Sonata Software Limited (SONATSOFTW) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Sonata Software Limited Q3 FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jagannathan, CFO, Sonata Software Limited. Thank you, and over to you, sir.

Good morning all. Welcome to the Earnings Call Q3 2020 of Sonata Software. I have with me my colleagues, Mr. Raju, Chief Delivery Officer; Mr. Ranganath Puranik, Chief Growth Officer of Sonata Software Limited; and my colleagues from finance, Sathyanarayana and Premnath Murthy. We will now get into the details of the financials for this quarter. Mr. Srikar Reddy, Manager -- CEO and Managing Director, will join us in a few minutes, a little later. I will give an update about the numbers now. The consolidated numbers for Q3 financial year 2019-'20. The revenue stood at INR 1,236.9 crores, a sequential growth of 75.9% on Q-on-Q basis and a growth of 46.6% on year-on-year basis. Our EBITDA at consolidated level was INR 118.3 crores, sequential growth of 6.2% Q-on-Q and year-on-year growth of 24.4%. Our PAT for the quarter was INR 75.9 crores, sequential of 5% and Y-o-Y of 18.4%. The consolidated head count for us was 4,177 employees as on 31st December 2019. The ROCE at consolidated level is 39%, and return on net worth is 37%. The consolidated DSO is at 45 days as on 31st December 2020. Now the update on International business. Revenue for the quarter was INR 329.8 crores, a sequential growth of [ 5.4 -- 5% ] and year-on-year growth of 16.1%. The revenue from International business contributed 26.7% of the consolidated revenue. Our revenue growth in USD is $46.8 million quarter-to-quarter, which had a sequential growth of 3.1% on -- 5% on constant currency basis. The revenue from digital components stands at 25 -- at 38%, and IP-led revenue stands at 25.1% of the services revenue. EBITDA for the quarter in the -- from International business is INR 91.6 crores. This reflects a 27.8% EBITDA percentage. The sequential growth of the EBITDA was 2.4% and year-on-year growth of 20.6%. The PAT for the quarter was 57.8%, which is 17.5% of the revenue, the sequential growth of 2.4% and year-on-year -- sequential growth of 3% and year-on-year growth of 11%. The rupee rate for the third quarter was -- [ exchange ] rate was USD is INR 73.6, and EUR is INR 84.7, and GBP was INR 95. We added 9 new customers during this quarter. International head count was 4,028 as of December 31, 2019. Return on capital employed was 42%, and return on net worth is 40%. The International DSO remains at 42 as on Q3 2020. Now the update on Domestic Products & Services. Revenue for the quarter was INR 912 crores, which reflects sales quarter-on-quarter growth of 128.5% and year-on-year growth of 61.9%. This contributed about 73.7% of our consolidated revenue. EBITDA for the quarter was INR 27 crores, which is 3% of the revenue with a Q-on-Q growth of 19.7% and year-on-year growth of 38.3%. PAT for the quarter was [ INR 18.1 crore ], which is 2% of revenue. This quarter-on-quarter growth was 12.1% and year-on-year growth of 50.1%. The -- this contributed about 23.8% of the consolidated PAT. Domestic head count remains at 149 as on 31st December 2019. The return on capital employed was 33%, and the return on net worth was 30%. The domestic DSO remained at -- domestic DSO is at 47 days as on Q3 2020. With this, I complete the financial update for Q3 2010 for Sonata's -- on consolidated basis both for International business and Domestic business. I hand it over back for the questions from participants.

[Operator Instructions] The first question is from the line of [ Krishna Parikh ] from [ Summit Share Capital ].

Can you tell us what portion of the International revenues are onetime versus recurring?

Look, this is -- we -- there's no onetime revenue assets. The concept business, like any other services business for us, this has 2 elements to it. Something that's IP-led revenue is there. IP-led revenue is a differentiator that can be the primary driver for the revenue from customers with the IP. But then these services component to that. We don't carve out separately for the subscription on our IP revenue separately. This is -- we classify this as an IP-led revenue. So we may not be able to take it out as onetime revenue because this is a continuous revenue coming from customers.

But wouldn't when you acquire a new customer, there's a onetime portion generally that you have? And then there is a maintenance annual contract. So you can't differentiate between the 2?

