Sonata Software Limited (SONATSOFTW) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '21 Earnings Conference Call of Sonata Software Limited. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Srikar Reddy, Managing Director and Chief Executive Officer, Sonata Software Limited. Thank you, and over to you, sir.

Thank you, Vikram, and good morning, everybody, and welcome to the analyst call. First, the announcement of our Q1 results FY '21 yesterday. So when we met about 3 months ago, I think everybody were going through very, very uncertain times, both from a human perspective and obviously impact on business. And in our commentary, then I think, we had mentioned the facts of the situation as they were unfolding in terms of what had happened and what do we think will happen, what is likely to happen, what will we do? And most -- and a lot of things were still fluid, though we did obviously give some estimates about drop in revenues, drop in estimated profits for the quarter, but fairly uncertain how different industries will behave, how different customers will behave, what's going to exactly transpire and how things will shape up kind of stuff. So I think -- as we stand today and speak today, I think the good news is that things for us have turned out to be better than what we thought they will be, both from the quarterly performance, but actually really I think what the company did in the quarter to actually deal with the situation and be able to grow out its business in a meaningful fashion. So while the revenues, we had estimated it could be anything between 18% to 20% down, maybe they're a little bit more down also because some -- we might not have started -- restarted some projects on time and there has been, I think, a shift from on-site revenues to -- offshore revenues, I think, which have also shown up in the margins. But more importantly, I think it was absolute for the company to be able to work well. I think now it's about now 4, 5 months. And happy to inform you that 100% of our people work from home and they're working well. And my team said yesterday, I think our customer satisfaction actually last quarter was the highest in terms of the quality of deliverable and satisfaction of the customer. So things are going well in terms of us being able to do work. Second, obviously, was about how do we do the rest of the operations? Obviously, I mean, the internal operations or HR and all that, I think we had to -- like somebody said, we had to do so much of digital transformation that everything has become digital in the way we operate today from onboarding people to training them to onboarding them onto projects and everything, new people and so on and so forth. But more importantly, it was how we're going to deal with the external market. I think the good news is that teams have been able to adapt themselves well and actually, I think, work with both existing clients, and actually, more importantly, I think, new clients -- I think our traction in the last quarter with new clients, getting new opportunities into the pipeline, I think, was extremely good. So from a qualitative perspective, obviously, there was a big hit from our large clients. I think we're expecting a significant drop, which happened last quarter, but we see the client is coming back to life. And hopefully will not go back to where it was, but I think we'll see some reasonable growth in the client. And the other was obviously the nonessential retail, which is still not as good as where it should be. The other sectors, I think they'll be focused in the last few quarters for the agri business, utilities, commodities, service industry, and the -- we call the others and the ISV kind of stuff. So there, we see traction and we are able to create interest. So the pipeline, as we see, looks good. We believe that the worst is behind us, unless, obviously, there are some absolutely unforeseen circumstances. So what we are seeing is there are no further drops, either customers are restarting or are at least not are billing, but there are no drops to what the kind of work which is going on, which is good news. So going forward, it's clear, obviously, I mean, the many things we are focused on, ensuring we stay good with the current business, try to get back some of the business, which has been reduced because of these effects, but for that, the customers need to come back, start hoping for the deferred delayed projects to restart. There's quite a few of them. So -- and then obviously, go about trying to convert the current opportunities. And while do that to deliver on the services extremely well. The cost reductions we had announced, I think we had implemented, we're actually now trying to come back. So we made some changes this quarter of -- are calling back some of the cost saving reductions and things like that. And hopefully, we will do most of it by the middle of next quarter to go back to where we are. So the number of people have decreased a little. And I think for the current revenue streams, that's good. So I think that will show up most probably full effect in the next quarter results. So as I said, in our press release yesterday, I think we can look forward to a more positive future with growth in the next quarters. So that's, I think, a summary of our analysis, of our performance. We also acquired GBW last quarter and integrated it. Unfortunately, I think their business was very heavily COVID affected because they provide customer experience services mainly to retail and quick service industries, and so people couldn't go and do these kind of services. So that got affected. But we think that's a great platform and a good investment for the future. And when things turn around, I think it will add back to the growth and strategic differentiation of the company. So I'm not worried about that. I think it's a good, strategic investment in the right space, in the customer experience space for the company, while the business in the short term is affected. So that's a net-net summary. I'll hand over to Jagan, I think, he has the presentation for you, and we'll go through that. And then very happy to take any questions and comments and anything else you may have. Okay. Thank you.

