Persistent Systems Limited (PERSISTENT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Persistent Systems Earnings Conference Call for the first quarter of FY '21 ended June 30, 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; 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. Good morning and good afternoon. It's our pleasure to be here with you today, and it's also our pleasure to have this opportunity to speak with all of you regardless of where you are in the world. I want to open this with a heartfelt wishing of safety for all of you during these times and for all of your families. It's unprecedented times in the world, and I think it's important that we always start with safety first. It gives us a lot of pleasure to share today's results with you. You've seen the earnings results as we published them. Arguably, this has been one of the most interesting business environments we've all seen in the last 30 years. And it unfolded in a very interesting and very good fashion for us as we went through the quarter. Let's quickly just highlight the results in U.S. dollars. $131 million of top line, which is our best quarter ever, 3.1% Q-on-Q, 9.5% year-on-year growth in terms of the top line. We saw a growth of 1.8% through the -- quarter-on-quarter in our Services business, which translates very well into a growth of year-on-year of 15.3%. We also saw our IP-led revenue grow by 9.8% quarter-on-quarter. While that was a decline of 11.6% year-on-year, we think, directionally, this is an improvement in the right direction for a variety of reasons we can talk about as we go through the call. Our margins, likewise, crept upwards. EBIT at 10.4%. We think that's sustainable. And we think in the future, there can be upside on that as well. The quarter, quite frankly, unfolded for us in 2 broad trends. First, we worked with all of our people and all of our clients to get through the COVID transition. And you should think of that as pretty much the month of April. The second thing that we noticed as we went through April was that client curiosity was at an all-time high. Clients were open for suggestions and opportunities and discussions of all types, whether that was in the way that they made software or in the types of solutions they brought to market. And in the sectors where we focus, this turned into growth for us. It turned into growth in existing clients, and it turned into new clients, all of which we managed to obtain and close inside of the quarter at the same time. So just a fascinating and very busy quarter in terms of all of those items that we did to accomplish where we are today. Let's talk about the COVID situation for a minute and its impact on our business. First, we brought home everybody in the company in about a week during early April and late March. This included all of their work. It stressed and tested our IT systems. We use many of the technologies that we work with our customers on. And we held up, we held up well. So basically, everybody came home in a week. Everybody was productive. Nobody was not productive. And with the exception of maybe one minor case where we had a client, where we had to work through some fiduciary terms, all of our work came home with us. And so we came home in a very neutral and flat trajectory, meaning that we had everything that we started with, and we didn't lose much if anything along the way. This gave us a lot of strength, right? We had a couple ramp-downs during the quarter, a few discounts, most of which were minor, some of which have already ended in their discounts and have gone back to normal pricing or normal rates as a part. Our cloud pipeline in digital projects was strong as we entered the quarter, and it maintained its strength. We found that digital cloud projects maintained strength the entire time and grew -- and opportunities as that client curiosity kind of took over and clients started asking themselves, how can I use cloud-oriented digital technology to extend my business during this situation and for the future. So that pipeline was active as we entered the quarter and it became more active as we went through the quarter. And the market was just simply active. If you answer the questions of the customers and the curiosity was there, we found work. And as I mentioned already, we expanded existing clients and found new clients as well. And overall, there was a demand for improvement in how people write software too. We found a certain set of clients were very open for the idea that we could help them do software better than they could by themselves, and that led to both expanded existing business and new business. And we think that client curiosity remains high as we exit the quarter, and we certainly have it as a goal to continue to work as we go into 2Q as well. Last, the COVID situation also led us to think very much about how and who we are in the industry. We announced the donation of INR 25 crore, of which we started that contribution during the quarter. And so that is baked into our financial results, and we can talk about that as well, but that is included in our results for the quarter. And it's part of all of the numbers that I've just reflected with you. So we feel strongly as persistent and as who we are that part of our responsibility is to help the regions and areas of the world where we participate, and we know the clients and the population's needs and we're very proud of the donations that we've done around the world as a result of that. Our growth engine continues to progress. We talked in previous sessions with you about the need to bring together a very integrated system. The need to not just rebrand the company, but to have marketing and sales work in a coordinated fashion. We continued to make significant progress this year -- or this quarter as a result. The thing the quarter provided for us was the opportunity to really retool how we think about market progression and how we think about creation of pipeline. And so our marketing team went completely digital. Instead of having this blend of on-premise events and things that people would usually go to, we went completely digital, and we went digital with our partners, doing strong lead demand generation events with people like Salesforce, AWS, Mambu, Appian, et cetera, a whole variety of them that we did. And we'd never done it stronger. So we got the digital marketing machine engaged. We got the marketing machine engaged with partners. Partners, likewise, for the first time, started to donate marketing spend dollars to Persistent, meaning clients -- meaning partners spending money on funding Persistent's marketing of the overall story we have to tell in the market. And we received funding from Salesforce, from AWS and from IBM to help tell our story with them as our partner in the industry. We see this as significant trend-oriented progression of our story, of our solutions and of the value we can bring clients and -- in cloud-oriented digital technology and the solutions that they engender. So we think this is paying off. Let's move last and finally to focus on the 2 units as we have been operating in this year. Technology services run by Sandeep, who is here on the call with us today, just continued steady growth in numbers for this quarter. Sandeep will give you a great overview on the TSU results and also the details of what we're sharing now with you in terms of our BFSI and our Healthcare & Life Science businesses and how well they're doing. From my point of view, I'm only impressed by the track record of TSU, and it continues in an impressive fashion. And Sandeep will give you that overview in just a minute. The Alliances business unit also grew during this quarter. It grew at 6.6% quarter-on-quarter. The growth was driven under the new leadership of a new President, Jiani Zhang, who could not be with us today due to time zone differences. In short, if I had to summarize what happened, she focused on services to our largest clients and services through them -- through their enterprise clients, particularly in cloud and Red Hat domains. If you follow the quarter, you'll notice that IBM did a press release with us around their Cloud Pak software. This is a software that IBM is leading into the market around how they're approaching cloud. And they announced a partnership with Persistent as one of the premier providers of capabilities to help clients deploy and gain value over that. And in this quarter, we closed our first several wins in that area also with IBM, which helps us build a pipeline into subsequent quarters of that growing as IBM focuses there and as we can focus there as well. We likewise grew the IP revenue. We grew total revenue in other areas as well, bringing this more into balances. Our reseller business did well. Our reseller business also included services in nearly every contract that they did, which is a change for us. We have put a very keen focus on making sure that there are services attached to every reseller deal and in nearly every deal that we did, including Europe's largest airplane manufacturer, we brought home services as a part of those components of the deal. And it gives us more balance. It gives us better control on the margins out of that business, and it gives us more build and strength in terms of things that we can do with those clients in the future. IBM, for its own part, focused on their own contracts with all of their vendors. We have over 100 contracts with them. And we're happy to say that nearly every one of those contracts was held in place, and we survived and worked through all the questions that IBM had with all of its vendors around their own spend rates. And we came through very well in terms of the contracts that we have existing. And so we are optimistic on what we see happening with our businesses with Red Hat and IBM as well as the work that we're doing around cloud as well as the continued good trajectory for our IP businesses that we do with that client as well. So we think this is key. And finally, our largest client recognized us as a key GSI among 5 others in their earnings report as well as personally in a pen -- in a letter penned by Arvind Krishna to all of his employees. We've never had this type of recognition from our largest client before, and we think it propels us well into being a recognized provider of capabilities for their enterprise clients as we look forward. All in all, just a tremendous amount of activity this quarter. The team, frankly, refused to lose. We gave the team just a simple mandate, which was after we got home, we just simply told them grow. And nearly all of our teams did that and accomplished that with the pipeline they had and the pipeline they built. I can't articulate the amount of activity, well enough or how proud I am of the team, but it was a fantastic journey this quarter for us. With that, let me turn it over to Sandeep for his overview on the TSU business. Sandeep, over to you.