We don't different -- I mean we don't differentiate that way. What has happened is this one -- this revenue of an IP deployment with the customer, there will be additional revenues also coming in. This is a holistic contract in there digital transformation, and we don't call out separating on what has led to IP and not because always there will be multiple engagements with the customer. Different types of contractual commitments will be made to the customer, so we don't call out this way.

The next question is from the line of Vimal Gohil from Union Capital.

Sir, I just missed the head count numbers. Could you just give me the Domestic head count and the International head count once again, please?

Yes. The total head count is 4,177. With international head count, there's...

4,028.

4,028.

Okay. Sir, 2 questions on the IT services space. One is could you -- what explains the weakness in the travel vertical for this quarter? And what's your outlook over there for the medium term?

Yes. This is Srikar Reddy here. So as I said many times, travel vertical is primarily driven by one large client. So as I said, there is no weakness.

So do we expect this to come back? Or what is leading to this maybe a weakness in growth?

What is your definition of weakness in growth?

So if I were to check, I mean, your travel and transport vertical has actually de-grown this -- I mean, this quarter by 7%. So I just wanted to understand what has led to it.

Yes, I've said it, this is primarily driven by one large client. And we have said that, that is stable, so there is no reason to be having any concerns on the revenues per se from that vertical.

Okay. Okay.

Yes.

Any -- so a very strong performance from the domestic base this quarter. Was there any onetime element over here? I know this is a project-specific business but...

No, it's not project specific. As you know, the Domestic business is mainly comes from reselling software. And as we mentioned in our results that the big growth in revenue is on account of one single large transaction, which has driven the huge growth in revenue. But overall, I still think I was there at the beginning of the meeting. So overall, I think the shining star for the performance last quarter was our Domestic business. And we will continue to see that trend in our Domestic business as we go forward. And as I said, we especially measure the business on our gross margin, and we have seen an extremely healthy growth in the gross margin in our Domestic business.

Fair enough, sir. Sir, could you give me what was the contribution from Scalable and Sopris? How have they panned out? What is the progress there?

That's more or less -- I guess Scalable has been flat. We have seen some growth in Sopris. As I've said, these businesses are more project-based businesses. We need to convert them into more accounts-oriented businesses. I've said that will take about 18 months from the time of acquisition. So we will see this continued waviness in these revenues. But overall, I think the -- at least in the Scalable business, we are seeing good traction. I think we have got some good new clients in Australia last quarter. And the commodity trading platform, which we acquired from them, is showing promise not only in Australia but in the rest of the world. Sopris, as I said, it's still very heavily still U.S. focused. We have yet to take their -- or this industry capability to the rest of the world. And I think we have done much better with the global delivery model with Scalable, so we will start seeing better margins there. And Sopris has taken a little bit more time. But I think both are in the right direction.

The next question is from the line of Harit Shah from IndiaNivesh Securities.

I just wanted to get a sense on the main drivers for the growth that you saw in your retail verticals generally in a quarter, where generally a lot of your admittedly much larger peers have called out that they've seen some sort of slowness in this vertical. You have seen fairly healthy growth of double-digit growth. So what is the main drivers out there? Is it -- does it have anything to do with the mix between CPG and retail? Is it that there's a higher cost...

I think as I've said many times, we're a very different company. We are IP led. We are Platformation led. Most of our business is growth business. We don't have too much of legacy commodity business in our portfolio, so we don't have to replace large losing revenues in our portfolio with new revenues. So I think we are a very, very different company in terms of what we -- our value proposition to clients, our strength with our alliance. It has nothing to do with the verticals we operate, it's really our value proposition.

Okay. So I mean -- okay. As far as your OPD business is concerned, that also -- apart from travel, that also -- does that business also have seen a fairly steep decline in this quarter. So anything to call out there on that front?

No, I think the way you should look at our overall businesses is some of the verticals are more broad-based, and some of the verticals are more narrow-based because the travel vertical is really -- what we have said is that it's really focused on mainly leisure travel, so the revenues could be lumpy. When we get clients, they'll be large in nature, and the revenues go up substantially. OPD business is primarily driven based on our Microsoft alliance. And so the way we are monitoring growth strategies, growth across all the verticals, so it's not that we are saying every vertical should grow at the same proportion. And if you see our investments in IP and so on and so forth, and acquisitions and all that, there are lots more in these other verticals. So yes, it's not a relative business for us, it's just where we are making investments, where we are seeing growth. You may see sometimes some verticals being flat and some other verticals growing much faster, but that's the nature of the company we are, really. It's not anything to do with lack of growth or lack of traction or whatever it is. So I would rather look at the overall growth of the company.

