Sonata Software Limited (SONATSOFTW) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Sonata Software Limited Earnings Call for Q4 FY 2024-'25. [Operator Instructions] Please note that this conference is being recorded. Today, we have with us on the call Mr. Samir Dhir, CEO; and Mr. Jagannathan Chakravarthi, CFO. I now hand the conference over to Mr. Samir Dhir, CEO of Sonata Software Limited. Thank you, and over to you, sir.

Thank you, moderator. Welcome, and thank you for joining us today. We appreciate your time and continued support. In this session, we will walk you through Sonata's strategy, the progress we have made over the recent quarters, our strategic road map and the financial results for Q4 quarter '25, which ended on March 31, 2025. It's a pleasure to share the momentum we are building around our long-term vision and growth trajectory. I'll begin with an update on our strategic priorities and goals, followed by a review of our performance in FY '25 and take a closer look at our Q4 performance. First thing first, let's talk about our strategy and goals. Our ambition is to be a differentiated modernization engineering firm, powered by our proprietary platformation framework, AI-driven solutions and modern technologies. We continue to scale and execute across our strategic focus areas of 4 key verticals, which is health care, life sciences, banking, financial services, retail manufacturing and technology, media and telecom which is TMT and across our 5 core geographies, which is North America, U.K., Europe, India and Australia. We continue to drive relentless investment in modernization engineering with our differentiated IP, lightning tools and robust offerings, we remain focused on delivering transformative value aligned to our clients' modernization priorities. FY '25 was a defining year. We deepened our capabilities in data, AI and modernization engineering. We expanded our presence in BFSI and Healthcare Life Sciences, and we continue to win large deals, deals which are strategic to Sonata. We made this progress despite facing headwinds in retail and manufacturing verticals, budget cuts in the second half of the year from our largest client and broader macroeconomic uncertainty. While we didn't grow at the pace of the prior 2 years, we have built a strong foundation for growth as we continue to diversify our business. Looking ahead to the next 3 to 5 years, our ambition is to be a top quartile growth company, helping clients achieve their modernization goals. We see significant potential at the intersection of AI and modernization, and we believe this is our pathway to industry-leading growth. We aspire to be in the top quadrant of growth in the 4 industries that we compete in as a firm. With that, let me give you a progress update on our strategic goals. Our success is anchored on 3 strategic pillars. First, relentless focus on winning large deals. In FY '25, we won 11 large deals, underscoring our growing relevance and transformation impact that we create for our clients. Number two, sharp execution across our strategic verticals and geographies. Through our partnerships with Microsoft, AWS and other ecosystem players, we opened 13 new enterprise-grade logos in FY '25, expanding our strategic client base. And number three, scaling Sonata for the next phase of growth through continued investments in AI, building our AI talent while strengthening our frontline sales and solution experts in the company. With that, let me give you an update on the large deals. Large deal pursuits remain a cornerstone of our growth, which we have seen over the last 3, 4 years of our strategy, with 33% of our large deal pipeline comprising of Fortune 500 clients. I am truly pleased to share 2 marquee wins from FY '24 and in the recent weeks. Win #1, which is a very large deal and a material deal for Sonata go forward. Our client is a leading American TMT company, which delivers programs for its clients on a technology platform. Sonata has been selected as a strategic technology partner to lead a comprehensive modernization program across their platforms, data services, platform transformation, Workday, Salesforce and cybersecurity. This marks the second largest TCV win in Sonata's 40-year history. Let me repeat, this marks the second largest TCV win in Sonata's 40-year history, a proud milestone for all of us, Sonataians. The second win is for a global BFSI leader who has chosen Sonata as a strategic partner to modernize and consolidate its data platforms and drive application development and quality improvements. And quality improvement here includes modernization, tech debt reduction and evolution to AI. In both engagements, our teams differentiated with our AI-led transformation capabilities, leveraging modern engineering tools and platform-driven data modernization to deliver tangible business value. With that, let me provide you an update on our strategic verticals, geos and SITL business. We remain confident that our investment verticals of health care, life sciences and banking and financial services will scale to $250 million of revenue in the next 3 to 5 years' time. These 2 verticals now contribute to 35% of our total revenue of the international business, which is up from 13% 12 quarters ago. So we have traveled the journey of 13% contribution of revenue from these 2 verticals to 35% of our revenue now, a testament to our focused execution and strategic investments. Highlights of performance in these verticals. We closed 11 large deals. Out of the 11 large deals, 4 are in BFSI and health care. We closed 13 enterprise-grade logos. Out of that, 4 are in health care and BFSI verticals. Industry recognition in Healthcare/Life Sciences, HFS recognized Sonata as an enterprise innovator for payer transformation capabilities. In BFSI, we were named a Disruptor among the best service provider for commercial banks. Most recently, as of last week, HFS included us as the fastest-growing firm in both BFSI and HLS during the last 12 months. Our recent new logo wins and momentum. In Healthcare/Life Sciences, we onboarded one of the Blues as a client to deliver a multiyear modernization program. In BFSI, we are partnering with a leading global investment banking firm to build