against 4.6% in the previous quarter. EBIT was INR 857 million at 9.2% as against 8.7% in the preceding quarter. And for the full year, the EBIT was INR 3,270 million at 9.2% of revenue as against 12.6% in the previous year. The treasury income for the quarter was steady at INR 229 million as against INR 232 million during the previous quarter. As you know, we had dividend payout during this quarter, that is Q4, both the first interim dividend of INR 9 per share and the second interim dividend of INR 3 per share. The foreign exchange gain was INR 44 million as against INR 102 million in the previous quarter, primarily on account of the mark-to-market loss on the hedges that stand in the books, which were taken last year. For the next quarter, the hedges are in the range of INR 72.50 to INR 72.80. And that is why you will find that mark-to-market loss gets adjusted against the gain that is recorded against realization from customers. And hence, the foreign exchange gain is lower as compared to the earlier quarter. The PBT was INR 1,130 million at a margin of 12.2% as against 12.4% in the previous quarter. The EPS for the quarter was 25.9% as against 22.9% in the previous quarter, and this is primarily because of the fact that the foreign exchange gain, which is accounted in the Indian book, has a direct impact on the tax liability. And that is why you will find that the stand-alone profit for the quarter is significantly higher. PAT for the quarter was INR 838 million at 9% as against 9.5% in the previous quarter. And for the full year, PAT came in at INR 3,403 million at 9.5% as against 10.4% in the earlier year. The operational CapEx for the whole year was INR 523 million. The cash and investments on the books amounted to INR 14,796 million at the end of this quarter as compared to INR 13,779 million as at 31 December 2019. The value of forward contracts we have is $125 million at the close of the year with an average rate of INR 74.03 per dollar. One update that you would have noticed that we had filed on the 23rd of April when we had the Board meeting that Mr. Praveen Kadle has been inducted as additional Director on the Board, he is an Independent Member of the Board, with effect from April 23, 2020. With that, thanks, everyone, and I hand it back to Chris.

Thank you very much, Sunil. Thank you, Sandeep. So at this point in time, we'll turn it over to the general population that's all here with us today, and we'll be happy to take questions.

[Operator Instructions] The first question is from the line of Sandip Agarwal from Edelweiss.

And I wish everyone good health, and please stay safe. [Technical Difficulty]

He's faded out on there.

Right. We seem to have lost the line for Mr. Sandip Agarwal. We'll move to the next question. The next question is from the line of Madhu Babu from Centrum Broking.

Sir, congrats on a steady execution in a tough environment. Sir, most of the companies are giving a hint on how 1Q would be and how bad it can be. So do we also expect kind of a mid-single digit kind of a decline? Or what are the areas where we are seeing weakness? Can we quantify anything on 1Q?

Sandeep?

Yes. So we -- as you know, we don't give forward-looking guidance. What we can tell you is, as Chris alluded in his prepared comments, that we are seeing a mixed bag. There are some customers which are in the smaller categories, which are coming and asking for some discounts or some accommodations. But we have also seen them invest more business as they go along. As of this point in time, we remain cautiously optimistic about our quarter. And so we would not want to give any forward-looking guidance. We are on the execution part. We are in very close touch with our customers, whether they are the top 25, top 50, and we'll give an update as we go along. But we would want to not give a forward-looking guidance for Q1. Sunil, if you want to add to it, please go ahead.

Yes. I think the only thing I'd add to it is we're busy. We've never been this busy. It's a good busy. It's depth and clients, it's new relationships, and it's working with clients around current problems, which in some cases, could have a negative earnings effect or negative revenue effect at the same time. So as I mentioned, we're in the middle of a whole group of puts and takes. And it's positive in the fact that all the puts and takes are taking place. There's a lot of activity. And the activity, we view every piece of activity as an opportunity to strengthen and broaden our relationships. We had 1 client ask us to take a revenue trim. And of course, they're great clients, so we said, yes. But along the way, they asked us if we'd look at 3 other things. And so we're also looking at 3 other things with them right now as well. So I think that's the best way to say it. I think cautious optimism and our ability to float neutral and minimize any significant downturn, and I think that's the best we can say right now.

And second question is on the -- we have a lot of project-based work on Salesforce and some of these platform implementations and all, which currently, we have a travel ban across most of the countries. So is that leading to a lot of pushback in discretionary spends? And my last question is on a possible buyback because the cash on balance sheet is now at a very strong level. So last buy back we completed in August, so would we look at a buyback post August this year?

