Sonata Software Limited (SONATSOFTW) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Sonata Software Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Srikar Reddy, from Sonata Software Limited. Thank you, and over to you, sir.

Yes. Thank you, Stephen, and good morning, everybody, for joining the analyst call post the announcement of our results yesterday for Q3 FY '22. I have with me on the call today, Mr. Jagannathan, who is our CFO, Mr. Raju, who is our Chief Delivery Officer; Mr. Sachin Arana, VP and Head of Finance; Mr. Philip Monti, Head of our India business; and Mr. Ranga Puranik, Chief Growth Officer of the company. The results and the relevant text have been loaded onto the website, along with the press release, I'm sure you all have had a chance to look at it. So overall, I think, first of all, I'd like to summarize the quarter in line with what we have been saying about in the last few quarters that we see the demand situation continues to look good. Obviously, we continue to have the challenges on the supply, though we do see the tapering off. We hope that taper off will continue into the future. We are continuing to invest for the future and creating capacities well in advance and all those plans should rectify and start showing up in the numbers in a couple of quarters from now. And one of the reasons. I think we do have a little softening of the margin in this quarter is due to -- I think we did some level of correction in the last quarter in the compensation and the cost of new people have increased. We also will continue to see a little softening as we do a correction in the compensation in this quarter and then in April. So while we continue to see a good uptick on the demand situation, especially from the digital side and clearly across most of our segments. The travel has taken a little bit of, let's say, I would say, slow down because of all the issues with the Omicron and other stuff. But we do think that starting from spring that is March, April, I think that should come back and that's what we are expecting to happen. As a company, as I mentioned, we continue to invest in improving our digital capabilities across the board. A lot of focus on the Microsoft digital platform capabilities apart from the dynamics, a more focus on the data, cloud, Azure and all the other related services. We're also trying to -- starting to invest in the non-Microsoft cloud stack. A big, I would say, performance, though this time has been our India business and I think, which has shown a huge uptick, not from really the top line because the top line keeps wearing this on the kind of deals we do, but more from an absolute bottom line perspective. And as I said, we continue to see that kind of a trend in the India business as we expand into more and more cloud business in India and some other related services. So overall, I would summarize the quarter as a continuation of the investments and strategies we have made in the past. And the fact that they're starting to yield more results both in terms of our story, both with our existing clients and new clients. I also did mention we do see a healthy pipeline, both in existing clients and in the new pipeline on the digital side, and we'll continue to see that. So while we are -- and we continue to make investments in getting talent across the board, both on-site and offshore. I did mention last time that we had opened a couple of development centers, one in Canada, one in Ireland. The pace of growth hasn't been at the pace at which we wanted and that's because of the issues we've been having with the travel and other restrictions. But we do expect those to start kicking in. There are a lot of other initiatives we have taken to take care of in the short term. The capacity and supply side issues. So that's really a summary of the performance for the quarter and what we look forward for the next couple of quarters. I'll hand over to Jagan to take you through the more detailed financials, and we'd be very happy to answer any questions you may have. Okay. Thank you all again. Hello. Can you hear me?

Yes, sir, we can hear you.

All right. Okay. I just hand it over to Jagan yes. Yes.

