Quant Systems Inc. (SONATSOFTW) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sonata Software Limited Investor Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Samir Dhir, Managing Director and CEO from Sonata Software Limited. Thank you, and over to you, sir.

Thank you so much. My name is Samir. Good morning, and good evening to all of you, and thanks for joining us today. I appreciate your time and support to Sonata. A very warm welcome to this conference to discuss acquisition of Quant Systems Inc., that we signed on 22 February 2023. We are indeed delighted and excited to announce this acquisition by Sonata Software North America, which is a wholly owned subsidiary of Sonata Software Limited, and we signed a definitive agreement with the shareholders of Quant Systems Inc., a Texas USA-based IT solution and software company, to acquire 100% stake. This is the biggest ever acquisition of Sonata in the history and it's a very proud moment for all of us. And I also want to reiterate that this is all about growth. This acquisition is with the heart and center of the growth strategy of Sonata, and I'll explain to you in a few minutes. In an all cash deal, Sonata will make an upfront payment of USD 65 million and a deferred payout of USD 95 million paid over 2 years. The acquisition is expected to close within 30 days, subject to customary closing conditions. With that backdrop, let me give you a rationale why this acquisition is strategic for Sonata as we move forward? As you know, we aim to be the fastest-growing next-gen digital firm, delivering modernization into digital outcomes for enterprises to our Platformation framework. As a company, we are going towards Sonata's International business to $0.5 billion in 3 to 4-year period as we've outlined to you earlier. Now to achieve the vision, we've outlined some key strategic drivers to scale Sonata. Number one, we want to get more large accounts and large deals, and we've shared some of those successes within the recent quarters of the deal that we have closed but largely which we've closed. Number two, we want to continue expanding our services portfolio and really develop a strong partner ecosystem to drive a modernization agenda. And number three, we want to invest in BFSI, which is Banking, Financial Services and Insurance vertical and health care and life sciences vertical as we move forward beyond our current and existing verticals that we have already scaled up. Sonata's growth philosophy is based on making organic and inorganic investments to acquire talent, expertise and scale. Quant Systems aligns to our strategic drivers and will enable us to win larger deals in our [indiscernible] verticals. This acquisition has the following benefits to Sonata: Number one, and the foremost, 2 large accounts in the top 5 accounts of Sonata from day 1, one a banking client and another a health care client. Each of these 2 plants have a spend pattern of -- annual spend pattern of our over a digital dollar -- digital billion dollar -- digital -- sorry, $1 billion of digital spend per annum. It also strengthened our presence in the recently announced verticals of BFSI and healthcare. Beyond this, our technical capabilities in enterprise data analytics, cloud modernization, cybersecurity, data source, and data privacy will just strengthen as part of this acquisition. And it also will bolster our partnership with Saleforce.com, Snowflake and multiple other data partners. Quant also has differentiated IPs in the area of Salesforce and Chatbot. With that said, let me provide you the details about the company. Quant Systems was founded in 2008 and has shown tremendous growth year-on-year over the last few years. In year 2022 Quant delivered a revenue of $37 million, which is a 48% volume-wise growth and with impressive EBITDA at mid-30s. Quant has over 300 employees globally. For CY '23, we expect Quant to grow on low- to mid-30s on top line and continue to deliver EBITDA of mid-30s going in the CY '23. Quant [indiscernible] BFSI, healthcare life sciences, consumer and retail. It has built a very strong partner ecosystem of industry leading players, including AWS, Adobe, Salesforce, [indiscernible] Cloud. IPs, Chatbot to broaden our offering is part of our platform which is strategy. This enables a true omnichannel experience by integrating enterprise systems, contact center and support system solutions. While [BFSI] simplifies digital document management which is integral for both banking and healthcare clients. Quant has strong leadership team which has this experience to successful track regarding delivering excellence and technology innovation to its clients over the years. In summary, we're very optimistic about Sonata's long-term prospects and addition Quant Systems to Sonata will only further accelerate our journey that we aspire to become the top 25% growth company in terms of revenue performance in the industry. My team and I are continuously working and judiciously working to accelerate growth for Sonata as we move forward. With that, we'll open up the discussion for questions. Operator?

[Operator Instructions] The first question is from the line of NGN Puranik from Enam Holdings.

Congratulations on this acquisition. It's a quite relevant and timely in the context of new service clients that you need to add and the analytics is going to be a great space. So the question I have is about what are the new service lines you're adding? And how will you expand your million accounts and also the current million-dollar portfolio of systems? So if you can take us through and then are there varied complementarity or overlap in the current Sonata and Quant Systems?