Okay. Fine. And my last question from my side. In the others, apart from the industry key verticals, the focus of yours, you also have a fourth vertical, which is classified as Others. That vertical has seen a very, very healthy growth in this particular quarter. In fact, they have grown by almost 20% sequentially. So what would be the components of this particular quarter?

Components of any of our other vertical for all our company, whether it is financial services or health care or service industry and so on and so forth. And typically, those other sector clients in this space tend to be larger, with a larger footprint to grow kind of stuff. So it's a mix of various -- all the other clients we have, which we just put it into this Other vertical.

So fair enough. So would you consider maybe breaking this out a little bit later on, maybe in future quarters...

No. As we've said, I think we have started not yet reporting separately our commodity vertical, our service industry vertical, which are the 2 acquisitions we've made. Maybe we will do that when they get to a certain scale. And both of them, again, tend to be larger footprint clients as opposed to, let's say, the OPD clients or maybe the retail clients. So we will do that at an appropriate time. At this stage, they're not significant in numbers to report separately, but we will do that. We'll definitely not be reporting financial services or whatever separately. But that's not -- because it's not a focus vertical, we are not making investments and so on and so forth.

Right. Right. I got that. Okay. And do you plan to reinvest some of the excess margin that you earned in your IT services business this quarter? But I think you have mentioned your 20% to 24% as a comfortable EBITDA margin range. So this quarter, you did 25% plus. So would you know -- you looking to maybe reinvest some of that back into the business? Or how is that -- the outlook out there?

No, no, sorry, I didn't get your question.

Yes. So I'm saying that in your IT services business, generally, I think you are comfortable, margin rate.

Yes, yes, correct, correct. Yes. Yes.

So this quarter, you have done well above that range. So my question is are you planning to reinvest some of those gains back into the business. What is the outlook out there?

No, if you -- I think we have put our investments into key areas in our business, in our investors' deck, which is either R&D, IP, sales and marketing. We continue to invest money into our business. So yes, it's not based on that we make extra margins, we will invest in our business.

So you mean to say 25% or thereabouts is a sustainable range now?

No. As I've said, it is -- yes, I mean with all the levers which are in our control are in the 22%, 23% range. If there is a swing in the ForEx or whatever it is, then these margins can go up. That's what I've said in the past.

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

My question is on active clients, like was there a decline in this quarter versus last quarter in the client count?

Not in the, I would say, what you call material clients. I'm not too sure if there is some tail kind of clients, where it is a decrease. But overall, I think -- I mean we are seeing much better quality for our client acquisition, which you saw about 9 clients we acquired last quarter, the quality of clients like we acquired last quarter in terms of their potential for growth is a lot more healthier than the previous quarter. So I'm not too sure about the total clients, this thing. And they are definitely non-material clients that have decreased in number.

Okay. Second, sir, on the quality of clients, so you disclosed this Fortune 500 and 1 million-plus accounts.

Yes.

1 million-plus is more or less [ account we've seen but ]...

No, because when we only earn, we'll tell you. We're not going to base it based on potential.

Sorry, I missed that. This is based on?

This is actually that we earn 1 million of new clients. It's not based on that we will be this -- that the client has a potential to earn 1 million. So what I have said is the client of clients we acquired in the last 2 or 3 quarters have a lot more potential than the past, but they won't be reported here because they haven't yet earned 1 million on a run rate basis to the company.

Right. But in 1Q, we had these 28 clients, which is now at 25-odd level. So we've lost some 2, 3 clients in 1 million-plus record in the last 6, 9 months.

I think we've said that last time, and I think I told my team to correct it. It's wrong information. I'll ask them to correct it.

No. But it's not the way to...

Yes.

And similarly, for Fortune 500, the number is not moving up, so to say, so is there a strategy to move towards lower...

No. As I said, our sweet spot is like would be Fortune 2000 rather than Fortune 500. I've said that in the past, clients up to like $8 billion to $10 billion, $2 billion to $3 billion to $10 billion is the sweet spot we are operating in. So they will tend to be not in the 500 but in the 2000 category.

