Persistent Systems Limited (PERSISTENT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Persistent Systems Earnings Conference Call for the Third Quarter of FY '21 ended December 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. Sandeep Kalra, Executive Director and Chief Executive Officer; 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. Sandeep Kalra. Thank you, and over to you, Mr. Kalra.

Thank you. Good morning, good evening, everyone. It is good to be with you once again. I hope you are all keeping safe and 2021 bodes well for all of you. Coming to our performance for the quarter gone by, we are happy to share that we delivered yet another strong quarter with significant progress on all major business metrics. The revenues for the quarter came in at USD 146.15 million, giving us a growth of 7.4% quarter-on-quarter and 12.9% on a year-on-year basis. In rupee terms, the quarter's revenue gave us a growth of 6.7% quarter-on-quarter and 16.5% year-on-year basis, respectively. On the margin front, all the margin parameters right from EBITDA to EBIT showed considerable improvement. Our EBIT for Q3 translated into 12.7% in rupee terms, and gave us a growth of 12% quarter-on-quarter basis, 69.2% year-on-year basis. For the 9 months year-to-date, the total revenues came in at USD 413.3 million, which gave us a growth of 10.3% over 9 months of FY '20. In rupee terms, that year-to-date revenue growth was at 16.5%. The EBIT margin for 9 months year-to-date came in at 11.7% compared to 9.1% for the 9 months of FY '20, which translates into an EBIT growth of 49.6% through the year-to-date period. In terms of employee numbers, we had a net addition of 1,600 plus FTEs in this quarter. This is the highest number ever added in a quarter in our history. 70% of this number came from lateral hires, the rest are freshers. Our attrition came in at 10.3% compared to 10.6% in the last quarter on trailing 12-month basis. We implemented the salary increments for our employees effective November 2020. On account of COVID-related uncertainty, this salary increment had got delayed by a few months from our normal increment cycle, which is effective July. However, compared to the rest of the industry, we are happy to say that we were the first few companies to have implemented the wage increase. For clarity, the increments are in line with standard practices and have not been impacted due to the COVID-related uncertainty. A number of you have been asking us about the order bookings. So starting this quarter, we are announcing the order bookings. For sake of clarity, the order bookings that we will announce from here on, our total contract value across all kinds of deals, small to large, renewal and new. For this quarter, we came in at $302 million in TCV terms, which is one of the healthiest from the time we have started measuring it over the last 5 quarters. This includes new business in new accounts, existing business, renewals in existing accounts, new business and existing accounts for the sake of clarity. We had a pretty strong quarter from a collections perspective. The collections through the quarter came in at $150.4 million. This brought the DSO down to 57 days, which is also a pretty strong DSO in the last few quarters that we had. The cash on the books ended at USD 258 million, roughly about INR 18,880 million. Our Board has recommended an interim dividend of INR 14, and Sunil will give you more details later in this call. On the M&A front, we completed the acquisition of CAPIOT Software in the first week of November. As a result, 200 CAPIOT employees became part of the Persistent family. And we also added to our capabilities new soft TIBCO and Red Hat platforms. We are seeing pretty good traction for these capabilities in our existing and new customers. We are pretty confident on this acquisition boding well for us and our new CAPIOT team members along with our customers. Now moving on to giving you a little color on the vertical performance and service line performance. On a quarter-on-quarter basis, technology and emerging verticals led the growth at 13.2%, followed by Healthcare & Life Science at 6.4%. BFSI vertical declined slightly by 0.8% quarter-on-quarter. This is attributed mostly to cost control by a couple of large customers in terms of furloughs and some intermediate ramp downs. We do expect this to get normalized, and BFSI verticals will revert to its traditional growth in the near term. Just to remind you, Q-on-Q, year-on-year comparison, the vertical grew by 9%. And for the first 9 months, the vertical -- the BFSI vertical grew by 18.4%. Moving on to the service lines. We saw good traction across all service lines. Product engineering, cloud, security and Salesforce led the pack, and pretty much, there was a secular growth across the board. From a geographic perspective, we saw a secular growth across North America, Europe, India and rest of the world. North America is the biggest volume for us. And more than 80% of our business comes from there, and I'm happy to state that, that grew 5% quarter-on-quarter. Europe, India came in at pretty high growth percentage-wise, although they are lesser contributors in volume terms for us. Changing the track to 2 organizational units that we have. Technology services continued to grow sequentially at 6% kind of rate for this quarter. The revenues for technology services came in at about $111.6 million. The acquisition of CAPIOT basically gave us about $1 million in this quarter in that $111.6 million. Alliance business came in at a revenue of $34.6 million with quarter-on-quarter growth of 12.2%. This growth was driven by seasonality in IP revenue as well as there were some upticks in the reseller revenue, both contributing nearly equal to the growth. Let me give you an additional color on the progress of Alliance business. I'm sure a number of you are looking forward to it. I'm happy to share that we have seen pretty good traction in the Alliance business, as we have been sharing in the last few quarters. We are confident this business will return to significant growth in the coming financial year. To give you a little bit more color, we continue to expand our relationship with our largest customer, IBM, and are strategically aligned with their new leadership's vision in the pursuit of hybrid cloud market. Last year, we were one of the named partners in IBM's Financial Services Cloud. This year, we have expanded it to include IBM's new telco cloud, and that includes some of the IP from our side as well. We're deeply aligned with IBM's strategy and Cloud Paks, including being a development partner for Cloud Pak for data, Cloud Pak for integration, Cloud Pak for multi-cloud management. We've also created Cloud Pak deployment services in order to help IBM in their deployment in enterprises. We continue to grow key IBM businesses in security, automation, data and AI and Watson Health. We've also become an advanced-year partner with Red Hat, and we are helping drive modernization mission across ISV and enterprise markets globally. Finally, from a pipeline perspective, we are seeing good traction on our deals in our Alliance business. In fact, we won some large deals in the Alliance business, which are ramping up. And we pretty much expect it to come to revenue starting the Q1 of next financial year. And that gives us the confidence of a healthy growth trajectory in Alliance business going ahead. Now in terms of client wins, [indiscernible] has a significant number of client wins. I'll just focus on a few of them. In banking, financial services and insurance, we won a large multiyear deal to deliver a solution. For regulatory compliance, customer due diligence, data quality and test automation, we got one of the top 5 banks globally. We will be helping the bank to comply with the rules issued by U.S. Financial Crimes Enforcement Network, FinCEN, through identification and verification of beneficial owners of legal entity customers and so on. Broadly, the theme that we saw in banking financial services was driven through compliance, modernization, launching new products in digital banking, making new digital products more secure and so on. From a Healthcare & Life Science perspective, the theme that we saw came across digital front door, which is basically the consumer experience, on one side in terms of providers. On the instrumentation/medical device kind of companies, we saw acceleration of product development road maps, given the COVID opportunity in terms of providing services and products for them, and we are very well aligned to their strategy. We also saw some wins in doing AI, machine learning work, for example, for one of the leading chronic kidney disease kind of companies, we are doing an AIML platform in health care. On the software, hi-tech and emerging verticals, we continued -- this is the traditional stronghold of Persistent, and we continued our journey in terms of larger, longer-term wins, including with large U.S.-based software company, where we are doing the engineering and support of core and mature security products. We are working with a telco software company on 5G communication related VOIP-related test software and so on. So pretty much a healthy growth across board in all these segments. Now moving on to the analyst recognitions. So this quarter boded well for us in terms of analyst recognitions as well. There were a number of those, including the ISG Booming 15 global for the sub-billion dollar category. We were the only provider recognized consistently for the last 4 quarters. Why this is important is this means we are being consistently seen by people like ISG in our category in larger deals that are being fought by people like us in the enterprise space. On the Zinnov side, we won the recognition as a leader in Zinnov's ER&D services report. We were recognized out of 50-plus providers as the top 3 in consumer software, enterprise software and platform engineering. That bodes well for us in terms of our consistent recognition in the market. Also, this is a segment where we have the highest percolation from a capability and a customer space perspective. The average group recognizes us as a major contender in Salesforce healthcare in the services peak metrics for 2021, based on the strong offerings we have in this market space. We continued our journey with the likes of AWS, winning or achieving the AWS financial services competency status. We also won an award from Saviynt for helping their customers use the next-generation identity governance solutions. We were recognized as a rising star for 2020. I'm pretty sure a number of you are curious about our work-from-home, work-from-office related progress. So we're happy to say we have our facilities open in a secure manner. We are starting to implement a hybrid working model. We are encouraging our employees to come partially to office. And we are hopeful that with time more and more as the COVID thing settle down, more vaccines are rolled, we'll come back to a little more number of people working from office. And we'll keep reporting on the progress as we go along. With this, I would like to hand over to Sunil for a detailed financial commentary. Sunil, over to you.

