Sonata Software Limited (SONATSOFTW.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and a warm welcome to Sonata Software earnings conference call for the second quarter of FY '26 ended September 30, 2025. We have with us on the call today Mr. Samir Dhir, MD and CEO; Mr. Jagannathan Narasimhan, Chief Financial Officer. We also have our extended leadership team on the call. [Operator Instructions] Please note that during this call. Management may make certain forward-looking statements that involve risk, assumptions and are based on information currently available to management. Sonata does not undertake any obligation to update any such forward-looking statements that may be made in the course of this call. We advise participants to exercise discretion while making any investment decisions. We will begin with opening remarks from CEO followed by a business overview and financial highlights. After that, we will open the floor for questions. With that, I now hand over the call to Mr. Samir for his opening remarks. Over to you, sir.

Thank you, moderator. Good day. Good day, everyone, and thank you for joining us today. We truly value your time and appreciate your continued trust and support for Sonata. In today's session, we'll walk you through Sonata's overall strategy, the progress we have made over the past few quarters, our forward-looking road map and a detailed view of our financial performance for Q2 FY '26, which concluded on September 30, 2025. We are excited to share the momentum we are building as we continue to execute on our long-term vision and growth aspirations. I'll begin with an overview of our strategic priorities and key objectives followed by the highlights for the Q2 FY '26 performance. So firstly, the strategy and the goals. At Sonata, our ambition is clear. We want to be differentiated AI modernization engineering firm powered by our proprietary platformation framework. We are executing at scale across 3 core strategic dimensions. First, across the 4 focus verticals, which is healthcare and life sciences, banking, financial services and insurance, BFSI, retail, manufacturing and distribution, RMD and technology, media and telecom, TMT. The second dimension is on 5 priority geographies that we have decided to focus on, which is North America, U.K., Europe, India and Australia. We want to focus on modernization engineering leadership with sustained investments in our IT, proprietary lighting tools and robust offerings, we are enabling continuous modernization for our clients, building digital AI and data platforms that deliver transformative value for our clients. We see significant opportunity at the intersection of AI and modernization engineering, driving momentum across strategic bets we have made, which is enabling us to consistently secure large deals and large accounts, expanding significantly our footprint in BFSI and health care verticals, deepening capabilities in data, AI and modernization engineering backed by scaling our talent across sales, delivery, HR and finance and other operational functions to support our growth ambitions. With that, let me provide you a progress update on the quarter. Our success is anchored on 3 strategic pillars: number one, scaling Sonata for the next phase of growth. Second, relentless focus on large deal wins. Third, sharp focus across strategic verticals, geographies and talent. I'm going to get deeper into each of these 3 dimensions. So first, scaling Sonata, specifically on AI, which is a strategic growth pillar for us. We have made steady progress in scaling our AI order book and are perhaps one of the few companies which publicly share our order AI order book consistently. For the most recent quarter, our AI order book grew from 8% in Q1 to 10% in the most recent quarter. These AI-driven wins span multiple verticals with TMT vertical showing the highest adoption of AI. We have tightly aligned our go-to-market with our AI CSP co-sell program particularly with Microsoft's new AI consumption model, which went effective July 2025. We are replicating this model with other CSPs as well. During the quarter, we closed 2 midsized AI and CSP deals. We expect these deals to drive both client expansion and sustainable new client acquisition engine. Earlier this year, we launched our cloud agnostic agentic platform, AgentBridge. The platform is designed to help clients build and deploy next-generation agentic AI solutions. In addition, we are collaborating with IISC in India and water school in U.S. for enhanced research in agentic AI. We have deployed agentic solutions. Internally within Sonata through our AgentBridge platform, our HR and finance teams now run