Thanks, Srikar. Good morning, all. Welcome to our analyst call for quarter 1 2021. And just a brief presentation from our side on highlighting of financial performance. So for the -- this quarter, we had the entire organization move to work-from-home model. The second highlight for the quarter is we acquired GAPbusters Limited this quarter. Sonata made a strategic investment in training sustainability-related platform. Sonata won Microsoft Eagle award for 2019, '20 from Microsoft. So it's one of the prestigious awards won by us. Six new customers are added in this quarter. In spite of COVID situation, we were able to add customers in this quarter. Stronger cash conversion despite COVID headwind. Although our DSO has gone up, our net cash position has improved by about INR 110 crores this quarter. On the financial performance, this highlights revenue and EBITDA on PAT the growth. As mentioned, we had a -- at the consolidated level, both India and -- India business as well as the Internet IT services, India business has improved the revenue this quarter. International IT services, as mentioned by speaker in the month of March, as we have highlighted the second largest customer, Europe-based travel customer, they have suspended their operations. So the revenue is expected to have impact for us. However, we have given a warning on the profitability of about 40% drop. We were able to take action, strategic action, and able to bring down the reduction in the cost, which resulted in the drop in profitability, it was only 24% this quarter. And it's very clear that this is the kind of reason it is. But still, we were able to pay up EBITDA for the quarter and the PAT for the quarter is -- the growth has been -- the quarterly -- there is a degrowth on the EBITDA, but on the overall percentage -- as a percentage, we are still doing around 23.2% of EBITDA. This is considering the current situation, we have done well for this quarter on the International IT Services. We are continuing to focus on delivering the better results in the coming days. Then about the domestic business, the revenue has grown compared to last quarter. There was a quarterly revenue growth has been about 3.9%. EBITDA growth -- quarterly EBITDA growth has been about 0.9%, and the PAT has been about 2.6%. We continue to focus on the improvement in the gross contribution, as Srikar mentioned every time. We measure this business on gross contribution, and we continue to focus on incremental execution for this. This has been done very well, considering the current situation in the Indian economy and the performance of other businesses. This is the financial summary. And for -- it's clearly mentioned here, international business revenue -- for the quarter-on-quarter, there was a drop of about 15%; and year-on-year, there was a drop of 9%. And domestic business, there was an increase of 12% quarter-on-quarter and 19% year-on-year. On the EBITDA front, international business, there is a drop of about 10%; and domestic percent, there is a drop of a little more than that. The consolidated level, the EBITDA drop has been about 15% year-on-year. It has been a little more compared to last year. The PAT, our international business has a drop of 15% at PAT and domestic business added up about 36%. But overall, the revenue was improved in the domestic business. So there is some amount of operational metrics. This is just to give a summary of whatever we have given in the investor presentation. Our U.S. geography continued its position. It is -- about 64% of our revenue comes from U.S. The percentage has increased more because of the drop in Europe. All of you know that our leading customer in Europe the revenue has -- their revenue has dropped. That's one the reason. Otherwise, we have really competency wise, and we have given the revenue on each of the industry verticals also. Industry vertical, there has been drop in the travel vertical for this quarter. That's the highlight of this. On-site portion has come down because of the changes in the situation. And also it has been improving in the last couple of quarters, and we continue to -- because of the changes and because of the situation in on-site, it has come down compared to last quarter. These are the broad financial metrics which we wanted to share with you. Now there are some more of this operational metric. This will be uploaded in our website for you people to refer to. We will now hand it over for the questions. Thank you.

[Operator Instructions] We have a first question from the line of Madhu Babu from Centrum.

Congrats on a strong execution at the margin level. Sir, just on the travel vertical. So now assuming the operations can improve from October onwards, post COVID. So how do you see the recovery in the top account in travel? I mean, when can we expect a strong swing in the second half because the fall has been steep. And second, on the new account additions because from the last 3 acquisitions, [ Scalable ] and GAPbusters, most of them have a decent client base. So how are we mining the services in these accounts? That's it from my side.

Okay. So as I said last time, Madhu, that the client, we would be very happy, would go back to 50% of where they were by Q4. So as I said, we've also seen some change, and we'll see some growth from the client even in the current quarter as we speak. And hopefully, they'll continue to do business because there are these continuous ups and downs because suddenly, they have again stopped travel back from Spain. And but there is -- I think they are now taking that as like as life-as-usual, that the start and stop will continue. But the good part is, as long as I think they're funded by the government, and they believe that technology investments are where they should put their money in right now, and that will help them deliver a better product at a much better customer experience at a lower cost in future, we'll continue to do that. So I am expecting if there is no untoward incident, that we should see a steady growth from the top clients from this quarter onwards, heading towards into Q4. But as I said, it won't -- I don't expect it to be more than 50% of what it was. It has come down to about 10%, 15% So we will see -- I hope that we can go back to at least 40% to 50%. But we'll see steady growth starting from this quarter. And to answer your other questions, obviously, the intent in all these accounts is to mine these accounts. And some accounts, I think we have seen some mining, which is showing up in the results, both, I think, a couple of accounts from Scalable and I think one account from Sopris, GBW, GAPbusters, I think it's absolutely new, we are still integrating. And then figuring out what their customers will need. And I said, most of their customers are in the retail space and are in a little slowdown mode. So it's -- right now may not be the best act to go back to them to -- with the offering. But we see that as an opportunity -- and things change, we're also trying to take reverse, take the GAPbuster offerings to our clients who are non affected sectors because customer experience is a solution which is needed by every industry. So that's, I think, what we're trying to do. I hope I've answered your question, Madhu.

