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Edited Transcript of PERSISTENT.NSE earnings conference call or presentation 26-Jul-19 10:30am GMT

Q1 2020 Persistent Systems Ltd Earnings Call

Pune Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Persistent Systems Ltd earnings conference call or presentation Friday, July 26, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anand Suresh Deshpande

Persistent Systems Limited - Founder, Chairman & MD

* Christopher O’Connor

Persistent Systems Limited - CEO & Executive Director

* Mark Simpson

Persistent Systems Limited - President of IBM Alliance

* Sandeep Kalra

Persistent Systems Limited - President of Technology Services & Executive Director

* Sunil Sapre

Persistent Systems Limited - CFO & Executive Director

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Conference Call Participants

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* Apurva Prasad

HDFC Securities Limited, Research Division - Research Analyst

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Manik Taneja

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Neerav Dalal

Maybank Kim Eng Holdings Limited, Research Division - Analyst

* Nitin Padmanabhan

Investec Bank plc, Research Division - Analyst

* Rahul Jain

Dolat Capital Market Pvt. Ltd., Research Division - VP of Research

* Rajeev Agrawal;DoorDashi Advisors;Founder

* Ravi Menon

Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst

* Sandip Kumar Agarwal

Edelweiss Securities Ltd., Research Division - VP

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Persistent Systems Earnings Conference Call for the First Quarter of FY '20 ended June 30, 2019. (Operator Instructions) Please note that this conference is being recorded.

We have with us on the call today Dr. Anand Deshpande, Chairman and Managing Director; Mr. Christopher O'Connor, Executive Director and Chief Executive Officer; Mr. Sandeep Kalra, Executive Director and President, Technology Services; Mr. Mark Simpson, President, IBM Alliance Business; Mr. Sunil Sapre, Executive Director and Chief Financial Officer; Mr. Mukesh Agarwal, Chief Planning Officer; and Mr. Amit Atre, Company Secretary.

I would now like to hand the conference over to Dr. Anand Deshpande. Thank you, and over to you, sir.

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Anand Suresh Deshpande, Persistent Systems Limited - Founder, Chairman & MD [2]

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Thank you, Raymond, and it's my pleasure to welcome all of you to this first quarter analyst call. And thank you all for joining us today.

Very briefly, we had the Annual General Meeting of the company yesterday, Wednesday, 24 July. And I'm happy to announce that all the items that were listed were approved unanimously. We had withdrawn the item regarding Deloitte, which Sunil will explain later in this conversation.

It is my pleasure to welcome the new team that has taken over a range of new services at the company's operations. We have Chris O'Connor here in person in Pune today for this analyst call. And we also have Sandeep Kalra on the call today in person in Pune and also Mark Simpson. Now of all us are here in Pune.

So I'm going to hand this off to Chris to share the details of the performance of the company for the quarter. Over to you, Chris.

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [3]

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Thanks, Anand, and thank you all for joining. And as you may know, this is my first full quarter in the company, which I was able to really to get a full understanding, go through the operations.

From a performance point of view in the first quarter, our revenue came in at $119.62 million. Obviously, this is a number, the PAT was INR 824 million. And that kind of gives you some highlights of where we are. I think you all have our details to go through, through the rest of the call. So those are just the updates in the quarter. These are just the highlights. That was also a part of the press release.

We completed our share buyback program. That has been going on for some time. That program completed in June and it's now over. And that is part of the business standard process, standard process we have been working for some time.

In terms of business awards and highlights, we, in this quarter currently, announced the acquisition of youperience, a Salesforce practice, which is based in Germany with a component in the U.K. as well. This highlights everything that we should have taking place in our sales force as we execute for the future. We continue to be ranked well in other industry standards and participated in events that we had again in the industry. And you can see several Hackathons and Gladiator events that we participated in from a technology point of view in terms of who we are.

I think a key point from a business indication point of view that I would like to celebrate is during the quarter, we likewise crossed the 10,000-employee milestone. And we'll be celebrating that this coming weekend, planting 10,000 trees, one for every employee in the company that we have today. Crossing the 10,000-employee milestone is certainly an indication of health in terms of our ability to grow at our rate, which is at 1.2%, as well as our ability to continue to manage our employment needs as a global team, balancing between also certain roles that we have. And so it's an indication of strength that we feel.

