Sonata Software Limited (SONATSOFTW) Earnings Call Transcript & Summary

[Audio Gap] Vikram. And good morning, everybody, and welcome to the analyst call post the announcement of our results for quarter 2 FY '21. The results are all posted on the website with the necessary [ analysts ]. Today, we, I have with me Mr. Jagannathan, the CFO of the company; Mr. P. V. S. Raju, the Chief Delivery Officer; Mr. Ranganath Puranik, the Chief Growth Officer; and Mr. Sujit Mohanty, the head of our India business; apart from Mr. Sathyanarayana, the Head of Finance Function. So quickly getting to an analysis of the results and the outlook for the future. As I mentioned last time in the call we had, I think we've just come out of the uncertainty with the pandemic we have faced; and we are setting a -- in motion a lot of actions to deal with the immediate issues facing the company. And I also said that, and you saw it then, that things were changing for the better. And we believe that the worst was behind us and we would be looking forward to growth as we go forward. And so you see the numbers this quarter. That's, I think, an absolute reflection of what I have said then. So obviously things continue to get better in the market, as we see. So there is more -- while there is still caution, there is more openness to spend as we go forward. And as I said, obviously the strategy was twofold to see how much of the business which we had lost we could get back and then also look at growth from both existing clients and new clients. We look at the market. And if you look at the industries overall, we continue to see the travel and nonessential retail still badly affected, apart from some nonessential manufacturing. And we generally see there is secular growth across the different industry verticals. We have also initiated some cost-reduction measures last quarter about some voluntary pay cuts for the senior management mainly, but from the other costs which were not there, because of the nature of the way we are operating, of travel and some office administration expenses. This quarter, we have reinstated part of those salary voluntary cuts, and we will reinstate all of it back in the next quarter. We did not add to the manpower last quarter. We did not replace the people who had left the company last quarter, so then -- so that we have the right level of people for the volume of business we had last quarter. The other trend we have seen last quarter is a greater shift to offshore, and we'll continue to see that as we go forward. So looking at the future. And we also, I think, this time have given -- trying to present our India business in a more analytical fashion so that you all can get a better understanding of the business not just from a top line, bottom line part but from the cloud and non-cloud mix, the revenue, margin distribution by clients, the number of clients and what they contribute, the annuity and non-annuity nature of the business. So -- and we'll give more details as we go forward in terms of analyses by product lines and the number of [ years customers have with us ] and so on and so forth so you get a much better appreciation of the business than just the top line and bottom line and margin kind of stuff. So going forward, as I said, we will continue to see the same trends in growth in both top line and bottom line in the next half of the year, overall secular growth. And we will stop adding people back into the business in the subsequent quarters. The GBW, who is the company which we have acquired, obviously continues to be affected by the pandemic, but I think we should see growth in that business in Q4 of this year. So overall, I think now going forward the strategy is to focus on aggressive growth, post things shutting down in April or July, next year. So we will be starting to invest very aggressively in sales, marketing, presales, consulting, et cetera from now to March to prepare the organization for growth as we go forward. So that's a high-level summary of an analysis of the performance of the business last quarter and the way we see it going forward and what we plan to do as we go forward. We, I'll be very happy to take questions later on in the session. I now hand it over to Jagan to take you briefly over the numbers and analysis for the quarter.

Yes. Thank you, Srikar. Thank you for your brief outlook update. Good morning all. I will now take you through the key highlights of this quarter. Are you able to see the presentation, all of you? I hope all of you are able to see...

Yes. Thank you.