Okay. Great, sir. And lastly, on utilization, what is the number currently and to what level you think it can operate on given our current visibility?

I think the utilization, as I've said, the levers are more or less fully utilized. I mean they could be very marginal 1% or 2% at best.

So is it like closer to 89% as of 3Q?

Pardon?

Is it like close to 89% for third quarter?

Yes. The utilization is in the same range. Exactly. It has not varied from last quarter to current quarter. It remains at that level.

It remains at the same level as last quarter?

Yes, yes, yes.

So is there an increase in pricing? Because then our head count is more or less similar, but you are showing good growth on the IT services side.

Yes. If you see the revenue per person, average revenue per person, it is going up.

So this is more like -- because we missed the regional split as well. So is it more like portfolio play, or you think pricing in itself is sort of moving up?

No, no, this is a seasonal impact you'd have seen in the quarter 3, the total efforts will come down, but building will continue to happen. So that's the reason why the rate may have been a little higher. This has always happened in Q3.

So we should assume head count addition to resume as growth comes back from fourth quarter or first, right?

Yes.

Yes, yes, yes.

The next question is from the line of Andrey Purushottam from Cogito Advisors.

Yes, this is Sangeeta Purushottam. Actually, what I wanted to understand was that with -- our PAT numbers, the growth has been lower for the first 9 months in the International services as compared to the revenue growth. Just wanted to understand what were the dynamics at play here, why is this happening, because the EBITDA growth is stronger, but at that PAT number, the growth rates are lower. The second thing is that in terms of the tax rate, the effective tax rate seems to be about 27%, 28%. If you could just guide us as to what kind of tax rate we're likely to see going forward.

I think that you answered your question, Sangeeta. I think our effective tax rate has gone up by about 4%. It was about, what, 20...

26. It grew up to...

29%.

[ 29.6%. ]

I see. Okay. And why has the tax rate gone up? And do you not benefit from the capital corporate [indiscernible]?

We are -- as I've said, you're not in the last call, we are exploring with our tax advisers about opting for the lower tax rate. So considering the business growth and so on and so forth, so we will make a call on that, hopefully, this quarter. But let me just warn you right now that even when we'll make the call, we may not make a big difference this year on the PAT number because there will be a fairly large amount of deferred tax [indiscernible]. So it won't be significant, the PAT number for this quarter. But going forward, next year onwards, if we offer the lower tax rate, one would start seeing some better PAT number as compared to the past.

I see. Okay. And a related question was, because of the accounting change for leases, there's been some shift, right? The interest cost has gone up. And I think depreciation has...

Yes, yes, you answered your question, Sangeeta. Yes, the other reason why there is a difference between the EBITDA growth and the PAT growth because of the accounting of the leases has, what, [indiscernible] because it's treated as finance costs, yes. That goes after EBITDA.

Right. So my question was that at the PBT level, has the accounting change made any difference at all?

At the PBT levels, we have numbers?

PBT numbers...

Yes, [ I will share that ]. But if you have any other questions, otherwise, somebody just mentioned that number before the call ends.

The next question is from the line of Madhu Babu from Centrum Broking.

Sir, firstly, on the Microsoft strategy, so could you give us -- we have been, obviously, investing in -- more in [ that area ] other than Dynamics. So could you give us some view on that? And currently, what are the team size in other areas? And how much is the team size in dynamics in all broadly on the Microsoft strategy?

Yes. It's totally about, I think, 2,400, 2,500 totally in Microsoft. Dynamics is about 1,000...

1,100.

1,100 is Dynamics. The rest is -- cloud is your data app dev, so on and so forth.

Okay. In other areas, there also we would be attaining a preferred partner status gradually?

The other preferred partners, that's not a challenge. But obviously, one needs to work on these things. They take time because, obviously, there are other partners, too. So we are trying to expand it to both data and what we call platform engineering using our Platformation approach as a digital partner. So that's a part of the plan for the current year, Madhu, so because, end of the day, I think the only way we can see much larger, these sizes, is that we do all the 3 pillars.

Sir, and just on the Others vertical, it's almost double in the revenue almost in a 4-, 5-quarter perspective, not double but very significant growth. So is it that some of these verticals -- subverticals we are entering through Microsoft and able to get there?