Thank you, Srikar. Thank you all. Good morning all for this analyst call. This quarter, as Srikar was mentioning, has been good to us from the revenue trend, the pipeline, the digital services, what we offer to the customer has been growing strongly. The revenue performance has been good. As you said, the domestic performance is not measured by the revenue what we have got revenue has been good this quarter, but the absolute growth in the profitability in the domestic business has been very good for us this quarter. And the common kind of demand that is coming out, both in the international and in domestic business have been very, very strong. So the other quarter, the revenue growth and the profitability, EBITDA growth and PAT growth has been consistently growing. The quarterly CQGR of both EBITDA and PAT has been very, very strong. over the period of time. There were some profitability impact for this quarter due to the cuts in the salaries, which we have mentioned in the last quarter also, there will be some short-term impact of the sales. International Services, the revenue has strongly grown with the new acquisitions and additions, we have about 8.1% quarter-on-quarter dollar growth. Very, very strong growth has been reflected. On a constant currency basis, it has been very strong at around 6 percentage growth. The PAT and EBITDA growth has been consistent there quarter-on-quarter, although the percentage has a little bit dropped for this quarter. Domestic business, as we mentioned, absolute profitability has been very, very strong for the domestic business. We have a very strong growth coming in, in this quarter, and we are very, very confident of the daily demand situation in India, and we will continue to have a strong growth in this. And the quality of revenue has also been very, very strong in domestic business also. Financial summary. This talks about the profitability and how much we have made on this. We had a strong revenue for this quarter and strong profitability also. The PAT for this quarter was been INR 97.6 crores compared to INR 91.2 crores last quarter, very strong growth of 7.1% quarter-on-quarter on profitability and on the consolidated EBITDA also was around 7.6%. Operational performance mix in the -- mix has not changed between the geographies, not much of the same. It reflects the same. Although the EU has been a little more and as Srikar was mentioning, the travel has taken a little backseat, but we have a European still bit small change in this quarter. However, U.S. has compensated that kind of growth. our growth on Microsoft Dynamics Services, Microsoft digital platform services has been very, very strong, and the key quality of revenue or high digital revenues have been growing very, very strongly for us and we continue to have a booked kind of growth in ISV as well as in the retail, the spend has been very strong. The on-site/offshore mix has remained in the same level for us for this quarter, and we expect this to be in this range for some time till the change happens in the overall post-COVID impact. Other operating metrics, we have added 11 new customers to end the year. Out of that, we have 2 customers in more than $1 million kind of customers. And we continue to add new customers very, very strong about it. Our headcount has gone up very well, about people added this quarter. This is a very, very strong -- we have been having a strong growth of employee addition also during the last couple of quarters. With this, my financial update is there, hand it over back to that to the host for the questions from analysts...

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

Congratulations on a great quarter beat but all counts and my best wishes to the team. Couple of questions. Could you flesh out the drivers within your managed cloud service line. What is the split here between the implementation versus cloud-native development? And how should we understand the mix between Azure versus non-Azure within the service line?

Okay. I think we've clearly broken it up in the Microsoft digital services and the...

So I was just want to confirm that all of this is non-Azure I'm guessing then.

Yes. When you say open source is non-Azure when you say Microsoft digital essential. Yes. And your first question was what is lift and shift? What is native development? And what is infrastructure migration? Was that the question?

That's right. That's right. What's the split and how you're seeing the space progress?

Yes. Currently, most of our business is on Native development, and we are trying to push it up into more of -- not more. I mean, do also the migration and while migrating the way we're architecting. So that's where we are heading towards. Though the big consumption revenues come from actually when you do infrastructure migration that's the e-data migration. While the consumption revenues are large for Microsoft, the service revenues are a percentage of that consumption they are a little lower, but that's exactly good in our India business, if we can actually do greenfield stuff because the margins on the license itself are very high. So that would be my answer overall on the cloud fees. And the non -- in the non-Microsoft cloud, most of our revenues are currently on the Amazon platform, and they all come from our existing clients. We don't have still a very strong Amazon cloud go-to-market. So we're starting that in India at as a [indiscernible] and try to expand it globally as we go forward. Google Cloud services would be a lot lower.

Sure. That's very helpful. So on the Microsoft, obviously, the indicator that obviously there from ISV itself, just given how they continue to deliver on both Dynamics and Azure keeping that in perspective. How would you advise we imagine? How your ISV practice will look, say, in a block in the next 3, 4 years? I'm not asking the guidance...

There are 2 businesses. Microsoft, ISV sell-through revenue is what we sell to Microsoft. So that could be anything, but could be Azure, could be Dynamics, et cetera. What we do with Microsoft in the market is what I just spoke about, where we address customer leads jointly. Still a large number of that is Dynamic led, but because Dynamics 365 is also cloud. So there are associated cloud services especially Trading. There are new data lakes on the cloud, especially around the Dynamics data and so on and so forth. So as I've said many times, the revenues we make in the market, along with Microsoft, reflects more or less in the other industry, it can also reflect in the ISV. But it's not necessarily all that we do for Microsoft. So please separate those 2 out.

Yes. Sure. Just squeezing one last question on the domestic business. The revenue is substantial, and I'm assuming all of this is cloud-driven. So is it fair to assume that the earnings growth here in the years to come will be significantly higher because this is annuity? And the license consumption on this base itself is growing in very high double digits. So is a very steep jump up in earnings growth in your domestic business of that assumption?

