Persistent Systems Limited analyst Q&A

Thank you, Sir. We will now open the call for Q&A session. We will wait for a few minutes until the question queue assembles. We request participants to restrict to two questions and then return to the queue for more questions. Please raise your hand from the ‘Participant’ tab on the screen to ask questions. Okay, the first question is from Sandeep Shah.

Yeah, good morning. Can you hear me?

Yes.

Yes, we can.

Yeah, yeah. Congrats on a good execution. Sandeep, just wanted to understand entering into 2024 , any signs of recovery in a discretionary , small-size, faster -converting deal wins in terms of client discussion , starting some of the projects which are put on hold in any of the verticals?

Look from our perspective , yeah, that discretionary spen d we are seeing some green shoots , but I wouldn't say that the environment is any significantly different from the last few quarters. Most of our growth, if you see , is coming from the proactive efforts that we have had in our existing customers and new, and these are longer-range deals that we are in. So, I wouldn't say necessarily that we are seeing too many green shoots, there are some green shoots, we'll let that time pan out and see how this goes from a discretionary perspective.

Okay. Thanks. And Sunil Sir, looking at the margin walk which you have provided with subcontracting cost and furloughs together impacting margin by close to around 120 b ps, is it fair to assume furloughs may reverse in the fourth quarter and we can exit the fourth quarter with a 15% EBIT margin?

Yeah. So, as I mentioned, the increase in subcontractors is on account of the ramp up in the recent deal wins and this will continue for some time before the offshoring starts. So, you're right directionally. We are working towards multiple levels to improve EBIT margin and that's the effort to continuously improve the EBIT margin from here on.

Okay, will come in the follow up. Thanks.

Thank you, Sandeep. The next question is from Manik Taneja.

Hi, good morning to the leadership team. I hope I'm audible?

Yes.

So, couple of clarification questions. Sunil, the first question is for you. When I look at our segmental performance, what we see is that through the course of last three or four quarters, our segmental margins on the Hi- tech side have been coming off with the exception of this particular quarter. So, what is explaining the movements in terms of segmental margins given the fact that in the past , we renegotiated the deal at the large customer, which was to step up the margins for the business and also the second question is basically clarification on this large ramp up, is this largely to do with the Healthcare business, which was a deal that you won on the Healthcare Payer side in the prior quarter?

Yes, Manik. So, the answer to the second question is yes, that is what it is, but it is also not just that one deal, there are some other deals as you would recall, we had announced in the earlier quarter, which are also ramping up. Coming to segment margins, what you mentioned about the Hi-tech margins, basically it is a function of three areas. Hi-tech is an area where we have the larger IS V business, which includes the top customer. There are IP-related revenues that are coming over there, not just in the large customer, but also in our Accelerite portfolio and there is also the recent trend where we have see n carve-out kind of deals, right. There is also certain portion of IP revenues over there. So, the margin is a function of, if there are partner IP revenues coming in that, the margin conversion on that is lower and in this quarter, particularly, we had good accretion in our own IP revenues because of which the margin on the Hi-tech side is higher this quarter. So, it's a portfolio of customers we carry and the deals in every quarter may have you know relevance to the way margin s pan out. But overall if you see the gross margin is steady and we have been able to improve the EBIT margin.

Sure. Thank you and all the best for the future.

Thank you, Manik. The next question is from Ravi Menon.

Congratulations on a really good quarter. One question is on the Healthcare side. If I look at your breakup of customers, it looks like there is now pharmaceutical companies, payers, providers, and clinical research organizations, is this a change from the whole s cientific instruments and medical devices focus that you've had maybe three years back, are most of these new customers?

Ravi, good observation. So, if you look at our Healthcare portfolio, we have had good footprint in the scientific instruments, medical devices, that was the leading segment for us, which used to contribute a lion’s share. We did have pharma customers, providers at scale. Providers is where our Salesforce business dominates in the US compared to our competition. What has happened is , there have been some good accounts super -sized in all these domains and we have invested heavily in the payer domain and some of the larger wins we are getting are additionally in the payer domain. So, now it's a very well-balanced portfolio across scientific instruments, medical devices, pharma where we play mostly on data analytics and the specialty pharma on the Salesforce front , providers where we are leaders based on Salesforce and other C X initiatives and payers, where our next generation development capabilities as well as data analytics is playing out . So, now yes, it's more diversified and scaling in all of this.

I also see that you are beyond the top -10 customers, the traction continues. So, can you explain also that you're seeing some wins from your Private Equity channel. Anything else that you could call out, some of these customers their potential to take them to the top-10?

