Persistent Systems Limited (PERSISTENT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Persistent Systems Earnings Conference Call for the Second Quarter of FY '22 ended September 30, 2021. 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; Mr. Saurabh Dwivedi, Head of Investor Relations; and Mr. Amit Atre, Company Secretary. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Kalra. Thank you and over to you, sir.

Good afternoon, good morning, good evening to all of you, depending on where you are joining from. It is good to be with you once again, and we hope all of you are doing well, staying safe and healthy. Before I go to the financial and business updates, I would like to thank you all and our team members and customers for their continued trust in us. This quarter also marks the completion of 1 year for me as the CEO and about 9 quarters as a part of the Persistent Systems. I'm happy to report the continued progress through this time with yet another strong quarter across all major business metrics. I'll begin with giving you a color on the financial updates. The revenues for Q2 came in at USD 182.32 million, giving us a growth rate of 9.3% quarter-on-quarter and 34% on a year-on-year basis. In rupee terms, this translates into a growth of 9.9% Q-on-Q and 34.1% Y-on-Y basis, respectively. This is the best Q-on-Q and Y-on-Y organic growth delivered by us as an organization yet. Our EBIT for Q2 came in at 13.9%. This translates into an EBIT growth of 12.5% on a sequential quarter basis and 53.8% on Y-on-Y basis. Now let me give you this quarter's performance from an industry segment perspective. On a sequential quarter basis, this quarter's growth was broad-based. It was led by Healthcare & Life Sciences industry vertical which grew by 13.5% on a sequential Q-on-Q basis, followed by BFSI and Software & Hi-Tech segments, which grew by 8.6% and 8%, respectively. On a Y-on-Y basis, all these 3 segments dropped healthy growth rates with Healthcare & Life Sciences growing at 47.9%, Software & Hi-Tech at 31.9% and BFSI at 28.7%, respectively. Now coming into the order book details for the quarter. The total contract value for the quarter came in at USD 282.5 million. The annual contract value component of Q2 is to the tune of $201.1 million in TCV terms -- in ACV terms. In terms of new bookings in the quarter, the new business TCV was $149.3 million of which the ACV component was $108.8 million. As you may already be aware by now, these numbers, both on TCV and ACV side include all bookings, small and large, renewals as well as new bookings across existing and new customers. On the people front, we brought in 975 new colleagues, bringing our total employee base to 15,879 at the end of September 2021. The new addition was a healthy mix of lateral hires and fresh graduates and this should help us continue our growth in the coming quarters. We are happy to report the progress on the utilization side. Utilization for the quarter came in at 82.8%, a 2.7% improvement Q-on-Q backed by deployment of a number of our hires over the last few quarters. Attrition for the quarter was at 23.6% compared to 16.6% in Q1 on a trailing 12-month basis. As you would have observed, attrition has increased across the industry, given the shortage of digital skills coupled with the overall increase in demand. This definitely is a focus area for our management team. We have taken many proactive measures with an aim to bring this under control. To give you some color on a few of the initiatives, we reverted to our normal wage cycle earlier this year in July, just about 8 months of having our last pay hike, with the quarter -- the current quarter seeing the full impact of the hikes awarded to most of the eligible employees. Sunil will give you more color on the financial impact of this. Apart from this, we continue to undertake other measures, including developing our own talent both from fresher intake and lateral hiring, upskilling, helping our people with long-term career planning with active L&D, learning and development interventions. We also doubled down on enhancing engagement levels with our employees with a series of global employee events, while respecting the social distancing norms, bringing back in-person employee engagement in a major way. Another major highlight for us in the quarter on the employee front was the launch of a broad-based employee stock option plan, covering 80% of our total employee base. This is unprecedented in the IT services industry, and we are very proud of the support from our investors and our Board of Directors. Our employees have been foundational to the company's success and this significant shareholder returns that we have been able to deliver are on the back of contributions from each one of them. This ESOP will reward them for the resilience they have shown during the last 2 years and help them participate in the shareholder returns as stakeholders and partners in our growth journey over the next multiple years. There are a few other highlights from this quarter that I would like to share with you. First, on the acquisition side. We have been talking to you about our inorganic strategy over the past several quarters. We have been talking about how we want to go deeper in certain verticals or in service lines or expand in the geographies that we are focused on. I'm happy to report the progress on the same, with the acquisitions of SCI Fusion360 and Shree Partners. We had organized an analyst call to discuss the relevant details post acquisitions in late September and here, we'd just like to refresh everyone's memory on the same. SCI is a North Carolina-based company with significant payment domain consulting and implementation capabilities in North America, while Shree Partners is a New Jersey-based company with capabilities in cloud, infrastructure and data. The acquisition of SCI deepens our client portfolio and relationships with 10 market-leading banks with many of them categorized as among the top 20 banks in North America. The SCI acquisition will be foundational to the dedicated payments business unit that we announced alongside the acquisition and the future expansion in core solutions and applications of a bank's technology architecture. With time, as we integrate SCI, we'll look to see if we can do bolt-on acquisitions to further our foray into different streams in payments and associated areas. Shree Partners consolidates our position in a strategic account and is a part of a large vendor consolidation deal we won in Q2 with one of our existing customers. Furthermore, SCI helps us extend our footprint in Charlotte, one of the largest banking hubs in the U.S., while Shree Partners adds a new point of presence for us in the National Capital Region in India. We continue to scout for and engage with potential targets in our focus areas. We'll keep you posted as we make progress on these over the next few quarters. Now coming to the IP side of the business, we are constantly working to optimize the margins. As a part of this exercise, we have optimized one of our long-standing IP contracts with conversion to a time and material contract. This should help us on the margin side as we go along. Coming to ESG. We continue to make progress on the ESG front. We are working with a leading consulting company on refining our ESG strategy. And by the end of FY '22, we'll be releasing a comprehensive report on our ESG road map and the status of our current initiatives against industry standard frameworks on the ESG side. With this, I'll turn the call to our CFO, Sunil Sapre, to give a detailed color on the quarterly financials and related matters. I'll come back after Sunil's comments to give you more details on key client wins, analyst awards and other recognitions for the quarter. Sunil, over to you.