Earnings quotes as I said, I mean, I did say last time, I said 10% to 15% annual growth is certain, whether we want to make it up 20% annual growth, we will confirm and it will be driven by more cloud and our expansion to more clouds. It's also driven by the policies of remunerating partners on what kind of workloads you move to the cloud, and that keeps changing. And one needs to keep close track of where we want to play to maximize our margins in that business.

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

Sir, one was related to travel slowdown. So like you spoke about this being slow in the March quarter. So should we expect like a flattish or are you also expecting some decline because of some work that was stopped on the way? So that was one.

No. What we are saying is that it should stay this way in this quarter, and the growth we'd expect in the April quarter.

So March will be more or less flattish and then we will resume.

Yes. That's what we're expecting. I mean, you know in lieu of Omicron. So I mean I do want to but I'm not able to explain and the new thing that there are no such things where, again, there are lockdowns, shutdowns and travel becomes a little difficult kind of stuff. But overall, everybody is quite now -- I wouldn't say bullish, but practical about it and I think that things should start returning back to normal.

Okay. And second was on the salary direction. So what -- because I did not see much impact on the margin for IT Services segment. So was it absorbed and how much was it there? And when are the next correction plan?

The next one, we are saying we'll do this quarter, fairly we did last January, and then we did some intermittent correction throughout the year. We're going to do a big one this January and then a follow-on upward in April kind of stuff. I'm assuming that you should have about..

You mean, there is just -- there is one correction in Q3 and the other one in Q4, and there is one more in Q1, is it?

That's right. The Q1 will be the largest.

And how much is the impact? How big is this large, meaning..

I've been looking at about 67% on an average on maybe about, INR 7 crores. INR 8 crores.

In 4Q.

In Q4.

Correct, Q4. And then in Q1?

Maybe a couple of crores.

Okay. And then we should be done for the next year.

We hope so.

So where is your attrition currency?

We are at about 22%, 23%, but we see that flattening out in the last few weeks and that may take a little dip. But we want to wait and watch. But we have -- as I said, we have made our plans to create our own capacities and how much capacity should start delivering a couple of quarters from now. And hopefully, we'll get back to better margins then.

Okay. And any -- like what was the impact for the quarter in terms of margins, Jagan sir if you could help me? And then what -- how much margins you may be on the steady state for IT services?

Okay. Maybe I'll ask Jagan to answer the question. But we have an impact of about INR 3.5 crores, INR 4 crores this quarter.

Yes. Mohit, as R. Sathya said earlier also in quarters past, we have always maintained that the medium term, our EBITDA margin will be in the range of 23% to 25%, in a normal range. And this impact can have a couple of percentage impact coming in this quarter. We are also working on with the customers for [ rate exchange ] but I think that's depending on a couple of .

So sir, how much was -- like EBITDA margin for IT services in 3Q?

It's not around [ 27 ] compared to [indiscernible].

Is it for ForEx movement, it appeared to me it is flat Q-o-Q. Is that correct? Or is it down?

Yes. And just for solid movement and then it may be a little better, but I'm talking about EBITDA, EBITDA percentage.

Okay. And then on the control margin, like when we try to sort of add up the segment margin and then move to control margins, there was a little higher impact. So is there something which is like when you add up the EBITDA of segments and then look at combined EBITDA. Usually in the gap of 5%, 6% this time, I think it was a little higher. So is there a line item with sort of impact that?

Yes, I will take it offline with you on this because there is some consolidation and some eliminations happen, that's the reason why it happens.

Okay. And last one is on DSOs. Any outlook on DSO segment-wise because they came off for one segment and then also moved up for the others, which was a little opposite compared to the historical trends. So what are you expecting in DSOs?

DSOs. We are -- this quarter, it will be a little more because December quarter is lot of vacation during December. Last 2 weeks of completely collections on the delay. This quarter, don't expect it to understand of day sales. It will improve in the coming quarters. Definitely.

And on the domestic side?

On the domestic side also, domestic didn't even know that last quarter impact was not spent. It's just because you had a huge kind of a building happening in this quarter, there was an impact of a gain in domestic business. We think it will go back to the normal level of 32, 33 days.

Because on the domestic front, you were quite low compared to where you were a few months back. So the question was DSOs were more in domestic or will they move up again?

No, they can not expecting to move up, but will not also improve from very large extensions here.

The next question is from the line of Sathish Kumar from Kotak Securities.

So my question is around, I just like to know what are the top 2, 3 areas where there is strong demand in the cloud-native application development be taken well? And how are we positioned in that state in our plan? Are you gaining share on the potential set of clients and lots of [indiscernible].

