Sonata Software Limited (SONATSOFTW) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 FY '22 Earnings Conference Call of Sonata Software Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Srikar Reddy, Managing Director and CEO, Sonata Software Limited. Thank you, and over to you, sir.

Thank you, Margaret, and good morning, everybody who joined us this morning. Today with me on the call, Mr. Jagannathan Chakravarthi, our CFO; Mr. Sathyanarayana, the Head of Finance; Mr. Sujit Mohanty, Head of our India business; and Mr. Ranganath Puranik, our Chief Growth Officer based out of the U.S. As you know, I think the results have now been posted on our website post the announcement and the Board meeting yesterday. So I'll quickly take you through some of the qualitative highlights of the performance of the last quarter and then some headline outlook of where we see today the business in the next few quarters. As I did mention last time, the demand continues to look extremely promising. I also mentioned last time that there are -- there were and have been and continue to be supply constraints, as you all are aware of, overall, the current context on the supply side in the industry. We have, as mentioned, put in a lot of, I think, initiatives to create capacities, look for alternate sources for talent, both in India and outside India. Also look for opening up proximity delivery centers in some of the markets to ports to serve our clients better and also address some of the challenged talent issues. So as I said, so overall, the demand situation looks good. We are addressing supply constraints, and even if you factor in the additional capacity we got from the acquisition of Encore, we have added about, I think, a net of about 300 people last quarter. And I believe that we should continue to be able to do that similarly as we go forward, both for meeting our current needs and actually investing and planning for the future. I think that's, I think, what we are doing to ensure that we have the sufficient capacity 2 to 3 quarters from now, which has been really created internally and are able to meet any kind of needs, which we will have going forward. So overall, if you take each of our business segments. In the international business, I think we have seen good growth across most of our industry verticals. We have seen a -- continue to see a growth in our digital services business. Again, I think primarily based on and driven by our whole Platformation theme and value proposition and approach to market along with the Microsoft alliance-led go-to-market. On the domestic business, we continue to see extremely steady growth, as I said. And we continue to see that as we go forward, both driven by demand in the market, additional partnerships. We have signed a more shift from our client to cloud, leading to more, I would say, annuity-led arrangements. We have made this acquisition of Encore, which was announced last -- in the last meeting, but it had just happened now [ it will be right ] about a couple of months acquisition. So that's going well and some of the figures are reflected in the current quarter. Our CX business and GBW, as I said, based on -- as the COVID is reducing in various markets, we are seeing some of the markets come back. Again, we are investing a lot more into that business. So while we see a top line growth, we may not see a commensurate growth impact, while the margins in that business are good because of the investment, both in marketing people and R&D development of the CX platform. So overall, net-net, we continue to see the demand being good across all the geographies, across all the industry verticals. We are doing, have done and we'll continue to do a lot to ensure we meet the supply-related issues as we go forward. And overall, I think the margins continue to be healthy, although there are obviously increases in costs driven by the supply side. To think if you do a limited one-off item, which we had last quarter, our margins this quarter continue to be decent, while on the organic basis, the margin growth has not been significant while the growth in revenue has been about, I think, 5%, 5.5% on the international services side. So as I said, we continue to see a very robust promising demand situation, continue to invest in a lot more senior talent. We have -- I added more senior talent than we had done last quarter. We've done some this quarter, both beefing up our cloud and cybersecurity side of the practice. We have created large deals team last quarter, and then the deals team is operational. We'll continue to invest in senior talent and creating for growth. So that's, I guess, in a nutshell about the performance of the quarter and our visibility for the future. I'll hand it over to Jagan to take you through some of the details of the financials for the quarter. And then we'll take questions that you may have at the end of Jagan's presentation. So thank you all again, and over to Jagan.