Yes. Thank you, Sandeep, and good evening, good morning to all of you. I hope you are all keeping safe and doing fine. Let me give you some details about the financial performance for the quarter. So the revenue, as you have seen at $182.32 million with a Q-o-Q growth of 9.3% and Y-o-Y growth of 34%. In terms of INR revenue, it is INR 13,512 million, reflecting growth of 9.9% Q-o-Q and 34.1% Y-o-Y. On the industry verticals, as Sandeep mentioned, just to refresh those numbers, Healthcare grew by 13.5%, BFSI grew by 8.6% and technology companies grew by 8% on a quarter-on-quarter basis. In respect of linear revenue, the offshore linear revenue grew by 12.4%, primarily on account of volume growth of 11.8% and growth in billing rate of 0.5%. The onsite linear revenue grew by 6%, comprising of volume growth of 8.9% and reduction in billing rate by 2.7%. This drop in billing rate onsite is due to lower revenue from Europe, essentially due to the seasonality, and increase in the revenue from Mexico, which has relatively lower billing rates. The number of customers in greater than 5 million category went up by 1 from 21 to 22 and the number of customers in greater than 1 million to 5 million category went up from 76 to 84. So far as the acquisitions that Sandeep mentioned about, these were announced at the end of Q2. So just to clarify, this quarter does not include any revenue or cost from these acquisitions except the costs relating to the due diligence of the companies. As you're all aware, the annual pay hike was done with effect from July, and the impact of this on the margin is 230 basis points. However, the increase in revenue coupled with improved utilization of 2.7% helped us to absorb the impact of pay hike and yet have some small increment to the margin. The utilization improved from 80.1% million to 82.8%. And with that, the gross margin was same at 33.5%. With the additional hiring that continued during the quarter, as you would have seen, last several quarters we have added significant number of employees to our headcount, you have higher recruitment costs and that's where you find that so far SG&A expenses are concerned, they reflect that higher increase -- higher recruitment cost. That is the main reason for G&A expenses increasing almost similar to revenues of slightly higher than revenues. In terms of the overall SG&A, the growth in revenue allowed us to absorb the overall SG&A costs, which came in at 16.9% as against 17.2% in the last quarter. The EBITDA was 16.6% compared to 16.4%. Depreciation and amortization has been in the range, which is 2.7% as against 2.8% in the previous quarter. And with that EBIT was 13.9% as against 13.5% in the previous quarter. The treasury income for the quarter was INR 293 million as against INR 256 million in the last quarter. And the ForEx gain was INR 10 million versus INR 109 million in the previous quarter. In terms of profit before tax, it was 16.1% at INR 2,176 million dropped from 16.5% in the previous quarter, essentially because of the lower ForEx gain. The ETR for the quarter was in the range at 25.7% as against 25.5% in the previous quarter. And with that, PAT for the quarter was INR 1,618 million and 12% of revenue as against INR 1,512 million in the previous quarter at 12.3% of revenue. The elevated employee attrition rate along with increased cost of new hires thus pose a challenge on maintaining margins, but there are several margin improvement initiatives being undertaken. The fact that we have been working on utilization improvement, pyramid improvement with the induction of freshers. We have been in conversation with customers on increasing billing rates, and customers have been amenable to the discussions, and we find that they're receptive to the discussion. We hope to see this effect of all these initiatives coming through in the coming quarters. The ESOP scheme that we have launched to cover a larger, wider section of employees will have an impact of about 70 basis points to 80 basis points, but we believe that the positive outcome it will create from broader participation and the sense of ownership will largely offset this impact over time. The operational CapEx for the quarter was INR 1,431 million, which includes payment towards new office premises at Hinjawadi, Pune, of INR 915 million. We have also provided a loan of INR 1,880 million, approximately $25 million to our ESOP Trust for a purchase of shares from the secondary market. This is to meet the obligations under the ESOP scheme. Thus with this, the cash and current investment on books was INR 18,704 million as at 30th September as compared to INR 19,955 million as of 30th June. The DSO came in at 55 days as against 54 days in the previous quarter and the cash generation was quite healthy. Forward contracts outstanding as of 30th September was about $150 million at an average rate of INR 76.74 per USD. Thank you all. I wish you a happy Diwali in advance, and I hand it back to Sandeep.