Thank you. It's a great question, Puranik, and thanks for your wishes. There are 3 parts to your question. I think in terms of first part, what the capabilities we are adding as part of this acquisition. From a capabilities perspective, if you think in 2 dimensions. Number one, we are adding and strengthening -- not adding, our capabilities in healthcare life sciences and banking financial services as part of this acquisition. Sonata [indiscernible] in both BFSI [indiscernible] in that area, specifically the Fortune 500 clients that Quant brings and the headroom to grow in those accounts is absolutely exciting for us. And the second end, on the second part of this, the second product capability that we added is really around enterprise and strengthening that. As you know, in today's environment, every customer is looking to monetize data, modernize their data platform, draw insights from data, AI-ML models and data. And beyond that, making sure that the data privacy within the parameter cybersecurity is ensured is a really a strong offering that Quant Systems has, and we believe that will really augment our capabilities and go-to-market efforts from a data strategy perspective and the data privacy and data security perspective. So very bullish about that. And beyond the data discussion because Quant has built some significant IPs in the Salesforce area, which is a strong growth area for us going forward, and we called it out earlier -- in the earlier quarters. They have built some strong IPs from the Salesforce perspective, which should also be accretive from a capability perspective. Now the second part of your question is how do we jointly work together and take this discussion forward? Clearly, we are not final with ground-zero BFSI and healthcare so Sonata, over the years, healthcare and we believe our differentiated growth over the years [indiscernible] If you think about the capacity that you build in healthcare life sciences around provider space and the pharmacy space, we believe we can extend these offerings to the Quant clients and the Quant's capabilities on the data side and the data services side to our existing clients within Sonata ecosystem. And likewise, in banking financial service and insurance, we have done, over the years, a significant amount of work, especially on the insurance side, with the lending organizations, and we believe the capabilities that we have built on the lending side, we can take extend this out to the customers of Quant, the capabilities of Quant brings into our existing clients. We believe fair amount of overlap from a synergy perspective and the gross leverage of our joint capabilities will help to accelerate the growth curve for Sonata and as well as Sonata existing accounts.

[Operator Instructions] We'll take the next question from the line of Samyak Shah from Sameeksha Capital.

Yes. Am I audible?

Yes, sir.

Yes. So I just wish to know that the profit of the company has achieved like Quant Systems, so is it completely organic or the growth rates comprise of inorganic component?

Yes, growth over the recent years has been completely organic. We build partnerships to build some IPs that has not led to any revenue recognition. It has the partnership that we built over the years from an IT perspective, but the revenue growth has been organic in the recent years.

Okay. And how do you see the growth rate coming for about in the longer run for Sonata with respect to this acquisition?

So like we've earlier alluded, our growth rate trajectory continues to be same. We have talked about that we want to get to $0.5 billion for international business in 3 to 4 years' time. And we are working hard and our entire delivery team is working very judiciously to make sure that we can get to the goal. As far as Quant is concerned, as I alluded earlier, we expect them to be in low-to mid-30s growth rate.

[Operator Instructions] The next question is from the line of Chirag Kachhadiya from Ashika Institutional Equities.

So congratulations on this acquisition. Sir, couple of questions. First, you explained about synergy with -- in context of the BFSI and healthcare verticals. Now I want to know how this acquisition will help in platform business and also our viewpoint on reducing the volatility in the platform business we have, does this acquisition will help in that context also? Second, are there any other acquisitions in pipeline in near term? And third, what revenue synergy we are expecting in coming years with the help of that please?

Sure. We have multiple questions, one by one. So beyond the discussion we had on the synergy revenue, I think we believe that the capabilities that Quant Systems would build are truly differentiated and unique, especially on the enterprise data and data privacy side, which we believe we can take aggressively forward to our existing client base, and that's why it's a pretty high demand area. So we believe that will accelerate our growth rate as we move forward on one end. And then the second one, we are a broad services provider ourselves and our extended capabilities around automation, around Platformation, et cetera, we can take to Quant and hence extend the pie of Quant's client base. From availability perspective, with that point. So what Quant Systems brings to the table really essentially is deep expertise in the data side and data analytics side. And we believe as we go forward, data platforms and data projects are going to be multiyear programs. So we build the pipeline collectively together, we believe we will be able to general more earnings to pipelines. Now do not to a long-term contracts, but we know how to get [indiscernible] it tend to be 2 to 3 years, sometimes 5 years programs. We believe that the analytics business will take upswing as we move forward given the capabilities of some other heritage and Quant Systems Inc. To your third point about M&A, like we've outlined earlier, we will continue to look for assets in the market, depending upon -- based on our strategy that we've outlined to you. At this point in time, we have a focus to get this acquisition integrated into Sonata and we will guide the synergy revenues as we move forward.