production-grade agents, reinforcing our aspiration to be a model AI-led technology services firm. We are truly proud of that. We are actively pursuing AI opportunities across 100-plus clients, helping them unlock value through operational efficiencies, time-to-market and transformative business models through AI innovation. Let me provide an update on the key modernization driving engines. First, cloud and data. Cloud and data opportunities now account for 55% of our total pipeline, reflecting strong client demand for modernization. We are seeing accelerating adoption around Microsoft Fabric where Sonata is an official Microsoft Fabric feature partner and enabling clients to build data analytics foundations for an AI era. Microsoft Dynamics will continue to work closely with Microsoft on programmatic growth plays across ERP modernization, SaaS transitions and low-code no-code compete deals. With that, let me provide an update on large deals. Large deals pursuit remain a cornerstone of our growth strategy with approximately 40% of our pipeline comprising of large deals. I am pleased to share in Q2 FY '26, we won yet another large deal. It's -- this is a leading health care provider client in U.S. who awarded a Sonata multiyear contract to modernize their core platforms, leveraging automation and AI to drive enhanced consumer experience, reduce technical debt and AI enablement with data-driven insights for the end customers. In the deal win, Sonata differentiated through its AI-led transformation approach, integrating modernization engineering practices and platform-driven data modernization to create real outcome driven value for the clients. In addition to the large deal, we also won several midsized deal in AI. I want to cover the top 3. The first AI win is through super sizing with one of our leading financial mortgage leader. They awarded Sonata multiyear engagement to migrate its legacy suite of applications to a modernized platform. This strategic engagement modernizes the customer's core platform, enhances security, scalability and sets the foundation for future SaaS transformation. The second AI win is within the retail vertical. We secured a strategic AI program with a U.S.-based consumer product client to develop their enterprise playground powered by AI. We will provide a comprehensive solution using AI, which will provide robust security and privacy, access control and monitoring. We also secured 2 AI CSP midsized deals in the quarter, one with a health care client and other with a global TMT client. With that, let me provide an update on our verticals, geos, ITL business and talent. We remain confident that our investment verticals, which is healthcare, life sciences and banking financial services are on track to scale to $250 million of revenue in about 3 to 5 years' time. Together, these verticals now contribute to 33% of our total revenue, a sharp rise from 13% just 3 years ago, a clear reflection of our strategic focus and disciplined execution. Our North America business has now scaled significantly and represents over 70% of our total revenue, up from approximately 55% 3 years ago. This shift reflects our continued success in the geography. On the SITL front, we are making strong progress across 3 strategic growth pillars. First, to expand the Microsoft channel with a sharper focus on SMC segment, which also included incubating our Sonata and cloud offering, which we launched about 4 to 6 quarters back. Second, broadened partnership with other ISVs such as Oracle, IBM, OpenText and others, expanding beyond the 3 hyperscalers that we already have a very strong partnership with them. Third, win large SI deals that integrate various product set and ISVs infrastructure with leading cloud platforms. These strategic bits are core to building a more deified resilient and featured business, and our teams have been judiciously executing to the strategy over the last several quarters. With that, let me provide an update on Sonata capabilities and talent. Our trailing 12 months attrition stands at 14%. Our gender diversity remains healthy at 31%, underscoring our continued focus on building an inclusive organization. Despite a challenging macroeconomic environment, we remain committed to future focused talent investments in training and strengthen our ability to deliver on our growth ambitions. Sonata University continues to power our upskilling capability agenda with a stock focus on AI readiness. 