Thank you, Chris. Good morning, good afternoon to all of you. We are happy to report Technology Services delivered yet another strong quarter. As we'd mentioned in the last quarter, we have combined the business for Accelerite with TSU. So whatever I'm going to talk from here on in terms of numbers is a combination of the 2 businesses. From a Q1 FY '21 perspective, the numbers panned out at INR 100.97 million versus Q4 FY '20 of INR 98.8 crores -- million, which represented Q-on-Q sequential growth of 2.1% and Y-on-Y of 16.9%. This is for the combined, Accelerite and Technology Services, the erstwhile numbers. From an industry vertical perspective, this growth was broad-based. BFSI came in at 4.9%, Healthcare & Life Science at 5.7%, and tech companies and emerging verticals at 1%. From a horizontal performance perspective, the service lines that we have, as Chris pointed out, the digital product and engineering service line as well as cloud and infrastructure service line panned out at the top with others following sequentially. From a top customers quarterly revenue growth within TSU, we had a healthy broad-based growth as a part of our strategy to mine customers effectively. The top customer in TSU grew by 11.3% sequentially on a quarterly basis, top 5 by 5.8%, top 10 by 4.5%, top 20 by 9.2%. So the fact that the top 20 grew by 9.2% sequentially should give you the comfort that the mining strategy that we have in place is working out well. From an order booking perspective, this was a good quarter once again for TSU. We won a number of multi-million multiyear deals. These were across existing and new customers, both. In terms of significant events and large deals in the quarter, from a BFSI perspective, one of our leading BFSI customers selected us in their vendor consolidation itself. And so we are expecting that account to grow further with more business coming our way along with other more vendors who are among the preferred partners in this account. For a U.S.-based retirement, health care, education, savings, third-party services provider, we won a multiyear, multimillion-dollar deal. This is to roll out and manage an AI-enabled IT service management, asset management platform for them. In Healthcare & Life Science, we won a number of deals, and a number of them are mentioned in the fact sheet as well. To give you an example, for a large pharmacy benefit manager, we won a deal to build a collaborative platform using Salesforce. This is for nurse practitioners and caregivers to coordinate care in a better way. From a technology company perspective and the emerging verticals perspective, you would remember, earlier in the quarter gone by, we had announced a large deal. This was with leading enterprise software company in data virtualization space. This deal was done with this existing customer and has incremental revenues of $50 million plus over 5 years. Similarly, we won a number of deals in the enterprise software/enterprise space on digital product in line as well. From a go-forward perspective, we continue to have a reasonably decent pipeline of multiple multimillion, multiyear deals, which are looking promising for Q2. These are a mix of our proactive proposals in our existing accounts and a number of RFP invitation from your partners. On the analysts recognition, again, we had a good quarter. Among various recognitions, there was this IT recognition naming us as a top 15 sourcing standout in less than $1 billion category. This is based on the deal flows that ISG sees from various providers being invited to. And so it was a good recognition for us. In summary, Q1 was a good quarter for us. We remain cautiously optimistic, and we believe pending any other events this quarter would also be a fairly decent quarter for us. With this, I'll hand over to our CFO, Sunil Sapre, for his comments.