their AI and automation COE. In SITL, we continue to deliver strong annuity-driven growth with an industry-leading ROCE of 43.2% in Q4 FY '25. We are making rapid progress in SI-driven deals, security operations center offerings, compliance programs, AI adoption across client operations. The newly established SOC business in SITL is projected to contribute 20% of gross contribution within the next 3 to 5 years. With that, let me provide you an update on scaling of Sonata. Scale here means scaling our capabilities and our talent. So let's talk about update on our AI and modernization. We expect AI-enabled services to contribute 20% of our revenue over the next 3 years, reflecting strong market traction and focused execution. We're currently pursuing $34 million pipeline in AI programs across 100-plus clients, helping them unlock value through operational efficiency gains, enhanced customer experience and innovative business model transformation. This year, Sonata proudly achieved AWS generative AI competency and became a member of the Microsoft Partner AI Council, reinforcing our leadership in enterprise-grade AI adoption. Some of our key wins in AI in the recent quarter. We opened a new logo in healthcare insurance space for a solution that comprehensively enhances consumer experience using GenAI. One of our existing travel clients chose us to improve IT support and efficiency for the regional service desk. For a technology company undergoing transformation, AI is an integral part of our solution to automate contract loading, flexible audit rules and operational analytics. Let me move on to our investments in cloud and data. Cloud and data deals now continue to make 60% of our total pipeline. Demand is accelerating, particularly around Microsoft Fabric. Sonata is an official Microsoft Fabric feature partner supporting data analytics for the AI era. Since its general availability in November '23, we have built 31 million fabric pipeline across 70-plus clients. Microsoft Dynamics, we continue to collaborate closely with Microsoft on programmatic plays across ERP compete, SaaS compete and low-code, no-code compete deals. These deals involve us migrating customers from legacy technologies to modernized Microsoft Dynamics platforms. With that, let me provide an update on our talent and leadership capability. Our active headcount increased to 6,800-plus, up from 6,619 in Q1 of FY '25. Our LTM attrition rate stands at 14%, and we maintain a gender diversity of 31%. Despite the macroeconomic industry uncertainties, we remain committed to the future talent investment, and we onboarded 95 campus graduates during the quarter. We have restructured our technology leadership by expanding the roles of Hanumanth and Manu Swamy to jointly lead our global technology practices. This two-in-a-box model strengthens our focus, combining deep internal capability, building with sharp execution on client-specific AI transformation initiatives. This change is executed within the CTO organization, both Hanu and Manu will continue reporting to Raj. Sonata University continues to drive our upskilling agenda, especially in AI. Today, 97% of our workforce is trained in GenAI, underscoring our commitment to future-ready skills and broad applicability of AI across our delivery, engineering and consulting operations. We also scaled our near shore presence in Mexico, Malaysia with both the centers now exceeding 100 professionals together, enabling us to serve our clients with greater agility and geographical flexibility. During the most recent quarter, we achieved silver rating on the EcoVadis Sustainability, which is awarded to top 15% of the company. We were also recognized as official Microsoft Fabric Feature Partner. Update on M&A. Quant, which is fully integrated into Sonata now and operates as a business unit, Q4 is a seasonally weak and declined quarter for Quant, and we expect them to bounce to growth in Q1 and scale by Q2. With that, let me provide you an update on our Q4 performance. In the Q4 quarter, we witnessed degrowth in both international and domestic business. As mentioned in our previous call, we had anticipated impact of degrowth due to TMT's large client. The impact was significantly more than what we expected as we continued budget cuts in Q4. Our forecast is that from Q4 onwards, our largest client will come back to marginal growth. Seasonal softness in the momentum for Quant and SITL following a strong Q3. For International Services business, we witnessed 6.6% quarter-on-quarter degrowth. However, on a full-year basis, revenue grew by 3.7% Y-on-Y. Order booking was strong. We closed book-to-bill of 1.25, which is over $100 million of booking in the course of the quarter for the international business. In Q4 FY '25, we won 2 large deals. We now have 8 clients with more than $10 million revenue run rate at a company level. EBITDA. Our EBITDA grew sequentially as expected, grew by 1.9% to 16.5% in Q4, which is up from 14.6% in the prior quarter. We had guided for that as we announced the results last quarter. Utilization remained steady at 87%. SITL contribution degrew by 4.3% due to the seasonally weak quarter, and it was anticipated as per our read out earlier. In summary, we remain optimistic about our long-term growth trajectory. While the upcoming period will present a mix of tailwinds and headwinds, we are well poised to navigate both. Tailwinds include the ramp-up of our large TMT deal over the next 2 to 3 quarters, along with strong momentum in our Healthcare, Life Sciences and banking verticals. At the same time, we are mindful of the headwinds such as longer deal closure cycles and continued softness in retail and manufacturing sectors. At Sonata, we are committed to accelerating our growth judiciously, building scale through strategic client relationships, larger deal wins, new market expansion, deeper partnerships and continued investment in our talent. I want to take a moment to sincerely thank all Sonataians across the globe for their dedication, hard work and relentless focus on delivering high-quality outcomes for our clients. With that, let me hand it over to Jagan to walk you through our financial performance, and then we'll come back to take questions. Jagan?