Yes, yes, sir. And just on GAPbusters, the annual revenue of INR 10 million at the time of acquisition. So what was the current quarter contribution? And they do a lot of surveys and all that. So I mean how that will align with our business? At least from my understanding, what I've seen on the website.

Okay. So what GAPbusters is, the customer experiences, they have a platform from designing the survey, like a Qualtrics or a Survey Monkey or whatever it is, from designing a platform to delivering the survey. The survey can be done either yourself or by a third-party who visits the location and then does the survey. And then automatically, the survey results gets uploaded into the platform. And then there's an analytics platform, which is there, where this data goes in and then the clients can then online view the survey results. So the largest client, I think, has about 10,000 locations, which they view. It's a large oil company worldwide. And so they have every single retail and gas station on this system. And so they can see at an area level, what is the analytics and different parameters. And the second thing is then they're able to take it and connect it to the operational data to see the correlation between customer experience and like operational performance, and then they are using it actually as a metrics to measure the performance of their employees and so on and so forth. And then on top of it, there's an action tracking system. So the -- where it fits in for us is like we'll be able to combine the customer experience data with the operational data, which we are already having today and offer a unified customer experience management solution to our clients. I think that's where we are heading, both investing into the platform and building on the capability of the platform and going to some of these existing clients and offering this. So that's the -- this thing. I'll ask Jagan to give you the numbers of what they were this quarter and what were the annual revenues last quarter. Jagan, can you answer the question?

Yes. Yes. For the quarter, there's about USD 800,000. In terms of the Australian dollars, it's about AUD 1.3 million.

We have a next question from the line of Baidik Sarkar from Unifi Capital.

Given the circumstances, a very good set of numbers. Two broad questions. The ex travel business seems to have been almost flattish Q-o-Q. Just to get us a sense of what is driving traction here? And also explain to us, what is your definition of retail essential? And what's been the experience of clawback here in, say, June, July and August? The ex travel business.

Okay. There are many questions. So I'll take the -- essential retail is [ growther ] quick service kind of food kind of people mainly and pharma retailers. So these are the people who -- and then specialty retailers like in agri implement and so on and so forth. So these are what we call the essential. And nonessential are jewelry and fashion garments and all the other, shoes and so on and so forth. So that's the nonessential retail. So that's how we define it. And the second question was really, what is driving. There was no de-growth in the existing non-travel accounts. So what is driving, as I said, is that our ability to engage with these clients, in these current times, and actually offer them solutions so those people who are obviously wanting to invest. There are people -- I mean, there are -- between them, there are people who want to invest, who can't invest kind of stuff. Actually going to the people who can invest is very proactive ideas about how they can start some new things to get more value out of their investments, especially those who have put in the Dynamics systems because there's now a lot of data available to do analytics and then putting surround systems on power platform and stuff like that. So that's what is one which is driving. Second is, obviously, last quarter, I think we had more of a strategic, I would say, tie-up with Microsoft to drive, what I call, the Dynamics modernization program, which is moving current clients to cloud. And I think we have seen a huge traction there. It starts with initial assessment, which is funded by Microsoft, which we execute. And then obviously, if the client then wants to actually execute on the project, then the reasonable chance that we'll get the project kind of stuff. So that's been, I guess, the second major driver, I would say. And then the others category have been steady secular growth because those customers are continuing to invest and have not flacked out.

Okay. That's very helpful, sir. In the India product, we see business traction has been rather strong. Could you give me a sense of what are the split here between cloud storage, GRP, OEIS, Microsoft and otherwise? And how much of this India business would you see is recurring in terms of monthly license and stuff like that?

Okay. Maybe I'll ask Mr. Sujit Mohanty who is on the call to answer your questions. Sujit, are you on the call? Hello? All right. He is not on the call, so I'll answer.

Hello. Can you hear me?

Yes, please go ahead, Sujit. Have you heard his question?

Yes, I heard the question. So today, from the total business we do, out of that, almost 37% is in the cloud. And for the micro subside, a lot of the total Microsoft business we do out of that 44% is on the cloud. So that's how cloud and on-premise mix. Is that the answer -- is that the enough?

So that's helpful, Sujit. So can we assume that given the Microsoft side and the overall 5% to 37%, about 37% of the revenue will actually be recurring quarter-on-quarter because there will be a subscription that you collect every month. Is that a fair assumption?

Yes. Yes. So the way we measure our recurring business is 2 ways. One is obviously on the cloud, which is monthly or a quarterly subscription. Besides that, most of our Microsoft, or even otherwise, other businesses, what we focus is what we call the multiyear contracts. So almost 70% of our total business is actually annuity business. That means we have multiyear contracts. And on a particular date, automatically, we renew it on -- I mean, unless and until there is something wrong which happens. But otherwise, as far as we have sense, 70% of our business is annuity business.

Sure. So just to understand, the element of the multiyear contract, well, I mean, what kind of licenses are these? Are these enterprise licenses or are simple O 365 kind of license? I mean, just for us to understand the stickiness of this business.

