Sonata Software Limited (SONATSOFTW) Earnings Call Transcript & Summary

Hello, everyone. My name is Inba, and I'll be moderating today's session. Welcome to the Sonata Software Limited Analyst and Investor Conference Call for the First Quarter of Fiscal Year 2027 ended 30th June 2026. This call is being recorded. We have with us today on the call, Mr. Rajsekhar Datta Roy, CEO of International Services; Mr. Sujit Mohanty, CEO of Domestic Business; and Mr. Jagannathan CN, Chief Financial Officer. We also have our extended leadership team on the call. [Operator Instructions] During the call, please note the management may make certain forward-looking statements that involve risks, uncertainties, assumptions and are based on information currently available to the management. Sonata does not undertake any obligation to update any such forward-looking statements that may be made in the course of this call. We advise participants to exercise discretion while making any investment decisions. We will begin the opening remarks from the Executive Vice Chairman, followed by the business overview and financial highlights. After that, we will open the floor for questions. With that, I hand over the call to Mr. Raj for his opening remarks. Over to you, sir.

Good evening, afternoon to everyone, and thank you. Ladies and gentlemen, thank you for joining us today. We truly value your time and appreciate your continued trust and support in Sonata. In today's session, we will walk you through the overall strategy progress we have made in the last quarter. We'll also present a detailed view of our financials for Q1 FY '27, which concluded on June 30, 2026. To begin with, I'll walk you through the -- what we have done during the last quarter and then focus on our strategy going forward. Over the last quarter, we have successfully completed the leadership transition and built a foundation for our next phase of growth. We have ensured seamless continuity across all key clients relationships. We have strengthened the leadership engagement at our key accounts, maintained business momentum through focused execution. Having said that, let me now cover how we are looking at doubling down on AI, which was what I had outlined earlier last quarter. Our strategy going forward is towards building an AI-native Sonata. It is becoming the operating tenet of our business, and we are accelerating our transformation to an AI native engineering-led organization. Sonata is positioning itself as the engineering -- the AI enterprise, which enables driving enterprise velocity across 3 key dimensions, which I will outline with 6 value pools that we are addressing in 9 micro verticals. The 3 dimensions are outcome-led business transformation, focused on delivering agent process transformation and domain-driven customer-enabling operations, AI-first technology platforms focused on building AI native technology platforms and modernization of legacy platforms. We also are looking at AI native service delivery, which will drive accelerated outcomes through AI-enabled service delivery. In our endeavor, we continue to strengthen our proprietary assets under Harmoni.AI, our responsible first IP platform. And one of the key things that we have done over the last quarter is we have launched our enterprise-grade Agentic AI service delivery platform, Workbench, designed to transform end-to-end software delivery life cycle by bringing together contextual intelligence, AI agents, workflow orchestration and enterprise governance. It also helps enterprises accelerate their software engineering, improve developer productivity and scale AI adoption while keeping security governance, compliance and token economics at the center. Multiple clients have shown interest in Workbench, and we continue to sharpen this further. To drive the execution of our AI strategy, we are pleased to announce the appointment of Mr. Hari Rebala as the Chief AI Officer at Sonata. He brings a unique combination of coming recently from a start-up ecosystem and before that being as a part of enterprise services IT organization and his clear mandate is to accelerate Sonata's transformation into an AI-native organization. We have also bolstered our leadership at our largest client with the appointment of a strategic business leader with 30 years of experience with very similar to what he's handling going forward. And he will be instrumental in driving strategic expansion for one of our largest clients. We have also onboarded a seasoned leader for Southeast Asia and ANZ to continue our growth in that region and strengthen our alliances and partnership team by bringing in internal person who has been at the helm of driving our relationship with partners, especially Microsoft. We continue to strengthen our 360-degree partner ecosystem, which includes collaboration with Microsoft. We have officially been invited by Microsoft to join Copilot agents and platform engineering depth partner program, which is a very select group of people globally to be taken as system integrators to work closely with Microsoft to scale their GTMs around Copilot and AI. We continue to collaborate with eminent educational institutes like Wharton and IAC to further understand technology trends and build fine-tune our offerings towards what's coming in the future. Finally, we have spoken of the 9 sub micro verticals that as you like. And we are trying to focus on each of these verticals. By concentrating on these sub-verticals, it gives us ability to invest and create a concentration of our investments as well as creating greater outcomes for our client and finally, greater market impact. To support our growth ambitions, we have -- to support our growth ambitions, we continue to invest significantly in talent transformation and building an AI-native workforce through structured skilling, certification and adoption of frontier AI platforms. A key differentiator is we are expanding our forward deployed engineer talent pool and transforming our people from that into -- by about 100 people by August itself. Underpinning this Sonata University, which has enabled 93% of our workforce to be trained in AI. We have also launched our Sonata Modern Action Engineering Program for 2026, which is AI at the center, and there is an extensive work underway to transform all our folks for the offerings and aligned to our GTFs that we have. With AI strategy being in place, and you will see that getting rolled out, we believe that we are building a compelling value proposition for our clients and prospective clients in the areas of intersection of the horizontal and micro vertical positioning. The progress and market response so far has been encouraging. We now take you through the Q1 business highlights. Our AI-led pipeline has improved 21%, while new AI-led order wins have increased 27% quarter-on-quarter, reinforcing our conviction around the strategy. I want to highlight 3 key deals. One is a manufacturer of computer peripherals and software, where we are helping them in AI-driven model engineering in the digital assurance and DevOps space. Second is a quick service restaurant. We are helping them in legacy modernization of their applications. And third is an oil and lubricant manufacturing major where we are helping them transform their AI-driven payment reconciliation system. We now have multiple AI-led client success stories through our customer operation, enterprise workflows, regulated industries and technology modernization. The common thread across this engagement is that Sonata is helping clients move from AI experimentation to AI at scale, developing -- delivering measurable improvements in productivity, velocity, quality and business outcomes. Today, 21% of our engagements are output-based. Key wins, we have won a key deal with a global beverage brand with over 800 locations across 11 countries, and we are working with them on modernizing their retail application and cloud infrastructure, and this is a multiyear deal. We are also scaling a large deal from a global financial technology organization and payment solution organization and awarded to Sonata multiyear contract to modernize their core digital wallet platforms to enable faster and secure. This is a multiyear large deal. We encountered some headwinds and delays in ramp-up and have now completed it. Our teams help -- our teams to help in customer in accelerated time to market in digital wallet platform. We continue to execute with operational discipline. BO's space utilization continues to operate at 88.5%, and we incurred a delay in the large deal ramp-up and AI capability incubation, which caused a slight reduction in the utilization. This has caused a temporary drop in utilization this quarter. Revenue grew at 0.01% quarter-on-quarter, reflecting resilience and mixed market conditions. Order bookings stood at 1.18x book-to-bill ratio, and we secured 1 key deal in Q1 FY '27. The number of clients with greater than 10 million run rate is 8 million. EBITDA stood at 15.4 million for the international business. I'll now request Sujit to give a commentary for the domestic business.