Yes. Thank you. Thank you, Chris and Sandeep, and good evening, good morning to you all. And hope you're all doing good and are safe and healthy. So while Chris and Sandeep have given you the business updates and some of the developments as we see in the market as where we are placed, let me take you through the margin movement and certain financial details for the quarter. The revenue at $131.02 million with Q-o-Q growth of 3.1%, Y-o-Y growth of 9.5%, the rupee growth was 7% at INR 9,914 million and Y-o-Y growth of 19.1%. The linear revenue grew by 1.8% quarter-on-quarter and 15.3% year-on-year. And as you know, the growth in linear revenue is net of the impact of COVID in form of discounts and ramp-downs. The IP-led revenue grew by 9.8% quarter-on-quarter, while on year-on-year basis, as Chris mentioned, it declined by 11.6%. The growth was mainly driven by reseller business here, while the royalty income was steady. Coming to linear revenue, the on-site linear revenue grew by 5.5%, comprised by volume growth of 7% and decline in billing rate by 1.4%, reflecting some of the discounts agreed. The offshore linear revenue declined by 0.6%, constituted by increase in volume by 2.2%, while there was a decline in billing rate by 2.7%. So this decline in billing rates is essentially the effect of discounts offered to customers over a shorter term, and this will progressively come down in the subsequent quarters. I would like to draw your attention to the fact you would have seen the segment reporting. So turning our focus on industry verticals, we have decided to reorganize the segment reporting into BFSI, Healthcare & Life Science and technology companies and emerging verticals. The revenue contribution by the organization units is also given in the fact sheet, which is Technology Services and Alliance being the 2 units. And as Sandeep mentioned, the Accelerite unit is now part of the Technology Services unit effective first of April. In terms of industry verticals, the BFSI growth was 4.9% quarter-on-quarter and 26% year-on-year. And Healthcare growth was 5.7% quarter-on-quarter and 14.1% year-on-year. In terms of the technology companies and emerging verticals, the quarter-on-quarter growth is 1%. And on Y-o-Y basis, we saw a dip of 0.6%, mainly on account of Y-o-Y dip in the royalty income that you would have seen. Sandeep has already given you the numbers with respect to the TSU growth, which was 3.1% quarter-on-quarter, 17.8% year-on-year in its old format. And including Technology Services, it was 2.1% quarter-on-quarter and 16.9% Y-o-Y. So henceforth, we will report TSU numbers along with Accelerite. Now moving to gross margin. The gross margin for the quarter was 33% against 33.8% in the previous quarter. Gross margin reflects the impact of COVID in form of customer discounts and some ramp downs and the increases in resale revenue. This was partially offset by lower person months deployed in the IP portfolio. You would have seen that in the IP person months. Lower salary cost due to the pay cuts [Technical Difficulty] and the currency benefit.

Sir, I'm sorry to interrupt, your voice was breaking.

Hello, is it okay now?

Yes, sir, little better.