Yes, that is one. Some of the acquisitions like service industry, et cetera, are going into that, Madhu, like, so for instance, so on and so forth. We are in the service industry, which is not a vertical which we report separately.

Okay. Okay.

Yes, yes, yes.

And another one is the good conversion on the cash, if we see there's a good improvement in the cash position...

Yes, yes. I think that we're unnecessarily worried last time. Our cash conversion has always been good. Only thing, unfortunately, on the quarter ending, it didn't show up well. But if you see our interest payments and all that, they are decreasing steadily over the year. So actually, we were cash positive throughout the year on more than 200, 250, 260 days kind of stuff. It's just that large transactions at the end of the quarter we're tending to show the cash lower. But I think you should look at other metrics rather than the pure cash in the books at the end of the quarter. I think they've asked our team to start sharing more detail about cash positions on a more frequent basis. So actually, this quarter, it just happened that at the end of the quarter, the cash position is much better. But overall, as a company, I think the cash position was always good.

Yes. So last time, you said the domestic economy was a bit -- so that is behind?

No, no, that's what I said. Despite this, I mean we have to give a little, but not that things were going bad or we're putting more. Listen, that's why I said you need to see it more frequently and not at one single end-of-the-quarter figures because that may not give the correct picture.

Sir. And lastly, the dollar revenue within IT service, I missed that, and CC growth for the quarter in IT Services?

The dollar revenue was $46.8 million, I think, which is about 3-point-odd percent, 3.7%.

3.1%.

3.1% in dollar terms. And in constant currency?

Constant currency, 5%.

On a rupee [ estimate ] ?

Constant currency estimate.

But GBP will be a tailwind as well, so constant currency will be how much? Because GBP has appreciated this quarter, so we get around 20% from GBP. So CC would be around 2.5%, right, if I'm right?

Yes.

The next question is from the line of [ Vipul Shah ], an individual investor.

Sir, what is the IP-led revenue as a percentage of...

I think it's about 25-odd percent.

25.1% -- 20%, 25%, yes.

So is it part of the digital revenue or it is over and above digital revenue?

So like part of digital revenue. Actually, most of it should be digital revenue unless some IP is still on-prem or something like that.

So it is part of the digital revenue, right?

Yes, yes. Correct, you are right.

Okay.

Most of it. Yes.

The next question is from the line of [ Rishit Shah ] from Dhanki Securities Private Limited.

So 2 questions. One is regarding the breakup of revenue between U.S., Europe and the rest of the world?

Is it not there? Is it there? It's not there?

[ Breakup ] of revenue, you're asking about, right?

Yes.

One second.

If it's not there and it was there earlier, I think we'll just add it to the investor deck and publish it.

We'll be happy to give it to you.

Okay. And the second thing regarding the one large order that we have -- I mean the one large deal that we have done in the DPS segment. So what is the kind of margin profile over there? And what...

Not retail segment. We said one larger then in the domestic segment, we said.

Right, right. In the DPS, right, domestic segment only. If so, what's basically the margin profile over there? In the domestic segment...

Margin profile there would have been about 2% to 3%.

2.5% to 3%?

Yes, yes, yes.

Okay. And going forward for -- in the domestic segment only, so what is the margins that we expect, sir? It will be...

Gross margins only, right? So I said don't look at net margins. I've said it many times in the past, the only way we measure that business is gross margins, not net margins. I think we grew gross margins quarter-on-quarter almost by about 10%, 15%. So we will not see that kind of a growth. But definitely, we're extremely bullish about our domestic business, and we will see steady growth in the absolute margin in that business.

The next question is from the line of Ashish Aggarwal from Principal Mutual Funds.

Yes sir, most of my questions have been answered. Just wanted to get one clarification. So what was the CC growth in the IT Services business?

I think, yes, we just answered Madhu, it's about between, I think, 2.7% to 2.9%, something like that.

The next question is from the line of [ Minaud Makarya ], an individual investor.

Sir, I have 3 questions. The first one is in the domestic product business, is it restricted to pure reselling? Or is there any other value addition also?