Yes, okay, yes, yes. This talks about the consolidated financial performance of the revenue as well as the EBITDA and PAT growth rates. If you see, it has been a very, very solid performance compared to what it was last quarter. We have grown the revenue by 7.1 percentage, and the CAGR has been consistently growing, quarter-on-quarter, our revenue growth has been 5.4% CQGR. So the EBITDA percentages. EBITDA has been growing solidly. We have a solid performance growth on -- in terms of EBITDA also. 11.2 percentage has been the growth now. This is again a solid growth. It has CQGR up 2.6% EBITDA growth and PAT CQGR of 2 percentage grow. We have -- again profitability has grown faster than the revenue growth overall. The international services, highlights and performance of international services. The Q2 has been very good for international services with the revenue growth coming in with a solid performance, and the EBITDA and PAT growth has also been very solid. We have an EBITDA percentage of 24.4 percentage. And the PAT percentage has 15.1 percentage, which has been industry-beating EBITDA and PAT percentage for us. This is the domestic business. Domestic business has also done well. [indiscernible] the profitability has gone up in domestic business. If you see here, the revenue growth, as we have been mentioning, we have to make sure the business on gross contribution, absolute amount of gross contribution. It has gone up from -- again we maintained in spite of change in the absolute revenue value. We have maintained the same profitability. Hence, the overall EBITDA as well as the PAT have gone up by -- from INR 11.6 crores to INR 13.6 crores this quarter. Domestic business has been consistently performing and maintaining the profitability and increasing quarter-on-quarter. This is the financial summary of all the businesses. If you can see here, the international services, the quarter-on-quarter growth has been 4 percentage year-on-year. Domestic dip -- we have a dip of 8 percentage on these domestic services. The revenue growth has been [ safe ]. And this is -- the consolidated [ print ] revenue has also -- it's been growing for -- the revenue may have because of the domestic -- distinct domestic revenue. Again, as mentioned earlier, the domestic business, we should not see it on the revenue performance. We should see it on the gross contribution. The EBITDA has been a solid performance for us. We have been doing -- kind of the domestic profitability has also gone up. And the PAT has also gone up for us in the international as well as the domestic business. Here are some operational metrics. We will leave it to you on this because these are all covered in our investor presentation itself. This is just a summary of those operational performances. The -- consistently, we have been growing on this. The change in a little bit of travel and ISV is probably because of the base effect. Otherwise, we continue to have the performance in ISV continue to be strong, and distribution and manufacturing and retail continue to be strong for us. And there is a change in the on-site mix. It is coming down because of the -- whatever the change due to the COVID. We see this is helping us to improve our profitability in future also. As I mentioned, this is all covered in the investor presentation. Again this is just a breakup of the same and the -- in the presentation for you. There is no -- there have been a -- new client addition of about 10 customer additions are there. We continue to keep growing on the customer [ front ], and we have a solid pipeline coming in this period. As Srikar was mentioning about it, we have not replaced the people of attritions in the last quarter. That's the reason why there has been a drop in the head count. This is a brief update. With this, I conclude my presentation, hand it over back for the questions from the analysts on this. Thank you all. Thank you for all the support.

[Operator Instructions] We have a first question from the line of Baidik Sarkar from Unifi Capital.

Congrats on a very tight quarter again. A couple of questions. First, there seems to be some moderate weakness from your Microsoft accounts, which is quite contrary to Microsoft's own performance in Dynamics and other portfolios of theirs like Azure. If you could give us some color on what exactly is happening there. And how does the future look up there?

Yes. So the revenue for us on that, this thing is twofold. One is what we directly sell to customers and what we sell to Microsoft as a customer on the Dynamics side. On the Dynamics side there has been a bit of a -- let's say, based on the pandemic, across the board there was a little conservatism in the overall spend, across the board. And we will see that coming back in the future quarters, but the growth -- the second growth is the growth in the market where we sell to customers. That doesn't show up as Microsoft or Microsoft as industry vertical. And we are seeing good growth there. So that's -- yes. So you need to look at it the growth in the market will drive the growth in the industry business and the growth in the Microsoft account will drive growth in the ISV business.

Sure. That's helpful. Just given how the situation is panning out in Europe, again, do we foresee any weakness with the TUI account? Or will the recovery continue to be [indiscernible]?

Yes. I mean we don't -- as we see today, we don't see further weakening, but we definitely see that the more growth will be stifled till there is more visibility. Everybody is expecting some kind of a vaccine or whatever it is in the first quarter. And so based upon that, then there could be [ first quarter as in fourth quarter for us ]. So we won't see any growth [ neither ]. And we see today because they have got now a second tranche of funding. So they are adequately now funded to [ dive over ] through all these things. So whatever they have started to spend, we don't see any reduction, while obviously there are absolutely no business for them because of all this lockdown. They were expecting to do some business in this quarter, but because of the lockdown, they have, more or less, no business. So yes, the summary is that we don't expect growth. Neither we -- at least this quarter. I mean maybe beginning of Q4. And we neither, as we speak, expect any shrinkage, but whatever growth forecast we are giving is assuming that we will see no growth in that account.

Sure, sure. And lastly. We understand the India product business needs to be seen from an absolute earnings perspective and not margins, but even the absolute numbers from a Y-o-Y perspective has been weak. We understand there is some pricing pressure given the environment. Do you expect this to deteriorate further or...

No, no, no. As I said, we are now going to see growth across the board.

In the domestic product business as well.