Okay. Okay. We expect the discounts, as I said, to taper down over the next 2 quarters, and we should be looking at normalization by the end of third quarter. In some of the new engagements we started recently, we have higher subcontracting expenses, which are also expected to come down over next couple of quarters. Coming to sales and marketing costs, you would have seen that being much lower at 8.7% of revenue as against 10.2% in the previous quarter, mainly on account of lack of travel expense. The admin and other expenses were lower at 8% of revenue as against 9.1% last quarter, as we could see reduction in our facility costs. And also in the previous quarters, we had been providing for IL&FS deposits, which were fully provided by March 20. Coming to the doubtful debt provision, we have provided for an expected credit loss of $650,000 on customer outstandings where we see some stress, and this is required as per COVID reporting guidelines, and that reflects in the higher provision for doubtful debts. In addition to the regular CSR spend, we had additional spend on account of COVID donations of INR 74 million, which accounted for 0.7% of our revenue. So out of the INR 25 crores that we have committed to donate, about 30% has been contributed during the quarter. With the lower spend on SG&A, the EBITDA was 14.8% as against 13.8% in the previous quarter. The currency benefit in terms of favorable impact on margin is 110 basis points. Depreciation and amortization accounted for 4.4% as against 4.5%, so fairly steady there. The operational EBIT was 11.1% without considering the donation for COVID relief and on constant currency basis at 10%, as against 9.2% in the previous quarter. Post COVID donation, the EBIT was 10.4%. Treasury income for the quarter was INR 279 million as against INR 229 million. The reduction in interest rates and the rally that happened helped us to have better gains in terms of mark-to-market gains on debt funds. So that's the reason for the increase in treasury income, while the interest rates have dropped on the fixed deposits that we hold with banks. ForEx loss was INR 88 million as against a gain of INR 45 million in the previous quarter, mainly due to loss on realization against hedges booked last year. Finally, the profit before tax was INR 1,220 million, at 12.3% as against 12.2% in the previous quarter. ETR for the quarter was 26.2%, and PAT was INR 900 million at 9.1% as against 9% in the previous quarter. Coming to operational CapEx. We had a little higher operational CapEx this quarter, amounting to INR 280 million. This included procurement of laptops to enable work from home and certain fit outs expenses being incurred at our Hinjewadi campus for housing the newly started engagements. The addition in intangible assets includes payment of $1.8 million, which was part of the large deal we won during the quarter. Being a long-term contract over 5 years, this amount is treated as an intangible asset in form of contractual rights and will be amortized over the contract period. The cash and cash equivalents amounted to INR 14,940 million as compared to INR 14,717 million. The increase in DSO from 65 to 69 days includes spillover of collections from a large customer, which happened in the first week of July, which impacted DSO by 2 days. And the other 2 days is because of slowness we saw in certain collections, impact of COVID. We expect the DSO to come back to 65 levels within a quarter. In terms of forward contracts, we hold steady hedges of $121 million at an average rate of 75.39. Just to also update you, you might have read that in the press release in respect of our Board, Mr. Kiran Umrootkar, who was the Chairman of the Audit Committee; and Mr. Prakash Telang retired as Independent Directors at this AGM, which we had on 24th of July. So with that, I thank you all, and I hand it back to Chris.

Thank you, Sunil. Thank you, Sandeep. And I appreciate the updates and team on the phone. We're ready to enter the Q&A period. So with that, let's go ahead and open up the lines and let's see what questions we have.

[Operator Instructions] The first question is from the line of Sandeep Shah from CGS-CIMB India.

Congratulations on a very strong execution. I think one of the very few companies, which reported a positive growth in this quarter as a whole. So congrats to the management. This question to -- first to Sandeep related to Technology Services. Can you give details in terms of the growth outlook? Because you said, at least for 2Q, you believe the growth momentum can continue. So -- and also the deal pipeline, which you are looking going-forward basis? And in this quarter, outside the $50 million deal, are you had enough wins outside that as well?

So Sandeep, I'll take your question the reverse way around. So outside the $50 million win, were there other wins that we saw in this quarter. Yes, we had multiple deal wins in this quarter. And they were like multiple -- multimillion-dollar, multiyear deals. Many of those are mentioned in the fact sheet that we've circulated. As far as the pipeline for this quarter is concerned, yes, we have a decent healthy pipeline of similar kind of deals. We don't give forward-looking guidance, so I'll not be able to give you the color on the revenue side. But as far as pipeline is concerned, we have a healthy pipeline, and we had healthy bookings last quarter.

Okay. Okay. And Chris, can you give an outlook in terms of Alliance business because if you can break down within IP and Services because the reseller business, though the potential looks good, but it still continues to remain lumpy. And do you believe, by what time the Services business within Alliance because of the Red Hat tie up, can actually start turning around and can start showing a sequential growth?