Yes. Thank you, Srikar. Good morning, all. Welcome to Sonata's earnings conference. We will get to the quarterly financial performance. The quarterly, we have continued to have robust growth in our revenue. The consolidated revenue has continued to have a quarterly CQGR of 4 percentage and the EBITDA CQGR is 3 percentage, and [ PAT ] CQGR is 3.0%. We continue to have a robust profitability and combined revenue growth in both the business -- India business as well as international business. In the International business, our revenue CQGR growth has been consistently high in spite of the supply-side constraints with Srikar was highlighting. We continued to grow the revenue very well. Our margins have expanded in this quarter, and we are doing well, both in terms of EBITDA as well as in terms of PAT. With the addition of Encore, the strength in our expanded verticals also were doing well. We continue to have a robust outlook for the next few quarters on the growth perspective. Domestic business has been consistently doing even. This is like a [ piece that has been ] existing. We have been highlighting that revenue. Please don't [indiscernible] this business on revenue. Please make this on gross contribution. If you see here, the gross contribution is consistently around 3.94 percentage. This is a continued growth we have, both in EBITDA as well as gross contribution. And the PAT percentage has been good for this quarter. We will -- this business is seeing a new growth perspective in -- with the advent of cloud adoption by a lot of Indian companies. We continue to see a lot of growth in this business in the coming quarters. And this has also performed very well on the cash collection perspective and the working capital investment perspective, the return on capital employed continues to be robust in this business. This is broadly the financial summary of how much is the revenue -- international revenue and also the domestic revenue. You can see the international revenue had solid growth of 11 percentage quarter-on-quarter and year-on-year growth of 25%. The EBITDA percentage has also been solid in this business, and we continue to have robust growth of EBITDA in terms of continued growth in revenue. And we expect this -- there can be some cost increases coming in because of the demand in the market and also supply side constraints, but we are very, very confident of doing well both in front of revenue and PAT perspective in the coming quarters. On some of the operational metrics. The U.S. business continues to be the largest contributor for us. This quarter, we have a little higher U.S. contribution. And in terms of industry verticals, our ISV vertical has done well. We continue to have robust growth in many other verticals like the retail [ essential ] has continued to be growing very well for us. And also the travel has continued to be maintained at the same level. And domestic business. The key digital services are really doing well, particularly, Dynamics services and also the rest of the digital, Platformation services have been robust. And we continue to see the growth coming in, in this quarter. We continue to see the offshoring a little bit increase in this quarter compared to last quarter. However, we feel that, over a medium-term perspective, it will [ get more better ] a little bit. our IP-led revenue is continuing to remain at [indiscernible]. Few more operating metrics. With this -- we have added new clients have added for this quarter, 8 new clients have been added, and we have added more than 1 million customer -- I mean, new customers have been added. The top 5 customers' contribution remains very robust, and our headcount addition has been very strong. Apart from the addition from Encore, we have also got a solid addition in the -- organically with this company. And sales and marketing, we have -- as Mr. Srikar highlighted, we continue to invest and expand on the sales and marketing. Yes, more investments are happening. We expect this to add to our growth in the coming quarters. With this, I conclude my financial presentation. I'll be back for questions. Thank you.

[Operator Instructions] The first question is from the line of Mohan Kumar from Emkay Financial.

Congrats on a great set of numbers. Please forgive my ignorance, I'm relatively new to the company and I just wanted to understand what's driving the seasonality over here. Because I've noticed that for the last couple of years, too, the Q2 tends to be relatively weaker versus the rest of the year. So can you please throw some light on that? Hello, can you hear me?

Yes, yes. So the seasonality, as I mentioned, is in our domestic business and the domestic business depends upon sometimes lumpy deals, which happened in quarters. So typically, in Q2, there are less of these large deals. So typically, large deals means lower margin. So the percentage of -- when you have quarters where the deals are larger, the percentage of the margin will decrease. So that's why, as Jagan mentioned, we manage this business based on gross margin and not on absolute margin. So that's what we have been mentioning in the last whatever 30, 40 quarters, where we have tried to describe what this business is, which is managed kind of stuff. And that gross margin continues to steadily increase. And because of that, the PAT is increasing.

