We will now begin the question-and answer session. We have our first question from the line of Baidik Sarkar from Unifi Capital. Please go ahead.

Could you give us a flavor on how your large client looks specifically? There was a sense of weakness in the previous quarter. I understand the re have been some pullback maybe like the macros. How are you reading this specific engagement with Microsoft, any flavor will help? And also, on the large deals, have we added to this kitty, did you say your pipeline is at 25% or was it the order book?

Thanks, Baidik. So, on the large client the spend pattern has resumed on newer area, especially around AI and GenAI which is where the bulk of our focus is and winning that business . Like we announced last time, we already have closed one deal with them in that area and we continue to make progress on that. So , in general, the market within the environment from a Microsoft perspective is looking up. The results were also pretty strong. We believe that we will continue to grow back with them as they come out and start the spend pattern. So , the future looks relatively strong as we move forward with them. So that's on Microsoft . On the la rge deal, Baidik, the single large deal we announced $16 0 million deal is fully ramped up now. What I talked about was in general pipeline improvement that we have seen in the large deals, it's up by 25% quarter-on-quarter and the total pipeline of all large deals put together.

In the domestic product s business, I understand every now and then, there will be a quarter of consolidation. So, should we read Q2 as one of those quarters or is there a caution in the demand ecosystem specifically, any flavor from you would help?

Q2 has always been over the years has been a little bit weak quarter for us because a lot of these are large contracts to where they have been structured across the quarters. That's how Q2, Q4 is a little bit of an issue as far as the numbers are concerned in terms of the top line. This is not an exact indication of how the market is and, from the profit point of view, how we're going to do quarter-on-quarter. Just that historically this quarter has been all this like from the revenue point of view.

But getting into Q3 Sujit, should we expect a flush, I mean, there's been years in the past where flush happened in Q3. I'm just trying to understand what your broad sentiment is?

Q3 is a good quarter for us.

And then lastly on the margin front, is it fair to assume we'll hold these levels? I'm just trying to understand how we read our investment levels into the business given what our growth momentum is?

The margin for international business or domestic business?

International.

International business, as we mentioned, we will continue to be at the lower 20s before FOREX and other income. We will continue to maintain that . Depending on the quarterly requirement and our investment plans, it can vary from quarter -to-quarter, the investments will continue in our focus areas where we have announced already . So, the medium term it will be only lower 20s of margin.

As a follow up to the previous one, so when you say la rge deal ramp up, $ 160 million is completely built into revenues now . You also announced one large deal with TUI. So that part should we expect to ramp up in second-half or that part is also built into the revenue?

No, that will continue to ramp up. Those are early days of that ramp up right now, part of it is already inside, part of it will go into Q3, Q4 and some part of it in Q1 as well.

So, with that, what is the general outlook for second half like I was initially anticipating a sharp ramp up in Q3 and Q4 given our deal signing, so is that the trajectory or do you think the usual Q2 is strong and Q3, Q4 little on the slower side given f urloughs and all, that's how we should look at for our international business?

We don't give quarterly guidance, but I think in general what we have said we will grow in high teens this year YoY and I think that's the trajectory we are on, and I think we'll be very confident again organically, we're very confident of getting to the same trajectory during the course of the year. So, yes, the business momentum is pretty strong as you can see this quarter, last quarter also, 4.6% reported currency. We expect to be in the same high-teens growth YoY.

Last is on headcount reduction like there was I think some reduction in the quarter which was like we were expecting some addition given this ramp up etc ., So, is that a quarterly aberration or do you think headcount is something which may lag behind revenue?

Not even aberration or a correction. If you recall, last quarter we had talked about we fully ramped up for two large deals in the quarter and they were in transition. So, this quarter we had the benefit of having them give full quarter revenue and hence it impacts the utilization as well favorably because those people were all billable this quarter. Secondly, this quarter also , we could not hire in time for AI. We wanted to ramp up more. We just couldn't get that hiring done. So, that full quarter impact will come into next quarter. So , I think it's just a delayed hiring a little bit that happened for us this quarter, it will catch up in next quarter.