Yes, lot of questions in there. We continue to remain optimistic and bullish on the composition of the Alliance business unit. And as I've told you in prior calls, the trick to this is to get the pieces to work in concert. So our reseller business on straight resell grew this quarter, adding multiple new clients and several major clients. The piece that I'm watching carefully on the reseller businesses are attach rate of services, which we have not done before. And so while we've attempted it before, we haven't executed it well before. This quarter, we executed well. We changed the composition of our team a little bit. We got focused on selling services with every resell deal. And in nearly all the deals, we included a service component. So this included opening up services at, for example, Europe's largest aircraft manufacturer, a major German automotive company, several industrial clients in the United States. And so to me, that builds durability because the resell deal will come and go inside of a quarter, but leaving behind your people becomes a durable facility to revenue growth. And this is a focus of ours right now to help make that happen. So we saw evidence in progress and deal wins there. Likewise, we have doubled down in the Alliance business unit on focusing on our largest clients -- clients. And so this led us to the cloud announcement that we did with them led us to putting a lot of work and effort behind marketing their cloud capabilities, including Red Hat. We found new clients as a result of doing that. That started a pipeline, would be the right words. And we've built a pipeline to go after now in subsequent quarters with them. So we're motivated by that as well. We think all of this will balance the IP revenue, which will continue, and I think continue to be strong but as we all know, has a little bit of a cyclical fashion based on how they sell. So we think this will help us balance out, and we saw good evidence there.

And Chris, just a follow-up. Whether the OPD business within the Alliance can actually also have an upside because of the Red Hat, where some of the legacy products of IBM can actually be upgraded for the Red Hat platform? Or do you believe that maybe a expectation far in future?

We've actually been doing work with our largest client on upgrading every product they have to include Red Hat, OpenShift, cloud-based capabilities. And so this is absolutely a part of every IP piece of work that we do. And at the guidance and in conjunction with our largest client, we've been upgrading actively and releasing that software back out with OpenShift and Red Hat technologies included in its core. And it gives that software, frankly, a cloud-based point of view, which it never had before, which we think is exciting for their clients.

Okay. And just a last question to CFO. In terms of CapEx, if I look at the intangibles, you mentioned that $1.8 million have been paid because of the large deal. But if I look at outside that also, the organic addition to the software and the acquired contractual rights has been much higher on a quarterly basis this time versus what it used to be earlier. So what is the nature of that? Is it the transition from WIP to the gross block? Or is it the incremental spend, which we have capitalized as a whole? And a bit of clarity in terms of margin sustainability going forward in the coming quarters as of now?

Yes, yes, absolutely, Sandeep. So that is -- you're right, it is conversion from WIP to the asset block because we capitalized the ERP implementation costs that we had incurred in the last year and as we went live on the ERP modules. That was the main item there. And in terms of margin sustainability, as you would have seen from the comments I've made with respect to specifically the gross margin area, we have several levers and we are working towards each one of them to improve the margins. So there is enough room available for us to sustain the margins at these levels.

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

Congratulations on extremely good set of numbers, very good execution in this difficult time. So I have only 1 question, which is a little on the strategic side. So Chris, what is your sense? How has this pandemic impacted the tech sector? I'm not asking a very near-term impact because, obviously, in near term there is a lot of pain in different economics, so things may not be as great. But from a medium- to long-term perspective, do you think that tech spends have got accelerated and tech -- client queries have accelerated and things may improve much, more people would be happy to spend more on tech? Or you would say that it is too early to comment?

Yes, I have a view, which is still forming. But the view is as follows. The words, tech sector is a pretty big word. Inside of tech sector, I think there are going to be puts and takes. Clients have clearly shown an interest in understanding if they've optimized how they build and make software. And I believe that has accelerated as clients that were profitable or that had growth, but hadn't tuned their software R&D, now are seeking to tune every area they have, and that includes how they build software. And I think inside of tech sector, optimization of software R&D will continue to be a very important subject for clients. And it will have an effect long term, I believe, moving that capability into a much more mechanized and manufacturing-oriented approach for experts, like Persistent, and they know how to do it well. So that's one trend that I see. The second trend that I see is that clients are digitizing and going to cloud-based technologies in an increased rate as a result of what's there. The trend was already there, but the businesses were approaching it in a more casual style. We see a much more concerted press to bring a digital front door to their clients into how they do business. I used the word front door because that doesn't mean a complete application overhaul in all cases, it doesn't need an application migration in all cases, it could, but this notion of digitally extending yourself, even existing things that you have is very, very active. And I think that will continue as that accelerates as well. I think on the other end of it, clients are looking at status quo areas or build and run areas that they have with a new light of negativity in terms of how much am I going to spend there. And I think you'll see that trend continue also as you look forward. So those are the macro movements. But it's puts and takes in tech sector. I think it remains strong, but those are the growth areas we see very active in the market.

The next question is from the line of Mohit Jain from Febbrisia.

This is Mohit from Anand Rathi. Two questions. One is on your outlook on pricing, like are we done with it? You said it will gradually fade off over the next [Technical Difficulty]

Mr. Jain, your voice is breaking.

I'm talking about pricing. Are the realization discounts, as you've said in the opening remarks, the discounts will fade off automatically over the next 2 quarters. So how much impact will be there from a full year perspective in terms of price discounts that you have offered to your clients?

Sandeep, maybe you want to give perspective on what you're seeing?