Sorry, there are too many questions. Can you just ask one question at a time, please?

Sure. So I would like to know what are the top 2, 3 areas where there is strong demand for you guys. How about cloud-native application development tool?

You're asking what are the 2, 3 areas? You mean areas are in geographies? I didn't understand.

In terms of cloud services, for example, like analytics, for example.

Okay. Yes. So it's across the board, right? It's across the board, the 3 things, whether it is architecting, rearchitecting current solutions for cloud, building absolutely brand-new surround solutions for the cloud. And the third is the creating the cloud data and analytics solutions, both from creating the infrastructure for the cloud and then doing the cloud analytics. And of course, for us, we have the Microsoft Dynamics 365 on the cloud. That's a big service client for us. So we are seeing demand across all these segments.

Got it. And are you gaining share on the digital setup plan?

What is the question?

So are you gaining wallet share in digital setup plan?

What is our wallet share in digital setup plan?

Yes. I mean, are we gaining share or because we have strong set of numbers and sequential results.

There -- when I'm saying gaining share, one is we're getting new clients and going with existing clients and we have our share in our, what we call set of services, and we continue to grow there. Yes.

[Operator Instructions] The next question is from the line of Vipul Shah from Sumangal Investment..

Congratulations for very good set of numbers. Can I have the subcontracting cost for this quarter, please?

Jagan, you have that?

Yes. The subcontracting cost in terms of dollars is around $4.5 million for us.

$4.5 million. Okay. And sir, can you comment on performance of our recent acquisitions like scalable data systems Sopris, Encore, I mean they all have turned around and have started contributing profitability?

Yes, sure. I think scalable has definitely been contributing. So has Encore, I think those numbers are there. And GBW the one which was maybe a little older. It continues to be steady, although they get because their services are customer experience measurement services, they do get affected when markets are down because there is a physical element to that measurement service. So that is varying but overall we are very happy with the progress of that business too.

Next question is from the line of [ Vanit Sawla ], an individual investor.

First of all, congratulations on excellent Q3. I just had one question. I wanted to know that till how much is the frequency of the renewal of the contract with Microsoft? And are we expecting gains in terms of revenues and services you provide to them in coming FY?

Sorry. You're talking about a renewal of service as a partner to Microsoft or...

Yes, exactly.

We've been a partner with Microsoft now for the last 30 years. We started in 1991.

Yes. Is that a contractual thing wherein you, your rates and everything gets revised yearly or something? Or it's a different mode of offer?

So it's a service we provide Microsoft. So they -- depending on the nature of contracts vary from annual to 3 years.

Okay. And what kind of outlook are we seeing in terms of the we revenue generate as a service partner to Microsoft in the coming year?

I think we're quite optimistic in the growth we think across all the things we do with them whether it is product development, customer support, internal IT and working with companies to serve customers, we are seeing the traction in all of our ranges.

Next question is from the line of Amit Chandra from HDFC Securities.

So my first question is on the IP-led revenue. So we probably are very, very strong on the IP-led capabilities in the transformation of the IP-led revenue has been coming down or has been [ deep ] for the quarter? So what's your reason for that? And my second question is on the along, apart from travel, I know we are getting strong growth in the retail vertical, apart from agri and travel. So what's happened in the retail vertical, both essential/nonessential. So is it, like you know, by -- around the acquisitions or is their targeted growth that we are seeing or it is actually coming from [ nuclear ] addition. And also if you can give some more color on the distribution and manufacturing verticals, what is happening there?

Many questions. What are your first questions on the ISV verticals?

No, no. IP-led revenues.

Okay. And what was the question on IPs revenues?

The IP-led revenue has actually come down in this quarter. So I just wanted to know...

Come down?

Yes, like have come down in terms of the contributions. In terms of contribution also, the growth there has been like lower in the company. So that's what I was asking.

So I don't know. I think the numbers are about 8% growth quarter-on-quarter on ITS revenues? Is that what you're referring to?

IP-led revenue, sir. IP-led.

Oh IP-led. I see. Okay, that I mean as a percentage as we acquire more companies and the revenues of those companies are less IP dependent. That's why we will see that flattening out or decreasing as our overall revenues go up. Okay. I understand. Okay. Yes, yes.

Yes. Because we have seen a decline in the IP-led after very a long time. So is there any specific reason for that? Or is it actually led by a specific client?