Yeah. So, good question. So, if you look at the mix of the wins that we have had, so as we have grown from being a US$ 500 million organization to a billion-dollar organization, as we have grown our capability significantly along with the addition of leadership teams and so on, we are now being invited to the much bigger bi ds. So, today if you look at the wins that we are having, they are against the top -5 in India, the big-5 across the globe, and so on and so forth. So, the revenue mix, the client mix is changing, and to your point, some of these customers have the propensity to absolutely become among our top -5, top-10 customers, and you will see the top -10 customer mix changing in terms of the names moving in there, the quality of customers moving in there over a period of time.

Yeah. So, good point. Let me answer a few more things along with this. There have been a few questions alluding to the margin side of it before and all of this comes together. So, if you look at the sales and marketing side of it, if we look at our investments in sales and marketing, we have brought in a significant rigor to sales and marketing. We have over - invested in sales and marketing as well in absolute terms, if you look at it. If you look at year -on-year comparison, not just quarter -on-quarter comparison, we may be at a higher level in terms of SG&A from a year back and part of it , whether it is direct SG&A investments, part of it are investments which are in enabling things which enable our sales to be much more productive, whether it is in our capability-build around the Private Equity side, capability -build around our AI, and Gen AI side, capability-build more deeper into certain parts of our cloud infrastructure and security and so on so, all of them are enabling the growth and there is definitely further leverage on the SG&A side as we go along. Now, let me also take this opportunity to answer the broader margin question before everyone asks us the margin question in different forms and shapes. We have said very clearly, we will increase our margin from 200 to 300 basis points between now and the next two to three years and I do want to recognize the mistake on one of the earlier calls I had said 150 to 200, our intent is 200 to 300 basis points, I want to clarify. Now, let me build it up for you before everyone asks the same question. If you look at our utilization today, our utilization is at 81.5%. If you decipher that utilization into two distinct buckets, the laterals that we have and the people we hired from the campuses who are yet to become productive and these are, I'm talking of the volume hiring that we have done two years back. That hiring is yet to be productive more than 64% of what it was. Our laterals are running at 85%, so as a company we have the propensity if we, look forward to in charge utilization up from 81.5%, slowly up to 83%, 84%, and 85%. For each percentage of utilization going up, there's 30 basis points of margin that we release at the PAT level. So, keep that in mind that's one part. We talked about the SG&A leverage. So, we have invested significantly in our SG&A and not only SG&A in terms of sales folks, but if you look at the leadership hires that we have brought on board, in the last one to two quarters, those are leaders that will kick in, in high gear as we move along. They don't have the impact on the current quarters, they're just settling in, but as we move into the next financial year, we will have a leverage of it. Then, again if you look at things like our facilities and so on and so forth, there is certain amount of leverage that will come in because we invested in certain facilities. You would have seen many announcements in India and outside and as we see our revenue growing, all of those is going to kick in. It is not going to necessarily increase in line with the revenue part, not to mention the amortization that we have from the earlier M&A that we have done, as our revenue increases that also gets defrayed over a larger base. So overall from a margin perspective, we are reasonably sure and we have initiatives inside the company where we will incrementally , whether it is next quarter or the next few years move up. Now, obviously in certain years, when the macro is soft, we will not press that trigger on margin improvement that hard. If you look at the current year, we wanted to make sure we come in first on the top end of the growth quartile and then comes the margin initiative and as the economy stabilizes, the focus will move and it will always be cross-balance with growth being the first priority. So, with that, back to you moderator.

Thank you so much.

Thank you, Ravi. The next question is from Karan.

Hi, can you hear me now?

Yes, please.

Okay, great. Again, obviously congratulations on a fantastic quarter and looking forward to see what comes ahead. So, I just wanted to dig a little bit into the GenAI pipeline and let me start with a basic question , which I know you won't answer, but I'll try it anyways and then I'll ask just one or two sort of follow up questions to that, which is, is it possible to get to sort of US$ 100 million of revenue from GenAI in the next two to three years, just in terms of size, scale, and scope. Of course, there's no kind of firm guidance for anything, but just in terms of how big it can be and I guess that's part of that my question would be, can you add some color on just the size of the pipeline in the sense that how many of your 176 clients have some kind of POC related to Gen AI and then related to that , what percentage of the POC's are leading to production and we've seen surveys where actually the vast majority, more than 50% of POC's will enter production, so actually the technology works broadly and I think everybody understands and realizes there's a lot of POCs out there, but they have an uncertainty around what that conversion rate will be, but the leading indicator seems very strong. So, if you can just add some color there? I know a lot of questions there, but whatever you can answer.