Thank you, Sunil. Now let me give you a color on the movement of our customer segments and key client wins from this quarter. So we saw healthy growth across our top account categories. Top 1 customer grew by 8.6%, top 2 to 5 by 5.9%, top 6 to 10 by 3.1%, and top 11 to 20 customers by 8.1% on a sequential quarterly basis. All of this growth, as you would have noticed, is on the basis of organic growth, and the acquisitions, as Sunil pointed out, will start contributing to the growth from this quarter onwards. Our press release for the quarterly results carries a number of our deal wins across industry segments. Just to highlight a few of these. In the Banking, Financial Services & Insurance segment, we were chosen by a leading global third-party insurance administrator to establish a global technology center to deliver enterprise by digital transformation. This is an existing customer and one of the largest proactive deal wins in our recent history, including vendor consolidation as a part of the deal. The TCV of this exceeds $50 million over 5 years. We were chosen by a U.S. government and health savings facilitator to build and enhance the government savings platform to provide competitive advantage and accelerate revenue growth. On the Healthcare & Life Sciences, let me highlight 2 of the wins. The first win is with a contract research organization to aggregate clinical data services in Microsoft Azure-based data lake, and the second win is with a leading U.S. health care provider to develop a patient engagement platform using leading no-code, low-code platform-based solution. Software, Hi-Tech and Emerging Technologies segment as well saw some good events. We were chosen by a leading provider of employee engagement solutions to migrate its product from legacy platform to AWS and enhance the product roadmap. Similarly, we were chosen by a leading tax preparation and financial technology provider to transform and modernize its cloud-based product. Now moving to the awards and recognitions for the quarter. Q2 saw us get continued recognition from industry leading analyst firms and associations. To mention a few, Forbes Asia named us on its Best Under A Billion list, which highlights 200 Asia-Pacific public companies under $1 billion in revenue with consistent top line and bottom line growth. This is the first time we have been included in this list, and we are very proud of this execution. For the seventh consecutive quarter, we were named top 15 sourcing standout for managed services in Q3 2021 Global ISG Index Booming 15 category. ISG also named us as a leader in traditional archetype of outsourcing for hybrid cloud deployments and private cloud in the Architype Report 2021 for ISG Provider Lens Next-Generation Private/Hybrid Cloud Services and Solutions. In summary, we delivered yet another strong quarter. We continue to see good traction for our services in the markets we serve, and we remain confident of our growth journey going ahead. With this, I would like to conclude the prepared comments. I would like to request the operator to open the floor for question and answers. Operator, over to you.

Thank you very much, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Mr. Mohit Jain.

Yes. First was on account of onsite billing rates, while you alluded in the opening remarks that it is probably on account of Mexico, but what I wanted to check was if you look at last 4, 5 quarters, onsite billing rate is more or less steady, some quarters it is up, some quarters it is down. So how should we read it? Like clients are really willing to give you a higher rate, and we should expect it to trend up over the next 3, 4 quarters? Or do you think it will more or less remain stable with some delivery moving to Mexico or other places if that is included in?

Sunil, do you want to go ahead?

Yes. I mean, I'll give my perspective on that, and you can add. Mohit, what is happening in this situation is that, that we are also, as we have talked earlier, looking at this nearshore delivery. So far as onsite billing rates are concerned, earlier they used to be only concentrated between U.S., as our footprint in Europe has been small, but over a period of time, we have been working on Europe business. So now you can say U.S., Europe is the more critical mass of that onsite footprint. Now over the last few quarters, say, 3 or 4 quarters, we have been working on adding Mexico, Canada as the nearshore delivery and a few other pockets we have where we already have footprint like Malaysia and so on. So I would not read too much into this. We would only ensure that there's not too much of volatility. And this time, the main reason for this, as you know, the Europe business contribution has been slightly lower this quarter, and the main reason for that being the vacation period in Europe. And post COVID, there has been a bit of opening globally. And this is a time when people have been able to take vacations after a longer period. So we have lost certain billing days over there because of which the euro billing rates being higher, it has put further pressure on the onsite billing rates as a number that you see going down. So Sandeep any further comments?

Right. And at a uber-level, if you look at it, there is no pressure on the U.S. billing rates downwards or Mexico billing rates downwards, et cetera. The mix is changing, and as we go ahead, as the U.S. travel opens up next month and similarly, the other regions like Canada, Mexico, et cetera, open up bigger, we do have plans to go bigger in terms of our presence in Canada, in U.S., in Mexico, and we are seeing a good receptiveness for nearshore Canada and Mexico from our U.S. customers' perspective. So you will see those numbers go up over a period of time in terms of volume. In terms of value, as I said before, the mix may change, so your average dollar value may change, but there's no negative pricing pressure on that.

Sir, second was on the TCV where they've reported -- you mentioned $50 million deal is probably included in the TCV reported for the quarter. But there are also some companies reporting higher ACV and lower TCV kind of a scenario. Do you also -- or are you also observing such a trend where larger deals are drying up and smaller deals are sort of picking up?