Got it. Got it. That sounds good. Just one more question on similar lines. So the margins have expanded considerably in this quarter. So can we expect that trend to continue? Because -- so you've spoken about supply side concerns. But despite that, it looks like pricing power is really coming in. So can you throw some light on what can we expect for probably the next couple of quarters? Maybe the next of the years, while demand continues to remain solid?

I would stay cautious in the immediate future. While we will work towards retaining in the margins given the pressure on the supply side. But in the long term, I think the margin should be robust. When things stabilize and one is going to get back to a more stable situation on the supply side, one can expect the margins to be better. But in the short term -- I mean the short term is anybody's guess. But one is all expecting it's about at least 3 to 4 quarters where one can be dependent on the dynamics on the supply side in the market.

Got it. Got it. Sounds good. And just one final question. So I remember during the last call, you had alluded to growth on a Y-o-Y basis of close to 20%. And the last 2 quarters have been really strong. So can we expect probably to see a number slightly higher than that?

Yes. Subject to the supply side next quarter, we'll have a lot more vacations and stuff like that. But overall, I think, as we see it, as I mentioned last time, I don't see any reason why we shouldn't meet that number.

[Operator Instructions] The next question is from the line of Baidik Sarkar from Unifi Capital.

Congratulations on the quarter. A couple of questions. Could you flesh out the moving parts within the managed cloud practice for us? What is driving this kind of momentum? Is this our non-Agile practice? And what is your service confidence within this as the management?

Okay. Managed cloud services have got 2 components really. One is the infrastructure-related services for cloud, which are mainly management of the cloud infrastructure or migration, which are really lift and shift to a cloud environment. Then on the development side, there are cloud-native application development, modernization of existing cloud applications onto the cloud. So these are the 2 service categories, which are there in the managed cloud services. And -- in the initial phase, we are seeing more on the managed services and migration. And now we are seeing more demand pick up also on the native cloud development and modernization and so on and so forth.

Sure. That's clear. And also the practice area within the Microsoft digital platform, how much of this is project-based versus annuity? And is this primarily as Azure migration? Or is there a [indiscernible] impact within this as well?

So Microsoft digital platform is really the Dynamics platform and the surround of the Dynamics. So that's the Microsoft digital platform. And then there is the Azure cloud, which is a separate platform.

Sure. So how is that different from what you report within Microsoft Dynamics?

Sorry?

See -- no. Unless I interpret this wrong, you report the practice areas around Microsoft as Microsoft Dynamics as well as Microsoft digital platform. You're saying a part of Microsoft digital platform also does work for Dynamics. Did I hear you right?

Okay. I should -- let me just then step back. We are reporting the Dynamics separately, and the Dynamics is separate. Then the digital platform is non-Dynamics part of the Microsoft because then Azure is data.

Okay. Good. That's clear. Just a bookkeeping question on your reported growth. Ex the acquisitions that you did last quarter, what is the constant currency, if you can please spell that out?

Sorry, I didn't get the question.

No. Just a bookkeeping question on the reported growth. Ex of the acquisition that you completed last quarter, what is the constant currency number growth?

The organic growth on international services has been, I think, 5% or 5.5% or the organic growth on the international business. On the revenue side and the margin, if we -- I mean if we adjust for that onetime we took last quarter on the ILFS and all that, I don't know I can ask my finance team to share it. But my feeling is that margins would also be of a similar nature. But if you just -- these are reported number, and the margins growth may be about [indiscernible] percent.

Sure. And if I could just slip in one last question. The run rate on your top client and travel seems to have stagnated. Although the EU travel seems to have come back quite strongly. Is the outlook looking any better than what it was a couple of quarters back?

That's one account where we have supply challenges. Otherwise, outlook looks good.

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

Just 3 questions. One was related to ISV OPD revenue growth. Like it appears that some part of the acquired revenue has gone into that because health care revenue, which is shown separately, is a small component of the overall integration. So can you give us what was the growth in ISV sequentially? And what is the outlook there in that particular segment?