94.8%, nearly 95% of our workforce and 80% of our managers are now AI trained, reinforcing our commitment to building future-ready skills across delivery, engineering and consulting. We also rolled out white coding training across the company with 78% of the employees successfully completing it, reflecting a high engagement in a very short span of time. We are delighted to announce that [indiscernible] summit has joined us as sales leader for Quant to drive our next phase of growth. Srini, who led Quant earlier, has decided to pursue opportunities outside of Sonata. We are proceeding with our annual compensation revision for this year despite market headwinds. These compensation revisions will be have been enacted in Q2 and will continue to be enacted in Q3, reaffirming our belief in investing in people and maintaining industry-leading engagement and learning initiatives. In terms of industry recognition, during the quarter, we continued to be recognized as a workplace of culture and market momentum. We won CII AI awards for 2025 for best AI solution showcase and best industry AI application for agent bit platform. We were recognized also as a major contender in Everest Group's Application Development Services for AI applications by metric assessments. With that, let me dive deeper into Q2 FY '26 performance. Tailwinds of -- which are driving our growth. Number one, during the quarter, we continue to benefit from 3 strong tailwinds. Number one, Strong momentum from large TMT and health care deals that we announced earlier in the year that continue provided us to the ramp-ups and expanding scopes. Number two, the continued strength in our health care and life sciences and BFSI verticals continues to be a pillar of strength. and robust performance in data AI-led reflecting growing client confidence in our capabilities. In addition, our operational efficiency is driven by 3 levers: higher utilization, planned large deal offshoring and AI adoption and agentic AI implementation across all functions within Sonata that delivered a net EBITDA accretion of 0.7% quarter-on-quarter even after absorbing 0.9% of impact on salary increments. That's a total of approximately 160 bps of EBITDA accretion in the quarter on a gross basis and 70 bps on a quarter-on-quarter basis, net. And we expect full quarter upside to reflect in Q3 from the work we have done in Q2 to drive sustainable actions we have implemented in Q2. As we continue to drive improvements from the other 3 levers, our expectation is that PAT will further accrete in second half of the year compared to first half of the year. With that, let me talk about headwinds and offsets. While we are navigating this business, so there are some near-term challenges as well. Our largest BFSI client underwent organizational changes and budget constraints and led to significant ramp down in the course of the quarter. Within SITL, we had headwinds. However, based on our 3-pillar strategy, enacted several quarters back, our teams were able to largely offset the impact of the broader sectoral impact that we see in the business. As previously indicated, we continue to see decision delays in our largest TMT customer and global RMD. The impact from the BFSI client was largely offset by the large deal wins in health care and TMT and the midsized AI wins. Outside of these, TMT and BFSI accounts, we recorded healthy growth across all our client base. We are truly proud of that, reflecting the resilience and diversification of our portfolio. International business. Revenue grew 1% quarter-on-quarter constant currency. Our order booking stood at 1.28 book-to-bill ratio. We secured 1 large deal in the quarter. The number of clients with more than $10 million annual run rate is now at 8. We added 6 enterprise-grade clients during the course of the quarter. Our AI order book, as I previously mentioned, contributed 10% of our total order book. EBITDA significantly improved to 17.3%, much in line with the road map which we have shared with you earlier, and we will continue to see this accretion going into the next quarter as well. The utilization rate improved to 87.3%, maintaining delivery efficiency. And in the SITL business, our gross contribution was at 0.3% quarter-on-quarter. In summary, Sonata delivered a resilient performance in Q2 FY '26. We secured 1 large deal, expanded our AI-led order bookings and now have 8 clients with an annualized run rate of exceeding $10 million. Our long-term ambition to be a differentiated Modernization Engineering firm, powered by platformation continues to drive a strategic momentum for us. I want to thank all Sonata teams globally for their continued dedication and commitment. their efforts form the foundation of our progress and future success, and we remain confident in delivering a long-term value to our clients, partners and shareholders. With that, I'll turn it over to you, Jagan. Jagan?