Sure. So, the first question, can Gen AI lead to US$ 100 million business over the next two to three years? Look, anything is possible and so GenAI is one form of AI and look, GenAI cannot be implemented beyond POC till the time you have an enterprise -wide wherever use -cases you are trying to put, clean data available to you in very simple terms and if you have to do that, GenAI you should look at it as a tip of the spear. For us to be able to deliver to any enterprise and for any enterprise to be successful in GenAI, it will spawn of f many different initiatives, which will involve data engineering, data cleansing, many other things. So, Gen AI in absolute terms just as a simple use case, we'll have many other things. We will put all those things together, can it lead to US$ 100 million business for us over the next three years, absolutely the answer is yes. Now, we'll let the time pan out and we are not going to get into that conundrum of now report your GenAI revenues like people used to do digital revenues and so on. I think GenAI is going to be mainstream in everything that we do in next two to three years. So, keep that in mind as well. Now, second part, of the 176 customers, how many POCs are we running? Today, if I was to look at overall at Persistent, there are more than 75-plus POCs that are running on Ge nAI in different formulations. How much of those will get to production, we'll see how that flows in. Today, any boardroom, whether it is ours or our customers, there are discussions on GenAI and that spawns of f initiatives and CIO organization, CTO organizations, the business leaders are given the mandate to go and experiment with Gen AI in their own fields and that's what is leading to those POCs and that's what is also leading to the collaborative agreements that we have with Amazons of this world, the Googles of this world, Microsofts of this world to go and do more POCs, so that we can unlock the aperture and people look at different possibilities. Very hard to say how much of those 50%, 100% what will lead to production, but over a period of time , it will definitely lead to good amount of revenue uptake. One last thing, I'll say on this, not everything will lead to Gen AI. GenAI is one form of AI, which is easy to use and so on, but also keep in mind, the bills on GenAI can very soon go up for enterprises and there are alternate forms of AI which are available, not everything needs to use GenAI as a use case and we have been doing that for many years. That's why in my prepared comments, I also referred to. So, we are very positive about AI being there in every part of Persistent service lines, digital engineering, to Salesforce implementations to the cloud infrastructure, security and so on, and you will see us announce many more initiatives in the next three to six months. Back to you, Moderator.

Thank you. Thank you so much.

So Sandeep, there is a question on the chat related one on Gen AI, where Gaurav Rateria is asking us have we been part of discussion in helping clients save costs somewhere else by becoming more productive and channelizing those savings in these GenAI initiatives?

Yeah, so, look, every enterprise or every enterprise software company at the end of the day their ability to spend, if I may say so, their expense budget or their pot of gold is only limited. So, when a number of people are looking to forward-looking initiatives and this is nothing new, this has been happening for long. People aware and reduce the spend in business as usual and take that to more next generati on initiatives, in this case it is GenAI and there are other ways also people are looking at us to help them, whether it is enterprise software companies or enterprises right from developer productivity. Now, looking at their own implementations of developer productivity tools like Microsoft GitHub Copilot or AWS Code Whisperer to many other things that we bring to bear with our IP like report rationalization tools and there are many things that are there on cost reduction and taking that money to see how we can impact the revenue side it or customer experience side of it using GenAI. So yes, there are many initiatives.

Sir, we will take the next question from Abhishek.

Hi, thanks for the opportunity and wish everyone a Happy New Year and congrats on a good quarter. Again, a related question to the topic we are discussing. So, Sandeep, there was a comment about an increase in the cost of ownership of software products in one of the industry analysts call last week related to Gen AI spend. So, first question is on that topic is are you seeing an increase in product engineering spends because you have a very strong relationship with software product companies and 2nd, is there a trend in terms of because of that spending we will see a moderation in non -AI related spending including cloud migration -related spends?

Yes. So, we are talking two different things here. See, the second part that you talked about the cloud migration and so on. So, that is much more relevant in the enterprise world because a number of enterprise software companies are today more and more cloud native in their new product development and a number of them who are there from the past have already moved their legacy products to the cloud. Now, as far as the spend on GenAI is concerned in enterprise software, is there more adoption of that and broadly AI, yes it is and everyone is trying to control their budgets, moving money from where they can squeeze on the business as usual support side of it to doing feature enhancem ents using Gen AI, doing copilots, doing other things from a CX perspective, customer support perspective, and enterprise software and so on. So, yes there's a movement and we are gainers of that and it's early in the game. It's not just that today GenAI is accounting for majority of our growth, but Gen AI and AI over the next few years will definitely account for more and more revenues for us.

Thanks for taking my question.

Thank you, Abhishek. The next question is from Dipesh.

Dipesh, we can't hear you yet.