Sure. So from our perspective, see, these discounts are not very steep discounts or anything and they are not across board. They are in very specific customers, and we have a handful of customers in travel transportation, hospitality and similar sectors, which are more hit. Outside of that, there are a handful of other customers. So we don't expect this to continue for too long. A few of them have already stopped. So I don't think you should take it as a very material impact going ahead. From Q2 onwards, you should see these come down to very low levels.

The next question is from the line of Madhu Babu from Centrum Broking.

Sir, on this cloud opportunity and cloud migration deals, could you elaborate more on that because we have both AWS and IBM Cloud Pak announcement. So what are the kind of deal sizes and any enterprise deals we are doing on the cloud migration because that is a hot area as of now.

Sandeep, over to you on cloud business and cloud opportunity?

Sure. So Madhu, good to hear from you. Both the things are there. We are seeing traction in enterprise cloud application migration, where the trend is only accelerating. So that is one side. And there, we are strong on the 3 clouds: AWS, Azure, and now we are also seeing increased participation in GCP, although that's relatively much smaller than AWS and Azure. On IBM Cloud Pak, we are, obviously, that's the journey that has started over the last 1, 2 quarters. That's accelerating, as Chris pointed out as well. So all these things, they have been -- because of COVID seems more accelerated then. So that's at a high level what I can give for you.

Yes. I would point out on this that our clients are not making singular choices. In many cases, they have all 3 of these clouds environments, and they're looking to understand how to bring that together and the best technology to build solutions from. And so this notion of hybrid cloud is very active in a lot of the work we do. And we don't see our partnerships as opposing each other. We actually see them as complementary.

The next question is from the line of [ HR Gala ] from Finvest Advisors.

Congratulations for good set of numbers. Just 1 question. It was very nice to see, Chris, in the annual report that your mission is to be $1 billion company. Now can you tell what will be the rough time frame? And by reaching that level, what kind of structural changes do you expect in the business in terms of different verticals, the clients and the practices that you follow? And how will that spell on the margin, which is currently, say, around 13%, 14% at EBITDA level?

I think on your first question on timing, the world is a funny place right now. So any timing that I could potentially give to you would probably be not the reality. So we watch the world today to see how it unfolds. However, we are focused on getting there. And with that said, we're focused on organic path in terms of the businesses we see. We like the segments we're in. We like the world of BFSI. We like the world of Healthcare & Life Science. We are greatly enjoying our work around technology sector and engineering and the work that we do with ISVs. Likewise, the fact that we're able to start to sell services with our largest client is popular as well. As these units continue or as these sectors continue to do well, one could picture that they become primary structures for us as you look forward into the future. Likewise, on the inorganic side, we continue to think broadly in the marketplace have nothing to announce today, but that would be a component of our growth as well. Not looking to advance into areas we have no knowledge of, but more looking to build complementary structures and enjoy the people that come potentially with that at the same time as future members of the Persistent team. So hopefully that gives you kind of a broad-based set of thoughts, and we are executing in kind.

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

Two questions from my side. First, about the margin outlook. I think in Q3 earnings call, we indicated about 35% gross margin aspiration. Q1, we are around 33%. So should we expect there is still some scope left for gross margin expansion, which is likely to flow to EBITDA margin. So if you can provide some -- your thought process around margin. Second question is about segment outlook, if you can provide across segment. And what is -- what are the other major subsegment part of your emerging vertical? And any investment plan to build capabilities to create new growth engine as a part of your emerging industries?

Sunil, I think this question is right for you.

Yes. Dipesh. So in the gross margin, as I have mentioned, the levers -- there are multiple levers that are there in this quarter. Of course, the biggest impact that we saw due to ramp-downs and discounts that unwinds in starting second quarter as we talk. The other bigger opportunity there is where we have begun the new engagements, right? These new engagements start with little heavy initial preparatory costs, which won't repeat in the next quarter. So that is the other part that will be there. And the third thing that I talked about is with respect to the subcontracting expenses. We are working in a focused way that how that can be transitioned to our own teams and reduce that part of the expense. And when the royalty income also looks up, that adds directly to the margin. So it has seen some softness in the last couple of quarters as we would have seen, but that's the lever where we don't directly control. But yes, that is another additional item. Over to Chris on the [Technical Difficulty] and the emerging verticals part.

So in terms of outlook, our segments that we're reporting on today, obviously, are segments we continue to think will do strong. Inside of tech companies and emerging, we have our businesses that we continue to grow around the work we do with other software providers, ISVs. We likewise have insight there, the work that we're doing around industrial sector. We have smallish pieces of works that we do with several other sectors, including telecom and media and some other areas. As they grow and as they turn into key focus areas in terms of their sustainability, we'll break those out going forward. But those are the types of things that are in that road that we say are tech companies and emerging verticals.

The next question is from the line of Manik Taneja from Emkay Global.