Yes, thank you, Sandeep. And good evening, good morning, everyone. First of all, wish you a very happy new year. I hope you all are keeping safe and doing fine wherever you are working from. The business outlook, deal wins and trends in the segments that we serve has been covered by Sandeep. So let me now walk you through some more details on the financial performance for the quarter. Very quickly, the revenue at $146.15 million with Q-o-Q growth of 7.4% and Y-o-Y growth of 12.9% and in INR terms at INR 10,754 million, the growth of 6.7% Q-o-Q and 16.5% Y-o-Y. And for the 9 months ended 31st December, the revenue came in at $413.26 million. It's a growth of 10.3%. And in rupee terms, INR 30,745 million with a growth of 16.5% Y-o-Y. Coming to the composition of revenue this quarter, as you know, was seasonally strong for the IP-led business, which grew by 19.8% Q-o-Q whereas the linear revenue grew by 5% quarter-on-quarter. The growth in linear revenue is despite the impact of furloughs, as Sandeep mentioned. Coming to the industry verticals, BFSI had a marginally soft quarter with a dip of 0.8% given the seasonality factor, while health care saw good 6.4% Q-o-Q and technology companies and emerging verticals registered very good growth of 13.2% Q-o-Q. In terms of the linear revenue, offshore linear revenue grew by 8.9%, comprising of volume growth of 11.5% and declining billing rate by 2.3%, essentially because of the lower number of working days. The on-site linear revenue decreased by 1%, while there was an increase in volume by 0.2% and the billing rate declined by 1.2%, again, basically because of the impact of furloughs. Sandeep mentioned about the pay hike, which we did effective 1st November, 2020, for all the employees. So broadly, we had planned about this and mentioned about this in the earlier call. The significant growth in revenue that you saw and continued cost optimization on several fronts helped us absorb the pre-hike impact, which was close to 200 basis points. And the gross margin for the quarter came in at 34.3% as against 34.7% in the previous quarter. As you know, the currency movement was a little adverse this time, and it impacted margin by about 20 basis points. The SG&A expenses were 17.3% as against 18.3% in the previous quarter, with very good collections that happened during the quarter. It resulted in lower provision for doubtful debts. As compared to earlier quarter, it helped margin by about 0.4%. The CSR spend was also lower during the quarter. As you know, we have contributed significantly in the first 2 quarters towards COVID-related donations. So this spend was slightly on the lower side this quarter, primarily because we expect some more spend to happen over the next few quarters to complete our committed INR 25 crores that we have committed for COVID relief. So the EBITDA with this for the quarter came to 17% as against 16.4% in the previous quarter. On the depreciation and amortization, it is in range, at the same level, at 4.3% like last quarter. The increase that you see in absolute terms in amortization is mainly because of the CAPIOT acquisition. With that, the EBIT was 12.7%, a growth of 0.6% over 12.1% of the previous quarter. Treasury income came in higher at INR 288 million as against INR 208 million in the last quarter, primarily on account of higher mark-to-market gain on mutual fund investments and also partially because the increase in the underlying treasury side. ForEx loss was much less at INR 2 million as against INR 51 million in the previous quarter. The profit before tax was INR 1,650 million at 15.3% as against 13.6% in the previous quarter. ETR for the quarter was 26.7%, and PAT was INR 1,209 million at 11.2% as against 10.1% in the previous quarter. And for the 9 months, PAT came in at INR 3,129 million at 10.2%. The operational CapEx for the quarter was INR 265 million. Sandeep has already mentioned about the cash on the book, so close to about $258 million in dollar terms. The DSO was 57 days as against 63 days in the previous quarter. So you would have seen a spike that had happened in the DSO in the first quarter due to the COVID impact. We have been significantly able to improve the collections over the last few quarters, which has resulted in very good cash conversion. Forward contracts outstanding as on 31st December was $128 million at an average rate of INR 76.93. And, as you have seen, the Board has declared an interim dividend of INR 14 per share. With that, thanks, everyone, and I hand it back to Sandeep.