No, it's not. It's what I'm trying to say is it -- those revenues are remaining flat as we are growing other revenues, some of the acquisitions are non IP-led. So to that extent, as a percentage, that will decrease. Is that clear?

Yes. Okay. And also on the vertical flavor what's happening in retail, essential/nonessential, and also on the manufacturing and distribution. So we there are focusing on having a capabilities both on manufacturing distribution and also on the commodity side. So what we -- like any update on that will be useful.

So absolutely, I think we are seeing good traction across all the verticals they're operating apart from the travel vertical. And across all the service lines we are looking at. So the essential retail, nonessential retail, manufacturing, distribution, commodity, agribusiness, ISVs. We are seeing, let's say, the demand situation as being very good. So...

Any specific like geographies that we are looking for distribution manufacturing? Or is it across geographies?

It is across geographies, whether it is U.S. or Asia or Europe, Australia. So a lot of it is also led by the traction we have with Microsoft and retail the geography. In some geographies, we'll have greater traction across more verticals. In some tractions, we'll have a -- with some geographies will have traction in only 1 or 2 verticals kind of stuff we have to expand the traction in other verticals.

Yes. Yes. And sir, the other question is on the offshoring. Offshoring is costing us 69%, 70% for us. So is there any burnout for this scope for increase in offshoring? And so like what is your view on this? And also, we are at a 90% utilization rate. So how sustainable is this?

Offshoring, I think we should keep it at the current number. As I said, as modern markets open up and the requirement for more nearshore. I mean I wouldn't even call it offshore, but the comment for more nearshore services that increase kind of stuff. So we -- right now, we'll keep it at wherever we are, I don't see too much scope there. But the second question...

90% utilization on sustainability.

No. I mean right now, it is because of the demand situation, it is sustainable for the next few quarters. But yes, I mean, we go back to our steady state, one. We get out of this current demand situation and we build up a capacity, then we'll go back to what our earlier numbers were.

Okay. And sir, my last question is specifically on the [ riotition ] scenario and on what is going on with the IT company. So how difficult it is to hire pressures? And exactly not to hire, but how you paying them on how exactly is the replacement that we have to do of special, let's say, a person who is likely to get your experienced side. So what is the acceptance of the client there? And what can you say in terms of deliveries?

Okay. And the key is really comes in the fact. I think that's the key, rest of it is manageable because end of the day, the people you hire from campuses on an average market and they're being trained very specifically on what we do and how we do and what we are focused on and so on and so forth to that extent. I understand what we do a lot better. The key is to get the client retention. And given the kind of demand situation and supply situation, there are people who are willing to be quite open to looking at this rather than strictly believe that. It's also trying to convert it from a purely people base to more manager based some put up and some continue to have good combination.

The next question is from the line of [ Mighul Butt ] from Ostro Capital.

This is relating to the India business. We are seeing -- I mean, obviously, the -- your optimism is well founded right now. But what we've seen over the last couple of decades is that India business, people get excited and we've seen retraction from the large guys also over the last 2 decades where suddenly, it looks interesting, and then everyone comes in, margins reduced and then the business becomes commoditized. Is it -- the optimism now, is it because of the propensity of domestic clients to pay better? Is it growth? I mean, what is leading to this year? And we are also...

Services business in India, and I'm talking about our license business in India. So -- and that we have mastered now, we've been doing it for 30 years. So for the margin anyway, razor thin there. Any of it to start to it.

Right. Yes, sure, sure, sure. But on the service side, also we...

Early scope for going up. So it's not the services business where you are talking about people came in, but they are figured and the margins go away or you lose and all kinds of other things happen. yes. So this is -- because our positioning, our relationship built over now 20,30 years with all the clients, if you don't understand this business very well, what goes into it. What service is better given that all the other factors are remaining the same kind of stuff. So it's not like -- yes, the services business, where once in a while, people come in thinking. There's a lot of opportunity, but then there's disappointment because of the margin in other areas.

Right, right. But on the domestic cloud business, there is also your action, right?

There's a lot of action, but there's still money we make from our principles, right, for -- time to buy the cloud platform and not -- the remaining part is the service is then delivered, that we have to be extremely careful about where we give our services, what services we deliver. And how much of that then leads to further consumption because then apart from the money you make on the service, you make some money on the additional consumption on the underlying platform.

Right, right. Sure, sure. So the pure-play cloud service business in India still is nascent and not very profitable. Is that a fair way to think about it?