I'll let Sunil talk to the buyback. In short, we don't have an immediate plan. The second part of your question about Salesforce. We see good strength in demand around Salesforce projects that are in the interest of connecting clients together digitally as a part of the extension of that value. And so Salesforce has areas where it could be discretionary. Some of the work we're doing, particularly around hospital systems, patient care, around digital front doors, for health care and non-health care institutions is absolutely the pivot that clients are making in COVID-19 and Salesforce is a prime platform in that as well. So we're out marketing opportunities around these solutions to clients around digital front door right now. And Salesforce is one of the components that we bring along and we organize in that as an option. And from that perspective, Salesforce is healthy. So I don't have a negative downturn to say about Salesforce in general, in terms of how we see that business for us. Sandeep, over to you, perhaps?

Yes. No, I chime with what you said. And Madhu, if you look at it, Salesforce is a SaaS-based platform, right? So any which ways in a business as usual time as well, not just COVID, a number of our people on the execution side can work remotely. So from an execution perspective, that has not impacted our ability on the demand side, Chris has made the comments. So hopefully that answer this.

Sunil, share buyback. Any question there for you?

Yes, yes. Yes, Madhu, we do appreciate the fact that we have cash on the books, and we have to look at the best use of it. Honestly, we had at the start of the quarter, a couple of acquisitions that were in the pipeline. But as you know, with the evolving situation, they have been on the back burner right now. So we'll take a fresh look at it as the quarter rolls by. And as you rightly said, we have the cooling time, which we have to take a look. And we will make a -- the Board will take a call on that in due course.

The next question is from the line of Mohit Jain from Anand Rathi.

Two questions. One is on the top client. Now you specified in the opening remarks that you have got some contract with Red Hat or you have started working with them. So from a qualification perspective, do you think that the decline in top client is sort of done with and we can have a fresh start this year in FY '21?

So in a normal business environment, I would tell you that certainly is our plan. In a COVID-19 environment, our top line has partnered with our largest client, is dependent on their ability to navigate COVID-19 as well. And so there is some vulnerability that we're measuring in that. And so while we see gathering services strength with our top client and their customers because we've opened up channels through them to their customers. They have a transactional revenue number to hit of software that is far, far bigger than ours, and that drops down into some of our royalty agreements. So that will push on us potentially as we work through the quarter. And depending on how well they do, that will translate into how well we do as well around that total top line. We have taken several steps to offset new partnership with Dassault that expands into Europe for the first time. And we have deals that we're working with Dassault in that geography to date. Likewise, the Red Hat partnership lets us not only sell Red Hat capabilities inside of our largest clients as they migrate all their products to be based on Red Hat. It allows us to sell those in the general enterprise, leveraging our relationship with our largest client. And we have -- we've built a healthy, healthy multiple digit millions of dollar pipeline on that, and we're working our way through that right now in the COVID world. So in a normal world, I would tell you we are strongly on that path. In a COVID-19 world, there is some risk.

So from our performance perspective because COVID will hit everyone in the industry. So our performance from here on will be more aligned to how our top line does versus earlier situation where we were like falling off or declining faster than what our top line was reporting?

Yes. I think we're in a good neutral to better positive position right now. And I think we have the pipeline to be able to work multiple facets, particularly around the Alliance business unit. Overall for the company, we've got a lot of different areas that we're working to open up. And that presents lots of opportunities for us as well.

Second is on services. So now you will stop disclosing the split between legacy and digital services. But as a total unit, what do you think in terms of your orientation is more towards digital business where the impact potentially is lower? Or you think it is more discretionary in nature, and therefore, your impact would be a little higher in FY '21?