Thank you, Sunil. So from here, we are open for questions. So please go ahead.

[Operator Instructions] The first question is from the line of Sandeep Shah from Equirus Securities.

Congratulations on a very solid, consistent strong execution quarter-on-quarter. Just, Sandeep, wanted to understand how to read this robust employee addition of 15%, of which you are saying close to 70% of them being lateral. So is it fair to say your growth momentum could be even stronger than what we have witnessed in the third quarter in the coming quarters as a whole because most of the addition being lateral as a whole, and that is also reflective in the order book, where book-to-bill has been about 2x as a whole?

Sandeep, good question. And yes, from a hiring perspective, obviously, we are trying to hire ahead of the curve. And we are trying to do a few things. If you look at not just this quarter earnings, if you look at the last few quarter earnings, we have been announcing larger deals. We've been announcing multimillion dollar, multiyear kind of deals. A number of the hiring that we have done goes towards fulfillment of earlier deals, ramping up the deals that we are doing or we have announced in the last quarter, and the anticipation of what we expect over the next few quarters. Out of the thing that we talked about, 1,618 hires that we talked about, roughly about 600 are freshers, which will take about 6 months to get productive. The other 1,000 people are the ones who are getting deployed over the orders that we have booked in the last few quarters and this quarter. Also keep in mind that a number of our peers are also announcing good results. What that means is there could be a potential spike in attrition going ahead. So we are being prudent in hiring a little ahead of the curve, making sure that we are able to fulfill our commitments to our customers. And yes, that should give you some confidence in overall the growth trajectory.

Okay. And, just, thanks for started disclosing the order booking numbers. But how do we read because it includes all kind of deals and on a book-to-bill it's a 2x. So is this trend generally you remain at this kind of a book-to-bill ratio every quarter? Or this is at a very high rate and may not continue going forward?

So book-to-bill ratio, Sandeep, usually is -- if you are talking about annual contract value kind of thing, right? So total contract can be over 3 years, 5 years and so on. So this overall number is basically across all kinds of things. If I was to say going forward, what we will also try and do is give you the backlog for the next 12 months in terms of executable backlog. So that is also something that we will start announcing overall. If you were to look at the new part of it, roughly, you can look at about $175 million out of this TCV was new. In existing customers or new customers, that should give you some -- this thing. And, again, there's no average that can be consistent over quarters, so I don't want to put an average duration to this. But going ahead, in the next few quarters, we'll also start the next 12-month executable order book as well.