Thank you, Samir. Good day to all of you. Let me walk you through our financial performance for the quarter ending 30th September 2025. First, starting with the international services. In Q2 2016, USD reported revenue stood at $82 million, growth of 0.2 percentage quarter-on-quarter in constant currency terms, with a percent growth of 1% quarter-on-quarter. Rupee revenues stood at INR 730.30 crores, growth of 4.3 percentage quarter-on-quarter and 3.2% year-on-year. EBITDA before other income and for Q2 '26 improved to 17.3%, up to 70 bps sequentially from 16.6 percentage in Q1. This expansion was primarily driven by operational improvement across delivery, SG&A contributing to 160 bps, reflecting better delivery efficiency, cost optimization and also benefit from gross guarantee product impact. EBITDA improvement was mainly driven by utilization improvement from 87.3 percentage up from 86.6 percentage in Q1 '26, [ one ] large deal offshoring in our ASP program. As a result, our offshore mix improved to 57 percentage from 53 percentage in Q1 '26. Q2 utilization and headcount are also driven by sustainable productivity improvement and operational efficiency in delivery enabled by AI adoption, differentiated AI solutions, agentic implementation across projects. We expect utilization to further improve in future quarters due to productivity gains from AI across all function. These improvements offset by wage increments impacting margins by 90 bps as we continue to invest in talent. In summary, on a net basis, EBITDA improved by 70 bps. We expect full quarter upside to reflect in Q3 from the sustainable actions implemented in Q2. EBITDA after other income and ForEx for Q2 2026 improved to 19.9 percentage, up 150 basis points sequentially from 18.4% in Q1 '26. Q2 '26 reported PAT stood at INR 78 crores against the INR 70.7 crores in Q1 of '26, growth of 10.3% quarter-on-quarter and 28.5% year-on-year. Reported ROCE and RONW for the quarter stood at 17.8% and 22.6%, respectively. International Services DSO in Q2 is reported at 68 days and 62 days in Q1 '26. Now let me provide you with update on domestic business. Domestic business revenue for Q2 '26 stood at INR 1,391.3 crores with de-growth of 38.8% quarter-on-quarter and de-growth of 4.8% year-on-year. Gross contribution for Q2 so that INR 68.7 crores with a growth of 0.3% quarter-on-quarter and de-growth of 2.1% year-on-year. PAT for Q2 '26 stood at INR 42.2 crores against INR 38.6 crores in Q1 '26 with growth of 9.3% quarter-on-quarter and de-growth of 4.8% year-on-year. DSO of Q2 26 is 42 days as compared to 63 days in Q1 '26. Reported ROCE and RONW for the quarter stood at 43.8 percentage and 42.5%, respectively. Update on consolidated business. For the quarterly update, consolidated revenue for Q2 '26 stood at INR 2,019.3 crores with a de-growth of 28.5% quarter-on-quarter and de-growth of 2.3% year-on-year. PAT of our consolidated business in Q2 '26 is up INR 120.2 crores against INR 109.3 crores in Q1 '26, growth of 10 percentage quarter-on-quarter and 12.9% year-on-year. Consolidated EPS in Q2 '26 is INR 4.33 per share. Q1 was INR 3.94 per share, increased by 9.9 percentage quarter-on-quarter. Reported ROCE in RONW for the quarter stood at 22.1% and 27.1%, respectively. The company has declared a second interim dividend for the year at INR 1.25 per share, in line with commitment made during the previous call to implement quarterly interim dividend payment. Starting this year, the company intends to follow a quarterly interim dividend payout policy. Cash and cash equivalents stood at INR 323 crores at the end of Q2 '26 compared to INR 600 crores in Q1 '27. Moving on update on other operating metrics business operating performance. Total headcount stood at 6,649 in Q2 '26 against 6,859 in Q1 '26 with attrition of 14 percentage. On-site offshore revenue mix was at 43% to 57% in Q2 compared to 47% to 53% in Q1. Utilization reported at 87.3% in Q2 versus 86.6% in Q1. We added 6 new customers in Q2 '26. Top 10 clients contributed revenue share of 53%. In Q1, it was [ 55% ]. Number of clients created a 5 million and [indiscernible] stood at 13 in Q3 '26 same as Q1 '26. A number of clients of more than $3 million up to $5 million revenue increased to 8 from 6 in Q1. Q2 '26 order books stood at $105 million with a book-to-bill ratio of 1.2x. In summary, we are confident about our large deal momentum, AI adoption, agentic AI implementation and continued focus on sustainable EBITDA improvement levers. With this, I hand over back to the operator. Thank you.