Yes. So -- got you question, divide it into enterprise, than what we call SMC operator and SMB. If you see most of the manufacturers, they divide the customer base into these 3 categories. So we operate in all 3 categories. So we cater to enterprise, we cater to SMC, we cater to SMB as well. And coming to the O 365, that is -- that's Microsoft terminology. So in Microsoft terminology, there are [ 4 ] what they call it modern desktop and they have Azure and they have business applications, then they have data, and we operate in all the 4 areas.

Sure. And how much would the non Microsoft portion of your product business be?

Currently, the Microsoft and non Microsoft will be almost like 63% to 37%.

Okay. That's very helpful. And if I can just squeeze in one more question before I come back to the queue. Within the TUI business, how much have we clawed back from a lights-on business to actual service delivery, say, between July and August? If could just give us a rough...

We would have brought back about 15%.

That is sequentially.

From the first quarter. That's correct.

We have next question from the line of Mohit Jain from Anand Rathi.

First I just wanted to confirm, you said the top client revenue in the fourth quarter could be 50% of the third quarter. Is that correct? Third quarter of last year?

No, no, no. I said the revenues from -- TUI revenues could go back to 50% of what they were in the Q4 of last quarter because there's not much drop in Q4 and 3, kind of stuff. The Q4 of this year, we can get -- hope to get back to 50% of maybe were in Q4 of last year.

Which means you're looking at a sequential growth from 2Q onwards, is it?

No, we have, at that time -- we've actually seen sequential growth in this quarter itself in TUI.

In this quarter, meaning Q2?

Q2, yes, yes. I was answering the previous question.

Yes, that is what I wanted to make sure. And sir, second thing, on the margin side, if you could give some outlook, like how sustainable is like IT Services margins?

I think they're very sustainable.

So we will continue to run at 23%, 24% despite revenue drop for that?

Yes. Because I think we have seen a little shift from on cycle option, it's just [indiscernible] reasonable shift on the costs. I think we are very confident that, as I said, unless something else happens, we're quite confident that we'll maintain these margins.

Okay. Lastly, you all price-related negotiations are built into the 1Q numbers, and therefore, those things are behind us in some sense?

Yes. We've absolutely been conservative in reporting of our numbers.

Not reporting, sir. What I mean to ask is in terms of discounting, et cetera, which you had to give to...

Discounts, we would ensure that it reflects in the numbers.

It is already built. Okay.

Yes.

We have next question from the line of Sarvesh Gupta from Maximal Capital.

Sir, first question on some of the numbers in the presentation. I think we have seen some spike in bad debts and DSOs, and we have seen some fall in the DC percentage for our domestic business. So if you can comment on these 3 data points?

Okay. I'll answer the last one first. I think -- I mean, the market have now, I think, driven people to ask for more discounts and price pressures and so on and so forth on the customer side because I think the Indian economy is still not in a great shape. And so that means that the principles have to discount it and then they discount it, we have to also pass on something -- this comes to the client. So it's been a huge market pressure reacting to the situation in the market. So that's why the margins in the Indian business are lower than normal. Can you repeat the other...

Yes, the bad debt and DSOs.

Okay. This is on the overall business or...

Overall as well -- DSOs have gone up in both the businesses, and...

Yes. That is because there is, as I said, expectation from the customers to get more credit and so on and so forth. So that's been the reason for the DSOs going up. I'll ask the finance team to answer the question on the bad debt.

Yes. Now the initial impact of COVID on the first month, that is in the month of April was more. Our DSO, we give this as a weighted average of the last 3 months is our DSO reporting, which is the most conservative method of reporting. And in the month of April, the collection period was more. Towards the end of the quarter, it started improving, although some few customers have asked for more credit period, particularly in India, the India business, there have been large customers having -- asking for more credit period in this. The cash flow has towards the -- collection towards the end of the quarter has substantially improved for us, and we see good amount of momentum coming in the month, in the second quarter. If you would have seen our total cash position has been improved by about 1/3 of what it was in the last quarter, about INR 110 crores of improvement in our positive cash generation we have done for this quarter.

Understood. And sir, finally, if you...

Does that answer your question?

Yes, that does. The second question, sir, if you can throw some guidance for the exit quarter for this financial year, would we be able to reach a similar level in terms of gross contribution from the domestic business and in terms of revenues from the international business? As Q4 of FY '20, would exit off this financial year with similar at least compared to financial year?

Yes, I mean, as I said, I think we'll see steady growth. The intent is to get there. I can't really at this stage say whether it will be a bit of a climb to get there because if we actually get there then our profit will be a lot higher than what they were in Q4 given the current cost structure and revenue mix. So I think we will see a steady growth in both the top line and bottom line as we go forward, not too sure whether I can comment whether we'll get to where we were, although the intent is to get there, but I can't -- it still looks like an uphill climb. But if we do then, actually, the numbers look dramatically different compared to Q4 of last year. So yes, so at least the intent is to get to Q4 PAT, if not Q4 revenues.

Okay. Are we seeing any inorganic opportunities in this environment, given that we do have a healthy cash balance?