And just last question on margins. Looking at this quarter, despite great inflation and such a robust lateral employee addition, the employee cost has just gone up by 4 percentage Q-on-Q. So is it fair to say the employee cost will have some headwind in the coming quarters because that might have been added at the end of the quarter, and the margin may not sustain at the current level? And what is an outlook over medium to longer-term in terms of margin?

So I'll take the first part, and then I'll hand over to Sunil for that. So I don't think you should read it as a headwind for the future quarters. So look, what we are trying to do is this. We have a number of orders that we have booked. We are trying to kind of fulfill them, and we are trying to hire in time. And even when you hire, you take a little bit of time to deploy. That's a natural business cycle. If you look at our utilization, our utilization has not suffered despite our bringing people over a period of the quarter and so on. So I don't think you should read it as headwinds. You should read it as more fulfilling in time and maybe being proactive about hiring and being prudent about any potential spikes in attrition that might happen. Sunil, over to you for the rest part.

Yes, sure, sure. So Sandeep, what you mentioned about headwinds can happen only if these people do not actually get billed, which is not the case because of the deals that have been booked. So it's just the week-to-week deployment and billability efficiency, which we track internally, which should ensure that there is no impact out of the employee addition. The other part just to note is the pay hike that we had was the effect was for 2 months. So to that extent, only the full pay hike impact will come in the next quarter. But with the efficiencies on multiple other areas, if you have seen the overall employee cost, we have been able to manage with utilization staying in the band of 80%, 81%. We have also still some operating levers. And as you know, this quarter gone by had seasonalities like furloughs and other things, which should not impact us in the next quarter. And to that extent, there are some levers which can help us continue the approach on margin expansion.

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

Great performance, Sandeep and team. This was really great. My first question is from a medium-term perspective you think the best of attrition and cost is behind us, and now this will become a challenge again? And I understand that you have probably advanced your hiring in anticipation of this, but how do you see this landscape evolving?

So see, from an attrition perspective, I don't think it will be a huge uptick or anything. But look, the overall IP environment or overall the environment from our peer perspective also everyone is reporting good results. And it bodes good for our industry. And I hope it remains the same way. And if that is the situation, then obviously, the talent pool -- the good talent pool comes under pressure. So while we believe we are a very strong company to work for, a lot of our employees are long-term employees and so on. There may be a little bit of blip here or there. So that's where we have been prudent in making sure we are well-staffed for the demand that we have. Now a small bit attrition here, there is a healthy thing any which ways because that also reflects on the overall demand environment. So that is where I will leave it. I don't want anyone to be overly concerned about this. The other part, if you can ask again, I'll answer that. Cost part, what exactly did you mean by that?

So basically, what I wanted to understand is, is the best of the margins in -- done in Q3 because you have 100 basis point savings from travel. As you rightly said, attrition will slowly pick up and some of the sources may be under pressure. So I'm just trying to understand is 17% EBITDA pretty much optimal from your perspective? Or are there more levers there? Because at some point, travel costs will also come back.

Right. So from our perspective, the 17% that we have achieved, we believe there are some more levers, as Sunil earlier referred to, while the cost may come back in terms of travel, facilities, et cetera, as things open up, and we wish they open up faster than otherwise. But we do believe the revenue acceleration that we have brought in, the kind of deals that we have won, the kind of pipeline that we have will help us keep the revenue momentum going higher. And that should also help us in various ways in margin improvement. Outside of this as well, there are a few other levers, whether it is in our Alliance business, IP business, wherever else that we are exercising, which will also help us optimize the cost. So we are reasonably okay at this, and we believe there is some more room to go.

And my last question is on capital allocation. Now that you have DSOs, which are probably best-in-class in your peer set, so cash flow would not be a problem. What is the Board or the management thinking about the INR 1,800 crores, INR 1,900 crores of cash.

So the high-level answer to that is we announced the dividend, which we increased from the last year. That's point one. Point two, we are actively looking at acquisitions. That would be the way to go. Given the market where it is, it doesn't make sense doing any buybacks at this point in time, and we are more inclined towards giving return to shareholders through our growth. That would be the strategy for the near term.

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

I have 2 questions. One is on the Alliance business. So in the opening remarks, you spoke about alliance business growth picking up significantly for FY '22. So where do you think this could be? Can it match up to the company level? Or do you think it will still be lower, but much better than what we have seen in the last 2 years?

So again, I will not make forward-looking statements on the company level growth and all. All I would say is it will be better than what we have seen in the last few years. We already have booked some deals. We have a pretty good pipeline. We are seeing very good traction with the biggest customer that we have in all the pockets; sell to, sell with, sell-through. So we are fairly confident it will come up, and hopefully, it will be in line with the company average.

Okay. And second is on the IP-led revenues. So we saw positive momentum after a long gap. So given our portfolio of IP products -- now, there were 2 observations here. One, of course, this revenue decline, which has completely stopped. Second was its impact on margin was not visible on a sequential basis. So going forward, from an IP perspective, do you think we will see more stagnation rather than decline given your portfolio of offerings? And second, what impact will it have on the margin side broadly, IP versus services?