Yes, there is value addition. But I think I mean if we have done -- we were doing this business in any other market in the world, we would have got a lot more value for what we delivered. It's not purely reselling. There's no such concept called reselling. Nobody will buy anything from you. It's just that there is value added both in license consulting, advising on what to buy, when to buy, how much to buy, all that kind of stuff. There is also some amount of rebate they could probably get for providing point -- proof of concepts and so on and so forth. But because the volumes are so large, these things don't make a big dent to the margin. Yes. But it's not a pure distribution business like distributors like Ingram Micro. We are not in that business. We are a value-added reseller. That's what we are called, a large-account reseller. Yes, yes.

Okay. And is any of our IT or Platformation initiatives, namely in the international IT Services business, also driven by the learning we have from our alliance with Microsoft or other alliances?

Other way around. We are working with Microsoft to take our Platformation to market. Okay? Because Platformation, as you all know, is Sonata's proprietary approach to doing digital transformation. So today, that is the only singular where we go to market and every service or IP or whatever in the company gets offered under the Platformation umbrella. Okay. So when we go with Microsoft to the market, it is saying let's go apply Sonata's Platformation approach to getting some clients together. And when we do that, your technology will sell.

Okay. Okay. Understood. Okay. And my last question is -- and sorry, moderators, I'm asking [ multiple ] questions. So while I understand that you are different from others due to IP Platformation alliance, so it's different, but especially in the IT Services business, what makes you earn more margins? Is it like on the pricing front because your offering is unique or it's different from others? Or is it in the operations front? Like because of the Platformation, because of your IP or whatever, there is...

I think -- yes, but it's a mix of all these things. Obviously, as I said earlier, we are in certain services. We are in premium services not because we are charging premiums because the market is paying premium to those services. Okay? It's not to just me but anybody else also. Okay. It's not that I'm charging a premium to the market. I'm not, okay? This is I'm a premium services, so that's an easier way to look at it. Second is, obviously, because of Platformation and then there is some IP usage in delivering some of the services, there is obviously a little better margin. And third is overall management of utilization and cost of resources and all that kind of stuff. So that's the third, I mean, really, if you want to look at it.

The next question is from the line of Rohit Balakrishnan from VRDDHI Capital.

Sir, I have 2 questions. One was, sir, on your margin both in IT Services and in the domestic part. Both of them have expanded. IT Services around 27%, 28%, and you've always said that it's closer to 20%, 22%. That range is more comfortable. So I mean I just want to understand, is there anything specific that is leading to this? And also on the domestic side, while it is more maybe a specific order-driven and things like that, but just want to get a sense what is your guidance or what is your -- what should we really look at as a sustainable margin on both these businesses?

But I think the domestic business, actually, a percentage margin is lower than last quarter because of a single large transaction at a little lower margin percentage. So that's why I said last many times, don't look at the margin percentage but look at the absolute margin growth. And as I said just before, we have seen on a quarter-on-quarter growth of almost 10% to 12%, I think, in the domestic business margin. And that said, that is not sustainable. We were earlier doing like 1.5%, 2%, I think, quarter-on-quarter growth. But I think, as I said, we are bullish. We could see more like a 3% to 4% margin growth on the domestic business. This quarter, as I said, one large transaction was an aberration. But overall, we see a lot more traction because we have expanded our business now to include system integration and hardware and so on and so forth with the same client base, a little better margins. So I think that's why we are a little bit more optimistic there. And the international business, as I said, is a mix of so many things. So that 22% or whatever is a good metric to have. Anything more, we'll take as a bonus. But we are not do anything specific now as what we have not done in the past. So there is no new margin improvement program in the company kind of stuff. So we're just doing whatever we are doing, and sometimes it may just yield better margins. But it's not a very heavily -- management is up to the 22%, 23% range. After that, we take a bonus, whatever we get.

Sure. Sure. And sir, the second question I had was that if you look at the client addition over the last maybe 10, 11 quarters, it's been quite robust. So -- and if you look at the revenue contribution from the new clients, it's about 15% as of last year and I think similar numbers, 16%, 17% as of 9 months. So I had 2 questions here. So one was, sir, what is driving the strong addition of client addition? And I must definitely congratulate you because 3, 4 years back, you had talked about this as your like strategy going the new. You have strongly executed on that. So if you can just maybe talk a bit about this, what has led to this strong addition? And also, sir...

Yes, go ahead. Yes.

And also, sir, if you can maybe give a broad idea of what the share of new customer revenue would be maybe, let's say, 2, 3 year-ends?