I can ask our finance team to share the numbers because, as you said, some part of the Encore team, I don't know what part of the Encore revenue is going to ISV. They have 3 segments logistics, ISV and health care. Can somebody from the finance team answer that question about what is the...

Yes this is the...

About what is the total growth, including Encore stuff on the ISV side?

Yes. The major portion is between health care and logistics. The other portion -- a small portion has been added to the ISV segment, which is about 20 percentage of the revenue of Encore's [ revenue ].

20% of ISV revenue?

No, no. Encore revenue. Encore, whatever is the quarterly revenue we have add...

Encore revenue is added to ISV segment?

Correct. Correct. Correct.

And what is the outlook there, sir, from an ISV segment perspective on an organic basis? Like what kind of growth rates are we seeing in terms of recovery acceleration, et cetera?

No, as we said, we are seeing growth across all the segments, Mohit.

Sir, that's why I'm asking this is generally high tech is accelerating versus the rest of the segments. For us also, it may -- I mean, as Baidik also asked you, you are aligned in the right technology area and the client. So should we expect for us also, ISV will be accelerating and outperforming the other segments? Or do you think it will be evenly spread from Sonata's perspective?

I mean if we see our pipeline, I mean, what we have, right, I'm seeing a more unified distribution, right? The -- if I see my current deal pipeline, both existing and new.

Sir, second was on IT services margins. Now last quarter also, you opened some centers abroad. And I think in the last call, you said that as things normalize, you are also -- or you have plans to diversify the delivery base. Also, there are these base pressures in India. So what kind of IT services margins are you looking at from a steady [ step up ]?

That's what I said. The previous person -- I mean I would be cautious for the next 3, 4 quarters, while we try to manage it both sides. Both trying to get some extra revenue and trying to manage these costs to more very creative talent development initiatives. But I would remain on cautious. I mean it's very difficult. I mean I don't know how to predict because it's very volatile, right?

Exactly.

The [indiscernible] pressures are between 30% to 120%. So I don't know what that number will be. So I would rather be extremely cautious at this time. To be cautious, we are trying to manage this, but very difficult to predict. So I would say that let us be cautious for the next 3 to 4 quarters.

Cautious could be like 100, 200 basis point impact could be there? Or do you think could it be like [indiscernible] or something?

I don't know. That's what I'm trying to say. I mean what is the impact on both the sites. So at this stage, I would say, let's take a qualitative statement of let us be cautious, and it will be good if we can surprise ourselves as we go forward.

And sir, last is a repeat question for last many calls. Now this time, you said travel, you are turning positive. Like you -- our previous run rate of course, was much higher, and we are sort of at a much lower number. Also industry has recovered on the travel side, IT services industry. So now given this revised outlook, et cetera, that you have on European travel, in how many -- is there a way we can say that in, let's say, 3 quarters, 4 quarters, you can go back to the previous highs. Is there some direction...

I think so. As I said, we have a -- more of our supply constraints had impacted that particular business. So demand is picking up. More or less, the client has been back to 80% of 2019 numbers. So just hoping to get back to 100% of 2019 numbers in the next 1 or 2 quarters. So the demand is not a problem. And we are working towards solving the supply issues, and hopefully we'll solve it and -- so to that extent, yes, the demand looks extremely robust.

So this quarter, travel stagnation was more to do with supply than demand for the [ travel ]?

Yes, yes, absolutely. Totally.

So if hiring stays the way it has been in 2Q, you expect...

I expect back to everything. Yes. Yes.

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

Sir, just to extend the question on the travel vertical. So you said that we will reach 100% of like 2019 number. So I'd just like to understand travel with the larger client. So is the growth will be mostly like linked to the recovery in the travel? And is it like volume-linked? Or have we increased the scope of work with the larger client? Or is it like newer areas that we're working in? Or is this just the recovery of the volumes that a little bit doing earlier? So on the travel vertical? And second is on the attrition number. If you can share that, how has been the attrition? And on the margin front, we have done pretty well. But we have mentioned that we are likely to build a bench, especially for the Microsoft practice. So how that is going to impact the margins in the coming verticals?