Sure. Margin part, I'll let Sunil answer. On the overall IP part, look, there is, at times, seasonality in the IP business. That's the nature of the business, and that is not just with us. If you look at any of the companies that in our industry have IP that will be the same with them or with the software product companies as well. So there is going to be seasonality. Although we are working hard to make sure that we cover that seasonality through services on top of it and so on and so forth, broadly we hope to stabilize it. And then any which ways in the Alliance business and otherwise, the revenue growth should take care of overall the growth. And that should not impact the company growth, per se. On the margin front, Sunil?

Yes. So, Mohit, you would have also observed that so far as the IP-related person months are concerned, we have been continuously working to optimize that. So some of these areas, which help us in cost optimization, also ensure that our margins are in control. And the seasonality that you referred to with respect to the IP-led business, it sometimes also happens because of the customers' year-end kind of situation. So we have seen this happening probably several times in the past, as Sandeep mentioned. And not a whole lot needs to be worried about that. More keenly we are observing that we ensure that the margins in both the portfolios can be improved on a sustained basis.

So we should more look at it from a Y-o-Y perspective. The improvement we have seen in 3Q is more or less sustainable is what you guys are thinking in terms of IP business?

Exactly.

Yes. Yes.

The next question is from the line of Dipesh from Emkay.

Congratulations for very strong execution and robust performance. 2 questions. First about -- just want to get your sense about mining trend. I think we report only more than 5 in 1 to 5. But if you can help us give some data or maybe qualitative comment on how you are seeing the $20 million, $30 million, $10 million, $15 million kind of economy progress for us? And how one can look at playing out over medium-term? And second question is about how you make your deal intake number, if you can provide deal intake and new component of it?

Okay. So let me start with the deal intake and the new component part of it. So the deal intake was $302 million in TCV terms. Out of the $302 million in TCV terms, $175.5 million was in new, new in existing and new in new customers. If you want to even though look at the ACV terms, it was $256 million in ACV terms, $140.1 million of that ACV was in new in existing and new customers. Does that answer you on the deal intake?

Yes.

The mining trend, look, we announced the numbers between the top 1, top 2 to 5, and 6 to 10. If you look at it, the numbers there have grown healthily. But if you were to take the top 10 out and look at the growth overall, even the overall growth beyond the top 10 is fairly healthy, and we will look at giving you details in the fact sheet going ahead for the rest as well. But if you calculated pretty healthy growth across the board, the mining efforts have been fairly effective. And there is a number of proactive proposals that have been won when I talk about the new wins as well. So we are seeing a fairly healthy growth in both existing accounts and new accounts outside of the top 10 as well.

Sandeep, I ask because we give customer engagements $5 million, more than $5 million and $1 million to $5 million buckets. We are seeing steady progress on more than $5 million, where we are at $17 million this quarter. But $1 million to $5 million seems to be largely stable. And so that is where I wanted some detail, maybe if you can go provide.

See from an overall perspective, if you look at it, there are a number of customer wins. Where we are focused is getting the new customer wins also to be in the category where we can do multiple year kind of a business. And some of those that we have won over a period of time will start moving into those categories as well. I'm pretty sure you will see the movement quarter-on-quarter increase on that in the subsequent quarters.

The next question is from the line of Abhishek Shindadkar from Elara Capital.

Congrats on great execution. Sandeep, just one question. Could you talk about the trends in BFSI spends from a calendar '21 perspective? What you're seeing, is there a possibility that they can surprise positively? And, I mean, how is Persistent positioned, especially from our top 10, top 15 banks' perspective?

So from a BFSI perspective, look, the trends that we are seeing at a very high level are more related to the digital banking side of it, where more and more banks are trying to launch newer products on the online space. Now we are working with the likes of Mambu and similar other providers, where we are taking their solutions to market, whether it is a large bank, whether it is up to a credit union. So the entire 9 yards is the span out there. Then there is a number of initiatives on the modernization space. A lot of banks, large and small, are looking at their tech strategy. They're looking at their road maps, working with the hyperscalers on seeing what can go to the cloud, what needs to be in a hybrid cloud kind of environment. They are also looking at compliance-related things because as you put more products on the digital side, there is issues with respect to security, fraud, authentication, many of those. So we are looking at a whole lot of compliance and security-related initiatives as well. Those are the broad contours. We are involved with some of the larger banks. And in fact, one of the top 5 customers is one of the largest banks in the world. And we are also seeing some traction with other large banks here in the U.S. Hopefully, that answers you in a summary.