Look, the nature of business for us versus some of our bigger peers may be slightly different. If we were to be in the infrastructure business or typical application support business, the number of deals in 3 to 5 years is much higher. The kind of business that we do, it is more digital in nature and where the number of those deals are lesser. And the deals may happen in the 1, 2, 3 years period more, 3 to 5 years may be lesser and then they may get renewed with different scope and so on and so forth. So we are seeing a very healthy demand. Demand wise, we are not worried. But TCV may be slightly different for us given the nature of our business.

So in our case TCV reflects -- or it is a fair representation of revenue growth ahead?

Yes, it is. And we are confident -- if you look at it, if we were in the project business, we have now delivered, I think, 6-plus quarters of sequential healthy growth. But if it was project based, it would wobble. So we are fairly confident what we are doing is a longer-term play. And it's a good mix of short to medium to longer-term deals. So we are happy with the deal profile.

Next question is from Mr. Sandeep Shah.

Congrats on a stellar performance quarter after quarter. Sandeep, just wanted to understand, in this demand scenario, which is high also has a benefit of some bit of the pent-up demand. So do you believe your TCV wins, which is consistent now between $250 million, $300 million a quarter, can continue even beyond FY '22, where we may see some amount of normalization of IT spend, or you don't believe in this trend of pent-up demand being there. It's largely a transformation demand, which is driving the growth across sector?

So Sandeep, good question. So let's go a little deeper into this. The segments we play in, on one side, we have the enterprise side, whether it is Healthcare & Life Sciences, whether it is Banking, Financial Services, so there are those enterprise business transformation programs and a number of those are long-range programs. On the other side, we are also significantly playing in the product development side, where we are playing in the ISV/tech company ecosystem. Now a number of those are also impacted by people like private equity players. If you look at it, the dry powder, the committed money to private equities, which is not yet put to use, is at an all-time high right now. Similarly, the VC funding is -- the amount of money available is at an all-time high right now. A number of that will be called over the next 2 to 3 years, if not more. So what we are seeing is a structural demand, whether it is enterprise, whether it is product companies that provide the tools for the enterprise transformation. So as far as we are concerned, for the segments we service, for the industry segments or the technology segments, we believe this is a multiyear segment, multiyear play and this should continue for the next at least 2 to 3 years, if not more. So from a demand perspective, we are confident that this demand is here to last for the next many years.

Okay. Great. And second, just in terms of new restructuring, which you shared in your opening remarks related to IP, will it be effective starting from 3Q or it may be slightly ahead of that? And one can assume this will have a positive impact in the gross margin. And when you say converted to time and material, is it fair to say from an IP classification, it may be classified now as a services business?

Yes. So the answer to most of what you said is yes. So the timing is basically from 4Q for us, 1 calendar -- first calendar quarter of next year. And as far as we are concerned, now it will move from IP bucket to time and material, the revenue may be slightly lesser, but the gross margins may be much better. So that is the overall impact there, and it should be positive in the medium to longer term, both revenue and the gross margins, because we have enough demand to be able to redeploy any people that may be impacted or whatever.

Okay. And just the last question to Sunil sir. If you look at the headwinds, this -- starting from Q3, Q4, we may have the inorganic pressure on the margins plus additional ESOP costs, but you still believe there are tailwinds. So is it fair to say Q2 margins can be maintained on a going forward basis? And in 2Q, is there any nonrecurring expense or any nonrecurring reversals in the P&L?

Yes, Sandeep, there is no one-off in Q2, except for the small M&A-related expense, but that's a very small amount in terms of the overall transaction that we have. The headwinds and levers that we are working on, the whole idea is to ensure that we are able to attract best talent, engage with them. As you know, so far as the attrition is concerned, it is not just onetime pay hike that impacts the P&L, it is also the replenishment cost, which comes in at higher costs because of the situation we have in the industry. So as a company and all our peers, you would find have been working on balancing this with significant addition of freshers to the system. Just about a year ago, nobody would have wondered -- I mean, thought demand scenario is going to be so good and people could have actually onboarded much more freshers earlier, but that didn't happen. So as an industry kind of a situation when more freshers get deployed, I am sure over, say, next 2, 3 quarters, which is a time that is required to make those people -- if you can deploy them on projects, this should help. But 1 or 2 quarters more stress will be there. And that's the time when we have to put all the levers to use to ensure that I think margins don't go south, right? The improvement in margin will take a little while to come because of this scenario we are in. And we are also growing very fast. So we do need to carry the capacity for growth. While we have worked on the utilization from 80.1% to 82.8%, we feel that 83%, 84% in near term is what we would target, not something at a much higher level because of the growth that we have to fulfill. I hope that answers...

So directionally, we can maintain the margins at Q2 level?

Yes. So directionally, we will -- say, we will be in the 16% to 17% band. That is our attempt, while continuing to grow very well. So that is the band you should expect and growth is our focus.

Next question is from Mr. Nitin Padmanabhan.

Great quarter. A couple of quick questions. One is, I think there was an impairment of $74 million, and we saw a similar kind of number last quarter as well. Is this likely to continue in the next quarter or this -- we have already had 2 quarters, so is it likely to end? The second question was on the IP business. So obviously, there are a lot of end-of-life products in there. Do you think this will be -- over the years, it will be a gradual sort of decline there? Or do you think that there is scope for step drops if we think -- take a longer-term view on that? And in relation to that, I think we have seen the effort in the IP business sort of improve over the last 2 quarters was the multiple quarters of declines that we have had. So how should we actually think about it? And finally, on the new ESOP plan, how are you actually thinking about this? One, philosophically, is it over and above -- is it part of potential salary increases that you're thinking about as total comp or this is over and above in terms of philosophically sort of sharing wealth? And is there any impact in the current quarter? And do you see further impact going forward?