If I look at the quarter itself, I'm going to let Sandeep and Mark talk about their areas respectively, but not a lot of -- a few areas of strength emerging. Salesforce certainly comes across multiple times in our quarter. It's an area that is growth for us as well as our acquisition of fundamental strength in Europe, a delivery capability in Europe that we didn't have before, particularly in Germany. And the ability to take different concepts of how to collaborate and to educate sales force in the practice to our customers beyond this [state and] install [time and] materials, which every day looks like from that [industry] and you'll see also that our key wins in the quarter that we have multiple Salesforce wins put out there.

The second thing I'd like to highlight is this market opportunity as well will be our industrial sector catching on as a category. That balances our traditional work with just another client. And the reason why this is important and the reason why it's so important is they are the Persistent brand leading out at the top line the purchase of software from [auto loan], our largest client, with some of their collaborators in the industrial sector area as well. And this is a key trend that we intend to highlight and further advance around the idea of value-add and value-added, reselling.

So this is kind of key indicators from the quarter [that we passed out]. And as we get to the question-and-answer section, we'll obviously go into [the rest of it.] For the next section of this, I'm going to turn it over to Sandeep, our President and Executive Director of TSG; followed by Mark; followed by Sunil, our CFO. I will ask Sandeep to take us through the TSG unit and the challenges as a new member of the company. Sandeep, please.

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Sandeep Kalra, Persistent Systems Limited - President of Technology Services & Executive Director [4]

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Good afternoon to you all. And good morning to those who are coming from the U.S. side of the house. So this is what my first section would be on. I would want to give you a little bit of background of what I've done in the past. I graduated from IIM in Calcutta in 1995 and started with building software services with HCL Technologies in the U.S. in many, many months. As a part of this, [I got in the main] services. And I took on additional responsibilities over time, establishing new geographies, first within the U.S. then followed by Latin America and Canada. My last term within HCL Technologies was leading Latin Americas. Subsequently, I joined a private company with a business very similar to Persistent, and that business was acquired by HARMAN and subsequently by Samsung Electronics. I'm very excited to be a part of Persistent, and I am looking forward to working with my colleagues to take our company further.

Now I'll give you an update on the sort of 2 areas. First, I'll talk about our [fuel] business, and then I'll talk about the initial observations, having completed my first 3 months in the company.

First, on the fuel side, we saw a number of significant deals. As Chris alluded to, the shift has started. I'll give you color on some of the deals that we've won in banking and financial services on Salesforce [and design]. In India, we won, this is one of the largest banking and financial services company, a Salesforce implementation, which is an end-to-end outside of core banking. And we will be involved in doing noncore banking applications migration over to Salesforce and also launching new products again over the next 3 to 5 years.

Another significant deal that we won in financial services was with a leading global investment firm based out of the U.S. This was a multimillion-dollar, multi-year deal encompassing credit evaluation of multiple critical applications related to the credit functions within the business, like income tax return, entity life cycle, capital call, compliance and many more.

Moving on to the healthcare and life sciences segment, which is another large segment for us at Persistent. We continue to make progress within multiple business in terms of ensuring a deal with a managed service provider, a leading healthcare cloud computing company, where we will be working with them to provide managed services to them as an (inaudible).

Another win in the healthcare and life sciences business was with a leading medical devices firm on customer relationship analytics. This is a Salesforce-based team [mainly materially] sales, marketing and services.

Coming to the last segment within technology services. This is with a technology company. We signed a product engineering deal with a leading encryption hardware based in Texas, an area focused on broadband security, IoT and cloud for their clients.

(inaudible) license agreement to the company, and over the last few months, I have answered customers' prospects, some of our team members in shares and delivery. And I'm pretty encouraged with the basic foundation that we as a company have and the kind of customer base that we have.

As a part of the strategy for going ahead, it is not lost on us that we have to accelerate revenue. And most of these cases that we are building -- are building on our foundation and leading towards trying to get not just startup business but large energy-based business. We are also forming [a marketing] team, which will be working with system advisers and trying to get [product release] from there and also inform on their possible opportunities.