Yes, we are seeing opportunities. They are not distressed yet. But we are seeing opportunities, and we continue to look at that very actively.

We have next question from the line of Siddharth Rajpurohit from JHP Securities.

Sir, my question is more on the broader side and in the long run. Although near-term disruption is caused by COVID, but say 5 years down the line, what will be the levers in terms of that will lead us to further margin expansion? Although I know IP and Platformation is hurt...

5 years down the line is a long way into the future, Siddharth.

The near-term is very uncertain.

Yes.

So that is why -- we can talk about levers -- levers that you see as a company.

That's what I'm saying. There will be -- obviously -- the levers are obviously -- they'll be more digitization, there will be more automation. So levers for growth is, how do you get an opportunity to participate in that by tailoring yourself and to ensure that you're current and being able to meet the market needs as we go forward. The rest of the levers will remain constant in terms much of IP do you have and your delivery models and ability to monetize some of these things and so on and so forth. So beyond that, yes, I think it's very difficult to put a 5-year outlook.

Not a very fixed tender, but what will be -- if you can give some color, what will be the differential of margin in service, IP business and other business?

The difference in margin of a true IP business to our services business can be 30%.

Okay. On operating level?

Yes. Our true IP business. I mean, IP business is like Microsoft or whatever.

Okay, sir. And sir, second is on the receivables. Generally, our receivables, if we compare slightly on the higher side, also, we have improved a lot. There was a lot of improvement in the last year. We have seen that. But what -- is this an intentional thing of the business? Is it because of the client concentration or some other reason that we are working on? How are we working to reduce this?

So this is receivables in which business are you talking about?

The software side?

Software services. Okay. I'll ask the finance team to answer your question.

Yes. What -- can you repeat the question, please?

My question is on the receivables side, that ours slightly in the long term -- the generation is longer than the normal. So is it something intrinsic of the business or the clientele profile or anything? And how are we working to reduce this?

Yes. So the AR on an overall basis for this quarter, there was a little delay from the customer during the first month of this quarter, maybe filled over to the second month a little bit also. Towards the end of the quarter, it started improving, the cash flow, the collection, the momentum started improving towards the end of the quarter and see much more momentum in the quarter 2 of this year. In a long run basis, I don't think we are above average of other company on the receivables side. There are 1 or 2 companies who talk about 45 days or 50 days. But if you take a large players like Infosys also, they talk about 60, 65 days of DSO. I have seen other midsized IT companies also running at this range, between 60 to 70 days of DSO, depending on a particular quarter, what they have. So this is a -- I feel this is at a normal average level for this kind of business.

Okay. And sir, lastly, do we have any long-term internet targets in terms of reducing the concentration of clients? And any numbers over there, sir?

Yes, there is, obviously, I think, I've been talking about this, and it's been changing and luckily now with this, obviously, the concentration is going to change. We think that -- the intent is to diversify and reduce the risk, and that continues. That doesn't mean that we'll refuse business from large clients. But obviously, the intent is to make it as diverse and as risk spread as possible for the business. So that's the intent, I mean. But as I said we can't refuse business from clients.

Any internal target set, sir, in the long run?

Yes, there are all internal targets set to get -- to reduce the dependence and get more clients and grow them to a certain stage and all that. And then the incentivization is also along the same lines and so on and so forth. So internally, obviously, there are very strong plans to get this done.

And would you like to share some numbers around it?

No.

We have next question from the line of Ronak Vora from AUM Advisors.

I'm new to the company. So our partnership with Microsoft is kind of a perpetuity? Or is it for some specific period of time? How is it?

Sorry, in which business are you asking?

The domestic business with Microsoft where we sell the software service.

Yes. Maybe I can ask Sujit Mohanty to answer your question.

Yes. Can you hear me?

Yes, I can hear you.

So not only Microsoft but any kind of partner is for the reselling of the product in India, most of the manufacturers, they have what they call an annual contract, you keep on signing the annual contract. Like if you see with most of these OEMs today, what we are dealing with, the contract is with us almost for the last 18, 20 years. So that's how it happens. And there is nobody -- none of the manufacturer have a contract which is in perpetuity. Most of the contracts are actually annually renewable.

Okay. So is there anything -- so earlier, we were -- earlier I read the annual report and everything, we used to sell products of Microsoft with all the specific packaging and everything. But now everything is being online and on cloud. So do we see any contract that might be lost going ahead? So...

You're talking about the customer contracts?

Not the customer, from the vendor contracts.

No. So most of the vendors when they -- so most of them have products only what we call the on-premise product. Now the on-premise products, the line items have been shifted to what we call the normal products. So the same contract is balanced, and it's just a product mix which we've changed.

We have next question from the line of Rajeev Agarwal from DoorDarshi Advisors.

My first question is to understand a little bit more on our acquisition and strategy. I mean I think we have done some previous acquisitions and it seems to me that they have been successful. So can you just talk about how you look at acquisitions? And also, if you can elaborate on how those acquisitions have done? Give us some history around the acquisitions that you have done, but also how you look at them, what type of acquisitions are you looking and the synergies as well?