I'll talk for a second at the company level, and then I'll have Sandeep give us kind of a really good answer, a really good introspection around TSU. Across the entire country -- a company, Red Hat work and Dassault work included, just about everything we do has a digital flavor and focus. When I arrived at the company a year ago, one of my first questions I asked the company was I don't understand why we have these delineations. And the story and the work that we all talked through was multiple years ago when the cloud was a question. People understanding what was on-prem and what was cloud work was a key question. And back in 2015 and '16, that was an interesting question to ask. But now it's 2020, and Persistent has continued to focus on partners that leverage new technology and new capabilities. So for example, even around Dassault Systemes, they've come out with an online digital manufacturing system, and we're one of the prime integrators being able to convert people through that new digital capabilities. Red Hat, is all about hybrid cloud and being able to pick any cloud vendor and put hybrid capabilities on top of it and leverage any application base you want with that hybrid cloud capability. That's digital as well. And so the world has really shifted in a lot of the new projects of value to be digital, and that has been where Persistent is focused. As you know, we don't run large IT data centers. We don't do conversion projects on old code, on legacy systems. That's just not who we are. And so we, as a company, are keenly focused. And if you look at our key partners, focus on digital partners and digital expansion and that whole march of cloud presence. Inside a TSU, I think that's even stronger. And Sandeep, over to you for a few words on how TSU is navigating this.

Sure. Thanks, Chris. So as Chris said, if you were to just step back and look at our business mix versus what our competitors do, we are not focused on any of the legacy platforms. We are not focused on new things. We are not focused on Oracle or SAP production support and so on. Most of the investments that we have -- Persistent have done over the last years, and I will even say over the decade, are in forward-looking technologies. We've always been the first to predict the trends and ride the trend to some extent. Now if you look at our investments in cloud, our relationships with AWS, Azure, as Chris talked about Red Had, we look at our relationships with, let's say, visionaries of this world, that data companies as well, the platforms that we work with, the intelligent business automation companies like Appian Health Systems and so on. If you combine that with our progress that we have on traditional product environment, which marks itself in today's world to application development and maintenance, so the entire story is about the forward-looking side. Our investments in security, identity access management platforms as we work in more remote environment, as we become more digital, all of that is very relevant in this current environment. Now Chris said...

You're talking about this [ $61 million ] business, right?

I'm talking about TSU business, overall. If you look at it, TSU business is comprised of all these things. TSU is 73% of the company.

Yes. Sir, I was looking at the services, which you used to disclose in the earlier classification, where digital was more like $32 million, services was $62 million. Like I was referring to the $62 million piece.

Sure. So Mohit, that is what we are trying to clarify for you that while you may think as services being traditional services compared to our peers, the services that we deliver even when we say services, that is more digital-oriented services. Now if I was just to put a sense for you, what we are doing is, we are looking at more -- if you look at our growth, the services growth, if you look at Q-o-Q specifically, our growth for the first quarter to second quarter was 3.5%. Second to third was 6.4%, third is 3.7%. So that should tell you that we are not discretionary project dependent kind of a company. Otherwise, this growth -- sequentially, that growth is not possible. So that is coming on the back of larger multimillion-dollar deals, multiyear deals. And those are sticky businesses, platform development at scale, product development at scale, application development at scale and so on. So in short, our focus will remain more on the forward-looking technologies. Our focus will remain on the larger pieces of the pies in our top customers and otherwise and even in our newer projects. Hopefully, that answers your question.

So by definition, you should be less risk relative to others.

Mr. Mohit Jain, I'm really sorry to interrupt, but may we request you to rejoin the queue for follow-up questions as rest of the participants waiting in the queue.

And Mohit, maybe we can take it off-line as well.

Sure.

[Operator Instructions] We take the next question from the line of Sandip Agarwal from Edelweiss.

Sorry, I got disconnected the first time. So I just want to congratulate on a very good performance on services piece. As I have only 1 question to the whole management team that we have now revived very strongly our services piece, and it is showing up in numbers for the last couple of quarters or 3 quarters. Is there a way we can also probably fix the balance piece, which is the IP-led piece, and I know probably it will be very difficult to do a quick fix, but that piece is basically pulling our overall growth and margins quite substantially. And have you guys thought something on that front? And if I can squeeze a small piece of another question, is that this quarter also second time in a row that we are seeing beyond 10 doing reasonably well. So can we assign that the top client, top 5 clients, top 10 clients all are being pulled on by single client and that is more due to COVID-19?

Sunil, you want to do this?