Yes, please.

Can you hear me now? Okay. Two questions. First about the Private Equity genre, I think now last couple of quarter s, we have seen couple of successes in Private Equity channel. So, can you just help us understand what we are doing differently , which works well for us and any specific action we have taken which drives success? Second question is about revenue composition change. We don't report service mix, so just want to get sense, let's say three years back, kind of what we used to do, how has it evolved in three years and if you can help us understand how you expect it to evolve in the future? Thank you.

Yeah. So, I'll take the first question, second I'll let Sunil answer. So, from a Private Equity channel, if you look at it, we have been developing this channel for the last 4-4.5 years and we have hired people who understand this channel and so our Private Equity channel is housed with folks who have worked for Private Equity or worked in companies that have serviced Private Equity. On one side, we are mapping to strategic Private Equity folks like accounts. So, look at them as accounts we manage at the highest level. On the other side, the capability at the end of the day, it's all about the capabilities that you bring to bear. So, we understand what a Private Equity firm needs and what their portfolio compan ies need . So, we are partnering with Private Equity right from the stage when they're evaluating deals. So, we have certain tools, techniques, methodologies that we have perfected on that. We help them analyze companies, the platform, so right using from our digital engineering capabilities to analyze the platforms that these companies that they're trying t o acquire the majority of those, their hypothesis on engineering effectiveness, the capability to cost reduce using different levers and innovate using the forward -looking technology. So, we are right there when they are evaluating deals to the time the deals are brought in and there is work to be done if it is a carve -out. We have more and more become a carve -out specialist where we have tools, techniques, methodologies to de-risk the transition services and so on. So, across the Private Equity spectrum, right from pre-diligence to diligence to the value realization once a company is acquired to even the exit, we have a very clear set of service offerings and those are well proven along with the IP assets that we have built to deliver these . So, that's what is differentiating us and increasingly making us the preferred partner for all these large Private Equities as they go and you have seen number of our wins come from that. Now, Sunil.

Yeah. Dipesh, so in terms of the services and IP -led revenue composition. If you want to understand the growth profile, yes, both the parts of the business have been growing and if you take a period of three years, the only thing that has moved is the large deal that we had, which we discussed the end of 2021. So, that's the only period when the IP -led revenue had a bump up because of that contract, but otherwise on our own whatever accelerators, our own IPs in the Accelerite portfolio and the new work that we have been doing in multiple areas where we are able to bundle our own solutions to customers

No, sir I was not looking for that service, right. I just broadly understand the change services composition of revenue, how it has changed, let's say earlier we used to have very large Salesforce skewed kind of revenue. So, over a period of time how broad based that revenue mix is changing?

Fine, let me take that question, Dipesh. So, if you look at our services mix, so and I alluded to that earlier in the call as well, as we have grown from being a firm which was US$ 500 million to a firm that is beyond a billion dollars now and we have also built capabilities . whether it was building more capabilities right from our cloud native and the digital engineering side, where we are, we have always been very differentiated. We have built on capabilities on those. We have added on application, maintenance, and support capabilities the ASM part of it. We have built on the cloud part of it in terms of doing the next generation infrastructure on the cloud, cloud ops and so on. We've built significant capabilities on data side. So, what all this brings together is when anyone is looking for at one of the, let's say Fortune 1000 companies looking at doing an RFP and wanting to bring one or two challengers in the mix as they look at their current providers, we are definitely being involved and that is where if you look at some of the larger wins we have won against the top five in India, the top five globally, and so on and so forth. So, the services mix is changing towards, a lot of people think Persistent is discretionary. I would tend to believe Persistent is lot more non-discretionary today than what it was three to four years back. So, from that perspective , long-term deals across these segments, stick ier revenue, annuity revenue that is the kind of services mix that we have built over the last few years and that's where we are going while not losing the sense ethos of making these differentiated. Even our AMS, the application maintenance and support, we bring a lot of tools to bear. A lot of AI is what we are infusing in that. So, it is the next generation ops, the next generation development, and so on that is what is there, but the mix is definitely there.

Thanks.

Thank you, Dipesh. The next question is from Chirag.

Hello. Congratulations on good set of execution in challenging times. So, Sandeep, what's our M&A outlook for next two years?