So just wanted to get your thoughts with regards to the kind of deal that we signed during the quarter. Do you see a significant pickup in activity around transactions like this, given the current macro environment? And secondly, just wanted to understand from you what are the sustainable margins for Persistent over a 2- to 3-year time frame? And what levers do you think will drive that -- drive those margins?

I'll do a quick summary on the last question, then Sandeep, I'll turn the deal question over to you. On the margins, we think our margin level we have today is pretty sustainable. It's the right range for the international churn that we see. If you look forward a couple of years, I think it will rise. I think getting back to historic levels of where we were in 2019, I've always said, is achievable. We think we're on our way to that. So if you look forward, let's just take EBIT as a level to look at, EBIT heading into the 12% range is certainly longer term. When exactly, probably will depend on worldwide conditions. But hopefully, that gives you a margin overview. Sandeep, over to you for deal composition and how you feel about the deals?

Sure. So Manik, as we said before, there were multiple deals in the quarter gone by. So in Q1, we saw multiple deals, and they are there in the fact sheet as well. From a current quarter perspective and an ongoing pipeline perspective, we have a decent pipeline. I would say, this is a combination of proactive proposals that we are ongoing with our existing customers. There are RFI -- RFP invitations both from existing and new customers. And then there are multiple other channels where we get invited to do it. These are sourcing advisers like ISVs, et cetera, et cetera. And then there are other channels that we closely have relationships with. These are private equity portfolio companies and that we see funded companies and so on. So we are seeing a decent amount of deal flow. And for now, I would say it's a healthy deal flow.

The next question is from the line of Prakash Chellam from Marathon Edge.

Could you give me a sense of the -- your deal wins have been fantastic given the outlook given by Gartner and IDC, where they're talking about a drop in IT services spend, recently updated in May. Could you give us some color in terms of the incremental revenue growth? How much of this is coming from existing customers versus new customers? And also a sense of how much of this is market share that you're taking away from somebody else as opposed to brand new engagements that you're creating for yourself? If you could give me some color on that, that would be great.

Yes, yes. So I'll answer the last question first and then Sunil, I'll turn it over to you for our numbers in terms of new and existing. So the broad trends in those studies, they're very inclusive of everything. Whether they're right or they're wrong, I think, is their opinion. And they might be right. However, inside of that is a huge set of different types of capabilities and projects. And so you got to break this apart. And when you break it apart, we see quite a bit of acceleration and need inside of what we refer to as digital cloud-oriented project solutions and works, extending client domains to be associated with others using cloud and digital capabilities to be able to do that extension. And that segment where we are focused is large and very active. And so while it's a component of potentially a larger report, like you mentioned, and there could be some other areas that have negativity, we are enjoying this quite a bit of growth in terms of that area. We think we do it well. We think we compete well. We think we end up in the final talks with all of the clients we bid for there. And we often win as a result of the work that we've done. So for us, it's a very competitive area to address. And it's how we're focused. Sunil, maybe you want to comment on composition, new versus existing?

Yes, yes, sure, sure. Prakash, so in terms of the new deal wins, the last quarter and this quarter, whatever deal have happened, will take a couple of quarters to play out in terms of the actual contribution to total revenue as the engagements ramp up. What effect actually you can see is between 5 to 10, where the existing accounts have also [Technical Difficulty] so that is the, what you call, validation, how the existing accounts are also growing. And I will be in touch -- as you kind of see where Sandeep talked about the 10 to 20 as well, right? So that is the place where we would see the new clients contributing to revenue. It will take a couple of quarters to make a sizable difference there in terms of total volume.

The next question is from the line of Susmit Patodia from Motilal Oswal Asset Management.

Congratulations on a great set of numbers. I wanted to check from a cost base perspective, assuming -- forget the operating leverage that may come from higher revenues, has the cost base, the most optimum in Q1? That's the first question. And the second question is, what are the headwinds that you see from a revenue perspective? Or what are the 2, 3 things that we should be mindful of?

Sunil, do you want to take the first half on this question?

Yes, sure. So Susmit, the first quarter was something that had lot of limitations on what we could do with changing cost base a whole lot. So we made, you can say, several adjustments to ensure that we work with the client, don't take the lead of the every opportunity that came our way and ensure that we fulfill that. But there are levers in terms of the optimization of the headcount that we deploy in our IP portfolio, as you would have seen some optimization. And wherever we have growth opportunities internally to release the people from the IP portfolio into the normal services business, and keeping the option to swap them back when they are required to fulfill the new projects that hit the IP road map. The third angle, which is there is, of course, the increase -- the new deal wins that have happened, where some of the portion of these deals is on site, which also get converted to offshore. So here, I would say, the main key areas which led leverage -- the operating leverage and the cost is to improve. Chris, on the other topic.

I can take the second part.

Yes, yes, Yes.