Right. Okay. So I think we've said it in the past. So the acquisition strategies have always been strategic. That means we are looking for value in the acquisition rather than straightforward revenues and margins. And the -- in the past, the strategies have been -- if you take the travel was -- because we have the travel vertical, we've got IP in that vertical. And then I think when digital transformation was really picking up and mobility was a key aspect, we bought an enterprise mobility platform, which could be used to deliver mobile apps. So that it's strategic to our digital transformation offering. And then, of course, we started focusing on the Microsoft Dynamics ecosystem about 5, 6 years ago. And I think we have made 3 acquisitions there to strengthen both the horizontals, verticals, local talent, 2 in the U.S., 1 in Australia. So that was really very strategic to become a big player in the Dynamic ecosystem globally. And then the last one, in the customer experience, again, driving digital transformation or our old Platformation.

Great. And how do you have the pipeline? Like you are actively sprouting or you're working with companies who are actually giving the pipeline?

[Operator Instructions] We lost Mr.Reddy.

Looks like -- I don't know, I got disconnected. I don't know whether you've heard anything I said.

Yes. We heard till I, you talked about the 2 acquisitions in U.S. and 1 in Australia.

All right. Yes. So -- and the last one I was talking about, GAPbusters, again, aligned to our Platformation using platforms to drive digital Platformation. And so what attracted us was customer experience with a fast-growing area in the digital transformation arena, and they are had a platform in which were driving it. So to net-net, all acquisitions have been strategic. That means they're aligned to the strategy of the company. And then, obviously, see whether we can combine it with current offerings of the company to give a more unified, holistic offering in a particular space to clients. So that's been the thinking, and we believe it has worked well because as, I said in the past, the numbers are looked at separately. There are some revenues which flow directly through to us when we take the service offering of an acquired company to another geography, then the business comes into Sonata that would go through that. So when we look at the figures, we look at both, and I think that's what we have tried to share this time. So that's, I think, helped us definitely in all the areas to prove to clients that we are a serious player in that industry vertical because of the IP. Definitely in the Dynamics space to prove that we are a serious player because we are investing both to Microsoft and to customers and then -- so all of them, I think, have really helped us to get where we are today, to where we were about 8 or 9 years ago, I don't know if you knew the company then. So I think it's really helped us to move the company forward to a very dramatic situation to where we were about 8, 9 years ago.

Yes. No, sure. I think the company has definitely [ benefited ]lot from that. Just I wanted to understand the acquisition. The second question, and this is more sort of the numbers. I believe that this time, we have broken down the segment slightly differently than what we have in the past. So is that a way to co-relate what you have segmented this time to what you have done in the past? Just to better understand what numbers have been put into what segment?

Okay. Is this segment on the services side or on the vertical side, which...

On the vertical side, I think you have broken down by the domains, like the retail essential, retails and nonessential, those things are relatively new items. Right? I don't see...

Yes. Yes. They were not new. Last time, I think the same call, people wanted to see that pledge. Otherwise, they were all combined in distribution and retail as one vertical. So that's why we split it. But the finance team can maybe answer your question.

Yes. That's the intention. Last time, the feedback from the analyst was about the question on what is retail essential and retail non essential, and also they wanted to know what is the distribution and what is retail separately. So that is why we have split on this. And commodity and business and other service industry was actually given as generally as others, included in others. Now we have given a split on this also because that was an acquisition investment we have done in the last few years. We wanted to showcase how it has been moving on this. So the same case with your competencies also, we have realigned our competencies to the requirement of the market from the beginning of this year when we did the new planning for the current year. So we have aligned the competencies to that, and we have also given the last quarter numbers towards that. And this is what we are going to follow in the coming days.

We have next question from the line of Jay Daniel from Entropy Advisors.

Yes. Sir, the investor presentation, now there's a greater depth of information that is provided -- a lot more data is provided. So I just wanted to know, I mean, there are certain points which I wanted to be clarified, some additional clarifications that I needed. So to whom should I reach out to, I mean, offline? I just wanted to know that.

You can reach out to me. This is Jagannathan here. you can reach out to me.

Okay. Okay. I'll reach out to you, sir. And sir, this domestic business has kind of fared quite well. I mean you were expecting quite -- it would be worse in the 2 months of lockdown, but actually have grown Q-on-Q. I mean you have mentioned that 70% of the business is annuity. But still, I mean, what is it that we missed out in trying to understand this business, the strength of the business, if I were to put it.

I'll ask Sujit to answer your question. Sujit?

Yes. So as I said, very rightly, I mean, our -- always the focus has been to make sure that the annuity business is strong because in our sales person, that's a very -- that's what we like to do most. On top of it, these quarters, please understand that in April, when the COVID thing started, there was this rut to have this work from home. And to each and every organization and every person in the organization to be able to work from home, you need certain technologies, you need certain services. And in that environment, you also need a lot of itemized tools to buy, so that your security, your connectivity, all these things are perfect, and in regards -- what you're looking at when you are in an on-premise situation. And that gives a certain opportunity to get into certain new businesses that is what happen in the first quarter. And that's what we can see in the results, where not only we retain our 70% of the customer by doing very proactive engagement, not only with customers, but also in the back end with the manufacturer, so that whatever the immediate customer needs or addressed and we make sure that all the contracts which are supposed to be renewed got renewed, we also got into this new business and [ acquisition ] that's how we could manage these numbers last quarter.