Sunil, if you can talk about the impairment, I will take the rest.

Yes, sure, Sandeep. So Nitin, this impairment is kind of done with now. There is no further impact that you might see.

Right. On the other side, the IP business, I think it will be stable to maybe a slight growth for some time and then maybe decline over a long tail. So whatever decline had to happen in a bigger way, I think it is behind us. We have seen stability in that, and we are also repurposing the IP to derivatives, et cetera, and so on. So we are relatively confident will be flat, marginal increase in the shorter run, decline gradually in the longer run, so no worries on that. As far as the ESOP plan is concerned, look, here is what has happened and why we did the ESOP. So we have grown very well over the last 6, 7 quarters, as all of you, who follow us very closely, would have observed. Now with that, we have seen a significant amount of shareholder value creation that has happened. Now our employees who are the people behind the shareholder value creation in all our employee town halls have been requesting participation in this. And it is only fair that we take them along as we create value for our stakeholders because of the efforts of all our employees. So that is where we took our investor approval, we took our Board of Directors approval, and we did this fairly encompassing 80% of our employees are covered or will get covered in the next few months as they get eligible under this ESOP line. So this is to make sure we are basically creating an environment, which we are sharing wealth that our employees create for our stakeholders with them. It also helps us, on the other side, make our employee value proposition much stronger. So far, Persistent employee value proposition has been good brand, good work culture, good employee orientation, good content of work. So if you want to work on the latest technology in a very friendly environment, which is very employee-friendly, come to Persistent. And we are the best tech services company from a niche service provider perspective. Now with this, it is not basically is that it is a part of our core compensation, so core compensation will still remain very competitive. All the other things that I talked about will remain there. And this ESOP plan will be a small thank you, wealth generation for the effort that they do, and they help us create wealth for our shareholders. So overall, we believe this should also help us in retention over a period of time, manage attrition over a period of time and so it will be beneficial for our employees, our investors, our customers and nine yards of our stakeholders. So that was the philosophy behind the entire ESOP. And we are pretty sure in the shorter run, it may cost us a bit, but in the medium to longer term, it will be value accretive for our investors. So that is the story behind the ESOP that we have done.

Great. Helpful. Just one sort of clarification to Sunil sir is, over the last 2 quarters, our stock comp has been roughly 1.4% of revenues. Do you think as this kicks in, it'll replace some of that to a certain degree and that number should sort of come off? That's the last from my side.

No, you're right. Actually, the stock comp expense would stay in that range of 1.5%, it's not time related.

Next question is from Mr. Manik Taneja.

Sandeep, you made a statement about the restructuring of a large IP contract into a T&M billing going forward. If you could elaborate on that front and how that helps in terms of profitability improvement? That's question number one. The second was a much more broader question, which is true not just for Persistent but for the overall industry as well. While over the last 18 months, we've seen an significant increase in offshore delivery of revenues. Typically, what one used to see was that as offshore proportion of business used to increase, our utilization rates used to essentially moderate. But in the current environment, what one has seen is that the utilization has continued to record, to make new highs. So what's driving that? Is this the underlying demand momentum because of which utilization continues to be very sticky and high? That's the second part of the question. And also, are you seeing customers looking at more innovative engagement models as they get used to greater work being delivered offshore?

Okay. So I'll try and keep this brief because we have 25 minutes left. So on the IP side, look, here is where it is. We -- one of the largest contracts that we had, it was basically to be renewed in 5-year terms. So -- and since we have seen depressed margins in that, we requested understanding from our customer, and we have converted that to a T&M. What that means is it will become a services contract rather than a revenue share contract. And in a revenue share contract, our margins were getting depressed because the revenue on that product was not necessarily growing that heavily. Now in terms of the revenue impact and so on, without going into too many details, it will basically take our revenue down to maybe about 40%, 45% of what it was. And at the same time, the margins will become equal to the company gross margins for whatever business it is. So on a margin perspective, it will definitely be more accretive. On the growth perspective, the revenue profile, we don't expect an impact on this because today, honestly, we are hurting on the people side. If we add 1,000 more people today and anyone who's listening to this call and wants to be an IP hire, we are happy to do that. So any people that come off of this contract, we can easily redeploy them without missing a heart beat. So from a revenue perspective, not going to impact; margin perspective, going to be accretive. So it's good for us, good for the customer, good for our employees. So from that perspective that is the story on the IP contract restructuring. Now you talked about the offshore utilization. Look, we have been traditionally in the range of 78% to 80% offshore utilization. We have cranked up the lever a little bit higher because, obviously, we are also in the same industry facing the same headwinds where we have issues, whether it is attrition, whether it is salary increases, et cetera, and a lot of our investors and people like you want us to maintain a healthy margin profile. So in order to make sure that we are doing that prudently, we have cranked the engine. We had hired a number of people. Roughly, we have hired 5,000 people over the last 4 quarters. So we have taken the utilization a little higher as we have been able to train and deploy the people. We are not cranking the utilization to the levels of 88%, 89% that some of our biggest peers are doing. We are happy, as Sunil said, maybe doing another percentage or 2 at max. And we will be in this range so that we are able to bring in the kind of technical people that we need as additional team members as we go along with time and have a healthy pipeline to back up the growth that we intend to have. So that's the thing on offshore utilization. On the customers' innovative engagement models, look, there are definitely discussions that happen with customers on different models, whether it's fixed paid programs, whether it is taking over support for many years in different, different business models. But again, one has to be prudent in doing those business models. As we have seen some of these IP contracts can be -- or revenue-sharing contracts and innovative business models can be tricky. So where it makes prudent sense, we will definitely engage and we are seeing those discussions. So I will stop with that and happy to answer any questions offline on this.