Yes, I can take the second part. So Susmit, you talked about the headwinds from a revenue perspective. So the fact of the matter is COVID-19 has not gone away. Till that time there's a vaccine and/or an antidote or both, right, it's going to be uncertain times. So while we are seeing some amount of stabilization, while we are seeing some green shoots, we will have to walk with caution in this path. So that's point 1. Point 2, in larger customers, there's definitely talks of vendor consolidation. We have come out as winners in many of those. Some of those, time will tell whether they go through those exercises or not. So we have to keep an eye open, and we have to be close to our customers. Third is, we have won a number of deals, and we have to be able to fulfill those deals. And in these uncertain times, getting people in the market, depending on the skill set and most of the work that we do are forward-looking skill set. So from that perspective, that's another thing. Those are the kind of headwinds. Some of them are in our control, some of them are not. So those are the things that kind of keep us awake.

The next question is from the line of Girish Pai from Nirmal Bang.

I just want to touch on the vendor consolidation that you did apparently for a leading BFSI client. Can you throw more color on that in terms of did you displace existing large vendor? That is question number one. Second, you mentioned that some cloud hyperscalers are probably investing some marketing dollars in you. Will this continue? And can you quantify this amount?

So I'll take the first one, and ask Chris to take the second one.

Yes, yes, go ahead.

Okay. So from the large bank perspective that we talked about, the vendor consolidation part, so there the -- there is -- in any large organization like that, there is a number of bigger providers and then there's a long tail of medium to smaller providers. So they're consolidating the entire tail to a select set of larger providers to them. Larger doesn't mean that the organization size is larger. Larger means that we are a significant provider to them in the technology areas and in the business areas that they've chosen to work with us. So yes, we will be consolidating their mid to smaller suppliers over a period of time. That is on that part. And Chris, please go ahead with the second part.

Yes. So co-marketing dollars to us is an indication of our strategy at work. It says to us that our software partners have invested in us now for their own success. And so one, just achieving them -- achieving that milestone was a great thing to see happen, and achieving it with 3 large partners helps us balance our approach and strategy as well. So if you add it all up, you get to kind of a 6-figure number. If you add up the potential of what it could be, it could be a 7-figure number easily, as you look forward in time. And that's a good expectation to try to manage your marketing team, too, which is to maximize that effect. It just furthers your inroads with that company in terms of helping be able to solution a client together.

The next question is from the line of Rahul Jain from Dolat Capital.

Congrats on great performance. Firstly, if you see many digital measures have turned incrementally positive on the digital acceleration thought process, and with companies such as Salesforce talking about most calls done in the history in the last 2 months. So why we do not see that kind of an optimism extrapolated into our commentary despite strong performance and positioning in these technologies?

And I missed the first part of it. I heard digital, but I missed that with the word that was the descriptor.

I mean, leaders like Salesforce talking about significant acceleration post COVID, so why we don't see that kind of optimism coming in our commentary despite strong performance and positioning in these technologies?

I believe the sector for digital cloud-based acceleration is the strength area of the tech industry. I think you hear our cautious optimism in that. The world is an uncertain place until certain remedies are available or we can resume a greater degree of freedom of commerce, particularly geographically, which is inhibited right now. So I think what you're listening to is, we remain very focused on this path of digital-oriented cloud, and our prowess and ability to do software projects for people. And to us, that has strong pipeline. However, it is subject to how the world revolves around the pandemic and how it grows and shrinks. And as we've all seen, we've seen recent lockdowns in certain countries. We've seen countries debating their approach. And we've seen certain micro geographies open up and then close back down again. So I think that's the caution you hear in our voice.

We take the last question from the line of Rishi Jhunjhunwala from IIFL.

[Technical Difficulty]

Hello?

[Technical Difficulty]

Mr. Jhunjhunwala, your voice is breaking.

We may want to move along.

Can you hear me?

Yes, now we can hear you, sir.

Okay. I'm so sorry, the line is a bit patchy. So I was asking that, given the strong increase in deal wins, how are we incentivizing the salespeople and considering the fact that otherwise there is a lot of focus on cost control. What measures have we taken to basically incentivize the sales?

Sandeep, maybe right here in half.

Sounds good. So Rishi, from a sales perspective, see, we -- I think we have talked about it earlier quarters as well. So we have incentivized our sales team to work on longer-term the annuity kind of deals and so on and they -- in our spaces, which are mostly digital. And so from that perspective, there is no clamping down on that. And the only clamping down on SG&A that has happened is natural. It is the travel-related thing. From a company-wide perspective, I don't think we have done anything to clamp down on the sales effort, the sales trend or the incentivization for anyone. In fact, they are more incentivized to do the longer-term deals with the existing customers and newer customers. So hopefully that answers you.

Ladies and gentleman, that was the last question. I now hand the conference over to Mr. Christopher O’Connor for closing comments.

I want to thank you guys for all your insights and your detailed questions. We remain at your disposal. You know how to reach us, if you have any follow-on questions. And with that, we're going to close the call. Thank you very much.

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