[Operator Instructions] The first question is from Mr. Vipul Kumar from Sumangal Investments.

So I want to know why or on-site offshore mix is show skewed in favor of on-site, all other large companies have offshore ratio of around 75%. So why ours is around 50%?

So our offshore ratio has actions proved this quarter from 53% to 57%. I'm not sure which -- how the large companies have more than 78%. I don't think the fact is right. So we are one of the companies. There are a few companies who have more offshore percentage of revenue.

I think Infosys are between 70% to 75% offshore. And on-site, theirs is around 25%. I am the shareholder in a very long time. So I can say about Infosys. I don't know mean sure. What are the reasons for your low offshoring just I wanted to know that.

[indiscernible] let me take that question. So I think what you're looking at is the headcount mix, what we are talking about here in Sonata tech is revenue mix. So [indiscernible].

This is the revenue mix? Okay. Okay. Got it.

The next question is from Mr. Abhishek Shindadkar from Incred Capital.

Okay. So first question is on the services business. So if I look at the growth across verticals, it has been lopsided and driven by a particular vertical for the first half of '26. So Samir, the question is this on -- I understand the challenges. But in terms of the interventions required to make it a broad-based growth, if you can highlight some -- and when we could see more broad-based growth across verticals. That's question number one. The question #2 is for on the products business. So very heartening to see the increase in the gross contribution despite the drop in the revenue. So if you can just highlight, is that seasonality, which is playing out of the last quarter? Or is this more business driven improvement? That's my number question #2. The question #3 is on the purchases, especially between the stand-alone and the consol business. So in the stand-alone business, the purchases have gone up dramatically. So if you can highlight what has led to this, that would be helpful.

Thank you, Abhishek. I'll take the first two, and request I'll Jagan to the take the third one. So on the vertical side, Abhishek, just to give the first strategic overview, we started, as you know, banking and financial services and health care verticals about 3 years back. I think we made good progress in a broad-based sense across the 3 verticals, like I earlier noted that our revenue from BFSI and HLS has gone up from 13% of revenue to 3% of revenue. So now so it's a pretty good growth for us in the 3 years from a mix perspective. And why that is important is because as you probably know, banking and health care together constitute about 60% total outsourcing, which is an area that Sonata didn't have earlier, and we are very pleased with the progress that we are making and continue to make. Of course, we have a headwind in 1 specific client in BFSI right now, which will probably continue for this quarter and last quarter. But if you back that out, I think in general, we have seen fairly solid momentum across health care and banking over the last 3 years. As far as the retail manufacturing and TMT is concerned, I think retail manufacturing, in general, has had a slowdown. We noted that in our earlier calls as well with you guys. I think this quarter is a little bit of an aberration. We got onetime revenue in this quarter. But in general, retail manufacturing has been a little muted across the industry, given what is happening in the tariff side. What we see in the next 2, 3 quarters, hopefully, by Q1 next at will stabilize and return back to growth. TMT, as far as that is concerned, I think it's a tale of 2 cities. If you look at the big tech, I think there has been softness given one of our large clients in the TMT side. But outside of the big tech, the small take of the medium tech, I think we've seen very, very strong growth, and that's probably noticeable in our numbers as well that despite the large client slowdown, we have been able to hold up on TMT overall growth numbers because the growth in the non-big tech has been very, very good for us. In fact, the large deal we announced earlier this year was also in the TMT sector. So if you look at it from a geo or vertical mix perspective, a large deal win. Earlier, we announced TMT win, we announced healthcare just announced another healthcare win so very pleased with the progress, but the headwinds that we continue to have is 1 large TMT client and 1 large BFSI client. If you back the dose 2, I think we are pretty pleased with the progress on the rest of the business. So that's on the first point. On the second point, I think on the SITL business, and I'm going to invite Sujit to do it as well. Look, I think Sujit and team have done a phenomenal job to enact a 3-pillar strategy, which I talked about earlier. I think growing our footprint in the Microsoft channel in the SMC business, broadening our partnership with other ISVs and SI deals, I think we enacted that strategy about 4 to 6 quarters back. We are reaping benefit of it right now. And hence, the headwind that we got into this quarter. Based on the other decision that we had to withstand, we still came out balancing those out. So we feel very, very confident that the business has been well diversified now. And we are well on our path to diversify the business, the strategy we have put in place is the right strategy. But I'll just request Sujit to see if he has any additional points on that. Sujit?

Yes, Samir. It's you have observed for many, many quarters. So in our business, there is not all will have a very direct correlation between in the profit and revenue because the character of this business. So there can be sometimes the revenue numbers can drop because of various reasons. But we, as a group, always concentrate on maintaining and growing our -- what we call the GC, the gross contribution. So as Samir mentioned, there are various strategies, which are in place to make sure that we continue to hold on and grow our DC. And fortunately, as of now, we have been able to maintain our system. And hopefully, in future, even if we have some trouble times, we'll be able to manage it. Thank you.

Jagannathan will take the last one. Last point, which a third point as well.