Next question is from Mr. Rahul Paliwal.

Congratulations to the management, first of all, for taking this industry-leading initiative to share the wealth with the most important stakeholders, which is their employees. I'm sure it will have a boomerang impact in terms of profitability and stickiness to the organization. So congrats to Anand and the team and Sandeep to you. Sir, my question is around when I compare with the peers, the margin front, we are lagging almost since 2015. Why this is the gap since so long? And when the demand scenario is such high, how soon we can catch up with the peers? That's the question, sir.

So look, on the margin front, yes, we -- when you compare us with the bigger peers, there's a delta. But if you were to compare with our competitors, who's the competitor for Persistent, let's look at it. We are competing with the EPAM, Globant, Endava and the likes. So if you look at that profile of companies that we compete with, and then maybe in some places, we compete with niche providers, some places we may compete with the larger teams. Now if that is the competition, if you look at our margins versus that set of cohorts, we are pretty much in line, if you were to study any of these competitors. Now do we desire to go up from here, absolutely. Our answer to you would be give us next 6 to 8 quarters as we build the company to scale, there is a number of things that will not proportionately scale from a cost perspective. There will be a bigger leverage of SG&A. There will be a bigger leverage of many other fixed costs, or the proportion in which they will increase will not necessarily be in the proportion that our revenue will increase. And with that, our aspirations definitely are over the next, 6, 8, 10 quarters to go up by 100, 150 basis points on the margins, but it will take us time to go there. So definitely, we have eyes on the ball. Growth comes first. With the growth, margin will kind of follow. So have some patience, we'll get there sooner than later.

Next question is from Mr. Dipesh Mehta.

A couple of questions. First of all, the margin. Earlier, I think Sunil made a comment about 16 percentage to 17 percentage EBITDA margin. So just want to get sense about it is after considering both the [indiscernible] retention related posts which we need to approve plus ESOP. And on EBIT, there would be only incremental reward I assume, that is how -- right now [indiscernible] from margin projection perspective for the next couple of quarters. Second question is about overall hiring and fresher related things, how we should look fresher intake plan for the next few quarters, if you can share some number about how we look fresher intake? And whether it can access the margin lever for FY '23 considering pyramid, utilization wages and related?

Sunil?

Yes, Dipesh, so in terms of your question, I'll answer in 2 parts. One is with respect to the immediate near future and then as we go along in the next financial year. So if you see the acquisitions that we have announced when we had announced the acquisitions, we had mentioned about the fact that both the acquisitions are actually accretive at gross margin level. And so far as the retention payouts and the money that gets amortized, that will have, you can say some impact happening at the EBITDA and EBIT level. But overall, this will not have a huge impact, I would say, in the next 2 quarters. It could have an impact of 30 to 40 basis points, which we have to manage from various other levers. Over the longer term, yes, we have to work on these acquisitions, integrate them well, create synergy revenues and do a whole lot of those things to ensure that this is really not a worry for us to manage the amortization charge, which comes out of the intangibles and amortization. And in terms of the ESOP thing, it will happen as we go along. I don't think, as I mentioned earlier, the overall expense will not be of much different percentage to revenue. It is -- will remain in that 1.5% kind of band.

On the fresher intake, we will target somewhere between 2,500 to 3,000 freshers over the next 1 year. So if I look 1 year from now, that is the number that we are looking at and obviously, we have to execute on that and then train and deploy.

Next question is from Mr. Hardik Sangani. Next question is from Mr. Nagendra Maurya.

Congratulation on great quarter. I have just a small question regarding the employee cost. If you see, sir, you told there was a hike in salaries during the July itself, and if you see the ratio of the cost to revenue it is more or less similar, about 60% kind of ratio. So do you think from the next upcoming quarter with the normalization of attrition, the revenue -- this cost ratio about 60% would go up or it will be -- remain in the same level? That is one question. And second thing -- second question on the revenue goal or the revenue vision we shared about $1 billion revenue goal or target. So what is the time line of this revenue goal? And what additional effort company is doing to achieve this goal?

Sunil, if you can take the first I'll take the second.