Okay. Okay, sir. Sir, and in Platformation revenue, there's a slide on Page 24, which shows it to be flat over the last 5 quarters. So when is it going...

I came to know about this very late in the evening at today. I will update that.

Okay. And there's a sharp increase in IP-led revenues to 33%. Is it because TUI is largely legacy solutions?

Yes. No, because TUI was not using our IP, Jay. So those customers who use our IP, the revenues from them is what we book there. So while the other is ready, also automatically the percentage increase.

Okay. It's because of -- I mean, the travel vertical coming in?

Basically, the percentage increase is because of the reduction in revenue. Other revenues stay constant. The overall revenue decrease, so that's percentage increase.

Okay. Okay. And sir, one more question on billability, there's been a sharp drop, right? It was 79% in Q3 '20, and now it's 70%. Does it mean that the large part of the staff is involved in R&D activities, I mean...

No, no. Because the number of people released from TUI increased the number of people in the company. I mentioned it in my last call.

So they are on bench, actually.

Yes, yes, correct. Correct. Yes, yes, absolutely. Correct. So that's what likely -- hopefully, some of them will go back to something and some of them are leaving, whatever. So we'll see some better numbers in terms of billability, come Q3.

Because the billability is despite a 3% decline in absolute numbers of delivery staff. So that's why...

That's right because the revenue dropped by almost 18%, right. We didn't decrease our staff by 18%.

No, no. You didn't.

Yes. That's all. So that's why billability is lower. So once you see that come back, yes, it will also show up in the margins and stuff.

And for the other queries here, I'll write to Mr. Jagan.

Yes, sure.

[Operator Instructions] We have next question from the line of Vipul Shah from Sumangal Investments.

So what type -- this reduction in expenses, how sustainable it is?

The employee related, some expenses, there will be a natural drop because the number of employees will drop. So that's the thing. Otherwise, mainly reduction is on account of travel, that is sustainable. The rest of them are, I don't think anyway, there have been significant kind of stuff. And then the shift from on-site to offshore is sustainable because that cost will decrease automatically. So that is sustainable. So I guess these are the, I would say, 3 sustainable cost reductions going forward.

So sir, once air travel becomes normal, travel-related expenses will be very low as compared to pre COVID days?

I have -- very difficult to predict that. I don't know. I mean I would -- like who wants to travel, if the clients want to meet you physically and when all this will happen and how comfortable everybody is to meet each other and all that. So we have absolutely no idea today. We'll wait and watch. I mean what's the comfort level of the world to be very social and -- with each other kind of stuff. It's a psychological issue. I can't predict that.

We have next question from the line of Amit Chandra from HDFC Securities.

So my first question is on the domestic product services. So we have seen a sharp increase in the revenue sequentially and Y-o-Y. But if I see the EBITDA and the absolute EBITDA that I'm seeing, that is still in a drop of 27% quarter-on-quarter. So now as we understand that if you take some larger contracts, then it actually comes at a lower margin. Or we have certain like one-offs or like what is the strategy here in detail? Are we actually going for more larger contracts, which is having a lower margin because this increase in revenue is not translating into EBITDA? That is first question. And the second question is on the IITS cost reduction. So as in the last question also, it was mentioned that we have seen 20% sequential drop in the cost, okay? So that is around cost reduction of INR 50 crores on an absolute amount basis. So out of this, how much will reverse? And how much of the INR 50 crores is related to salary cuts? And because we are not seeing any significant reduction in the headcount. So maybe it is like furloughs of salaries and certain cost can come back. Sir, if you can quantify that how we have achieved this cost reduction?

So the first question I've answered, right? Saying that the business in the market is now taking place at lower margins because customers are wanting higher discounts. It's not we're going to larger deals. Every customer, as I said, because of the economy has gone back and said that, I can't afford to pay this. So I need a discount. So between ourselves and the principal, then we have to share the discount. So basically, the customer have come back and said that till all this thing lasts, please reduce my price for my bill of material, right? So that's why, while you're trying to keep your market share or actually increase your market share, the margins have to be decreased because that's a market phenomenon kind of stuff. And that's the reason why the margins are lower because the overall business -- because of those situations, the business is being done at lower margins, as we're highly competitive. So that's the answer on that. I had already answered that question at the beginning. The second is on the cost, I can ask the finance team to answer. But as I answered the previous person, the cost levers are coming from, one is shift from on-site to offshore. So that's like about, if you take the Q4 cost and Q1 costs, and even if you see furloughs, so that's about, I guess, INR 10 crores. So that's going to be prominent in terms of cost reduction. Then there is -- the travel costs, I think we talked about, so whatever that is, then there will be some general overall people reduction by, again, a few hundred people or whatever it is, could be another INR 7 crores, INR 8 crores, INR 10 crores kind of stuff. Then I'll ask financial department to answer your math of INR 50 crores. I don't know where you got the INR 50 crores from, but. And then there was -- I don't know, there was a onetime cost in Q4, which we don't have now, I mean, of the ILFS of INR 12.5 crores. So that's -- if you want to take that, that's not going to be there ever. So that's a big number. So I think that accounts for the INR 50 crores you're talking about.