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

Good evening to the management team, and congrats on excellent execution. Also wish you a very happy new year. Sandeep, I have just a little more question on the strategic and long-term side. If you see we had some challenges in last 4, 5 years, both at the industry level and at persistent level also due to some transition and other things, which are happening, some kind of pain, which came from the non-enterprise side, ISG side and all. Now we are in a situation where we are actually -- we have called broadly all the problems. We have sectoral tailwinds. We have all the leadership and very strong deal wins and everything with us. And we also have the problems, which were bringing down our growth in the past, they are also behind us. Moreover, if you see last 15, 20 years' history, it has never happened that a robust growth of -- in the cycle has come, and it has -- the margins have gone down substantially instead of currency. It has never happened because operating leverage always comes to play. So my question is that with so much of tailwinds with you, the sectoral tailwind, the internal tailwind, the business transition tailwind, and you yourself are aware that the kind of cycle for cloud, which has come, that is not going to go away in a few quarters. That is not the way technology works. So then why we are so cagey about not giving a clear direction of how we are seeing growth from next 3-, 4-year perspective, not in quantitative number, but at least in qualitative number that, yes, next 5 years looks much better than the previous 5 years because of this 3 tailwinds. And the margins, although could be -- there could be some 1 or 2 currency challenges or some cost escalation because the demand is good. So we may have to hire people at little higher prices. But other than that, the margin should also be good. So what is stopping us? Or you want to take some more time before you call it out? Or you think that this is a better way to look at one quarter at a time?

It's a good question. And I think there's a number of things in that. So Sandip here is what I would say. Look, a lot of things that you said are right. There's a secular trend. We are seeing a trend, which is potentially a 3- to 5-year upcycle for companies like ourselves, especially with companies like us who have forward-looking capabilities, whether it is on the cloud side, whether it is on app modernization, hybrid cloud, security, data, AI, ops. And we are confident of our ability to execute. I'm sure that track record over the last 5 quarters, consistent growth. Now we have also given the order book and so on. We'll also give executable order book. The -- all kinds of metric that you folks look for, and we are confident in our journey. Having said that, nobody has a crystal ball of how this COVID thing is going to go by. It would be prudent to wait for another 3 to 6 months before starting to kind of give overtly confident commentary and so on. We would want to wait for that. Second, we are also working towards doing an investor meet. Hopefully, in the Q1 beginning of next financial year. We were trying to do it in person, but it looks like it will be a little while before that can be done. And we'll address a number of these questions when we meet. But at an overarching level, are we confident of our journey over the next few years? We are absolutely confident. We have the right skill sets. The company's foundation is fairly strong. We were always on the cutting-edge of technology. And even if we were to announce some M&A in the near future, that would be on these lines itself, on the cutting-edge of technology. So rest assured, we are well-poised to ride this wave. But in terms of putting a stake in the ground of what percentage growth, what percentage margins, et cetera, we would want to take a little bit more time and do it prudently. Hopefully, that gives you confidence.

Okay. And a little -- another question, maybe you or I don't know if Sunil can answer, and it is very speculative right now, but there has been consistent hammering of the global tech companies in last few weeks that not only stock price or the business side, but from the commentary which are coming globally that they will be punished in some or other way or there will be some taxes -- in fact, today, there was a comment from -- a comment that global tech will have to pay additional tax or something like that. So what is your sense is -- have you seen this ever in the past or country specific, any additional taxes, something which has been proposed and passed? Or it is for the first time you're -- you guys are also seeing it?

Sunil, I'll defer this to you.

No. So Sandip, your observation is right. See probably what is happening, we are right now passing through some kind of a contradiction, right? While some sectors of the economy have been going through a lot of pain, there is income distortion, there is revenue distortion and all that. And because that sector is requiring certain help, the tailwind is in favor of our sector. So probably it is playing on the minds of various regulators in various countries that probably here is an opportunity to balance some of these things, at least in the near-term. So probably that's the way I read it. I don't think it's something that -- what you call, should be concerning in a big way. But yes, it's something that -- you see, the corporate tax rates were brought down in the U.S., in India and many other countries to levels like 21% in U.S., 25% in India. So they probably are looking at this aspect that why is it that this particular sector, which got the tailwind, should contribute a little more to what the government has put various resources to play. So we'll watch the developments how they happen.

Yes. So basically, it is more of a cost of doing business, right?

Correct.

[Operator Instructions] The next question is from the line of Ritesh Rathod from Nippon India.

Yes. Congratulations on good set of numbers. This question of -- on the client mining of more than $5 million, even though you don't give us the bifurcation further, but what had led to such a strong performance in last 4 to 5 quarters? The numbers have been going up. If you can help us in terms of on ground work, how you've changed the incentive structure? So a few more qualitative details would be helpful.