Yes, sure, Sandeep. So you know what you mentioned about the employee cost as a percentage to revenue, that's a very important direct cost that all of us always have. I want to ensure that we are optimizing to the best extent possible. So as you would have seen over the last several quarters, like Sandeep talked about, we added significant number of employees. And when we have such a significant growth from 10,500 to about 15,800 today, along with managing the attrition part of it, there is a significant investment that we have done to build the learning and development and the deployment kind of a framework to ensure that we get the best, you can say, talent available to our customers. Having said that, the percentage of cost to revenue is a dynamic -- you can say, a mix of 3 things; one is the onsite/offshore ratio of the business; the second is the utilization; and third is within the utilization, whether you are able to have a fair mix of lateral versus freshers. So directionally, yes, the whole idea about improving overall EBITDA margin in the earlier question that we talked about comes out of improvement in gross margin and also improvement by spreading the SG&A over a wider revenue base. So it is hard to predict these things because attrition is something that is evolving and how much attrition gives additional cost for the same capacity you know to be replenished is a factor that is not in our control. But you can be rest assured that all of us are working very closely to ensure that this is optimized to the best extent. Sandeep?

Sure. So on the $1 billion plan, our eyes are absolutely set on that. It is line of sight for us. And if you look at it, at $182.3 million, that gives us a run rate of roughly about $730 million. Over the past 5 to 6 quarters, we have been going 6% plus in CQGR terms. And if we look at it, next 6 to 8 quarters is where our ambition would be to hit the $1 billion mark. Now this would come from mostly organic growth. There will be some inorganic part to it, like we announced the acquisitions of SCI and Shree Partners. We are looking at multiple different acquisitions as well, but these are more capability acquisitions, whether it is in the cloud space or security or data or sales force. And we are confident of the combination of organic initiatives, the larger deals that we have been doing, going deeper into service lines, going deeper into partnerships, et cetera, a number of these things are panning out well first, as you would have seen over the last sequential quarters that we have delivered. So we are reasonably confident, next 6 to 8 quarters, we should be able to reach our vision. And then obviously, it is an evolving vision. When we are at $1 billion, we'll target $3 billion; when we are at $3 billion, maybe we'll have $5 billion or $10 billion. So it's an evolving thing, and we are confident of delivering it.

Just one quick question on the travel cost side. It was like 2%, 3% -- odd percent of the revenue earlier, but current COVID time it has gone down. So how do you see in the upcoming quarters, travel cost will pick up?

See, the travel has started opening up. It is already some small amount of 10, 15 basis points impact it has already had in this Q2 itself. And we expect that trend to be like that. So if you take about 2 to 3 quarters from now, if nothing materially changes, then it will have an incremental impact of about 15, 20, 25 basis points per quarter. It may move in that range. But today, it is a little hard to predict. But you are right, over a period of next 3, 4 quarters, we should be seeing travel coming to about 2/3 of where it used to be.

Next question is from Abhishek Shindadkar.

Congrats on a solid execution. A couple of questions. The first thing is conversion of that IP contract into time and material, would that end the seasonality that we have generally in Q3? I'm sure you said it will happen from next year. So we'll have this seasonality probably in this time. The second is more on the mix of geography. India is almost now at a higher mix than Europe. So what is driving this business? And what is probably not working in Europe? If you can just elaborate that, that would be helpful. And just a follow-up to that is India business, historically, the hypothesis is the DSOs are a little higher. Anything that we should be aware of from a DSO standpoint?

Sure. So let me try and answer that. So the conversion of the IP contract to the T&M, the seasonality, look, the seasonality, whilst October, November, December quarter is the highest in that particular contract or our overall IP business that we have, and January, February, March, which happens to be Q4 is the lower side. So every alternate quarter is the pattern that we see. So from that perspective, this quarter, it is continuing the way it is, October, November, December. The restructuring is effective January. So from that perspective, you should look to not have the major ups and downs beyond that. And we had -- more or less, as a company, if you look at it last Q4, we had overcome that anyways. So that should answer your question on seasonality. And it is all positive for us. The other side of it, the India business being higher mix than Europe, so in India, what has happened for us is this. Our capabilities on certain service lines, including service lines like sales force or our engagement with financial services customers, that's what is driving the revenue. And it's a healthy revenue that we are seeing in the BFSI segment that I talked about. And again, some of the other customers, which are multinationals, their Indian arms and so on. So that is the positive side of it. Now DSOs, I don't think it is impacting us. If you look at it, our DSO, we have been able to thankfully manage it because of our team's efforts very well. I think we are at a very healthy clip in terms of DSOs. They are at 55, if we were to not look at unbilled part and even with unbilled part, it's fairly healthy. Now what is not working in Europe, I would not say what is not working in Europe. The last quarter, as Sunil pointed out, it was impacted because of vacations, et cetera. Otherwise, we would have seen some amount of good growth there as well. Now can we do better in Europe? That is the question. I would not say what is not working. I would say how do we work better in Europe, and we have stated very clearly. As we look to our $1 billion goal, we wanted to be 12% to 15% instead of the 8.5% to 10% swing that we see in Europe. And we are at it, both organically and inorganically, the team is focused. And over a period of next several quarters, we hope to have that situation change in a positive manner, and we'll keep reporting on that. So that is the thing about Europe.

Next question is from Madhu Babu.

Sir, at least the perceived premium of the sector has increased in the last 2 years, the perceived importance. So what is stopping us on the price hikes, I mean, because even the inflation has been substantial for us and even not this sector, across other industries also input costs are increasing even in other sectors as well. So what is stopping on the price hikes when your all-time high demand as well as most the perceived importance has reached a new high for IT services?