That's a lot of questions. So as I said on the travel side, yes, right now, what's in the last 18 months, the focus was on building new stuff because they were wanting to use that opportunity to create new stuff, right? Now once things come back to normal, then we'll go back to doing the actual keeping the business going work, and that should start picking up. So that's where we will expect growth to come from. The new thing is what we have been doing already, the other thing. So that's on the travel business. And I guess your next question was around...

Attrition and...

Yes, yes. Attrition has been about 23% to 25%. And then the next question you had was on -- yes. I mean, the margins have answered that question, right? We are factoring -- factor all this building capacity and all that into what we are trying to do, but also trying to ensure that we keep the margins where we are. So it's very difficult at this stage to give an exact number. And I've answered this question to the 2 previous people also.

So I was just trying to understand from the angle that we are like trying to build a bench, right? So will that have an incremental impact on the margins? Or we are okay with this kind of margin and that we're working with?

The bench is already there. I mean we have added, as I said, 300 people. We had almost added about, I think, 500, 600 people in the last 2 quarters without the acquisition number. So I'm less concerned because that's controllable cost. The uncontrolled cost is the lateral part, which is we need to do to meet immediately. And that's where I think I will be cautious of either doing backfill or meeting immediate needs, not waiting for the bench, which has been created, right? We want to create a deliverable branch. That means you take x kind of people and then create the training and all that, so that they are -- and these are not trainees. These are, again, experienced people. But the different skills and how we train them on digital skills and then put them on the projects. So that's a more controllable phenomenon. So that's factored in. It's really how -- what the lateral impact both immediately and backfilling. And what that impact can be is what I want to be cautious about.

Okay. And on the international business, what is the subcontracting costs? And how that has changed? So obviously, that has gone up for the industry. So is it now ours is now somewhat like different from the industry or there is [ arising complication ]?

I get your question. I don't know whether you're looking at that. Do you have any number, the finance team, on that?

No, Srikar, we have not disclosed any specific numbers on that. But the subcontractor cost is remaining at the similar levels of -- it has at least come down compared to last quarter still.

The thing is, it has gone up for others. So that's why they're asking for that.

Yes, yes. because last quarter, we have invested a lot because of supply constraints and COVID impact. This time, we have a little bit moderation has happened, but it's not substantially different.

1 Okay. So I guess if you can share that number going forward, very useful because of [indiscernible]. Yes.

[Operator Instructions] The next question is from the line of Mohan Kumar from Emkay Financial.

Sir, just one question on the hiring front. So you had mentioned that you are looking to hire heavily. So I just want to know if there is a number around what -- how many people that you probably would be adding over the next 2 to 3 quarters. And would that be largely backfilling? Or would that be kind of to build up new capacity? And just a follow-up on that. I noticed in your presentation that the utilization is around 90%. So do we see a position where we probably get a utilization to close to the 95% mark over the year?

Sorry, the utilization is like 80%, right? Not 90%.

Yes, 80%. So do you expect that number to go up over the next...

No, not for the next 2 to 3 quarters.

And with respect to the hiring. So the numbers could you throw some light on what are the numbers you're expecting over the next couple of quarters? And would that be more backfilling? Or would that be for the new business?

Both. It will be both -- I mean, 3 things: backfilling, immediate needs and future demand. So looking at a maybe a gross number of about possibly 600 people in the quarter, a gross number.

The next question is from the line of Dhiraj Dave from Samvad Financial.

Congratulations on the good set of numbers. One question I had is related to Slide 19. We see the lowest customer addition. In fact, if we see this in the last 4 quarters, we just added 8 customers after the presentation in Q2 '22 in international business. One part is that if I look at the new million customer data, I find that we have almost like 36 new million customers. But 5 are being added from Encore equation. So if I take that, then basically, there is no sequential improvement. In fact -- so any reason why we are not seeing despite having so great demand, why we are not able to scale up our customers to 1 million kind of rate? Any thought on that?