Thank you, Samir, for the overview. Good morning, good afternoon, good evening, everyone. Let me walk you through our financial performance for the fourth quarter and the financial year 2025, first starting with the international services. In financial year '25, our international services dollar revenue stood at $335.5 million, registering a growth of 3.7% in the reported currency and 3.9% in constant currency. Rupee revenue stood at INR 2,829.7 crores, showing a growth of 5.6%. EBITDA margin for FY '25 stood at 17% compared to 21% in FY '24. PAT for FY '25 stood at INR 256.6 crores compared to INR 319.8 crores in FY '24. In Q4 '25 USD terms, revenue stood at $81.3 million, a degrowth of 6.6% quarter-on-quarter and 0.5% year-on-year. In constant currency term, it represented a degrowth of 7.2% quarter-on-quarter and 0.3% year-on-year. Rupee revenue stood at INR 702.3 crores, showing a degrowth of 4% quarter-on-quarter and 3.4% growth year-on-year. Quarter-on-quarter degrowth is due to the seasonality in Quant and weaker-than-expected performance from our largest client. Despite revenue decline sequentially, we were able to improve the EBITDA in Q4 '25. EBITDA before other income and ForEx reported basis improved to 16.5%. Q4 reported PAT stood at INR 62.3 crores. For the international services, ROCE stood at 16.3% in Q4 '25, against 16.9% in Q3 '25. The RONW stood at 19.3% in Q4 '25, again 19% in Q3 '25. Starting Q4 '25, the method for calculating DSO has been revised to align with industry practice. Under the revised approach, DSO is calculated using trailing 12 months revenue and the current debtor balances. Our internal services DSO for Q4 '25 is reported at 61 days, which is 3 days improvement from 64 days in Q3 '25. Now let me provide you an update on domestic business. In FY '25, our domestic business revenue stood at INR 7,340.6 crores, which is a year-on-year growth of 23.4%. Gross contribution for FY '25 stood at INR 299.1 crores, compared to INR 260.4 crores in FY '24, a growth of 14.8% year-on-year. PAT for the full-year stood at INR 178.1 crores, compared to INR 163.4 crores in FY '24, year-on-year growth of 9%. Domestic business revenue for Q4 '25 stood at INR 1,918.2 crores with a degrowth of 9.1% quarter-on-quarter and a growth of 26.6% year-on-year. Gross contribution for Q4 '25 stood at INR 78.4 crores with degrowth of 4.3% quarter-on-quarter and growth of 21.1% year-on-year. PAT for Q4 '25 stood at INR 45.2 crores, against INR 48.1 crores in Q3 '25 with a degrowth of 6% quarter-on-quarter and growth of 12.7% year-on-year. For our domestic business also, we have updated the methodology of DSO calculation in line with industry practice. Based on the new methodology, DSO for Q4 '25 is 46 days as compared to 51 days in Q3 '25. Reported ROC and RONW for the quarters stood at 43.2% and 41.8% respectively. Update on consolidated business, in FY '25 our consolidated business revenue stood at INR 10,157.2 crores depicting a year-on-year growth of 17.9%. PAT before the exceptional item for the full-year stood at INR 424.7 crores compared to INR 483.2 crores in FY '24. PAT post-exceptional items full-year stood at INR 424.7 crores in FY '25 compared to INR 308.5 crores in FY '24. Consolidated EPS reported for FY '25 stood at INR 15.3 per share against last year INR 11.12 per share. Final dividend we have announced, we have recommended INR 4.4 per share. Cash generation for the year continued to be strong with operating cash flow to EBITDA improved to 93.3%. The closing balance of cash which stood at INR 707 crores for the year. For the quarterly update, consolidated revenue of Q4 stood at INR 2,617.2 crores with a degrowth of 7.9% quarter-on-quarter and growth of 19.4% year-on-year. PAT before the exceptional item for consolidated business stood at INR 107.5 crores against INR 105 crores in Q3 '25 growth of 2.4% quarter-on-quarter and 2.6% degrowth year-on-year. Consolidated EPS for Q3 '25 was INR 3.87 per share and Q3 it was INR 3.78 per share increased by 2.4% quarter-on-quarter. Reported ROC and RONW for the quarter stood at 21.9% and 25.2% respectively. Update on some of the operating metrics. Total headcount moved from 7,019 by end of Q3 '25 to 6,810 at the end of Q4 '25 with attrition remaining at 14%, which was same in Q3 '25 also. On-site offshore revenue mix has changed to 51% and 49% in Q4 versus 56% and 44% in Q3 '25. Utilization remains flat at 87% quarter-on-quarter. We have added 14 new customers in Q4 '25. Top 10 clients contributed a revenue of 61% compared to 66% last quarter. The number of clients more than 3 million run rate in Q4 '25 is 21 number. It remains the same as it was in Q3 '25. For Q4 '25 order book stood at INR 101.6 million which is the book to build ratio of 1.25x. In summary, we remain confident in our long-term strategy and committed to driving sustainable growth and shareholder value. Thank you. With that, let me turn to moderator for question-and-answer.