So, if we look at our M&A strategy, it has been built on small tuck -in acquisitions, which are based on the capabilities that we want to enhance for geographical footprint that we want to acquire. So, we keep evaluating deals. Obviously, we have to make sure that the deals have the right fit both from a technology, cultural, and the valuation standpoint. From our next one to two years, we'll be focused on deals on the cusp of AI, cybersecurity, in terms of going into verticals, micro verticals within Banking Financial Services, Healthcare Life Sciences, and finally from a geographic perspective, tuck -in acquisition in Western Europe from a revenue/customer acquisition perspective because Europe is one place where we do want to scale up in terms of our revenues and the delivery in Eastern Europe. So, those are the broad contours and we are on the lookout for good targets and if anyone on the call has anyone anything to refer to us, please let us know and Saurabh also leads our Corp-Dev.

And just one follow up, vertical wise in AI offerings, which vertical you feel we will get more revenue acceleration once client look for more deals in AI-related areas?

So, our point of view is this is going to be a secular adoption of AI. Having said that, Healthcare Life Sciences has usually been a laggard in terms of adopting new technologies. We do believe Healthcare Life Sciences followed by BFSI will be the way we will see the percolation, but we'll let the time pan out and then there are several use cases like Contact Center Optimization using GenAI and so on, which are agnostic of all the verticals. So, there are certain horizontal propositions and there are certain vertical propositions.

Thank you.

Thank you. The next question is from Mohit Jain.

Sir, just one question on Hi-tech vertical. This quarter was a little slow. So, if you could share your outlook on that vertical and if you could split it between, say top client and the rest of the Hi-tech, how should we look at it going forward? Thank you.

So, Mohit, as you would have seen, our top client declined a little bit in this quarter and it was a planned decline based on particular large program, it has a profile where we had a certain amount of revenue going up and then it has a certain tapering. So, that is what caused a little bit of perturbations on the Hi-tech vertical and if you look at the Hi-tech vertical, that has been a very strong vertical for us for growth and so small blips will come here and there because of one or two things and December being the quarter where there are furloughs, there were some minor things there as well, but nothing to worry ther e. If you look at our overall growth, we've said that in the past, it'll be led by Healthcare Life Sciences and Hi-tech followed by BFSI. So, that's where it is.

So, operator, can we take the last question? We are coming to the end of the slot.

The last and final question is from Vibhor Singhal.

Yeah, hi. Am I audible?

Yes please.

Yeah. Hi, thanks for taking my questions. Sandeep, just one question from my side. You just mentioned AI cybersecurity is probably the focus areas for M&A, but as you mentioned that if you look at our profile at more than a billion dollars today, do you believe those traditional areas of let's say ERP or let's say BPO, which are kind of white spaces for us, would you also be looking to expand your portfolio with them as we become full -service companies and as you mentioned, we get attracted to, invited to more and more large deals, wouldn't our, let's say, I mean I wouldn't say inferior, but let's say lesser -capability in those domains hamper our chances to win those deals? Any thoughts on that in terms of growth and whether organic or inorganic that you're looking at?

Sure. So, Vibhor, valid questions, but look at it this way. We are a billion- dollar company in a much, much bigger mark et. As far as the ERP side is concerned, number one, there are many more, much more mature players in the market and second, I would tend to believe ERP basically plays the role of a system of record. There's much more that can be done on top of it in terms of systems of engagement and that's where we play. So, there is, if I am given US$ 100 in investment, I wouldn't want to go after a red ocean, I would want to build on our capabilities and there is enough and more market there. Same for BPO, where we play in the BPO realm is we go and disrupt the BPOs. We go and disrupt the BPO using technology, using GenAI, AI, and so on making BPOs much more effective, reducing the opex on the BPOs using technology, and that's where we have enough and more to do. Now, in terms of larger deals, when you go to large enterprise customers, they don't usually go with one single provider. So, they go with a mix of providers even if they're going with large or bunch of disruptors and so there is a way to partition the deals in a way where everyone brings their strength and the biggest strength that we have is on forward-looking technologies and that is where there's a significant amount of addressable market for years and years to come. So, we'll stick to our knitting, we'll bring AI into it, we'll bring differentiated capabilities much ahead of our larger peers and midcap peers. So, that's where our focus is at.

Got it. Thank you so much for taking my questions and wish you all the best.

Let me try and close this call. The key message that I want to leave with our investors today is that we have delivered top quartile revenue growth for the last 15 -plus quarters. Now, we are looking at good deal bookings converting into revenues going ahead despite a difficult macro environment. We will continue to operate as a strategic partner to our customers and enable them to drive their key business imperatives. We are positive on our growth prospects going forward, although we are cautiously optimistic on the macroenvironment. Nonetheless, we will watch these developments and will ensure that we remain relevant to our customers. We once again thank you for your participation and we thank our 23,300-plus team members, customers, and partners for their support in our growth. We look forward to giving you an update in three months from now. Thank you.

Thank you.

Thank you. ******************************************************************************