No. So our description of 1 million customers is not a customer has a potential to give us $1 million. The thing where the customer reached the annuity rate of $1 million. Are you understanding the difference?

Yes, yes. No, no. My question is -- the point is that if I look at past data, we used to have 1, 2 addition every quarter, at least 1 or 2. If I look at Q2 '21 to Q2 -- Q1 '22, you find that there has been...

Correct. What I'm trying to say is that addition is not that the customer was acquired the previous quarter, you understanding what I'm saying?

Yes, yes, that I understood. That it reached the $1 million milestone.

Yes, so they're acquired some time back. Now they have reached $1 million run rate business, right? So it can vary based on when each of these customers reach a run rate business. That's all I'm trying to say.

Yes. So you -- maybe when it's optimistic that over a period of time, many of customer will reach probably the [ timing issue ]...

Those who are -- who have been acquired, we convert into a $1 million run rate customer. That's correct.

Okay. And secondly, on Encore side...

[indiscernible] we [ depend ] more and more on people with more potential. To that extent, we are getting very selective about the clients we are adding to our portfolio, and you will see that these numbers will not be as high as in the past.

Yes. So these 5 customers which we have $1 million approximately from Encore, can you provide some geographical distribution? Is it the U.S. based? Or which area -- which -- all U.S.?

Encore is a around 100% U.S. company.

The next question is from the line of Vipul Shah from Sumangal Investments.

Congratulations for a good set of numbers. My question is, can you give the financials of Encore and what capabilities it brings to the table?

Okay. Let me answer the first -- the second question first, and I'll ask my finance team to answer the first question. So the capability, as I said, the industry verticals are health care, logistics and ISV. The main capability on the cloud services and then the digital assurance services. I'm going to ask my finance team to share the numbers which have come into this quarter's financial results.

Yes. We have disclosed this during the acquisition also. They have a run rate of around $15-plus million of revenue, with about 20 percentage of EBITDA [ they are running at ].

$15 million annually, right?

Annually, yes.

And Mr. Jagannathan, can you give me employee costs, specifically for IT services for this quarter and last quarter?

Employee cost is disclosed in our financials, sir. You can get that from there, from the financial system. The Regulation 33 has the details of all those things.

For IT services specifically.

Specifically. IT services, employee percentage is not at a substantially change as a percentage of revenue. You will be able to -- I will -- off-line, I will look at it.

I didn't find it anywhere. So why don't you share the number?

Okay. We will check on the details and then share it with you off-line.

Share it off-line, should I drop a mail or call you?

Please share -- or drop a mail.

No, no, we will not share it off-line. Whatever we share, we will put it on the website. There'll be no off-line.

Yes, yes, yes. Yes, Srikar, yes. We will do that. First, I have to prepare for it and then disclose I'll disclose it to [indiscernible] around the call. That is the reason why I ask them. I will share it separately because I have to update the website also.

And lastly, can you give the subcontracting expenses exact number from last quarter?

Pardon?

Yes, we answered the previous question. He doesn't have it. When he shares it -- when he discloses it and puts it out, he will share that also with you.

Correct.

[Operator Instructions] The next question is from the line of [indiscernible] from CONA Wealth Management.

Sir, my question is, you mentioned there are supply side constraints. So could you highlight what are the 3 biggest supply-side constraints? And what is the risk mitigation strategy the company has undertaken?

What are the -- what was your question?

Sir, what are the 3 biggest supply-side constraints you're facing? And what is the mitigation strategy for the same?

Okay. Okay. Supply-side constraints are attrition, then getting the right people at the right cost in the market at the right time. And the third is ensuring that the people who are offered actually joins the company. So these are the 3 supply-side constraints. Did I -- did you get the answer?

Yes, sir. So what is the mitigation strategy for the same? So like...