[Operator Instructions] The first question is from the line of Mihir Manohar from Carnelian Asset Management.

Yes, sure. Sir, congratulations on the deal wins. I mean a couple of good deal wins over there. Largely, I wanted to understand on this, I mean, large TMT client which we have. So I mean publically different TMT clients have called out that the AI investments that they have made in. As of now, I mean 20% to 30% of the product codes are written by the AI investments which they have made in. They are talking about taking this automation to 80% to 90% over a period of 5 to 7 years. Now fundamentally, does this pose challenge to us from the business model that we are operating in? I just wanted to get some clarity around that from a 3, 4 year perspective, if these high-tech companies are talking of increasing their coding from AI investments that they're making, how does our business model is placed in that situation? Some color on that will be really helpful.

Yes, good question, Mihir. I think there are 2 ends of the spectrum here. Clearly, if you think of the deal that we just won, the second largest deal that we announced, the AI investments and AI differentiation is part of the deal. So that's very much locked in from a differentiation perspective and that's one of the reasons we won a very competitive deal in a very tough environment against some stiff competition. So very proud of our capabilities in AI that we have been able to create and differentiate in the market. But broadly speaking, for our largest tech clients and other tech clients that we see, yes, there is more adoption of AI on 2 fronts. There is definitely an adoption getting into the customer support side of the equation where the adoption of AI is increasing, and we are definitely seeing that. And across our large clients in the TMT space, we are seen as an AI company. So we are really leading the way for them as they double down on AI investments in that area. So we're definitely leading this chart there in our mind, and we are doing well. The second side, I would say, is still marginal. Is the adoption of AI in the software development life cycle from an engineering perspective, that's still very much early days right now. It's not gone fully mainstream. We do see adoption in automation type of things, testing type of equations, GitHub Copilot adoption in development cycle, but it is not a very significant part of the push from the customer because there are concerns around security, there are current concerns around compliance, et cetera, with the customers. So it's not gone fully deep as yet. But we think in about 6 months to 1 year's time, this might go deeper than what it is today. But definitely, as we sit here right now, clearly, the customer support side of the equation, the more manual type of equation, people are really adopting the agentic architectures and agentic frameworks that Sonata has to offer to differentiate. And that's really part of the reason that we won the second largest deal that we just recently announced, Mihir. I hope that answers your question.

Understood, sure, understood. So I mean, on the large account, we are having a footprint. On the other side, this particularly, I mean deal, new deal which has been there, that can add 3% to 4% if you assume even the distribution. So from FY '26 perspective, can we have mid-single digits to high-single digits kind of a growth for the international IT business? How to see that?

Mihir, I'm having really hard time to your question, but I think I probably get a broad sense you're asking. So let's just divide it into 2 parts. So the deal that we won recently that we announced the $73 million deal, that will scale up over the next 2 to 3 quarters. We have started ramping up gradually in Q1, but Q1 will have a very small effect of the deal, but largely will be in Q2 and fully in Q3. That's how we see the deal 6 months' time. The largest client that we discussed with you guys last time around, where we see softness in second half of last fiscal year. And in Q4, the results we just announced has a full impact of that ramp down and impact of that whole issue that we had back in November. I think we believe that we are going to turn the corner in Q1, unless there is something new that we don't know at this point in time, we think we'll turn the corner in Q1 and we'll be back to marginal growth, flat to marginal growth from this quarter onwards. So the headwinds of that, the worst case hopefully has been absorbed at this point. At this point in time, we think we'll be back on growth on that account as well.

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

So I have a couple of questions, starting with quarter 4. I think at the end of quarter 3, we indicated some range for quarter 4. And in the April, we indicated about some further weakness. So if you can help me understand how much is fully attributed to top client-related softness? And how much would be, let's say, outside of top client, particularly on Quant seasonality. I just want to understand. And in top client, what factor led to, let's say, incremental weakness? If you can give some color around it? That is question one. Question two about quarter 1. How one should look, let's say, now quarter 4 is behind where we have a sizable dip. How one should look quarter 1 playing out for us, considering the deal intake what we have seen as well as some of the seasonality of Quant returning back? If you can give some sense about quarter over and subsequent period. Similarly, on margin side, we earlier indicated about returning back to 20-plus margin in Q1, Q2. Are we on track for that margin shift? And last question about domestic business. Now Microsoft also likely to, let's say, cater to some of the top clients. How one should look gross contribution profit outlook for next fiscal? Earlier, you always used to say, mid-teens is a good range to look at it. But considering some of these things, how one should look gross contribution outlook in domestic business?

Dipesh, the first question about the impact of the revenue degrowth, what contributed more from the percentage of degrowth, what we guided earlier to what has been reported, majority portion was from the large client. There is a small portion from Quant customers also, but majority of the portion was with the large client. And your second question on quarter 1 outlook, the large client, as Samir was mentioning, we have reasons to believe that we are turning around and will start a small amount of flattish or a small amount of growth in quarter 1, the degrowth at least we believe that as of now, whatever it stands, we believe that it has stopped, degrowth has turned around for us in the large client. Your question on the margin, we have -- at present we will -- we are outlook for reaching back to the earlier growth. We may take there can be a 1 quarter of delay to that, but we are in the track of reaching there. This is particularly due to the uncertainty in the market at present. However, based on the recovery, whatever is the recovery with the large customers in quarter 1, we will be able to comment about the full year on the EBITDA recovery path. Regarding the Quant customers recovery, as Samir mentioned, quarter 1 will be better than quarter 4 and quarter 2 will be start scaling up to reach the revenue growth whatever they are planned for. On the security business, the current outlook is, we are also waiting and watching on it. As of today, we have also taken various measures to manage the risk for the business. We have mentioned it earlier also. We are also in the process of seeing the impact of any impact that comes in. In case the execution or implementation of the change strategies happen, we expect there can be some short-term impact for it. The size of the impact, we will be able to give in the coming days, Dipesh.

So let's say, 2 questions follow-up. First about quarter 1, you indicated about one client only. I just want to get sense about overall company on international IT services side. Considering we have a sizable decline in quarter 4, whether some of those weakness, particularly, let's say, retail and manufacturing remains fairly weak. Similarly, delayed decision-making cycle and other things which you indicated, are we now confident on, let's say, bouncing back sharply or you expect very gradual recovery from where we ended in quarter 4? Second question was about margin, where you indicated about a quarter delay kind of thing. So whether it would hinge on, let's say, your growth returning back to some level then [ 20% ] is possible? And last question about depreciation and amortization. This quarter is a sizable decline, whether this is the new run rate?