Third point is on cost of goods sold, Abhishek. So there's no operation on the [indiscernible]. This is related to the India business, and it is in line with the revenue growth. Some of these quarters, this is a [indiscernible] also mentioning the revenue growth has -- we are not always concentrated on DC and the revenue growth has moved -- can change depending on a particular trade transactions or a particular transaction, particular mix of revenue, whatever we have. The cost is also in alignment with that. There's no changes in this. More details, we will, if you want, we will be give you offline on that.

The next question is from Asish Das from Mirae Asset Capital.

So my question is on again, on the domestic business basically your SITL business. So last quarter earnings call, you mentioned that there could be some discussion with Microsoft team regarding this domestic product business. And so I just want to -- now you mentioned that the business has diversified, what I understand, most of our business was skewed towards the Microsoft. And the question is, I just want to understand that how -- have they started taking over some of your partner accounts? How do you see that business is going to impact, particularly from the Microsoft?

Sujit, will you take this please?

Sure, Samir. Thanks. So first, I mean, if I've understood the question, if there is upgrades, looks if there's an apparent that Microsoft is going to take out all business, that's not the case. As of now, although they have not given anything in writing. Our guess is that worldwide, they are trying to have some direct contracts with a limited number of very, very large account of this, a large customers of theirs. So in that list, there may be a few which will fall in India, and it can fall into our customer basket as well, right? So that is the real situation. It's not that Microsoft has decided to completely go from an indirect to direct model. So this is the first time they are doing it in Asia Pacific region, including India. So this the first year, they have we are trying to do some direct billing. So we have to wait and see how things are going to span out and to what extent they're going to go. And we are not in a position to make a comment on that because, obviously, we don't know what exactly their future plans. But going the environment, knowing Microsoft since last 30 years, we believe that right now, it's a very limited plan, which they have. That is that's our assessment. Now coming to diversification. Obviously, once we come to know of this change in the business policy to protect our business, obviously, we have to do various other things to make sure that our revenue and profit growth, how to maintain that and how to keep on track. So we have done various things, including within Microsoft looking at various different options outside Microsoft what are other businesses possibilities growing towards associated services around the platforms. So there are many, many things which we are trying to do now. And hopefully, in next 4 to 5 quarters, 6 quarters, we'll be able to draw down on some of the plants which are actually going to work. and we'll continue to focus on them. And that is what is our strategy to hold on to our business and continue to grow. I hope I answered.

Yes, got your point. But earlier, we used to say that our gross contribution would -- is expected to grow at 15% [ CAGR ] in the medium to long term. So that adjunction continues? Or should we -- like you see that certain because of the changes, there could be certain headwinds should be there in this domestic business?

So [indiscernible] is such a large change in the policy, definitely, there will be certain headwinds. And considering the fact that we operate on it with most of our customers within the large enterprise segment. There can be a few hits and misses here and there based on the Microsoft policy. So there will be some headwinds. But as I said and as Samir also explained that knowing this environment, we have our diversification strategy. So we have tried our best to make sure that in the next 2 quarters, we come back to the growth, what we had discussed earlier.

Got it. And Samir, my next question is now in your presentation, you have mentioned your net new deal TCVs number. So between FY '22 to date, you mentioned that there is a net new deal TCVs of 467 million. But if I see the incremental revenue from FY '22, it's just 132 million. And what I see that there is some nonlinearity. So could you please help me understand that why there is a gap between revenue growth and the deal TCVs.

Yes. Ashish, so the deal that we announced, these are for multiyear deals. Some of these could be even 3 years, 5 years, 10 years as well. So the order book that you might be referring to, I don't know which number you definitely have in mind, but maybe Jagan can build on that. These are generally for the total contract [indiscernible]. In the term of the contract, which could be 3, 5 or 10 years and maybe sometimes even longer. What you're referring to the growth is the revenue realized in the year, which, of course, will be lesser than the overall deal book that we have booked.

So you are saying that there is no revenue leakage has happened, and so the growth will come back in the coming years?

Yes. So those deals that we have won, they have been that the order has been booked. So as time moves forward, we'll continue to realize revenue from the orders that we have booked already. So there is no concern on that front.