Q3, Q4 when we look at the numbers, potentially you will start adding again?

Absolutely.

We move on to our next question from the line of Mayank Babla from Enam AMC. Please go ahead.

I just had one question, and this was around this quarter we lost one of the seniors to a peer. So, I wanted to understand from you if there was any key man risk at all over there and if yes, has it changed or derailed our vision of international revenues doubling in the next four years or any sort of vision changes there?

Fair question. I think. Yes, we had one senior exit, but like I've always said, we have built our organization for scale, and you'll be delighted to know that we could fulfill that position from within and Anthony, who you met has taken that as an additional responsibility . So, as far as Sonata is concerned, onward and forward, we're moving forward and stronger and I think we have enough leadership that we have built that we feel we can take the company to the goals that we have outlined for ourselves.

Thank you. We have our next question from the line of Vipul Kumar Shah from Sumangal Investment. Please go ahead.

Hi, sir, is it possible to give revenue and EBITDA for Quant Systems separately?

Difficult to disclose that because we are fully integrated a t present and there are quite a lot of cross selling opportunities happening. So, for the purposes of earnout, we will have a financial, but it's difficult to publish it outside.

Sir, a lot of your large peers have given very cautious commentary due to recent macroeconomic and geopolitical situation. So , are you experiencing any consciousness on part of your clients, are you experiencing any ramp downs or delays in projects start, so your comments will be highly useful sir?

The market like I said at the beginning of my comments is macroeconomic headwinds are still there, the tech spending is still low. So , this situation is notwithstanding . As far as Sonata is concerned, I think our proposition around modernization engineering continues to resonate with the customers. Across verticals, we continue to see good demand build up, our large deal pipeline is up, our overall pipeline is up, the confidence in Sonata value proposition is quite high as far as we can see. Now, are there pockets where we see some softness? Yes, we see softness in hi - tech industry, we've seen softness in two clients in Healthcare in the most recent quarter, but those are isolated pockets of softness that we've seen, but in general the overall momentum is looking pretty good as far as the industries and geographies we operate in with the proposition that we operate in, Vipul.

And lastly, sir, Microsoft published results last night only, and they are relatively very ahead in the generative-AI. And since you are their sole partner in India, so do you expect a comparative advantage from that relationship?

Let me qualify the question first. We are not the sole partner for GenAI, we are the sole partner for the Fabric offering, which is a SaaS-based offering from India. So that's the one qualification. As far as GenAI is concerned, our proposition on Harmoni.AI resonates well with the customers and that's what is reflecting in the multiple 70-odd clients conversation that we've been involved in now to really take that proposition on. That proposition, Vipul, candidly is platform-agnostic to some extent because whether it's an LLM from Microsoft or any other partner, our offering stand on top of these industry-leading LLMs out there. So, that's how we are seeing it and we're very excited about the investment we made. We were probably one of the first ones to come out with the offering with the responsible-first and we continue to take that advantage ahead as we move forward. And the la rge deals we announced with another telecom companies has Harmoni.AI as the base infrastructure to really drive automation using GenAI in that business operations area.

We have a next question from the line of M ihir Manohar from Carnelian Asset Management. Please go ahead.

Sir, largely wanted to understand Harmoni.AI. I mean you mentioned that you are looking to get 20%, 25% of your revenue in the next two to three years from this particular offering. I know you provided one example of the telecom side . If you can provide some more examples as to what is the solution exactly that you're trying to target here, which are the areas which will be primarily focused that will be helpful? My second question was on the MS Fabric. Are you the sole SI partner at the global level or at the Indian level, I mean just wanted to have a clarification around that and how important is this product , I mean looks quite interesting , so how to understand business from M S Fabric in the next two to three years? My third question was on the deal wins. There were three large deals which were there. One, the $160 million and another two which were there in 1Q. So, you have provided clarity on two deals. Is the third deal also ramping up as per the expectation, just wanted to get the clarification around that, I mean are all the deals ramping up as per expectation or is there a slowness there in the ramp up itself?