Thanks, Raj. Hello, everyone. Domestic product business continued to demonstrate resilience and relevance in a dynamic market environment. We continue to make a good progress in financial performance. As you all aware that last year, we have faced headwinds due to one of our large OEM partners changing the business model and starting direct billing with some selected large customers. During the last few quarters, we have worked on our strategies, plan and related GTMs to operate within this changed business environment. We believe that through our quick and focused execution of modified plans, we have successfully managed the negative impacts and now we are on our -- now we are on a growth path and moving forward. Through our continuous engagement with our OEM partners and customers, we are pleased to announce that in the recent past, we have been able to retain some of our customers' contract renewals which were done through us now who are in the probable list for possible direct billing by the OEMs. So some of these anticipated risks which are there are now behind us. We are making steady progress across strategic growth pillars. One of the pillars is core platform and product business, within that pillar, we have broadened our partnerships with all hyperscalers OEM partners. We are executing multiple GTMs with each of these hyperscalers. We are also expanding our business related to tools and platform offerings of OEM partners other than the hyperscalers with whom we continue to do business. We are also focusing more on expanding our managed services and win more and more large hybrid system integration deals that integrate digital server storage and other ISP infrastructures, including IT security with leading cloud platforms and managing the hybrid infrastructure of our customers as a part of this program. We are also expanding to new segment. We are expanding our market coverage and our focus on SME and corporate segment. We have grown this business around 82% year-on-year. These strategic bets continue to be at the center of our focus in building a more resilient future-ready business. We continue to focus on strengthening the quality of our revenue mix, deep strategic customer relationship building scalable cloud-led managed services and managed IT security capabilities. Sorry, I think the line got disconnected. I'm not...

We can hear you now, sir.