Okay. I will get you that last one kind of stuff. So I think it's a combination again of various factors. It's been the combination of our investments in more sales, presales. These things take some time. So there is a much more robust now sales engine which is operating the alliance, which we have kick-started and made investments, et cetera. That is working much better. Our value proposition is getting better, both from an IP-led and Platformation, where the track record, as we've been, and word-of-mouth is also yielding to these things. So a whole lot of factors, I think, because I mean end of the day, as I said, it's finally, what is your value prop and what is it that you are offering to the market. I mean to whatever extent, I believe we are offering currently what the market wants, let me put it that way, and seeking to invest more in. I've said this many times in the past that we are more in spaces where we believe the market is growing rather than shrinking.

Sure. And on the other part, sir, like you said that you would give some -- I mean what the new revenue from the new guys , what would that -- how that would [indiscernible], next couple of years or 3 years?

That's what -- so I think I should give you a quick definition of how we define new clients, right? Otherwise -- so it's a -- for us, it's a cumulative of what we have acquired in the last 3 years kind of stuff. So obviously, that 3 years will keep changing as time goes by, so I think this current trend of about 20%, 25% in any 3-year period before they become then old clients. And then obviously, I think all of you need to understand that there is obviously a churn. There are sometimes some client shrink. And I think what we are doing is that despite the traditional shocks or whatever of client shrinking or some not-so-big clients stopping business, et cetera, we are showing this growth. So without adding these new clients, we wouldn't have been able to do this if we were only at the -- depending on a steady client who've been with us for a long period of time.

Sure, sure. And sir, just again on this point, there would be sufficient opportunity to grow with these...

Yes, definitely. That's why I said once they become the 3-year mark, they will then go back into the old client reporting, if you want to report it that way. The 2 buckets are people who have been recently acquired over the last 3 years and then people who have been there before that. I mean that's the way we look at it.

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

Sir, my question is related to the increase in margins that we've seen in the third quarter. So every third quarter, there is a sharp increase in the margin's improvement in productivity. And as said earlier, there is some seasonality to do it. So if you can explain what the seasonality is, now a little better? And what margin levers we have from here apart from IP-led -- the IP-led revenues because all other metrics seems to be operating at the peak levels?

Right. I think I've answered this question to 2 or 3 people who have asked me before. So all I said is that we are managing up to 23%. We will also dig into it why Q3 is more than others. We will get back to you because from our side, there is no extra lever or whatever happens in Q3. So we'll look at it if you started this thing you asked. Otherwise, as I said, the levers for us have been that the kind of services we are offering, IP-led, Platformation, utilization, automation and so on and so forth, and don't see too much lever available there to increase it. The percentage, significantly, we have always been saying that the margin growth should come from a revenue growth and not from -- apart from it, there is a huge currency benefit which is obtained, and that can help. But given the currency being flat, then I think we have exhausted all our levers more or less to increase our margin percentage. If there is something better happen, I mean it's not like some heavy management of that, but it's just that, that it's happened. But we are quite happy to look at this 23% or 22%, and focus is on growing revenue and gross margin.

Sir like in terms of seasonality, is there any kind of seasonality with the...

No, that's what you asked me. So you'll find out, but there is none as far as I know. I mean if there is some mystery there, we'll let you know.

Okay, sir. And sir, the second question is on the revenues from Microsoft. So I know, typically, we see that. Lastly, we have seen that the OPD revenue and the AX revenues were actually growing in sync. So as you have mentioned that you are now expanding the Microsoft services to other verticals also. So that is leading to the strong growth in other verticals apart from OPD. So can you mention these subverticals within travel or within retail or within others where you're seeing increased adoption of the Microsoft offerings?

Yes. So OPD is like also with Microsoft. But as I said, then we have retail, which you mentioned. Travel is not very significant in the Microsoft portfolio. Microsoft doesn't really travel as a separate vertical, so whatever growth we need to drive, we need to drive ourselves with our IP, Rezopia and so on and so forth and rail and things. All other verticals, the service industry, which we acquired from Sopris, is a focus. Commodity, which we have acquired, it's not expressly explicit vertical for Microsoft, but we are talking to them, explaining to them the potential in the vertical to see whether we can do joint go-to-market. Then CPG distribution, as where we have a vertical, is again, while it is mixed up with the retail, that's again a focus vertical.