Sure, Ritesh. So I'll try and keep it simple so that we can take some more questions as well. But at a high level here is what we have done in the last 5 quarters. We had a fairly strong foundation as a company. We organized ourselves into vertical and service lines. We cross-incentivized the teams to go and do the best of the services, do -- if we were selling 1 or 2 services in a customer, we went and tried to upsell ourselves into the customer, get more wallet share from the customer perspective. That was one side. Second was where we went into making sure that we brought in a set of new partnerships. We focused on the partnerships that we already had and added to the partnerships. So I'm talking about hyperscalers, whether it is AWS, GCP, Azure on one side, IBM on the other side. We doubled down on things like IBM Red Hat. We doubled down on Salesforce partnership that we have. We worked on the channels like ISG, Wavestone and a number of other sourcing and other advisory companies like Everest and so on and so forth, renowns of this world. So we looked at every part of our ecosystem from a market-facing perspective in order to service our customers better. On one side, bringing in more sharpness into service lines and our vertical offerings on one side. On the other side, expanding our presence in front of customers and prospects through various industry inferences. We also corrected the incentive part on our side to be able to incentivize the behavior in which we are looking at not just short-term projects, but we are looking at longer-term and bigger kind of constructs with our existing and newer customers. So a bunch of these things started playing in. And obviously, things like this are backed up by our impeccable delivery, the kind of awards that we won. The ISG award that we won where we surprisingly have beaten pretty much, right, everyone from Accenture to an IBM to an HCL to Wipro to whoever else in our industry. So there's a lot of those things that came together and that started yielding results. And obviously, confidence builds on confidence, whether it's our sales team or even the customers and so on. And if you look at our execution, we have been heads down on execution for the last 4, 5 quarters in a very disciplined manner. So that's where it is. And the team has come together well. We've also added wherever we had white spaces in our talent. So a number of those things are the ones that are behind our growth, and we have a fairly disciplined execution engine in place.

Okay. If I see your services revenue base of $100 million quarterly or maybe $120 million as of now for last -- and in the last 9 months, despite this pandemic, you've grown at a rate of 16%, 17% year-on-year. So -- and on the other side, if you see the Eastern European companies, their 5-year CAGRs have been 23%, 25% kind of revenue CAGR in last 5 years. Is it possible for us to do that kind of CAGR on such a favorable base? I know you said in the previous question not to call out, but there are no disadvantages on your side in terms of portfolio mix or vertical mix or any kind of disadvantage, structural disadvantage, which doesn't allow you to perform for -- at that run rate?

Structurally, there is no disadvantage. I don't see a reason why one could not perform at that. Obviously, it's a tall order. I wouldn't want to commit to those numbers. But structurally, there's no issue. As a company, as I said, we have a fairly strong foundation. We've built very good service lines and vertical offerings. We have a good set of partnerships. We have a disciplined execution going. So there's nothing structurally that is stopping us from achieving it.

The next question is from the line of Nitin Padmanabhan from Investec.

Congrats on a great quarter. I just wanted to say, considering that this quarter has been very strong, both in IP and services. And historically, we have seen that after a strong Q3, typically Q4 has been relatively soft because of the IP revenue sort of coming up. And typically, there's been a revenue decline. Do you think the current pipeline sort of will ensure that there's no decline in Q4?

Nitin, a very good observation, and that observation is not lost on us as a management team. And that's a healthy challenge that we have taken. And hopefully, we'll come out of it well. That is where I will leave it. We have a good pipeline. We have good bookings. And our eye is on the ball.

Okay. Two other questions. One is on the net new of $175 million, are the tenures like the usual 4-, 5-year type or are they slightly longer?

No. So they are not longer. They're in fact shorter. Because see that $175 million that we talked about is new business in existing accounts and new accounts. And that is basically spread from small projects to large 3-year, 5-year kind of deals. I would say that is much lesser than even 3 years if you look at the average part of it. So -- and as you go along, we'll give you the executable order book, so you don't have to keep guessing about all this.

Perfect. And one thing I think I missed in translation is I think somewhere along the way you mentioned a number of $456 million ACV. Did I hear something wrong? Or what was that in context?

I don't think I said $450 million ACV. What I said is, let me repeat, $302 million TCV, overall, including renewals and new; $256 million ACV out of that; $175.5 million new TCV; $140.11 million ACV. That if now you translate into your earlier question and do your math, that will give you the duration average whatever is.

The next question is from the line of Dipesh from Emkay.

Yes. Is it possible to, I think, you said some of the service line fee, product engineering, cloud, Salesforce -- so is it possible to provide some scale where we are in those service line? And how you expect them to play out over medium-term?

We can include that in the fact sheet somewhere down the line. I don't want to give it right now because it's a whole lot of data points, and we have 11 minutes left in this call. But if that is a request from the investor community, we'll start including it down the line in terms of service line revenues as well, the way we will give the vertical revenues.

The next question is from the line of Sandip Agarwal.

Sandeep, I have 1 question which I missed to ask last time is that what is your strategy for next 4 to 6 quarters or 8 quarters, whether you want to just focus right now to strengthen your existing practices, services and geographies and verticals? Or you are also looking to add some of the high-growth verticals as we move forward? Because basically, there is a lot of delta in some of the verticals where we are not very big right now. And would you go for that strategy or you will first consolidate your existing verticals in a very strong way?