Yes. So the first is quarter 1, the banking financial services, we expect a recovery from Q4 to Q1, but the full recovery will happen only -- start happening only from Q2. Q1 may not have the full recovery of BFSI. Your second question on the margin improvement, as we mentioned, it will be at least 1 quarter delay, but it also depends on the revenue growth and the impact of the turnaround in our large customers. So we have to see how much of turnaround happens and that will actually influence the margins what we are able to achieve and how fast we are able to achieve the recovery of margin. The third question is about the depreciation and amortization. It will not be to that extent the amount of reduction what we had. This is the fair valuation of the liability, hence the reduction happens. However, in the coming days, the current position -- the onetime impact of that because the fair valuation normally we do in the year end time and quarterly, it may not have -- some amount of increase can happen. And it will not be fully -- go back to the old number will not happen. It will be somewhere in between that. But there can be an increase in the depreciation and amortization value from here because we had a lot of credit coming in there this quarter. There can be some amount of increase from here in the immediate quarters. After that you will...

Is it linked with the Quant earnout? Because last time you -- whether now we have finalized Quant earnout?

Yes. Yes. It depends on that. And based on the total liability and total valuation, whatever we have to do, it depends on that valuation only it depends.

Yes, but can you provide some detail what is the Quant earnout we finalized?

No, Quant earnout for December 2024 period, it is in the process of we are discussing with the current CEO, still the discussion is going on. Along with the discussion, we will also be able to finalize the amount payable for December 2024. As I mentioned, this is also, we are planning to have at least 3 years extension of contract. Hence, depending on the extension contract, the value of the liability will also change. It is still under negotiation. Once it is finalized, we will be able to update you in Q1.

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

So my first observation is your call was going to start at 5:30 and until 5:35 results were not uploaded on the exchange website. So how can investors be prepared to ask the questions when you have not posted results and presentation before the call starts. This is not a very healthy practice, and this has happened in one quarter results last year also, I recall. So I would request management to look into this and possibly keep the call on next day if you are not able to post the results in time before the call. And so it is very difficult. So I cannot understand such a large decline in international revenue because I have not been able to go through the results. So would you explain once again in detail what has gone wrong? Why such a large decline in international revenue? And this is on top of already you had downgraded the guidance once in last year.

Okay. Sir, thanks for your input. We will definitely take your input and work on it. We will avoid this kind of last minute update in the coming quarters, sir. We'll definitely act on that. Thanks for your input. The question is about the international business degrowth, we have updated in December quarter itself when we had an analyst call that there will be a degrowth in this quarter. And about 15, 20 days back, we have given a press release also, saying that the degrowth in revenue is more than what we expected. The reasons are two-fold. One is seasonal impact for the customers, of Quant customers. Every year, January to March quarter, they will have a degrowth because of the nature of the contract signed with the customer, which will be low in January to March quarter because by the time they get the PO, they get the contract, it will be almost like a middle or end of February. Hence, they are not able to harvest the full revenue of the contract, whatever they have achieved with the customers. Every year, this happens, and that was one of the first major reason for us for degrowth. The second reason was, as mentioned by Samir, quarter 3 in FY '25, we had an impact of ramp down in our large customer. And in quarter 4, the degrowth was increased, incremental degrowth happened because of the ramp down was more than what we estimated during the end of quarter 3. That we have given a press release also before the Board meeting that it is more than what we expected. So that ramp down has also impacted us. These 2 coming together in January to March quarter, hence, the degrowth looks substantial.

So are you witnessing any other ramp downs from any other customers in view of the ongoing tariff uncertainties and due to that, the collapse in consumer and corporate confidence in the U.S.? So are you witnessing any ramp downs in any of your other large deals? What are your comments, sir?

Yes. Okay. Sir, the largest customer is an impact -- industry-wide impact. Many, many players have mentioned about the large customers ramp down. The other customers, there are uncertainties in the market. As of today, we are not expecting anything. But with this uncertainty, there can be a new development happening in the coming months. And because of this, that can also happen. I'm not ruling out that. But as of now, whatever information we have as on today, we don't expect any major degrowth in other customers. But situation is uncertain, anything can develop in the coming months.

But I would request you to schedule your call next time in such a fashion that everybody gets a chance to look through the results and presentation. And please don't take this as a criticism. This is a suggestion, sir.

Definitely, sir. We'll definitely take it in a positive way and work on that to avoid this kind of challenges, sir.

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

Yes. So my first question is on the large deal win that you had. So if you can provide some more color in terms of the client from which we have like won this deal, it's like net new spend for that client? And also, is there any rebadging element involved in this deal? Also, can we see some margin impact associated with a typical large deal because in other large deals also, we had some margin impact or initial investment that actually goes into? So how to read the margins in connection with the ramp-up of this deal? And also, if you can comment in terms of the pipeline, are we having such large deals in the pipeline? And how is the pipeline looking?