Yes, absolutely. We grew from the first quarter to the second quarter from, I guess, 7 crores to 13 crores or whatever that is at like 18%, 20% growth. We'll still continue to -- we will -- we expect to see that kind of a growth as we go forward

We have next question from the line of Harit Shah from KRChoksey Shares and Securities.

Yes. Congratulations on your recent [indiscernible] execution to the management. I just had a query regarding with the U.S. geography. So in a quarter where most of your larger peers have seen decent growth in that geography, your revenue has come down quite substantially by about 10, 12, more than -- double digits. So if you can give some color on what is going on out there, that would be helpful.

The U.S. geography, I think there would be -- some of them would be -- because of the acquisitions that we have made, would be projects kind of a business. So that can be wavy, but overall at a consolidated level we don't see a concern there, and we'll continue to see growth going forward.

So that -- you're referring to GAPbusters.

Not GAPbusters. These are like Sopris and IBIS. And these are all the dynamic kind of partners, so they can get varied results based on projects and license margins and so on and so forth from quarter to quarter.

Yes, I'm sorry. My mistake. GAPbusters, I think, is more Australian. I guess your -- or just to clarify. You had [indiscernible] have you partially restored that in the third quarter? Or will it be entirely restored only...

We have done -- we have more -- done quite a bit in the second quarter. And we'll do most of it in the third quarter, but as I said, all our forecasts are assuming in the base on -- of growth are based on assuming that we will do all this kind of stuff. We have factored in all this in the growth forecasts.

Yes. You said second and third quarters. So I'm assuming that [indiscernible] [ change made ].

No, no. We did some of it already in the second quarter.

Okay, okay, okay. Some of it was restored in the second quarter. So third quarter...

Yes. [indiscernible] balance in the third quarter and that's it, yes.

Right. And so then we can assume that, by December, the entire salaries would be restored to the earlier level.

That's right. And we possibly will look in the January quarter for some kind of at least a compensation review and for some people in the company.

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

Actually, I was going through your results. And in the other comprehensive income, particularly on consolidated, this is significant amount of basically exchange variation. So can you just explain what is really this 13.2 crore and 23.78 crore [indiscernible] exchange variation? So -- because that, if you say -- comprehensive income is 87 crore vis-à-vis 64 crore last year, while profit for the year is INR 57 crore vis-à-vis INR 72 crore. And I think broadly this is -- can you give some color what exactly is it?

Okay, I'll ask my finance team to explain that first.

Sure, yes.

Yes. This is mainly mark to mark on forward contracts basically. So whatever is there, it will come to the other comprehensive income and flow back to the P&L as and when the contracts are honored, [ yes ].

Okay. So just to clarify: So next quarter, we shall envisage around 33 crore, 34 crore...

Not next quarter. Basically we have contracts [ pending ] over -- more than 1 year, okay? So this is all contracts put together.

Yes. Can I -- fair enough. So that part, I understand that accounting made it required. Because what is happening is that, if we look number in isolation, you see deterioration in the profit. So if I have to [ contribute ] something like that, well, it will be over a period of time, but mostly will it be [ expiring ] in 3 to 6 months time? Or it will be like stretching over -- so 60%, 70% will be [ expiring ] in 3 to 6 months time, if you can put some time line [ before unwind ].

[indiscernible] 6 to 12 months time...

6 to 12 months time.

Yes.

Because -- so that was one part. So we shall see some kind of this getting booked in 3 to 6 or 3 to 12 months time.

Yes, correct.

[ You are right ]. That depends on exchange rate basically.

Yes.

Yes. So that was one part. And the second part, we see some kind of provision for doubtful debt in Slide 31, which you had put on the exchange as well as on our website. So that has increased. In fact, that has gone up highest 2.65% kind of it. So can you give some more color? What was the reason to -- this is the highest ever write-down as per the slide also and whatever is available data you have provided. So can you give some color on that?

Okay, let me just answer the question first, and [indiscernible]. Basically it's not a write-down. It's just a provision based on [indiscernible].

Yes [indiscernible] my apology. So provision for doubtful debt, yes.

[indiscernible] yes.

Okay. And then as I said, [indiscernible] will explain, yes.

Yes, yes.

This is the expected credit loss model. Under that, we provide for doubtful debt. It's based on that logic as per accounting standard.

But we envisage we shall recover basically based on business or whatever is stock we had with clients at the time.

Yes.

Yes, yes, yes. This will be -- it's closed in the subsequent quarter.