I would say the latter. We would first consolidate the industry verticals in a stronger way, but more important than that. Look, where are we the sharpest? At Persistent, we are the sharpest when it comes to service lines, when it comes to the technology expertise that we bring to that table. And number of the technology expertise, respectfully, is agnostic of the industry verticals that we service. So if we sharpen our industry service lines, that is where the most amount of growth will come. That is where you will see us. If you look at the future, let's say, 4, 6, 8 quarters, organically and inorganically, we will be focused there. If we do inorganic, that may bring us more into geography focus as well as Europe. It may bring us more into the technology focus that we currently have. So our focus will remain on being the best in wherever we are right now. And as we go along, if there is opportunistically something that we can enter into in a bigger way, that's a separate issue. But for the next 4, 6, 8 quarters, this is where we are heads down. And there's an ample amount of market for us.

The next question is from the line of Sandeep Shah from Equirus Securities.

Just, Sandeep, wanted to understand on the Alliance side, last time you said that you are opening many purchasing windows outside even the technology domain area of your top client. So any status updates on that in terms of health care and the BFSI subsegments of your top line?

Sure. So good question. And Sandeep, one of the larger deals that is there in our fact sheet as well as in the press release is in the health care space with the same customer that you talked about. And it is a fairly large. So we are definitely opening newer avenues of discussion. We are very well aligned to their new strategy, whether it is on their product/services side. So from that perspective, yes, the expansion will be in different parts, whether it is in the health care, whether it's in the telco, whether it is in financial services space with the largest customer as well. And we are seeing very good traction there.

Okay. Okay. So is it fair to say your strategy in Alliance is to keep creating opportunities within services, which will help you to compensate the volatility in the IP side of the business, which you earlier indicated, which is not very bullish scenario where your focus is more on margin rather than optimizing the IP revenue within Alliance?

Yes, to a certain extent, that is right. So let's quickly go over it. So the services part is one part where we deliver a sell-to kind of services to the largest customer. The other part is also working with them on our customers, joint customers, newer customers and so on. That's another revenue stream. And that's equally important because if you look at the IBM strategy, they are betting big on Red Hat, they're betting big on hybrid cloud, and Cloud Paks and so on. So as they look to partners like us, we are very well-positioned because of our long history with them. We have worked on many of their products. We have even taken many of their products onto the Red Hat environment and so on. So we are well-poised, much ahead of other GSIs in going to market also with them. So all of these 3 revenue streams are there. And as we build the business on these 3 revenue streams, the volatility, et cetera, will be much lesser. And this part is -- so this business is roughly about 22%, 23% of the business. The rest of the business, any which ways is growing very well. So there are many benefits of this. So not only will we grow the Alliance business, but also take away the volatility and overall as a company growth.

Okay. And Sandeep, just last thing, as a strategic question. It is perceived that the Persistent portfolio has a very low legacy services or legacy business. So as you grow your order book, is it fair to say most of the order book will translate into growth versus for many peers the baggage leads to a leakage in the revenue and the new order wins does not translate into a higher growth. So for you, it would be a reverse? Is it the right way of looking at it?

At a high level, I would agree with what you are saying. And yes, that would create a healthy set of backlog for us and help us grow.

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

A couple of questions. One is on IP. You mentioned that you would be spending quite a bit of money on M&A. Do you foresee spending that on IP?

So M&A would be more in terms of getting capabilities on cloud, security, data, any of these kind of things. When we look at companies in that space, we are looking at companies which will come with capabilities. And some kind of an IP may not be a product. We are not into the products business. The IP is around, let's say, they have built some reusable frameworks, which make them sharper around a certain partner or a partner technology and so on. So that is the way we are looking at it. We are not looking to acquire IP-based companies.

Okay. My second question is, there has been a lot of rebadging kind of deals that have been announced in the industry in the last, I would say, 6 months plus. Are you looking at any of those? Maybe not at the scale that some of your larger peers have been doing but somewhat on a smaller scale.

Yes. So if you look at it, a few quarters back we had announced a large deal to the market as well. And that included rebadging roughly about a 200-plus team members from that customer to us. There are a few other deals that involve this, but they are not at a huge size and scale. There are a few of them, and those are business as usual constructs what we need to do.

Okay. Lastly, on Europe, any thoughts on Europe? What do you intend doing there? You have a very large exposure to U.S.

Yes. So as a strategy, we are absolutely looking to double down on Europe. And it's both from a geopolitical risk mitigation perspective, but also from an opportunity capture perspective. There's significant opportunities in Europe as well. As you know, we made a couple of acquisitions in Europe over the last few years. We have a small footprint, but a growing footprint if you look at this quarter's numbers as well. On that small footprint, we have grown decently well. We are adding to the leadership team in Europe. You will see some announcements over the next few months in that. We are also looking at acquisitions, which can give us an intersection of European presence and the technology capabilities or the vertical capabilities that we want. So you will see some things on those lines as well in the next few quarters. So absolutely, Europe is a focus area for us. And 3 to 4 years from now, when we looked at it, it should be 15% to 18% at least of our revenues, if not more.

As there are no further questions from the participants, I would now like to hand the conference back to Mr. Kalra for closing comments.

Thank you. So first of all, thank you all for participating in our investor call. We hope this year goes very well for all of us. We also would like to thank our 12,000-plus employees and our customers for their support in our growth journey. And we look forward to being back with you in 3 months from now and reporting on our progress. With that, we would like to close the call. Thank you.

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