I mean, you're asking me to make a generic industry statement now?

Right. Yes, yes, yes.

I think so. I don't know. There's not a nascent, it's a way. But like any other thing, there has been always been a challenge of, I guess, delivering these services in the current context where the differential and the demand for the same service is so high somewhere else. And then it becomes a completely, I mean, different game altogether.

The next question is from the line of Dipesh Mehta from Emkay Global.

Just want to get things about the Microsoft Relay company? Can you help us understand what will be the revenue coming from Microsoft as a client where we are billing Microsoft for the current work which we are providing to them? And how much will be coming from overall partnership where we are going jointly with Microsoft and get revenue from third-party client kind of thing. If you can provide some sense on that mix and how would that makes it evolve for us over the last couple of years?

We can't give you the exact number of what we do with each client. But definitely, all the Microsoft-related services, which are mentioned in our service line revenues, right? Some part of it will be for Microsoft and some part of it will be for other clients. So that can give us a measurement of how much revenue we make on both sides of the partnership.

So if I look at roughly around 50 percentage currently and a couple of quarters there because we gained reporting, but when we started Q3, it used to be around 44 percentage. Whether these incremental growth coming with Microsoft as a client? Or...

There are more and more the growth coming from our go-to-market.

Okay. So go-to-market is a large part of incremental growth opportunities.

That's right. Yes. Because the opportunity is much larger.

Understand. The second question is just on clarity, we report billability as a part of data set one of the metrics? What it indicates?

Sorry, what was the question?

As a part of our data set or presentation, we report one number is billability. What that metrics indicate and how we calculate it? If you can help me understand.

Jagan, you want to answer that question?

Yes. Yes, Srikar, I will take that question. Billability, is the utilization of billable people who are in a kind of a billable project, it may be kind of internal projects or they are in the trading mode also. Billability is what we bill to the customer, to the people who are deployed on the project.

So to get approximate 9, 10 percentage, explain trading related stuff?

Not only trading, there are other related activities are there for people. The maybe working on to other support areas of the project. There may be some people working on those areas also. They may not be for a specific customer also. It will be for, like development of framework or other ready for the codes. There are other directly related to customers.

Understand. And one thing you said about what number you gave for medium-term EBITDA margin for International IT Services business. I'll leave that number.

With medium term, what we said EBITDA percentage is to be between 23% to 25%.

23% to 25%. Okay. Okay. And the last question is about tracer. Can you help us understand how we are looking fresher intake as a part of overall talent management? And any number if you can say?

Jagan, can you answer that question?

Yes, we are looking at 15% of next year hires from engineering colleges, and we'll have over 5% of people from management tracks and higher engineering. Could be 20% will be taken from fresh campus site.

That compared to this year how would be that number different?

This year. This year, it goes up by 14% next year around capability.

The next question is from the line of Ronak Vora from HomeAdvisors.

I had 2 questions. Firstly...

Mr. Sagora, sorry to interrupt, your voice is not clear, sir, if you can speak closer to the handset.

Is it okay now?

Yes, sir.

Sir, I have 2 questions. Firstly, on the domestic business side, our gross margins have improved dramatically for the quarter, but our EBITDA margins are down. So can you just elaborate.

Jagan, you want to answer the question?

Yes, yes. The gross margin to that extent because of the direct cost, the impact of the direct cost will be more in the coming quarter a quarter, although we have rolled out to specific reason. The EBITDA margin is because of the other cost increases. There are cost increases like, as Srikar was mentioning, specific people -- identify people, those costs have also been there and also because of what other acquired entities costs are getting added for one of these quarters since that thing is happening.

Okay. And secondly, in the total top line of INR 1,800-odd crores, how much would be due to acquisition? And how much would be organic?

In the domestic, we have no acquisition.

And international?

Srikar, can you take that question?

Yes, yes. I mean, I was trying to tell him there's no acquisition in domestic numbers.

On the international. The contribution from -- you want to know the revenue or on the profit?

Revenue would be much better.

Yes. Out of the total revenue of $53.4 million, about $4.3 million, $4.4 million is from the acquired entity for this -- in this quarter.

Next question is from the line of Sameer Pardikar from ICICI Direct. Mr. Sameer, your audio is not clearly audible, sir, if you can speak closer to the handset, please?

Sir, can you hear me now?

Yes, please proceed.