So we are extending and deepening our OEM partnership in the areas of AI tools and platforms to work with our customers in India in their AI initiatives spanning across infrastructure readiness, tool deployment and use case development, which will accelerate the path from AI experimentation to scale adoption. Now coming to the financials. The revenue for Q1 FY '27 stood at INR 2,505.6 crores. Gross contribution was at INR 78.5 crores. PAT for Q1 FY '27 stood at INR 45.9 crores, which is a growth of 4.2% quarter-on-quarter. We are confident that the financial performance will further continue to improve in Q2 and during the rest of the financial year. Overall, we remain confident in the direction of the domestic business. Our focus is not only on growth, but on building a diversified, scalable and future-ready business with sustainable value creation for customers, employees, partners and shareholders. With this, I'm handing over to Jagan for the financial updates. Thank you.

Thank you, Sujit. Good morning, good afternoon, good evening, everyone. I'll provide key updates on Q1 '27 business and financial performance. Starting with international business. During the quarter, we benefited from a few growth drivers. We added 7 customers in Q1 '27. This is same for the last 2 quarters. We have been very consistent in adding the customers. Top 10 clients contributed revenue share of 51% in Q1 '27. This is majorly changed because of the growth of 11 to 20 customers well in this quarter. Number of clients more than 5 million run rate stood up at 12 in Q1 '27, same in Q4. Number of clients greater than 3 million up to 5 million revenue stood at 9 in Q1 '27, same in Q4. Q1 '27 order book stood at 97.4 million with a book-to-bill ratio of 1.18x. It is better than 1.16x, which was there in Q4. order book of $21.4 million in Q1 '27. This was $16.9 million in Q4 '26. Now the order book contributes 18.2% of our overall order book. [indiscernible] is $340 million in Q1 '27. Total headcount stood at 6,293 in Q1 '27 against 6,283 in Q4 '26 for us with an attrition of 13% for this quarter. On-site offshore mix is 30% to 70% in Q1 '27 against 32% to 68% last quarter. Utilization reported at 8.5% in Q4 versus 91.8% in Q4 '26. We'll be covering the details of this later in my update. Let me walk you through the financial performance for the quarter ending 30th June '26. First, starting with international services. The US reported revenue stood at INR 82 million, represent 1% quarter-on-quarter constant currency growth and 2.1% year-on-year constant currency growth. In reported currency, this represents 0.5 percentage quarter-on-quarter degrowth and a growth of 0.2% year-on-year. Rupee revenue stood at INR 77.2 crores, a degrowth of 0.3% quarter-on-quarter, 11%-on-year, which is a good performance in the industry compared to others. EBITDA before other income and ForEx for Q1 stood at 15.2%, a degrowth of 4.8% quarter-on-quarter from 30.2% in FY '26. EBITDA dilution is primarily driven by the below factors. There was a onetime benefit of compensation expenses in previous quarter, impacting around 2% of the EBITDA drop. Our utilization includes impact of unexpected delay in large deal ramp-up. Utilization dropped to 88.5% from 91.8%, primarily due to this. The ramp-up will get completed in Q2 of '27. Additionally, in line with our positioning of the engineering, the enterprises, we have made significant investment in talent transformation and advisory investments in related to strategy. ForEx fluctuation, specifically cross currency was detrimental in this quarter, impacting almost about 50 basis points. Marginal increase in CSP bundled deal costs also impacted the above decrease is partially offset by our favorable offshore revenue mix improvement to 70% from 68% in Q4 '26. From this quarter, we expect EBITDA to have a positive traction every quarter in this year further. We expect some of the onetimers also to get normalized in the coming quarters. Q1 '27 PAT stood at INR 62.2 crores. This includes a ForEx loss of INR 6.8 crores as against INR 84.2 crores in Q4 '26, which includes a ForEx gain of INR 1.7 crores. ForEx fluctuation alone has impacted almost INR 28 crores on our PAT. This PAT impact for this current quarter has observed and still grown in spite of the ForEx loss for this quarter. [indiscernible] provide update on domestic business. Revenue for Q2 FY '27 stood at INR 20.6 crores, a growth of 42.4% quarter-on-quarter and 10.2% year-on-year [indiscernible] Q1 '26 stood at INR 78. 5 crores, a growth of 4.2% quarter-on-quarter and 14.5% year-on-year. PAT for Q1 '26 stood at [indiscernible] ForEx loss of crores as against INR 46. 3 crores in Q4 '26 which includes the ForEx gain of [indiscernible] reflected here. Q1 growth is offset by ForEx impact of INR 6.9 crores between gain in Q4 and the loss in Q1. DSO of Q1 '27 [indiscernible] 47 days of Q4 '26. This is majorly a seasonal impact for us. Reported [indiscernible] stood at [indiscernible] and 42.7%, respectively. Update on consolidated business for the quarterly update, consolidated revenue for Q4 '26 stood at INR 3,291 crores, a growth of 2.3% quarter-on-quarter and 10.6 percentage year-on-year. As for Q1 FY '27 stood at [indiscernible]. This includes a ForEx loss of INR 7.4 crores as against INR 130.5 crores in Q4 '26 [indiscernible] INR 28 crores, degrowth of 17.1% quarter-on-quarter and 1.1% year-on-year. Q1 PAT degrowth is primarily due to ForEx impact of INR 35.4 crores. Reported ROC and ROA in this quarter stood at 21.9% and 20.9%, respectively. EPS reported in Q1 '27 stood at INR 3.9 per share against Q4 '26 of INR 4.71 per share. Update on cash flow. Cash generation remained very strong in this quarter with a closing cash balance of INR 567 crores and a net positive cash of INR 67 crores. This is the third quarter we are reporting positive cash balance. To conclude, we are confident about our new portfolio strategy of engineering the AI enterprises pivoted along with the 3 dimensions and 6 value pools. Based on the pipeline movement and the especially improved ALS pipeline, we remain optimistic and expect gradual improvement in revenue and EBITDA over the medium to long term. While the market environment remains mixed, our strengthening AI pipeline, growing AI order bookings, deep partner ecosystem, focused vertical strategy reinforce our confidence in Sonata's medium-term growth trajectory. With this, I conclude my update for this quarter. Thank you and handing over for the questions.