Yes, we are looking -- we have done a compensation review. We have done an interim compensation review. We're looking at another compensation review partly something this quarter and then starting in January -- starting with the quarter of January 1. Second, compensation to improve retention. Of course, there are a lot of employee engagement initiatives and career planning, career migration, switching -- moving them to the right project, giving them higher roles, all that kind of stuff. So that's the second part of our -- their own career and all that kind of stuff to, get the attrition down. The second is obviously I mean we have scaled up our recruitment capacity by, I think, 5x in terms of -- I think today, I don't know, we must be having. We have increased our recruiting team by -- from about 15 to 50, and we got some recruitment versus outsourcing. And then as I said, we're looking at other markets, both Tier 3, Tier 4, rural India, rural outsourcing in some other countries for getting talent. So that's on the talent, the thing. Third is like I think it's -- we cannot do anything about -- if somebody today quits and has 5 jobs, you can't do anything about ensuring what percentage of offers we make join you. So all we are doing is that, as I said, the key biggest thing we are doing is to proactively create capacity, and that is the largest risk mitigation strategy we're implementing.

So in -- similar to that line yes. So we understand that internally, you are doing things to keep employees engaged and attractive. But at the same time, we have friends in the IT space. So they are getting offers left and right from other companies. So they are likely to move to ones which pay more. So in that context, internally, what is the percentage in increase in employee costs that with like 15 or 20 beyond which you will put a cap, so just to understand.

I didn't understand. What was the question?

Sir, the thing is, employee cost going forward, it has increased substantially for all IT companies in the last 9 to 12 months. So that's an industry-wide thing. So Sonata-specific or industry-specific, what do you think is -- it cannot keep exponentially growing, right? So there is a point that the company is...

You have to create your own capacity. That's what I'm trying to say. You'll keep the -- what is the popular concept called? The pyramid, in the industry. I mean you focus on the pyramid. So right now, the pyramid has become tougher. So you get it back to the normal stuff. And for that, you just need to create capacity. There's nothing else you can do about it. I mean you go into the market, you want somebody, the cost will go up. There's no other option.

Sir, my final question is, sir, the theme of digitalization, which played very well for many IT companies, especially companies like yours, during the COVID period. So can we assume that trend overall is still on an exponential growth? Or it has tapered down to some extent because a lot of people have adopted that already?

Not yet. I think there is still a reasonable amount of tailwind on that thing. So how long, we don't know. But obviously, there was a -- it's not that the digitalization, if it was at 15% to 18% growth kind of stuff before the pandemic that has just jumped up to about 30%. Even if it goes back to 18% or whatever, we'll be on a much higher base. So to that extent, it's not going to become less than what it was before the pandemic. It's just boosted up in the interim, and that will continue for at least a few quarters. That will be bumped up.

Okay. So can we assume at least another 2 years, this trend will continue [ digitization ] the 15% growth rate?

[ Digitization ] is going to continue or we don't favor long, right? That's not what we are talking about. It's this extra bump. I'm thinking that the extra bump in the demand by -- additional demand coming on already a high-growth industry, a high-growth service line will last 2 or 4 quarters. That's my estimate, but yes. And anybody's guess is as good as mine.

[Operator Instructions] The next question is from the line of Mohan Kumar from Emkay Financial.

Sir, just one final question from my side. Are you looking to do any more acquisitions across the world? I know you've done a few in the last couple of quarters, but is there a pipeline that...

Yes. There is a pipeline we are looking at actively. But we will be cautious about -- the valuations are a bit steep right now, so we will not be reckless.

[Operator Instructions] The next question is from the line of Amit Chandra from HDFC Securities.

Yes. So sir, my question is on the domestic product services business. So there, we have seen some kind of weakness in this quarter. So the Y-o-Y growth was one of the weakest in the last 5, 6 quarters. So is there any kind of the pent-up demand that was there which is tapering down? Or we are fully confident of the growth in the sector? And also, the receivable days, the DSO days in this is coming down. So are you getting very selective in terms of -- or is it being driven by like better collections? Or like what is driving that? So if you can throw some light on that.