Yes. Sorry, I was on mute. So thanks, Sandip. See the -- your question is very valid, that there is a 22% business in the Alliance unit and about 4% business in the Accelerite unit, and put together, that is 26% and whereas 74% comes from TSU, which is growing. It has grown by double digits this year as to what we are doing to manage the drag on the overall growth of the company. So what we have done actually is the fact that these relationships need to be leveraged on a complete cross-sell mode. So today, if you look at the Alliance business, sell 2 business with IBM is 1 piece, where we are dependent on their performance, partly due to the fact that what they outsource to us and partly due to the fact that they sell products of which we get revenue shares. But the third relationship that we have is with respect to the several logos that we have opened in both industrial and high-technology kind of companies. And we are making a very conscious effort to leverage that into TSU growth as well, where we can take these offerings of Persistent, which are outside of the Alliance unit, mainly on the new technologies, to these customers. So you will see more and more that kind of a leveraging of business while the dependence because of the, you can say, tag along effect, which is there because the partner revenues will be there to some extent. And to the extent Accelerite is concerned, we have blended Accelerite based on the underlying competencies with TSU business. It has now been fully integrated with respect to data security cloud products, which we had in the Accelerite portfolio, and we'll cross-mine those accounts as well with the TSU offering. So that is what I would say, and we can also have a off-line chat because there is several, this one in the queue, but I think that would be my perspective.

The next question is from the line of Keshav Garg from Counter Cyclical Investments.

Sir, I wanted to understand, sir, that our operating margins are consistently falling from around 25% levels in, sir, FY '14 to around 14% this year. Sir, so first of all, what is the reason for this? And sir, it looks like a structural downturn. And sir, do you expect now margin to finally stabilize at this level? Or further, there is going to be a fall because you are saying that customers are asking for discounts?

Sunil, over to you, that's particularly with the history part of this.

Yes, sure. So just to reflect back on the construct of the business that was there in 2014, and you would find that, essentially, we had a significant portion of the revenue coming from the ISV business, which was largely offshore. The percentage of people who were in the high-cost geos were not more than 7% to 8%. But that business had a limitation to grow. And when we started to grow in the enterprise side of the business, we started with the partnership approach, sell which kind of partnerships with whether it is Salesforce or the low-code no-code players and so on, and as well as the Oracle piece of it. So as the years progressed, you would find that our on-site presence has increased from that 7%, 8%, what I talked about to about 17%, 18% today. The other fact, which has happened is also the fact that in 2017 and '18, we had significant trust on building the new technology, and the fact that we find today in a, what you call, place where we can navigate and pitch to the customers as to what we can do for them in this kind of a scenario of COVID-19, there is a lot of work that has gone in building those. And as you know, we have not been capitalizing any of the R&D or accelerators that we create, we charge-off the P&L. So there is a 2% kind of an investment that has gone into building of various new technologies. The accelerators, both in Salesforce, health care and BFSI, whether it's a digital bank and so on, will bring both license and services revenues for us. So -- and a remaining part of thing is the fact that if you look at the sales and marketing expenses, we were at a 6%, 6.5% kind of levels. And that is at an elevated level right now. So definitely, there are levers that we have that we will pull and improve the margins on a sustained basis.

Okay, sir. And sir, I also wanted to understand so that since all air travel is shut now, and we don't know till when, sir, so without -- I mean, what happens to your on-site side of the business, wherein you send your employees to work, I mean, abroad at the client's location?

I'll give a brief answer to that, and then we'll move on to the next question. Our on-site people are home on-site, just like all the employees are of that same company. So everybody has moved to a work from home environment very productively, but everybody's moved to a work from home environment. And if they were on-site, that company is home as well right now across the entire United States. So there's no place for them to go to work and that company, in nearly all cases have figured out how to keep projects and work going and team meetings and everything else using virtual means. It's been quite fantastic to watch, but they're home as well. I hope that helps. Let's move along to the next question.

The next question is from the line of Girish Pai from Nirmal Bang Equities (sic) [ Nirmal Bang Securities ].

I just had 2 questions. One is regarding the opening remarks that Chris, you made regarding a change in the royalty structure. Is that the reason why IP revenues are down about 15% year-on-year in FY '20?

Let me be very clear. We did not change the structure of the royalty. The amount of royalty revenue arriving has been what has changed. So quite simply, the amount of royalty revenue due to us was not quite what we expected in some cases, and that's where that change comes from.

And what's the outlook for FY '21 on IP?