So, let me go in the reverse order, Mihir, so I can cover all the three parts. So, the deal wins that we had, we are seeing a ramp up as planned and, in some cases, slightly faster than planned, but not delayed at this point in time. So that's on the deal win side. All the deals that we have announced so far are moving as per the plan. On the second point, on Fabric, they have six or seven partners globally. Sonata is the only India-based SI which is headquartered in India in that list. Others of course are the general global partners that they have that are part of the list. We are excited with them in this partnership specifically because we are working with them to help them build a product, test a product and so on and so forth. So , we're really much ahead of the journey. Fabric is really Microsoft's attempt to provide a SaaS-based offering on a data platform. So, we believe that the market will keep growing for them as they launch the product in November. So, this will give us some accelerated growth not in the next one or two quarters, but it will take about a year for it to really fully ramp up. But we are investing in the area where we believe the future investments, the future growth will come from . So that's on Fabric. On your point about Harmoni.AI, our proposition is really simple , Mihir. We are not in this space of building an LLM. We have built a bunch of services, service delivery platforms, wrapper services, integration services around the L LMs which are there in the industry to provide responsible-first peace of mind to the customers. To give an example , if you're a Healthcare company and you want to make sure that your data privacy is ensured of your consumers or your members, our wrapper services ensures that that we have built out. So, anything which really provides responsible-first from a consumer perspective that they feel secure that their data, their information is not in wrong hands is what we're really after as a proposition. So that's really what happens at AI is, we're not competing with Google or Microsoft or any of these big tech companies. Our offering is really a bolt-on as a service offering, service delivery platform which augments the capabilities of the native LLMs in a very simple way.

Just two extensions. On the book-to-bill part, you mentioned 1.24x. Is this book-to-bill ex of the large deal wins because last time the number that you have given, it was ex of large deals. So, I mean even this quarter is it ex of large deals or including large deals?

It's the same framework that we had last time, so same methodology what we explained last time.

Lastly on the synergy pipeline of $150 million, which is there with Quant Systems, I understand it is difficult, but what can be the potential wins out of this, I just wanted to get an understanding on that?

These are, in general, us taking Quant offerings into Sonata accounts is one part of it , as you know Quant was very strong in data privacy area and enterprise data in general, sales force as a third area. So those offering into Sonata account is one part. The second part is to take broader capabilities of Sonata into account the accounts that Quant had which is a second dimension of it. And third is that in the newer clients we're seeing some accelerated growth that either Quant could not have won alone, or Sonata probably wouldn't have won alone. So, we're seeing some deal build up in that area because of our joint proposition for a net new customer as well. So, those are three broad areas.

We have a question from the line of Tushar Wavhal from InCred capital. Please go ahead.

My first question is regarding the weakness in the Dynamics business. Anything to read into it? My second question is, what will be the average deal size for the large pur suits which we are having in the pipeline? My last question is related to Travel vertical. Any outlook and what are the current size in the overall services?

Let's just start with the first one, the dynamics . I think we explained last quarter, the Microsoft year turns over in June and July timeframe. So, it takes us a quarter or two to build the pipeline and continue projects going. So, we're pretty confident that starting next quarter or current quarter now we will start to see an uptick coming to the Dynamics business. It's a seasonality effect that you see in the numbers that is probably it has in last quarter. So, we're not worried about the dynamics. I think we'll get back to growth in the coming quarter onwards on Dynamics question. The second question was on the deal size. I think we are not willing to give a deal size. I know that's been a common ask, but the things of these are multi-year contracts, which are anywhere between high single digit to multiple of double digit, $1 million of contract in multi- year. It's a pretty broad range so we can't give a single or number to you, but these are multi - year contracts which can only grow from there because once you get into these digital programs and cloud tra nsformation programs, you're there for the long haul. As far as the Travel is concerned, I think the Travel client that we have is doing well. We announced a deal last quarter also and that ramp up is moving well and we believe that it's time to come that business will continue to grow on us.