Okay. I guess, I will take it offline. Sir, my next question is on the Microsoft ecosystem. So as you have in the new year reporting. So the Microsoft-related services that we have mentioned is roughly around 20 million for this quarter, which is around 53% of your total revenue. So roughly, the Microsoft business, the Microsoft product engineering business and the Microsoft upgradation, which is the Dynamics upgradation. So all these 3 services comes under this? And what is the opportunity here -- this -- on a TTM basis, if you see that it's roughly around 80 million kind of revenue from Microsoft, direct billing plus Microsoft-related services, 80 million, what is the addressable opportunity here? And where we stand in terms of competition there -- here and who are the competitors here? And what is the addressable opportunity? So where we can see this 80 million, say, in the next 2 years?

So one is the Microsoft account, whatever that number is, if you take it aside, the balance sheet business, which is working with Microsoft and serving customers, so the addressable opportunity, as I've been telling all of you is a few billion dollars on the Dynamics and surround ecosystem with the business platform kind of stuff. The big competitors, as I said, have been our people like [indiscernible], Hitachi, maybe HSO and Columbus and DXC are the big players in this globally, who have global footprints and are able to deliver services in every geography of the world kind of stuff. So the addressable opportunity is vast. We believe that with our IP and we -- our own tooling around the modernization program, I think we've got a good differentiator to get some decent chunks of this vast opportunity.

We have next question from the line of Devang Bhatt from ICICI Direct.

I had just data related questions. But one question was the Q4 FY '20, the vertical was the -- the break-up that you have given, it totals up to 102%. So I don't know where's the -- and even in a [indiscernible] 101%, your top client, that is better earlier contributing 20%, now it has dropped to 18%, 102%, is it? And going forward, you are saying that, that 2% will grow at -- grow in this Q2, we're seeing growth of 15%. Is it?

I didn't get it. So what was the second question?

Your top client, that contributes 20%.

It had dropped by almost, I think, 85%. Out of that 85%, a 10%, 15% clawback in the Q2.

We have next question from the line of Madhu Babu from Centrum Broking.

Yes. Sir, just on the vertical alignment, now that travel has become a much smaller vertical. So which are the areas when you oppose these acquisitions, any new vertical which we would like to subvertical where you expect to focus much higher?

Right now, I think our focus is on the agri and commodity business and the service industries and utilities. I think these are the 2 things which we are focused on. And of course, the manufacturing and distribution. So travel, I guess, will be a challenge as we go forward. So -- and nonessential retail. But essential retail, again, I think, is looking interesting, especially pharma retailing and stuff like that. So I guess this will be the focus as we go forward. And with the GBW, I think there will be a more horizontal approach to customer experience. So that's, I guess, the way to go, where we will use that going forward.

So like utilities, I mean, there will be a lot of other IT vendors as well. So we will go through the Dynamics platform where...

That's right. Dynamics in this specialization is what -- yes, I mean, our market is finally limited to the utilities players. So we want to invest in the Dynamics platform for doing remote service management of direct spend. So that's our focus, and that's our service offering for that.

So how easy it would be for them to open up to traditional services, like infrastructure management and all, which are not directly related?

Infrastructure management will be a little far away. Madhu, it can be surround. Surround could be data and analytics, surround could be custom services using power platform. These are the opportunities, I think, which we are seeing, which are opening up. Infrastructure and all will be up, many steps removed. Those are not the immediate opportunities we see for ourselves. There will be surround to the core solution which is either data or, as I said, custom services using the power platform.

Okay. And just one on the ISV vertical now, which is the largest vertical. So could you talk about the opportunities within the top account and the other major accounts? Could you just give a view on what is the kind of work they are doing in there?

Yes. I think -- I mean, we would see it this year, maybe a little flattishness on the top accounts. And then obviously, the opportunities I have told about is also working in the field with this account to move some of the other ISVs on to their platform. So we are seeing traction. And there is some ISVs who were also, unfortunately, in the affected industry verticals. So we are hoping that they will come back, and that should give us kind of stuff in the Q4 time frame.

We have next question from the line of Baidik Sarkar from Unifi Capital.

My question has been answered.

[Operator Instructions]

Do we have a time limit? Or can we take last 1 or 2 questions? I think we're past the 1 hour.

Sir, there are no further questions in the queue. So as there are no further questions from the participants, I'd like to hand the conference over to the management for closing comments. Over to you, gentlemen.

Okay. All right. Thank you, Vikram. Thank you, everybody, for joining, and thank you for an interesting conversation. I look over to meeting all of you post the next quarter's results. Thank you for your support. Thank you all. Have a good day. Stay safe.

Thank you.

Thank you all.

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