The products remain essential in many, many cases. And so the basic component of those products, which is around service and support of software already sold, remains there and viable for us. And in some of those products, that's 3 quarters to 90% of the revenue we receive as a royalty. In some of those products, it's 50%. So the other component besides service and support of software that adds up to royalty is new sales, new transactions. And the new transaction component is what we'll have to watch carefully with our largest client to see how they do in their worldwide and global sales. And that is what could be at risk or suspect around a COVID-19-oriented impact. But the base component of service and support we anticipate to remain very healthy and strong, which is from 50% to 90% of the revenue we received in a royalty format.

Just 1 last question. Regarding spending in FY '20. It was indicated, there have been some one-offs in terms of branding and recruitment of sales, design, probably even recruitment of people in the technology side. How much would you quantify that one-off as?

Sunil, do you want to give a good answer there in some sort of percentage format?

Yes, yes. I mean in terms of the amount actually spent as one-off is $1.5 million.

Just $1.5 million.

Yes, yes. On the branding exercise, particularly, which is the one-off.

Yes. I think that's reflect to say of the branding exercise. I don't think that accounts for all the overlaps in personnel as we transition.

Yes, yes. That is only on the branding exercise.

So we, likewise, at the same time, had a tremendous shift inside of our leadership team. And then all those shifts, they were done with overlaps in most cases, meaning a new person was coming in, an old person was transitioning out and whether that's in form of a payment or whether that's in form of just meeting the legality of the geography where that transition took place. There were transition costs as well that went into the unit expenses of both Alliance business unit as well as TSU. So Sunil, I don't know if you want to comment further there, but that was also a substantial onetime shift that we see. We think we're largely through those transitions.

The next question is from the line of Dipesh Mehta from SBICAP Securities

Two questions. First to Sandeep. Sandeep, just want to understand for Technology Service Unit, what will be the mix of business between annuity and project dependent business and how you want to shape up our Technology Service Unit may be over next 3 years between these 2 mix? Second question is about operating cash generation this year. In FY '20, we have a relatively weak conversion to cash and considering now some credit period extension requests, which we may receive from clients, the FY '21 would also seems to be having some challenge. So if you can provide your perspective, how one should look OCF conversion into FY '21?

Okay. So Dipesh, we don't disclose the numbers, but I'll take a short at it. I'll give you an approximate number. And when we talk annuity, our annuity business would be, let's say, defined by contracts, which are multiyear contracts. Customers who have been with us for many, many years who give us annual contracts, but these are basically -- we can think of them as extended teams for our customers who have been continuing for maybe, in some cases, 2 years, 5 years, and some even 25 years. And so if we were to look at those mix of long-term deals versus long-term customers, I would tend to believe 65% to 70% of our business on the services side is based on that. And then there is business that comes in on project basis. And that project could also be 6 months, 12 months, 18 months, whatever. And it could also be the combination of net new business that we do. And as we go along, we are on the journey of increasing this every quarter. So that's where you see the consistent growth coming in the new wins that we've been announcing and so on. And on the other part, I will let Sunil answer the second part of your question.

Yes, sure. Dipesh, so on the operating cash generation, yes, we can provide you more details, but probably I don't have it right now handy. So we will connect off-line and give you. We have a good idea of how it will happen. On your question about the extended credit period, et cetera, I don't think the impact is going to be so heavy or something like that, and we are trying to balance that along with the discussions that we have with clients with respect to getting more work as well. So it's not just a very -- we are very conscious about the fact that we will not give extended credit in a way that has a net impact on the business as such.

The next question is from the line of Shruti Dhumal from ValueAdd Research & Analytics.

Yes. I had one question regarding the BFSI segment. While your peers are showing negative growth, I mean, a decline in the revenue, how is your company coping up with the COVID situation in the BFSI segment? And how is the outlook going forward?

Sandeep, over to you, and perhaps a mention of our mosaic strategy as well.

Sure. Sounds good. So if you look at our business mix, Shruti, that compared to our peers and competitors, whatever you do want to call them, number of our programs are forward-looking. And even when we talk about the COVID situation, what are the discussions we are having with our banking customers? The discussions are more about how the world will become more digital and that's where Chris alluded to we have the strategy of, what we call, digital mosaic, which are basically decomposable portions we can bring to bear, and they can be built on some partner solutions, which could be things like a digital bank in a box, where we could be layering within AWS or Mambu and a few other components, putting it together in a rapid manner. Now if you look at those kind of things, that's where we believe the dollar spend will be more and more. And the erstwhile legacy kind of applications, et cetera, would get squeezed. So that's our point of the way we look at it from our vantage point. But obviously, we will see as COVID progresses. So we are cautiously optimistic about our foray in banking and similarly in other places also. So hopefully, that gives you a color.