We have a question from the line of Sanjaya Sat apathy from Ampersand Capital. Please go ahead.

Can you just help me understand the EBITDA margin changes in this quarter compared to last year as well as year-on-year?

So, what are EBITDA margin changes from last quarter?

Yes, and the key positives and negatives, if you can just walk me through the bridge?

For international business, right?

Yes.

International business, the major benefit for us is the large deal and the utilization both has improved for us, which is giving about 1.3% benefit to us, and operational improvement is about 80 bps for us. So that's the movement from 21.1% to 23.1% in this quarter.

Any headwind basically on the staff cost that was done in Q1?

No, the headwind is at PAT level on consolidated level. Although we had the operational improvements and the large deals were a tailwind , we had our tax cost going up because our ETR went up by 100 bps compared to last quarter. So that's the impact at the PAT level.

Why is that sir?

That is because our ratio of onsite US revenue has gone up compared to previous year and last quarter was the first quarter of consolidation. So, we had the benefit of some carry-forward losses in in Quant in the earlier years. Now, this quarter that benefit is not flowing through. Hence, our average rate in US tax rate is 26% compared to 25% in India. So, our ETR has also gone up.

Lastly, this amortization expense and this interest expense, which is there, if you can just remind like for how long this amortization will continue and I can see that your d ebt level has come down even this quarter even though you might not have paid for the point bill. So, are we going to see moderation in interest cost from here?

No, there are three elements to that amortization, which we have given and the presentation we will be uploading now that will have all the details of the amortization and interest. There are three components to it. One is the regular bank loan interest that will be comi ng down once the loan is repaid anytime. The second is there are some unwinding of interest. It is an accounting standard requirement for the deferred payment. So, when I pay the deferred payments this year it will substantially come down, and when I pay next year, it will fully get knocked off. B ut amortization of intangibles is a little longer tenure . As per the IND AS which is equivalent to IFRS you have to make an assessment of the life and the life normally varies from seven to 10 years. So that's a little longer amortization.

Overall, you have about Rs.23 crores of such expenses on a quarterly basis, right, sir.

Correct, you're right.

Will that come down to somewhere around to 12, 15 crores next year by this time in the quarterly basis and further reduction in the subsequent year to a negligible -?

In that no unwinding of interest. These two constitute almost like Rs.17 crores out of the Rs.33 crores.

That will go away by this time next year?

By next year, yes.

While you are showing such a strong growth in your revenue, your headcount has come down a bit and you are again looking at a pretty decent amount of growth , it looks a large. So, is it an aberration on this headcount reduction and it will start improving from next quarter, how should one look at it?

That's what Samir explained no to an earlier question that our large deals, the revenue ramp up and the earlier investments have been closed in this quarter, our investment in AI is continuing, but we couldn't complete the hiring in this quarter, that's the reason why this has happened in this quarter. We'll continue to invest on AI in future.

But still your headcount will go up because the hiring which you could not complete this quarter will happen by next quarter or something?

We have continued to focus on investments in AI and wherever the business requirement based on that, our hiring will continue. That's nothing to do with anything related to the opportunity that comes in.

We have our next question from the line of Santosh Kumar Keshri from Keshri Finance. Please go ahead.

My question was that though we can see that there's a good increase in the revenue year-on-year as well, but there is a degrowth quarter -on-quarter. But what we can see is that there's a huge increase in the employee cost; it has gone up almost by 50% year-on-year. And that's the reason the PAT has not so much moved, it is hardly up by 10%-odd. So, what's the reason that we have such a great increase in employee costs, is it because of new acquisition or there is some other reason, I just wanted to understand a little more in detail?