[Operator Instructions] We will take the first question from Dipesh Mehta of Emkay Global.

Just want to understand domestic business gross contribution profit return to double-digit growth trajectory. Are we confident to sustain double-digit growth trajectory on Y-o-Y basis in domestic business? Second question is on the -- you indicated 9 micro vertical and value pool. Can you provide some detail which micro vertical we have identified and what value we have identified and overall growth thought process around it?

Yes. So on the domestic business, yes, we are confident that we'll continue our growth momentum, and we believe that some of the issues which we had, we have been able to come out of it, and we'll be able to maintain the momentum.

On the question of the value pools, we are -- one is customer engagement and operations transformation using AI, Agentic AI, legacy modernization, AI-ready data, resilient AI backbone and AI native service delivery and ops. So these are the 6 value pools that we are targeting. We are focusing deeply in building assets, partnerships and go-to-market around this. The micro verticals, we have 9 of them, but largely to give you an example of a micro vertical, it will be like payments, mortgage and lending, health care, clinical ops or logistics in retail manufacturing. So -- and there's a whole list which can be provided. So that's an example how we are doing this. And at the intersection of these micro verticals and our horizon offering, we intend to build a compelling solution for our clients.

Understood. And in this, let's say, vertical which micro vertical we identified, whether any of them are new and where we are making investment or all these are existing presence kind of thing and investment intensity will not be that high. I just want to understand that part, if you can give some sense which are new and which are existing [indiscernible]

We are -- in all of these, Surata has traditional strengths and have been executing. We also have concentration of clients already, and we also see a market potential based on our assessment so far, right? And so there is a track record, and it is part of the -- as you can remember, we were looking at BFS, health care, life sciences, R&D, TMT, so on and so forth. We are sharpening our focus so that we can concentrate our investments and go-to-market to areas which are more likely to grow compared to others. And we also are able to get better value for our investment. So -- but it's not completely new areas. It is within the areas that we have been working, but a larger -- a sharpening of our focus largely.

We take our next question from Ashish Das of Systematix.

So my first question on your revenue from top 10 accounts declined during this quarter, 6% quarter-on-quarter. And it has been remained weak last 6 quarters. So my first question is, is this because of your top accounts still the productivity gain pass-through continues? Second, relating to this, last quarter, you mentioned that there would be some -- you are scaling of some engineering subsegments within the vertical. So that would support your growth from Q2 onwards. So provide some outlook on that front. And third, relating to that, during your strategy discussion, you mentioned that you have strengthened your partnership with Microsoft and that also you have had legacy key accounts. So will that help to drive your portfolio?