Madhu Babu, there is nothing stopping us from price hikes. See, it is like this. The customers today understand it, they're very empathetic. But in the customer's organization, there's an organization called procurement, whose job is to make sure that they are controlling the cost and nobody likes to pay more. Even though they may be empathetic to you, nobody likes to pay more. And these things have to be done when the contracts are up for renewal. So one is the sequencing issue. You just can't go arbitrarily and ask for pricing increases. Customers -- some customers will not like it, some customers may still work with you. So we are -- as we have the contracts coming up for renewals, we are working with them, and we are hopeful of -- as you rightly said, demand is high, whatever issues we are facing in India is global issues. I don't think it is relegated only to India, only to services companies. So I'm pretty hopeful, as we go along, this will happen, and we are seeing pricing related positivity in newer contracts and even in renewals. So it may take a little bit of time, but it will happen. It will happen in the right direction.

We will take 1 question per participant as we have less minutes in hand now. Next question is from Girish Pai.

Yes. Sandeep, I had a question on the margin guidance. In the media interview you gave in the morning, you kind of said that you're looking at a 100 basis point improvement in margins over the next 2, 3 years, which seems fairly conservative to me because sitting 12 months back, you were saying that EBIT margins would be in that 12%, 12.5% kind of region and today, you're sitting at 13.9%. So are you being ultra-conservative on the margin front? You see could this be going up significantly as you see serious traction in your revenues?

So Girish, there is 2 things there. Number one, look, we are building the company for the longer run. We are hunkered down. If we can do the margin improvement next quarter, rest assured we will do it. But the point is if you ask us for a forward-looking guidance, we have to give you a guidance that is practically doable, while we will give it our effort to do it in the shorter term. So the fact that we said -- whatever we said on the EBIT, and we are delivering much better than that should give you the confidence that we are focused on growth, we are focused on operational improvement. Our profitability has so far, if you look at the operational improvement, it has outpaced the revenue improvement that we have done. So rest assured, if we can do it better, faster, we will do it. But from a guidance perspective, look, we don't want to guide something that we can't live up. So we are at it. If we can do it faster, despite the challenges that are there in the industry, we will do it. There's nothing stopping us from doing it. But if you ask us to commit to something, it will take us that much amount of time.

Okay. Sandeep, just 1 question more, if I can squeeze this in. What I see is 2 sets of Tier 2 companies like yours, which are giving the TCV number and there is a growth coming through. And there are companies in the Tier 2 side, which are not giving a TCV number, but showing very strong growth. So I'm just trying to understand the nature of business coming your way. Are these like really, really small contracts, which do not appear in the TCV, which are string together -- strung together, so to speak. And therefore, you see this growth in those companies where the TCV numbers not being given. What are you seeing on the ground? Why are those companies not giving those TCV numbers?

Look, I don't control those companies, so I can't say why they give or they don't give. We try to give you as much transparency into our system as we can and is practically possible. And as far as we are concerned, our contracts are with reasonable sized companies with the companies that we want to work with, thus contracts are increasing in size. So we are happy with the kind of contracts that we have. And the proof of the pudding is nobody can grow sequentially for 6 quarters. If you're doing shorter contracts and they finish and then you are digging newer wells to find newer sources of revenue. So there are some which are shorter term, some medium term, some long-term contracts, a healthy mix of all of this. And that's where we have been able to sequentially give the growth that we have. And if you look at year-on-year growth, 34% growth doesn't come on back of smaller contracts strung together. It definitely needs a lot of good work to be done to get sequentially from -- last quarter was 27%, this quarter is 34%. So we are happy with the kind of contracts. We have made good progress. If we can keep on this progress, I think as a company and as a team, we'll be very happy with this.

Next question is from Ruchi Burde.

Congratulations on excellent execution. My question is on pricing again. In the prepared remarks, Sunil mentioned that clients today are more receptible for pricing discussions. So are these conversations of equal ease for fixed pay contract and T&M engagement? And if not, is it fair to imply that the margin pressure is relatively more acute in the fixed pay engagement versus T&M?

So I'll keep it short. We have 1 minute left in the call. So look, a significant amount of our work is on the T&M side and customers are willing to look at that. As far as the fixed pay is concerned, it's more of the IP business and that's any which ways we control...

My question is specifically for IT services.

Yes. So IP services, if you look at it, we have a fairly healthy margin on IP, except for a few contracts, which we have basically said we are optimizing. So no concerns right now. The margins there are more than the company average. So moderator, I think let me get to the final comments, and then we will close the call because we are at the end of the call. So we sincerely appreciate all of you taking time and joining us for the call today. We would like to thank our 15,500 plus team members, customers, partners and investors for their support in our growth journey. We are bullish about our prospects for the future. We look forward to connecting back with you in the next 3 months to provide an update on our ongoing progress, and we wish you all good health and a very happy Diwali and seasons greetings. Thank you. Moderator, you may close the call.

Thank you very much to the Persistent management. Ladies and gentlemen, on behalf of Persistent Systems Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines and exit the webinar.

Thank you.

Thank you.