What cost? I couldn't hear that.

The employee cost has gone up from Rs.222 crores in Q2 of '22 to Rs.339 crores in Q2 of '23.

Domestic business you are talking about?

No, I'm talking about consolidated.

What cost? I didn't get that.

Employee benefit expensive.

The number of employees has also gone up and there was salary increase in January as well as in the month of April last year, and the demand was actually very high last year, so the average cost also went up during this one year. The market situation has changed only in the last two quarters and before that the situation remained very volatile for us with the market demand was high. So that's the reason why the cost has gone up.

So, what is the employee turnover now in just closing quarter, if you can just share that number?

Attrition we had about 16.1% in this quarter.

That's mostly large even with the larger peers the same attrition. So, can we expect the employee benefit expenses to go down or it will stay at the same level for future.

I don't think it will go down, but the dramatic increase may or may not happen in the coming next couple of quarters.

Are we getting better pricing for the new contract or the pricing pr essure still persist? As you can see, there is a chance of recession in advanced economies so it could be that on the pricing you may not much pricing power, what's your view?

Let's just clarify a few points before we answer your last question , Santosh. Our revenue is up on international level, which is what we monitor YoY as well as QoQ quite significantly, we talked about the numbers earlier, YoY 40% up and QoQ is 4.6% up. Domestic business we don't track revenue, Santosh, because it's a gross contribution business we don't track the revenue really as far as our performance is concerned. Point #2, our EBITDA for international business this quarter is abo ve 23%, which has really improved in the last two , three quarters and it is pretty much what it used to be two, three, four quarters back also, our EBITDA performance is high. As far as PAT is concerned, that is low because of the amortization and interest that Sanjay also asked about because of the acquisition that we have done. So that's the three, four parts just to keep in mind . Now, coming back to your question specifically on pricing, we're not seeing any pricing pressure. I think our pricing is pretty solid and holding up. Of course, there are some pockets with one or two clients it can always happen. But in general, our pricing is pretty solid. In fact, even in the most recent quarter, we got some price increases also. It's not a big concern in our mind at least at this point in time.

We have our next question from the line of Vipul Kumar Shah from Sumangal Investment. Please go ahead.

This question is for Mr. Jagan. He has already clarified, but I'm not able to understand. So , this finance cost of Rs.20 crores means what it relates to, although I think we have net cash on the balance sheet. So, would you explain it again, Mr. Jagan, please?

So, when we acquired Quant, we borrowed about $55 million in US. That was because of some operational issues with RBI and money transfer. We have explained that time. So , there is an interest cost of that is also there which is resulting in about 6.5 crores to 6.75 crores of cost every quarter. And there is an interest for future payment is that they have an earn out in the next two years to be paid , one in March '24 one in March '25 and one in August '25. So , as per the accounting standards, it's called unwinding of interest. We have to accrue some interest cost for the deferred payment and bring it to the current value when I am capitalizing that. So that unwinding of interest has about Rs.10.75 crores to Rs.11 crores impact every quarter. So that's what I was saying.

And Rs.6.5 crores for that 55 million, so roughly around Rs.18, 19 crores it works out, right?

Roughly around Rs.17 crores of impact will be there in every quarter.

That will go away approximately this time next year, is that understanding, correct?

No, it will go away once the loan is repaid, which we are planning to do sometime in the next year, then we have this interest unwinding will happen will reduce substantially after the first- time payment in March '24 and substantially reduce after March '25 payment, but finally go with the August '25 payment whenever we are paying in August of 2025.

I now hand the conference over to Mr. Samir Dhir for closing comments. Over to you sir.

Thank you, operator, and thanks all of you for joining us today. We really appreciate your time and your questions today and look forward to talking to you in the quarter again and thanks for your support for Sonata.

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