So I'll take the first one on the top 10, Asis. Top 10 is majorly because our 11 to 20 accounts have been growing well. The customers -- new customers we have added in the last quarter and the current quarter actually fall in this group. And this is the reason why there is weak in the top 10 percentages, okay? This is percentage-wise. So some -- the subsequent 10 is growing well, this percentage also gets impacted. No major issues, no discounts, no productivity gains passing off that, no major account which is coming down in this space in the top 10 account.

But sir, I can see the absolute number also declining on quarter-on-quarter.

We have not disclosed that, Asis. Probably we will consider how to disclose the top 10 because this -- many people know our top 5 customers at least from this people can know about exact revenue of a customer. That's the risk we carry in this. Hence, we are not disclosing the absolute number. There is no impact, not in this quarter.

There were 2 other questions. I think one was on the engineering subsegment. Yes, we are focusing on a few hyperscalers, and we are going to focus more on enterprise products, packaged software organizations. These are 2 segments that we are focusing in TMT for both. Second is your question on leadership hiring that we have done, will that be positive? Yes, we can see early signs of this driving positive traction in terms of pipeline, et cetera, and activities that we see in that. And third is about MS partnership. I think we continue to -- as you can say, that we have been part of the Copilot depth program. So we continue to be a critical part of the Microsoft ecosystem.

And I have another question on outlook. So last quarter, we were expecting that retail may stabilize in Q1. But what I can see it's declined quarter-on-quarter and also we have [indiscernible] deal in this space. So can we expect the recovery in this [indiscernible]

This is the same logic what I told you on top 10. This is BFSI percentage has grown beyond our expectation. R&D as a percentage has come down. Nothing to do with [indiscernible]

Our next question is from Amit Chandra of HDFC Securities.

Sir, my question is on your comment that you made that we are focusing more on outcome-based contracts. So how we are pivoting to that? And obviously, in this quarter, we had a client-specific impact where we had some like delays in billing, which also impacted our margin. So if you can explain what actually led to this? And how we make sure that in an outcome-based environment, we are on track of our milestones and the fluctuations in margins that we're seeing, it actually returns to a stable kind of a margin trajectory.

Thank you, Amit. And so there are 2 questions largely. One question is about -- it's not outcome, it's output-based. So yes, we are trying to -- we have got output based, and we have been traditionally managing the output-based as a part of our business. So we have practices which will ensure that our delivery remains strong. We have further strengthened our delivery team to ensure that our -- we have reorganized our delivery team and strengthened it to make sure that our readiness to engage and deliver on this output-based businesses and deliveries are consistent going forward. The second point was about -- what was the second part, sir?

Margin, the client specific impact.

Didn't get that question.

If you can repeat, Amit, sorry, I missed.

No, no. So I was just asking the client-specific issues that happened in which there is some delays in the billing and which led to the margin impact. So how we take care of that in the coming quarters? And in terms of the margin stability, what part of the decline was one-off and how that will recover in the coming quarters? If you can give some quantitative flavor to that?

So Amit, I think the large deal ramp-up is largely behind us. There's a little bit of ramp-up remaining, but that's -- second thing was about paperwork, et cetera, that's also behind us now. So that's going to come back in the coming quarter, which was largely onetime. There are 2 other aspects like Jagan mentioned, which is our investments on AI advisory and building capability like FDA, et cetera, to readiness to execute the projects once they come of the new GTMs. I think that's going to continue for a couple of more quarters, and we are going to recover it. Overall, we should have a positive trajectory on our margin from next quarter onwards as we go forward.

Okay. And sir, in the past 6 quarters, we had specific events in terms of the client-specific impacts in our top 5. So how do we see the top 5 behaving in terms of growth? Is it fair to assume that the worst is behind in terms of in terms of the drawdown that we are seeing in the top 5 and it will start to grow from here? And any specific client specific impact that you see still pending?

Yes. Amit, at present, we are seeing a kind of a stability in our top 5 present. We don't see any major threat in the top 5 at present or major issues also in the top 5. We expect that in the coming quarter, the top 5 will keep growing better. And probably we can see the growth back in top 5 in a few -- a couple of more quarters later.

Our next question is from -- it's a follow-up from Dipesh Mehta from Emkay Global.

We are a senior leader pipeline considering the deal pipeline in confident we are because that is one of the area of concern at least in last 12 to 18 months from [indiscernible]? Second thing is the new area of growth which we identified and which give you confidence the overall growth Second question is on the cash balance. I think Jagan indicated very healthy cash conversion. But if I look at your cash balance at the closing, it has declined quarter-on-quarter. So can you help us understand what played out there?