And last one from my side. Basically, this time, dividend of INR 4 interim. If even if we compare -- while we understand environment is challenging -- but numbers are reasonably lower, so what was the factor management considered to -- in fact, if I look at last year, interim dividend, it was something like INR 4.50 to INR 5.15 kind of it, last 2 years, interim dividend specifically. So what is your thought process on dividend distribution? And why we'll see some kind of reduction, if I may say so, in that [Audio Gap]

Hello.

Yes.

Yes. [indiscernible] continue to follow the same dividend capital allocation and dividend payment policy. There is no change on this. It depends on the particular circumstances. What are the opportunities coming in the market? What are the investment needs of the company? And what is the business support required? And there can be a small change on that. However, our dividend policy continues to remain the same.

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

Yes. So some more clarity on the top account in the ISV space. So we said that there has been some softness in Microsoft-related work in the OPD side. So how is the outlook? Or any other new opportunities? Because that vendor is fairly competitive. And there a lot of large players that were in that account and the OPD space itself. So how should we see this account and more on a 2-, 3-year perspective?

Yes. As I said, there's a -- in the overall R&D spend, there has been a general slowdown in the end of Q1 and the beginning of Q2. We see that coming back. So as I said, we are very uniquely positioned mainly from our strength in the dynamics space. And we see -- and I think we see more spend than less spend as we go forward. So to that extent, we see our position competitively, compared to others, is relatively strong both from a fact that obviously we'll make investments in the market too. And that is an important thing for the partners, but the partners also help in the sale of the products and not just deliver services to the company kind of stuff. So we see ourselves positioned very well. And as I said in my statement at the beginning, we will see reasonably -- reasonable growth coming back in Q3 and Q4 from that account.

Okay. And second, sir, in terms of the -- both the acquisitions Scalable and Sopris. I think, this time, the others vertical was also weak. Obviously, it could be something around that weakness from one of the acquisitions. So how is the integration with the top management? Have any -- is that progressing well in terms of retention of the top management, et cetera? And your views on both the acquisitions, how -- their status.

Yes, yes. Both the top management are there. It's almost now coming to 2 years since the acquisitions, but all the founders are there. Top management is there. In Scalable, we have seen a lot better performance. And in Sopris, I think going forward we will see that because the combined value prop for the energy and service vertical is much stronger. And I think, as we go forward, we'll see a much stronger performance coming from Sopris, but Scalable today is well integrated. And we are able to -- I mean their original strength was agri commodity, but we're now going after retail and distribution clients in that market, which is mainly Australian. And then obviously the rest of it is how we take the agri business to the rest of the world. Similarly, as I said, the value prop now is more comprehensive in the U.S. market with Sopris, and we have to take it to the rest of the world.

Okay. When we are now confident more about the growth coming back and on the hiring at the sales level now, so would it be fair to assume that [ in our base ] like 5%, 6% Q-o-Q growth momentum can come back in FY '22 or maybe like from 4Q onwards?

5%, 6% year-on-year or quarter-on-quarter?

Q-o-Q, quarter-on-quarter, growth on a run rate basis.

That's like some [ 30% ] growth year-on-year.

So some of the mid-caps have been growing at 18% now, sir, so I think market is expecting bigger momentum. Anyways, you are more than that...

Okay. [ We are expecting ] the solid growth in the next 2 quarters. And then we'll see, based on that base, what the growth will look like, but as we see it today, I mean, I think if we continue with the same growth, I don't know whether it's a 30% growth, but I think we grew about 5 -- 4.5%, 5% quarter-on-quarter. But definitely, a 3.5% to 4% look reasonable.

[Operator Instructions] We have next question from the line of Sarvesh Gupta from Maximal Capital.

Sir, for your travel -- largest account in the travel segment, now with this continued shutdown in the -- in European markets due to the COVID -- second wave of COVID, how do you -- I mean, earlier, itself, the business was majorly hit. And now it seems like they have gone into the ICU, so how do you envisage your revenues from this account going forward? And if you can comment on whether that business can stand on its own leg at some point of time. How do you feel that client is doing? Yes.