Amit, so this is Samir. Let me try and take your questions one-by-one. So the work involved here, Amit, has multiple parts. So this customer has a technology platform that they provide in a B2B environment to their other customers. And there are 2, 3 parts of this work. So part of the work is to replatform that technology into a more modernized platform. So part one is to just rescript it out, rebuild it out as a new platform, which is more futuristic ready, AI ready, etc. That's sort of one part of the work. The second part of the work is to -- as we build the new part out, hold the old part and sunset the old part or take significant features down from the old part and build a new part. That's the second part of the work. And third is essentially doing continuous modernization for the other application stack that they have. That's the scope of the work. It is under transition right now. And we expect the transition will go in waves. That's why we think the deal will fully ramp up in the next 2 to 3 quarters. Starting this quarter, some marginal revenue will trickle in, but I think it will be fully baked up by end of Q2, early Q3 time frame at this point in time. To your question about margins. The deal is a 5-year contract. It is accretive deal to Sonata over the term of the 5 years. But in year 1, there might be some marginal impact. We don't expect any significant impact to margins in this year. But there will be -- because of the transition involved, there will be some marginal impact in the course of the first -- especially in Q2 and very partly in Q1, but that's the extent of it. It's not going to be a significant impact. There might be some marginal impact because of the margins. As far as the question about pipeline is concerned, yes, we do have other deals that are under pursuit right now. Clearly, not as large as this one that we announced. We have a couple of them of this scale as well. But generally speaking, we calibrate our large deals to be above $5 million to $10 million range TCV. There are several of those deals in the pipeline. And like I mentioned earlier, about 35% of our total pipeline is large deals. So that gives us confidence that we have a few other deals which are under pursuit. But as you can imagine, we are seeing an industry-wide pattern right now, Amit. The retail manufacturing customers are much more measured in taking decisions. So we're seeing some delays there. But the tech customers, the banking customer, the health care customers are slightly more aggressive and more agile in taking decisions. So it's a little bit of industry sector model that is going on given the tariffs that are coming from U.S., but that's really what we're seeing at this point in time. I hope that answers your question.

Yes. And sir, my second question is on the ramp down that we had with the top client. So whether the ramp down was more broad-based or it was with a specific program that had an impact? And in terms of the recovery that we are anticipating in this large client, so is it based on the confidence that we have some newer engagements or we are working on certain like newer projects with that client? Or is it just on the assumption that the worst is over and maybe it will recover from here?

Yes. So I think the ramp down was in a particular area, not the broad-based ramp down, it was one particular area where the ramp down was -- had taken place, and especially because it was in newer geographies that we have started, especially Mexico, where we see ramp down, it had a bigger top line impact because it was more on-site revenue that went out. The second part of your question, where are we with the client and what momentum we see? Like we mentioned for this client in several of the LOBs, we are now getting into the preferred status. So we believe as they consolidate their vendors, Sonata will gain out of it. Their fiscal reset happens on 1st of July. So as they get into the new fiscal year, we expect our wallet share to increase gradually as we win business from quarter unless something new happens that we don't know at this point in time, we think we bottomed out in Q4. This quarter will be a flat to maybe marginally growth quarter, somewhere in that neighborhood. And from Q2 onwards, we should be getting back into more growth as we move forward. So that still is the current outlook. And we'll be like always keep you guys posted as to how we make progress in this account.

The next question is from the line of Asis Das from Mirae Asset Capital.

So my question is on your outlook. I just wanted to understand your FY '26 revenue growth because you are mentioning that your Q1 could be a weak quarter or a flattish quarter. Now what I see that retail and manufacturing remains weak. And your large deal would ramp up from Q2 and Q3 onwards and Quant will have a seasonality in Q4. So here, I want to understand like your FY '26 growth would be better than FY '25? And if, yes, what are the verticals would drive the growth?

Good question, Asis. I'll start and Jagan can add to it. So the way we think about this, Asis, is it's very much an industry story. We think in the FY '26, the healthcare business will continue to scale and will be a significant part of our growth going forward as well. It was a significant part of the growth in FY '25 will continue to scale. We feel pretty strong and good about where we are in the healthcare business. We also believe our banking business in general will scale, although the ramp from here on will be slightly slower, but will scale and get to peak numbers in Q2, Q3, may not have a full impact in Q1, but will scale from Q2 onwards in a significant way. That's the 2 sectors on the growth side. The retail manufacturing is really hard to predict. And as you know, the tariffs are still very much out there. The current U.S. administration is working deals out. When those deals will pan out, what impact it will have on the retailers is very hard to predict. But at this point in time, it looks like tough days ahead in retail market in general or retail clients in general. So we are really factoring in degrowth in the retail sector in Q1 and Q2, at least. Things might change. But right now, that's what we think will likely to happen. On the tech side, given the large deal that we have won, we think that, that tech sector will do well for us given the large deal as well as the large client, the largest client of Sonata that we have, which has bottomed up in Q4. So I think the tech sector will also do well for us. So in general, as we look in getting into the year, we're reasonably confident about healthcare. We are quite confident about banking, tech sector is doing well. Retail is the uncertainty right now that we don't know really about. We're factoring in our estimate that retail will degrow in the first half. And as market situation evolves, we'll be sharing the results. Hopefully, that answers your question.

Yes, that helps. Just wanted to understand one thing. See, in FY '23, we also announced a large deal $160 million. Also in Q2 FY '25, if I'm not wrong, we also announced a deal in the manufacturing vertical from Australia, I believe. But I don't see any growth in the retail, though currently, we see the weakness in the retail and manufacturing vertical. But even if I look at the quarter's numbers for last 5, 7 quarters, so I don't see any growth. So could you just explain me what happened actually in the retail and manufacturing vertical?