[Operator Instructions] The next question is from the line of Balakumar B from HDFC AMC.

Samir, first, congrats on the acquisition. Could you just provide some sense on the delivery and the pricing model of the company because the revenue per capita as well as the margin profile seems very strong. And just a follow-up, how should we think about growth in the margin for the company beyond CY '23?

Thank you. Thank you for your wishes, Bala. Jagan, can I request you to take this question, please?

Yes, Samir. First, I'll answer the second question, Bala. The growth, we continue to expect the growth to be in the lower 30s to mid-30s and the margin also in the lower 30s to mid-30s kind of a margin, EBITDA margin for Quant even in FY '24. The rate for them is onset there like out of 300 people, 125 people are non-sales, and their rates are pretty high. The average rate is much, much higher than that, particularly their lowest, if you take the on-site benchmark, their lowest rate is the highest rate for us, very close to highest rate for us. That's the kind of profile they have, particularly because of the services in data and the cloud space and then Salesforce data also. Even in Salesforce, they have very, very unique solution to the customers, one of the IPs help them doing that solution to the customers. So this is a pretty strong in that aspect. Did I answer your question.

Yes, this is helpful.

The next question is from the line of Amit Chandra from HDFC Securities.

Sir, my question is specifically on the -- now if I see the Quant Systems, it is a 15-year-old company. So last -- in the last 3 years, it has grown at 100%-plus CAGR and from $8 million to $37 million. So if you can throw some light on how the journey of the company has been in the last 15 years and what happened in the last 3 years, why it has grown so fast? And also just adding on to the margin question. So in terms of the revenue per employee, it appears to be very high. And what exactly is different in terms of offerings and in terms of the effort and also in terms of the vertical mix and the client mix, so that we can understand better what is actually leading to this higher margin profile?

So let me take that. Thanks for your question and thanks for your wishes as well. So if you may think this in the context when Quant started, the history really was to provide consulting services which was almost like a boutique offering and data privacy. The first 5 to 7 years [indiscernible] focus on doing small projects from a consulting perspective to do data privacy assignments. These are particularly volumes we can convert to 50,000 type of projects when they started because the buildout from scratch the founder was really focused on that activity. But in the last 4 or 5 years, they've really added scale to it. What that means is when they do data consultancy assignment, they're also picking up work which is downstream to do engineering work. So it was not just the consulting work, they started picking up a follow-on engineering work, it surround itself with being data, engineering, data modernization, data transfer from on-prem to cloud. So the services capability of Quant Systems has expanded in the last 5 years. And that's what they're doing to see and [indiscernible] but in the last 5 years, their growth rate has been accelerated, largely because they build the first 5 years to build the trust with the customers that they can do high-end consulting assignment. And because they built the trust and going, they can now break into larger enterprise clients and work as far as the data platforms are concerned. What will be critical [indiscernible] like 3 to maybe 5 years back? I think this scale has investment. That's what sort of exceeding the growth rate but also explains the margin profile of the company. It does not come from consulting down to explain to a client that we can take care of our data privacy requirements and hence, modernize your application infrastructure that's how they have approached the market. They've now come bottom up and we go bottom up, your red card is always in the pressure and consulting down.

[Operator Instructions] Sorry to interrupt you. Samir, sir, your audio is slightly getting muffled. Please check.

Okay. Thank you.

We'll take the next question from the line of Mohit Jain from Anand Rathi.

Sir, 1 question. I think it was asked before by Bala as well. But this revenue per employee, is there a proportion of revenue that you get purely as IP-driven revenues, so to say, because it seems way too high and that basically flows through to the margins as well. So how should we look at it? Is it really IP revenue or do you think it is more like revenue per FTE, which is the correct model to look at it?

Jagan, will you take that, please?

Yes. Mohit, there is a mix of it. The IP revenue, this is mainly driven by the services revenue, but IP review is also there in this total element of it. But the FTE revenue, why the revenue per person is there, I mentioned to you the rates are very high and the comparable as what Samir was mentioning about the consulting-driven the premium services to them with some amount of IP revenue is the reason why revenue per person is very high.

But sir, contractually, you are doing it as revenue per headcount kind of metric or do you sell it as, say, some percentage of revenue as IP?

No. 3 elements of it is there. One is the outcome-based total offering to the customer. The second is on the T&M as such for them is not very high, right? The major portion is outcome driven revenue per person. So this is like more on that. The reason is the revenue was high. And comparable competitive on all these things will be the high consultant services offered by Deloitte or Accenture kind of people who will be -- who can be selling to the customers at the high-end type of it. So that's the reason why it is not a typical manpower per person kind of a revenue, you have to see in this context. It's a overall revenue which we give it to the customer for the outcome base of offering to customers.