Okay. And sir, the last question would be on the retail vertical. So as you have mentioned and noted, there has been strong growth in the retail vertical. But if you see the number of clients, it has fallen down significantly. And this trend has happened for the first time, if I am not wrong. So is there any kind of a planned pruning exercise that we are doing here or any change in strategy with retail consideration?

Yes. I think in the retail vertical, I think -- I mean, as you all know, there are companies which are struggling. So while we see growth, we will also see these threats to these companies who are struggling to meet up to the challenges faced by Internet companies. So you would see that. While there's a huge potential for growth, there is also the potential of certain people going away kind of stuff. So what you have seen this quarter, while there may be a growth in revenues, you might see the number may keep changing a little bit.

The next question is from the line of [ Vipul Shah ], an individual investor.

Sir, my question pertains to Slide 27, where you mentioned IP-led revenue is 22%, while in Slide 24, it is mentioned as 25.1%. So what I'm missing here?

25 percentage is the right one.

Sorry?

25.1% is the right one.

Okay. So in Slide 27, figure is not correct, right?

Yes, correct.

And in OPD, which are the verticals we consider in OPD?

Well, OPD is outsourced product development, ISV.

I didn't get you, sir.

Sorry?

No, no. In OPD, which businesses you consider under the head OPD? That is my simple question.

Yes. OPD is like companies, like software product companies that's our OPD.

[Operator Instructions] The next question is from the line of Vimal Gohil from Union Mutual Fund.

Sir, just one clarification. When you said that you're very positive on the domestic piece and you're also looking to expand your service offerings to maybe system integration and other hardware-related services, hopefully, sir, this should not really impact our working capital, right? Why it...

No, no. All I said is we already started, that's why you see this growth. Otherwise, if we had just done the business we were doing, given the situation in the Indian economy, we would have had a degrowth. So we have made up for this by actually expanding our product and service lines. That's the only way we could grow. So all I said is that's been done is all I'm trying to say. And we are then seeing the response, and that's why we are confident of going forward.

And just to clarify once again, IP-led revenue is 25.1%...

That's correct. That's correct.

Okay. Okay. 25.1% it is.

[Operator Instructions] The next question is from the line of Madhu Babu from Centrum Broking.

Sir, just on the IP Rezopia, has it got any big wins in the recent 1 or 2 quarters?

No. The last one was, I guess, first quarter, a little last quarter, first quarter this year. Nothing in this current year, Madhu.

Because I remember one of the theme park has also taken it, if I'm right?

No, no, no. It was -- the last one was the railway in the Middle East.

In the Middle East, okay. Okay. Okay. Sir, and incrementally, I mean the other IPs, any recent wins, if you can give a small update on the Brick & Click or the [ Kartopia ], which of them are doing well in the region?

The IPs which we are seeing traction are Brick & Click and CTRM, the commodity trading.

Okay. Okay. And just one more thing on the databases. So there are 3, 4 metrics which we are unable to get real revenue from on-site and revenue from offshore because that is showed in the graph, but we are unable to get the number because earlier, it was 44%. That number for this quarter, if you can give?

Yes. This -- the on-site revenue for the quarter will be around 42 percentage, and the remaining is offshore revenue.

42%?

Correct.

The last quarter, it was around 44%.

Correct, correct.

[Operator Instructions] Sir, we have one more question, and that's from the line of Amit Chandra from HDFC Securities.

Just like a few like bookkeeping questions. So can you please like provide the attrition number? What has been the attrition number for the quarter?

[ 15.1% ].

15%? 15.1%, okay. So we are seeing easing of the attrition. So earlier quarter, it was 16.2%, now it's 15.1%. Okay. And sir, on the revenues from U.S., Europe and RoW, if you can provide?

Yes, we'll update. We'll update that. We'll update and update the presentation and upload it.

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

All right. Thank you all very much for joining and all the questions. Thanks for your support. Sorry, I was not there at the beginning of the call, but I think I've covered most of what I wanted to say in terms of we are seeing good traction on all our strategic initiatives. As said, our domestic business has been a shining star last quarter, and we're very optimistic in what it does. I think the cash flows look much better than what they were. So yes, so I wanted -- that would have been my opening remarks. But yes, thanks all, everybody, and look forward to seeing you soon in any analyst conference or the next analyst call. Thanks again.

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. Thank you. ]