Yes. So as for the deal that we announced in manufacturing vertical was in Europe, and that is factored into our numbers now. It's fully ramped up at this point in time. But we have seen in the last 1 or 2 quarters, the retail manufacturing vertical has been under stress. So that has offset the ramp down or the project closures have almost offset the new win that we had. Hence, we are seeing those things almost canceling out to marginal growth numbers in the retail side.

The next question is from the line of Abhishek Gupta from Axis Asset Management.

So my question was with the margin improvement, which you saw, which was very good, like what were all the levers which drove this margin improvement in International Services?

Great question. I think Jagan can build on the Q2. But I think like we said, in Q3 when we gave you the ramp-down news, we told you that there was a onetime discount sitting that time. So part of the recovery was because it was a onetime impact in Q3, so that impact went away in Q4. So part of the recovery happened there. I say about 40% to 50% was like that. And other was largely the operational improvement that we have done because as the ramp down hit us for the largest client in Q3, we had cost but no revenue. And in Q4, we were able to operationally correct that out and hence, that cost went away as much as the revenue went away in Q3 itself. Those are the 2 big items, there are small other items from operational efficiency, et cetera. So those are 2 big parts that really helped us recover the margin, the 2%. And we are very confident, if you recall, in our Q3 commentary, Jagan was talking about that we will be able to recover about 60%, 70% of this margin impact in Q4, which is what exactly happened. Jagan, you want to add?

So the idea was last time there was a onetime cost of settlement for near shore location, [ as well there were people ], we couldn't complete the ramp that was completed in this quarter. Hence, we were able to save the cost and that helped us to improve the margin. And as expected, we were able to improve the margin in a decent shape in this quarter.

Got it, sire. And sir, on the domestic side, I see there is a very robust growth year-on-year on fourth quarter. But I've seen this margin seems to be declining around 50 bps to like 5 bps to 10 bps on quarter-on-quarter, like earlier, it used to be around 3.5 bps to 4 bps. But now in this year, full-year, we have been seeing a lower end of the margin in the domestic side. So what kind of sale of software we are doing like that is impacting our margin there?

We don't see the margin percentage. As mentioned earlier, we have to measure this business on the gross contribution, absolute amount of gross contribution because depending on the product mix, depending on the requirement and depending on the change in the requirements of customers and also products offered by the OEM, this is also can change. There is a lot of changes happening in the market and a lot of new requirements are also coming in. So with this change, the percentage is not a measurement at all for us the absolute amount of gross contribution growth. That's what we monitor. Plus we will continue to focus on the ROCE, what does the business gives. If it is above 40%, it is good for us. So that's a broad view we have.

The next question is from the line of Prolin Nandu from Edelweiss Public Alternatives.

So just one thing, 2 questions right on the domestic part, right? I mean, to the earlier question on what is happening on the gross take rate, so to say. Now what we understand is that, again, there also your large client is thinking of going directly to the clients, right, in some sense. So when you say that you are in discussion, is this discussion happening with the -- that large vendor or is it happening with our clients? And how much of the revenue is this proportion going to be for us, right? Because we understand it's substantial. So what are the negotiations which are going on? And why when can we get a clarity on this because it's a very high ROCE business for us, right? So how should one think about this risk of the vendor going directly to our clients on the domestic side of it?

Okay. That's a good question. I also like to have a clear view now, but it is an emerging view. They have broadly taken a strategic position, but there is a gap between the strategic position and the execution. And the execution only when it happens, we will be able to exactly know what will be the push. It may take a couple of more quarters for us to have a clarity. As of now, we continue to do business, we continue to expand with new customers, we continue to expand the product and license from OEMs, different OEMs also. But having said that, we have taken measures for the management of this risk. However, the actual execution by the OEM will decide impact for us, we have to wait and watch for some couple of more quarters.

Is my understanding correct that the OEM that you are talking about and for execution the we are thinking about and how it will play out, is that like, at least 50% of our domestic revenue and that is there the picture is emerging yet? Is that quantification of the revenue correct?

Not exactly. We cannot comment about the percentage. There will be an impact because it's going to be about a few large customers for them for us also, this is not the numbers what you mentioned. I'm not able to comment because that is not the number what we are looking for. As I mentioned, there is not a very clear. I cannot completely say that this is a number or this is going to happen. There is a gap between the strategic intent of the OEM and the execution. We have to wait and see how it emerges.

And also on the services or international part, right? Now you mentioned that this issue that we had with a large client was largely one-off. So just we wanted some assurance from you that this is nothing to do with, let's say, a client asking you to probably pass on some of the productivity gains, right, which is probably going to be the very core nature of any new engagement or any existing engagement that we have, right? So could you just let us know a little bit more in detail as to why do you think this is a one-off and not a structural issue that might not crop up in the future, not with this client, but with other kind of clients and other kind of engagement that we have. Can you please help us to probably get some assurance on this part, please?

No. Again, these questions as of now what we expect is we are seeing that opportunity of these kind of changes, threats always comes with an opportunity also. So what we see there are more opportunities, some green shoots are there. We believe that we may have turned around from the degrowth to a flattish or a mild growth in the coming quarters. Having said that, will that not happen in future? Nobody can answer that. Market is very uncertain, and we don't know what will be the situation emerging in the future. As of now, what we have information, we have updated you. We are not seeing this kind of threat in the near future as of today, what information we have. But you cannot comment about what will happen in future, sir.