Yes. Congrats on the good set of numbers. My question pertains to the product business. And the volatility that you explain is because of the deals that you do. So can you help us a little understand in detail what kind of deals that you do because of which the volatility happens to your business?

The deals happen based on when some clients renew their contracts for the year. And some large contracts fall in place in Q3. And these contracts are fairly large, like $50 million, $100 million. So -- and that's because of the size of the deal, the margins are lower than normal. So there will be a waviness and lumpiness to these large deals, which will take the revenue up and down.

Okay. And second thing, did I hear correctly that we are looking for 15% to 20% growth in the domestic business this year?

In the -- I did -- what I said was last time I did mention that 10% to 15% growth, and we should get that. And I said we won't confirm whether we're comfortable in committing a 15% to 20%. But the EBITDA growth, that's not the top line growth.

That's in the domestic business?

In the domestic business. Correct.

Okay. And the margin, you said 20% to 25% in the domestic business.

In the international business.

International business.

Yes.

The next question is from the line of Chethan Dhruva, an individual investor.

Sir, I had one question, Srikar. Basically, the question is around where is Sonata coming in, in terms of the benefit license in supply chain because -- and when it comes to the cloud aspect, I mean, I assume people would go to and provisions and whatever visions they want and so on and so forth. I understand in the traditional license business Sonata will have to provision the licenses for clients in India. But in this completely cloud-based ecosystem, how and where does Sonata fit into the picture? I'm just trying to understand the model here.

I will ask. I don't know. Sujit. Are you on the call?

Sujit, is connected, sir.

Can you hear me?

Yes, did you get this question?

Yes, I got the question, I will answer that. So whether it is a physical license or is a cloud license, final in touch provision to the customer. In terms of a physical license, the license keys are given. In terms of cloud license, the partner has to sell the customer to provision it. And in both cases, finally, a partner is required because of 2 reasons. One is that, obviously, there is a commercial transaction which has to go through in a particular country where you have the contract. And secondly, once the license is supply, either in a physical way or in a cloud way, there is a lot of hand holding which is required in terms of actual instances of the license. And then how to provision it for different departments, for individuals within the customer organization. So in all these 3 segments, the customer enrollment is required.

So as a corollary then, anybody using -- buying Azure in India would essentially be having the contract at Sonata.

So we have to, yes. So specifically for Azure, Microsoft doesn't sell anything directly. So obviously, we need a partner to handle their transactions.

So basically, any Microsoft revenue in India from a license standpoint, product standpoint will definitely flow to Sonata? That's what I understand. That's a correct understanding?

No, not necessarily not at Sonata. There are other partners too.

Okay. Okay. Okay. Got it. Got it. Okay. But definitely through a partner. Okay. And another question related to the cloud services that you offer, again, in the domestic market. So is the platformation definitely part of the -- of any of the cloud projects that you do, especially on the Microsoft platform? Or is it something that is optional?

As I said, the majority of our business in the domestic market is right now provisioning on the license, and little of it is on the services side, right? Internationally is where we are providing cloud services.

Next question is from the line of Harshal Shah an individual investor.

Just one question. I want to understand any plans or inorganic investments domestic in India?

Yes, we continue to look for good opportunities, whether in India or outside India. What we can -- I mean, for the same reason which can align to our strategy, which help us give us a more differentiated proposition, make us stronger with that client. We'll continue to look -- we're not...

So any -- I mean, any areas which are -- which we are trying to diversify or get into specifically looking? Or is just normally which aligns with our long-term vision?

It aligns for a long term vision, it does has align to our strategy, so it could be something which will strengthen our Microsoft story, sometimes it could be center of vertical story. And sometimes we want to look at things to speed up our other cloud go-to-market. So the reasons could be any and including getting into a new vertical.

Okay. And so just I'm referring to your presentation, there you mentioned M&A investments of INR 46 crores in FY '21. So it's INR 46 crores, right? I mean. I just got confused there.

Jagan, do you want to answer the question ?

Yes, yes, yes, yes. On that, whatever is the Encore addition, whatever the payment we have done, we have mentioned that.

Thank you. As there are no further questions, I now hand the conference over to the management for their closing comments.

Okay. Thank you, Stephen. Thank you, everybody, for joining the call and continued support. Thanks for all the great and highly interactive discussion. I look forward to staying in touch and the Board being in your future calls. Thank you all again. Stay well, stay safe. Thank you all.

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