Yes. That's what I said, that it has come down drastically in the first quarter, and it's come back to a certain level. I think it did come back to about 25% to 30% of where it was. As I told the person who had asked this question previously, that -- we don't see a reason for this to be further reduced. Earlier, there was a thinking that this could increase in Q4, but based on all these lockdowns, we may not see that happen also. But so we'll have to wait and watch, but overall, as far as the company is concerned, as I said, they have now, I think, got an infusion from, I think, mainly various governments of EUR 3 billion to EUR 4 billion. And so I guess they are now in the position of "too valuable to fail" kind of a company. So -- and luxury, leisure travel is something which is expected to get back on its legs when all these things settle down. Maybe business travel could be affected, but leisure travel, like people are actually expecting a lot of -- both some pent-up demand kind of stuff. So as a segment, I think leisure travel is solid. So as I said, the company is -- now has enough financial might to go through. This is a question of when they want to invest, how much they want to invest for growth as we go forward, but the current level of investments with us, we believe, will continue.

Okay. And within your travel segment, as it was like maybe 1 year back with -- any sense on what could be the split between the travel business?

In our segment...

As it was 1 year back. Like maybe 25% of the revenues were coming from this segment. And...

Yes, yes. Out of the -- it would have been about 80% or 75% would have been leisure, 25% business

Okay. And secondly, sir, your digital revenues as a percentage of overall have grown a lot. So is it only because the travel segment was not in the digital side...

Yes. There are 2 things. One is the revenues which went away, and the revenues which are getting replaced are more digital. Secondly, I mean, you will see Dynamics earlier was an on-prem kind of a solution. Now it's cloud, so it's more digital, so as we see growth, we'll see more. So it's being driven by both the factors, that the revenues which went away are getting now replaced by digital services. And one of our main service lines is now more digital because it's now on the cloud kind of stuff. So both are driving the digital revenues.

Okay. And on the domestic side, if you can just give some color on -- earlier, I think there was some pricing pressure, but now in your conversations with your clients, both existing as well as potential, what are you hearing in terms of their ability to sort of invest more on this side as well as the pricing side?

As I said, depending upon the sector, the variability is quite high to very aggressive growth, to let's invest back, to let's wait-and-watch kind of stuff. So that's the overall thing, but the overall mood in the market is a lot more positive than what it has been across-the-board kind of stuff. Pricing pressure, we are not seeing any pricing pressure.

But do you see any upside from the [ last quarters ], where we had seen some compression?

Yes, absolutely. That's, I think, if you see, I think, the 4% or 5% growth on the top line, I think, 5%, 5.5%, whatever that is. So yes, absolutely. We are seeing upside in the market not only last quarter but going forward.

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

First is on your capital allocation. Like you guys mentioned it in the PPT as well, but is there a change in the payout versus M&A investments that you're planning for the next 12 months?

Okay, the payout. I think we have a policy. We will stick to that. M&A is really, I mean, obviously we have appetite for acquiring more. Obviously there is a whole lot of factors which are dependent on it, finding the right fit and at the right value and valuation. So there's no allocation as such, but the appetites to, I mean, invest is there. And I mean that can vary from year to year based upon "when we get the transaction done" kind of stuff, but there's an appetite to invest more, I mean. So that's for sure, but the payout is more or less, [ I mean, sort of fixed ].

And we have a fixed policy of whatever, 50%, or whatever it is of the consolidated profit.

Okay. So you're saying -- when you say appetite, meaning the size of the targets that you're looking at, that may go up. Is that correct?

The size of the target, yes, yes. That was always high. It was never any -- never a constraining factor. It's just that obviously, I mean, as I said, it's both value and valuation are important, so if one of them don't tack, don't work out, then there is no appetite kind of stuff. But the appetite was for more for, as I said, to do more M&A. The appetite for size was never a constraint.

Okay. And sir, second was in the travel vertical. Like you said top line can be slow or depending on how Europe pans out eventually, but given that our investment historically and our capability was very strong in travel -- so what are we trying to do there both in terms of investments and also, in terms of margins? Like if travel comes back, let's say, 12 months from now, will we see further increase in margins? And currently, your margins are depressed because travel is not turning out to be a revenue-accretive thing for us.

Right. I mean, when things come back, obviously that will lead to both in top line and growth in margins. I think there is no doubt about that thing, all right? It's a question of -- when is the question really.

Yes. So the thing -- connected thing is utilization. Now that -- is it like these people are getting deployed somewhere else because utilization also shot up last quarter and you are seeing growth in other verticals, I guess, for the next 2, 3 quarters?

Yes, yes, because utilization has shot up because the number of people decreased also. So that's why it shot up, but as we go forward, we are planning to hire more people. So the utilization will be normal.

Which is 85-odd percent levels.

That's right. That's right.

Okay. Sir, what is the hiring plan for the next 10, 12 -- or whatever you have frozen on?

We are looking at about -- I think, about 500 people in the next 2 quarters.