[Operator Instructions] The next question is from the line of Devesh Jhanwar from Jhawar Tradecom LLP.

Yes. Sir, I have heard in the news, I have read the news that Persistent System is awarded an order of USD 5.2 million from U.S. military. So you can throw some light on it and whether it is a one-off deal -- one-off type of orders? Or there would be more orders -- such orders in the short term?

Sandeep?

Yes. So we would not want to comment on any specific deal wins, and I don't know what your source of information is, but we would not want to comment on this at this point in time.

The next question is from Sandeep Shah from CGS-CIMB.

Just a question on the services side. So we -- at the one end, we say that most of our services are forward-looking, which is good. But as the BCP, which is important for you, would be also important as a priority for the clients. So don't you believe this forward-looking projects can, to some extent, get deferred where clients' current focus would be more in terms of business continuity and run the side of the business rather than change side of the business. So in that scenario, what makes you cautiously optimistic even in the 1Q and 2Q as a whole? So are you believing that even in a COVID situation, most of these change side of the business or digital side of the business is more defensive?

Chris, I can answer that.

Yes, yes. Go ahead.

So 2, 3 parts to it. So number one, when we talk of forward-looking technology, we are talking of not just change the business, but even supporting our current technology customers, for example, in their current -- even most of our technology customers are product companies, which are delivering data generation, cutting-edge technologies and so on. So our work is with them on both their current generation, which also, for a lot of our peers is maybe the next generation. And when I talk about the enterprise side of the house, everyone when they are talking about resiliency are talking about building these now. It is not about changing the business. It's about their survival. If they have to survive in a COVID world or a post-COVID world, the digital front door that Chris referred to is their pathway to accessing their customer base. So it's -- a lot of the work that we are talking about building for them is essential for their business survival, and it's no longer a good change the business kind of a scenario. So that's where we are cautiously optimistic, and we are seeing enough traction to be able to say that. Obviously, in a COVID world, nobody has got a crystal ball to firmly say this number and so on, but that's where our traction is.

The next question is from Tarang Agrawal from Old Bridge Capital.

Yes. So I just wanted to understand that if I look at your margin compression in FY '20 or FY '19, it's mainly on account of employee expenses on sales and marketing. But I understand that there are a lot of initiatives that were taken, but employee costs now accounts almost 61.5% of your revenues. So going forward, do we see this proportion to be maintained? Or do we see this to reduce? That's one. The second one is, in the post-COVID-19 era, do you anticipate much larger proportion of your workforce working from home as compared to a pre-COVID era? Two questions.

I'll take the second question, and Sunil, you can take the first one. The second question around post COVID. We anticipate that the comeback to work is going to happen very gradually. And it will be accelerated and slow all at the same time. We intend to follow the lead of our clients in most cases and work with them on the desired work format that they'd like to make sure we can do. There is benefit to being able to get back to the office, both offshore and onshore in terms of teaming, new on-boarding mentorship in some of those capabilities. And while we've put in place measures to account for those items, sometimes there's nothing better than working life together. Our clients, for the most part, are moving at a speed that is comfortable for them and not at the same speed as perhaps governments and states in North America are moving. And then in fact, in some cases, our clients are telling us they intend to deliberately move more slowly in terms of coming back to work. And so -- and in some cases, our clients have even out of social well-being encouraged us to stay at home. And that has engendered an entirely next-generation of work processes and procedures, a fantastic focus on being able to concentrate on the digital aspects of how to do work, which is yielding a new productivity and will also yield a shift in travel and a shift in business in terms of how it's done. And the long-term effect of this will be a partial permanent change, think of this as if COVID shoved us 3 steps forward into this work from home environment, we'll take 1 or 2 steps back to what was normal, but I don't believe we'll go back a 100% to full normalcy or where we were. The new norm will be a much more partial environment. And it will take multiple, multiple months for us to even be at a nonrestrictive point of view to see what that norm is. The good news is we're home. And we're productive, and our clients are productive with us right now just across the entire organization. Sunil, you want to handle the other question around the 61%?

Yes. Sure, Chris. So in terms of the specific initiatives on managing the direct costs, we have levers, which we are working on, and you will see how things are now going forward. But the fact is that at least 100 to 150 basis points is something that we have specific initiatives in progress on.