Okay. I don't know where you're getting our Y-O-Y on domestic business. [ It must be some ] huge stuff. I don't know what the number is, but must be at least 60%, 70%.

Y-o-Y was around 15%. Earlier, it was doing at 28% or 30% Y-o-y so...

No, no. So would it be about 50%, 60% Y-o-Y on the domestic business? I don't know, my finance team can share that with you. But maybe it's more -- so it's -- I think the Y-o-Y on the domestic business this quarter, I don't know, can the finance team share it?

Yes, we can. One second. The domestic business, revenue growth was actually 16 percentage growth. Total is 32%, 33%.

No, no. The PAT.

PAT growth. PAT growth is about -- it's 76% growth a year-on-year.

Right. Yes, yes. Amit, that's the number.

Yes. So I obviously -- in terms of PAT, there has been the growth, but that is compared to the COVID growth, like in the COVID quarter. But in terms of the -- in terms of top line growth I was talking about.

Yes, as I said top line growth something which is -- I mean it could be -- I mean any number. As I said, we focus on the gross contribution as top line is highly incidental on the revenue mix for that quarter. If you're going to see our top line for this business next quarter, Q3 will be huge because that's been the seasonality in that business.

Yes. Yes. And also on the collections part in this business. So what is driving that better collections?

Yes, I think things were obviously a little -- how do you say, tight, during the COVID period where people were asking for extended credits and so on and so forth. I think things have become a lot better now since the end of that, and I think that has led to a more healthy collection cycle.

We have very strong collection outlook -- money collection is there and the total working capital investment is also coming down every quarter.

Okay. So we have mentioned 77% around -- revenue from cloud, and around 75% annuity business. So that is also what is driving the high collections, right? Because the quality of customers that we're engaging has highly improved significantly in this business?

Sorry, the question is, is the cloud and the annuity business driving better collections?

Yes.

Yes. The nature of business is also helping, but our business is also improving a lot. Quite a lot of opportunities are coming. And by nature, the -- our continued monitoring of credit quality of the customers and the strong follow-up with the customer and the strong value delivery to the customer is helping us.

The next question is from the line of Vipul Shah from Sumangal Investment.

I mean we are a Platformation-based company. So I just -- I'm wondering, our requirement of engineers should be less as compared to traditional IT services. So could you please explain why there is some mismatch? Or what I am missing here?

I told many times that we are -- that Platformation is not a platform. We are not licensing platform. We are not an IP business, where we said we are using our IP as a differentiator to get services business. We are still a services business, and because of the Platformation or IP, we can hope to get better margins for our services. We are not a nonlinear business model. I mean -- so that's what I'm trying to communicate. We are not a nonlinear business model.

Okay. So our revenues will always be linked with...

In the services. Yes, you're absolutely right. Unless there is a clearly separate license-led business, then they will be nonlinear. It won't -- the revenues won't be linked to headcount, yes.

As there are no further questions from the participants, I now hand the conference over to Mr. Srikar Reddy for closing comments.

Great. Okay. Thank you, Margaret. Thank you, everybody, for joining the call today. And thank you all for your questions. Thank you all for your support. Whatever are the, I think, actions, our finance team will get back and share that information. So thank you all again for joining us.

Sir, before we conclude the call. I notice we have one question in the queue, would you like to take that.

Yes. Sure.

The next question is from the line of [ Rajeev ] [indiscernible], an individual investor.

Sir, this is [ Rajeev ]. Just one question. How are we shaping up on other cloud like AWS and, say, the [ GCP ]? We know we are masters -- or the leaders in [indiscernible], but I just wanted to check on how we are shaping up on other clouds.

As I mentioned, I think, maybe 2 quarters, 3 quarters back that we had just signed up with [indiscernible] in India. And I think both are looking extremely good, and we will see them driving solid growth to start within the India market. And then like we did with Microsoft, we will then take these partnerships to global. But right now, the focus -- we just signed [indiscernible], and I think it looks extremely good, and we will see growth in our India business, driven by these two partnerships. And as we did with the other alliance, we will then take it global.

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