[Operator Instructions] The next question is from the line of Vipul Kumar Shah from Sumangal Investment.

Congratulations for this acquisition. So my question is how are we going to finance this? And what are the profitability metrics for the acquired entity? Because I don't find any information regarding the financials of the acquired company on your website. So where do I get the financials for the acquired entity? And are we going to take any debt for this acquisition?

Thank you. I request Jagan to take the question.

Actually, these financials of this company, we have broadly given the EBITDA number and the revenue number when annualized annual reports are published that time whatever we have subsidiary financials is required as per our policy, we will continue to publish that. If not, this is a private limited company. Hence, like any other subsidiary for me, we will include in the business to that extent of it. Of are we say that funding this completely from the internal accruals? However, we are taking a debt for short-term operational reason. We have some operational reasons with RBI approval and other thing, hence we have money in India, but we are not able to transfer that to U.S. because of its operational reason, which we are going to address in the next 6 months to 9 months' time it will take to address the issue. So for the time being, we are taking the short term debt to -- for our initial payout. Over a period of time, this debt will be in a very short period of time, about 1 year to 15 months' time this will be completed, this is paid off. And the company generated a very, very strong cash flow. We have considered the cash flow of the acquiring company acquired entity as well as the current requirement of the next 3 years and then plan for the cash flow.

[Operator Instructions] The next question is from the line of Dhiraj Dave from Samvad Financial Services.

My one question [indiscernible]

Sorry to interrupt you, Mr. Dave, the audio is low from your line, please...

Yes, now it's clear?

Yes.

So my question is basically, since whatever is the kind of cash which we have on our balance sheet, most likely debt is getting utilized to fund the acquisition first phase of payment. So how that will be impacting over, say, 2 to 3 years, how we see dividend payment because your company is one of the very good dividend payout ratio? So how exactly management sees? And what would be your guidance on dividend payment for next medium-term kind of perspective? we shall expect same payout ratio or result in some reduction?

Yes. This is Jagan here, I'll take this question. The current cash position, as I mentioned to you, we are taking -- we are going for a short-term debt to fund the initial payout because of an operational reason. Over a period of time, that loan will be repaid and subsequent payment, 2 years payment will be funded from internally. As of now, the percentage -- the dividend absolute amount, we are planning to maintain the dividend absolute amount but the payout as a percentage may come down in the next 2 years alone, it may come down. But this is the final decision is we will discuss with the cash position with the Board and decide in the due course of time.

Ladies and gentlemen, we'll take the last question from the line of Amit Chandra from HDFC Securities.

Sir, just 1 question on how the impact will be there on the depreciation, right? Because -- and if you can throw some light how we see the in goodwill coming on the goods and how long it will be amortized. So roughly, what will be an impact on the depreciation number. So we can actually get the EPS impact roughly what can be there for FY '24 and '25?

I'll take the question, Amit. The total amount of goodwill, this business is all IT businesses, you know that [indiscernible] amount because asset value will be relatively lesser. However, in this intangible, there is 2 elements are going to be there. One is goodwill, another is other intangible. This company has biggest amount of IT customer relations and all this intangibles are there, which will be amortized over a period of time. And will be the other major portion of it. In a far growth high-valued company, generally goodwill tend to be more element of it. So the intangibles goodwill will be only tested for impairment over a period of time when the intangibles will be amortized over the period of time. The valuation on the amortization and the split is only estimated internally assessing. We will be finalizing the numbers because there's an external valuation person has to do that. I can't -- I have an estimated number what they have. It may not be the absolute number. Somebody external valuer has to confirm that. The period of amortization will be a little longer because of this IP driven and we continue to generate very strong cash flow even in the [indiscernible] method. The average period will be upwards of 7 years on total, very close to 10 years, probably. So on our side, valuer has to decide this is all based on the past experience, I'm just commenting. Please don't take this alone.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. Samir Dhir for closing comments.

Thank you, moderator. Thank you all of you for joining us today. Like I said earlier, we're very excited about this acquisition. It really projects us into a high growth trajectory from a data services perspective to clients, specifically it comes to BFSI, health care, life sciences and we can continue the verticals. And we strongly believe that the [indiscernible] us into the direction of what we have outlined to you earlier, Sonata international business in 3 to 4 years' time. Once again, thanks for your support, and we'll continue to keep up with business progress. Thank you for joining me today. Thank you.

Thank you all.

Thank you. Ladies and gentlemen, on behalf of Sonata Software Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.