We take the next question from the line of [ Sudhir Kay ] from Motilal Oswal.

If you look at the yields reported in the presentation, there is a sharp sequential decline of around 6%. This is despite the fact there is a 3% odd sequential increase in the field of global delivery centers. I do understand that the billable performance in India showed a higher increase than in global delivery centers. But even if I take a weighted average, I'm not able to reconcile the sharp decline in the blended yield. So is there any other factor that played here?

Sunil, over to you?

Possibly [ Sudhir ], we will connect off-line. I don't have that -- this one. It will be better to just go through that, and we can help you with that. You can connect with Saurabh off-line, he'll help you with that.

We take the last question from the line of Mr. Rahul Jain from Dolat Capital.

So basically, I want to more deeply understand the strategy for the Alliance business. I mean we have taken several actions in the recent past. But it seems that for even demand is not anywhere closer to getting stabilized. So what is the real road map out here? What are the hope element in this business? What are the variable aspect on the cost side in case it does not? So how it looks like both from growth as well as profitability perspective in this region?

Great question. As some of you may recall, we've gone through a set of transitions in the Alliance business unit with our leadership there as well. And that has given us and presented us as all transitions to the opportunity to thoroughly examine that business. And I think you said it very well in that we have cost variables that we can go after as well as we have revenue acceleration that we can go after as well. Several things. On the revenue side, we are in the process of extending our relationships to new sources of revenue that we see based on the skills that we've acquired out of that, that we think are unique valuable skills in the industry around industrial sector. Our partnership with Dassault Systemes, as evidenced in our press release several days ago, is part of that where we have expanded our ability to work in Europe as well as in North America with Dassault Systemes. And that will yield a much stronger services to software ratio than our largest partner has yielded with their product set. We see evidence of that already. The second thing is we've looked into our largest client and looked at how we penetrate to their customers, not just with that client as an ISV, but to their clients as well as enterprise solution builders using the digital mosaic that Sandeep so accurately described. This is born in our partnership with Red Hat, which is an independent partnership from our largest client and opening that channel up to work with the world of clients that are implementing OpenShift and Red Hat based technologies to do hybrid cloud, and the Alliance business unit will lead that charge as well into that environment. And we think that, that is an active segment of the market and it fits in our vertical and horizontal strategy across the company rather well. So we do see new revenue avenues there to go after. I'd like to note that our reseller business with IBM was on target to do extremely well. And in the last month of our last quarter, they were knocked down by COVID-19 in terms of new sales not taking place. And so while we had been tracking at 20% quarter-on-quarter growth for several quarters. Our fourth quarter in the month of March took a severe hit of revenue there. And so we will continue to feed that avenue as well growing more services and more clients there. We did add around 60 new clients in the Alliance's industry solutions focus in last quarter despite this as we grow. So that's the revenue story. On the cost story, you will see let's continue to focus on cost. We have a widely distributed team around the world. We've worked with our largest client on location and size and expertise. There is an opportunity there to drive for some consolidation, and we'll execute on that consolidation as 2021 goes through. And you'll see us move to a different cost equation as well, which I think will benefit the overall unit's business results and outlook. So we'll work in both levers. Hopefully, that gives you an overview.

We'll take that as the last question. I would now like to hand the conference back to Mr. Christopher O'Connor for closing comments.

I want to thank you all for your questions. The world's an exciting place right now. It's full of discussions and opportunities. We will absolutely, I believe, as a world, as set of societies emerge in a slightly different spot than when we went in to COVID-19, we maintain excitement around all the questions and all of the activity we see with our existing clients and new clients. And that excitement hopefully comes across to you when we use the words of fillers like cautiously optimistic. We see and we feel and can help many of the questions that clients are asking. And it is exciting to us. There aren't enough hours in the day for us to be able to work through kind of all the activity that we see out there. So the market is highly active and while the word shelter-in-place are used around the symptom of the disease, our clients certainly are not sheltered in place in terms of having conversations to asking us, challenging us and presenting to us discussions of all types. And in that, we'll work through the quarter. We'll continue to update you. And with that, I want to thank everybody for the call, and we'll see you next quarter. And if you have other questions, you can certainly contact us offline. So onwards, and everybody, be safe. And thank you.

Sure. Thank you very much. On behalf of Persistent Systems Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.