Can I just push for one more, right? Just one thing you mentioned that you are thinking about new opportunities, that there might be some emerging opportunities which might come out of whatever challenges that we or the industry is facing. Is it fair to comment that maybe -- I mean, when it comes to all the service providers, maybe most -- I mean, not all of them will be able to capitalize on this new opportunity that you are talking about and then probably that would be something to look at as a positive side of this disruption that we are talking about. Is that the right way to look at it?

This is Samir. Let me answer that part. So look, we cannot comment what others are doing. We can comment what we are doing. In this client, we are clearly seen as a partner who is leading the AI journey for them. To your first question, the impact that we saw was definitely one-off, and you can see that in our margin recovery as well. We're not overly concerned. Yes, it was a setback for us in second half of the year, which none of us are happy about. But we think in coming times, in coming quarters, we'll be back to growth. And given that we are seen as very favorable AI adopting partner for them and really in the top class for AI adoption, we think we'll have some growth in others. That's our current view. We are generally speaking, more optimistic about what will happen in the course of this year in this client. Now the only thing which is unknown at this point in time is what the ramp is from there. Will we see a full recovery in 1 or 2 quarters, very hard to say, but in general, we are more positive about what will happen in this client in the coming quarters. That's a broad picture we can paint for you.

Ladies and gentlemen, this will be the last question for today, which is from the line of [ Meet Makharia ], an individual investor.

So Samir, you happened to mention the guidance for HLS and BFSI 3, 5 years out. So I missed the figure. So can you please repeat the same?

Yes. So it's not a guidance, [ Meet ]. I think what we're saying is we feel that this business, which was about 13% of our business about 2, 2.5 to 3 years back, is now about 35% of our business, banking and healthcare combined. We feel that in time to come 3 to 5 years' time, this could be about $0.25 billion type of a business, $250 million type business in about 3 to 5 years' time. So we are very optimistic where we are in this business. We are taking market share away. And that's what I was talking about earlier. This is not a guidance, but this is more of a directional statement. We think this business can scale for us, and we are quite -- given where market is today, we think we'll gain more market share, more wallet share compared to the competition. And that's what our past trend has been. Just to level set, this was not a business Sonata was in formally about 3 years back. This was a new 2 verticals we created. And given these are new verticals, we have been quite successful and we're very pleased with the performance.

And where are we on the $1 billion plus $0.5 billion your estimate that we had for FY '27. So where are we on that? Of course, we have a broad picture from the IT services, but are you that confident from the domestic product service -- domestic products as well now, I mean, given the concerns raised by earlier participants?

So we are basically, look, we had put out 3 years back a directional number at that point in time that we want to be $1.5 billion in about 3 to 4 years' time. That's a directional long-term goal post that we have been working to. But candidly, if you really pare it down, the way we think about it is that in a year, at least more quarters than not, we want to be in the top quartile growth, which is what we have been talking about for several quarters now. So our view is as market goes up or market goes down, just stick to where the market is. We want to be in the top 4 or 5 publicly listed midsized company. We want to be in that zone. And that's really what our aspiration is. Now if we consistently perform in that zone of being a top quartile company, we believe in 4 to 5 years' time, which is what we said when we started this, we will be about $1.5 billion. So that's a long-term aspirational goal. But in the short term, I think the way you should think about us is, are we coming in the top 4 or 5, top quartile companies in the market in the listed company. Clearly, in the second half of last year, we did not. But we believe as we turn around some of these headwinds that we had in the coming quarters, we will probably catch up and be in the position we were in for the first 2 years when I came on board.

And just one last question for Jagannathan, sir. So one last question, I mean, for both of you that earlier, I mean, earlier years, I've been holding Sonata for the last 10 years or so. So earlier, we had a payout ratio of upwards of 50%, 60% and as we declare the dividend for this year, I'm seeing that it has kind of dropped to half. And I also happened to watch an interview of Samir, in which he had mentioned that there are no acquisitions on the anvil. So I mean, has there been any change in the dividend distribution policy? And what is the thought process there? Because we have INR 700 crores of cash and we will be distributing, I think, INR 120 crores, INR 125 crores of dividend this year. So I mean, correct me if my numbers are wrong, but...

The policy as such, we have not changed it. However, considering the debt we have taken for the acquisition of Quant, the Board decided that let us manage the cash in such a way that we are able to pay off the debt as early as possible. That's the idea we have. So that the interest cost and all this no impact of that will be less for us in the financials in the coming -- in the medium term. This is like a few couple of years, the pressure on cash flow will be there because of the debt. The second aspect to it, as mentioned to us -- to all the investors during the acquisition of Quant, we had a procedural issue with RBI because of which I'm not able to remit money from India. So that also actually has stopped us from utilizing the cash for the debt. So that's where we were carrying a debt, we were carrying a cash also. But net of debt, we are still in positive zone, but the amortize of the cash and net cash may come down substantially because of the debt what we carry. Our focus is to repay the debt as early as possible. And this RBI issue, we are in the fab end of the issue, and we may come out of the issue probably in a quarter's time in a quarter time. So we believe that this is the right strategy to focus on so that we are not hampering the investments what we need in the era of past technology changes. So that's the idea.

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

Thank you, operator, and thank you for all the participants for joining in and listening to our results. I just want to take this opportunity to thank to all of you for your patience and the feedback that we got of posting our results slightly earlier is well noted. We'll take care of that. And I also want to take this opportunity to thank all the Sonataians globally for their extreme amount of hard work and really keep the Sonata flight flying high as we aspire to become the fastest-growing company and be in the top quartile. Thank you all of us. We'll speak to you in a quarter's time.

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