And next to this, we'll double-down on our service offering to our growth solution organizations in our chosen market segments. All these initiatives, we believe, over the quarter, will lead to larger deals and annuity deals, which we believe should fuel the acceleration that we all aspire for.

With this, I hand over to Mark Simpson.

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Mark Simpson, Persistent Systems Limited - President of IBM Alliance [5]

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Good afternoon and good morning to everyone on the phone. Although I'm not new to Persistent, this is my first interaction with you on an earnings call, so I'd like to take a quick second to introduce myself as well. I graduated from a small university in Texas in the United States called Sam Houston State University in 1984 with a degree in Computer Science. And I immediately started my professional career at IBM in software development as an engineer. I had many technical managerial or executive roles at IBM over 33 years. I retired in 2016. In the last 4 years at IBM, I was actually a customer of Persistent. I didn't have to look far when I decided to retire. I ended up at Persistent literally the next day as part of the IBM Alliance unit. And now I, as of April 1, became a President of that unit.

Just as Sandeep summarized, the technology service unit also did an update on 2 aspects of our organization, both the summer and Q1, just a bit of a strategic look moving forward. In Q1, we saw an increase in both the volume and diversity of pipeline as well as our wins, which I'll talk about in a second. It required expenses we needed to make. It was in this past quarter that we've had any quarter since we started selling directly to the market and the ecosystem.

There are a number significant deals we're highlighting. In our continuous engineering practice, we started -- and we started testing 18 months ago at our first significant SaaS renewal direct to the market. And we've done the first deal 12 months ago, and we had a renewal. These are types of deals that start a foundation of growing an annuity stream direct with the clients as our partners.

Also in continuous engineering, we had another $1 million-plus deal with a customer in the automotive industry. This is going to help us execute on our objective of kind of consistent revenue quarter-on-quarter. In our PLM practice also in industrial sector, we acquired 2 net new logos. This is a part of our business. It's been a bit flat. So this is a good shot in the arm to give us some growth that we need.

And finally, in IBM, with the IBM unit, we had partnership with IBM close an over $2-million deal with a major -- one of the largest healthcare companies in the United States.

Briefly looking forward, strategic direction, 2 things to highlight. IBM is our biggest client, and they've just completed the acquisition of Red Hat. That was significant for them. Therefore, it's significant for us. Our investments are tightly aligned. If you're [with] Persistent, [with our own] strategy and that includes something that succeeds with this acquisition of both them and new clients.

And then the second thing that I'd like to highlight is that it really supports our corporate direction just over a year ago on broker solutions and believe that our line is tightly aligned with the industrial sector. So we'll take the software reselling that we do, [align some of it with] assets and in the light of tightening in the industrial sector to establish growth in that particular market.

And with that, I'll turn it over to Sunil.

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Sunil Sapre, Persistent Systems Limited - CFO & Executive Director [6]

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Yes, hi. Thank you, Mark. And good afternoon, and good morning to everyone in the call. So Chris has given you a brief idea about the market update and how we see the Persistent opportunity. Then you heard Sandeep and Mark show their perspective and understanding of the Persistent business.

Let me now take you through the financial information for the quarter ended 30 June. So on the top line, we had the revenue of $119.62 million, growth of 1.1% Q-o-Q and a decline of 3.2% Y-o-Y. The IP revenue this quarter was soft as compared to our internal expectations. In terms of Y-o-Y, there was a large reseller deal in last year's first quarter, which is the reason for the variation in IP revenue. And it is also reflecting the purchase royalty cost that you see on a Y-o-Y basis. This diluted revenue as the portfolio grew by 1.2% quarter-on-quarter and 4.5% on a Y-o-Y basis. And in terms of INR, the revenue was INR 8,321 million, which was flat on Q-o-Q basis.

Coming to the composition of revenue, the linear revenue grew by 1.2% quarter-on-quarter, while the IP revenue grew by 0.8%. In terms of linear revenue, there was an increase in volume by 1.8%, while billing rate declined by 0.5%. The offshore linear revenue grew by 3.2%, comprised of our growth in volume by 2.3% and increase in billing rate by 0.9%. Downside, linear revenue declined by 1.8%, constituted by a decline of 1.2% in volume and 0.6% in the billing rate.

Overall, the gross margin came in at 34.7% as against 36.8% in the previous quarter. The key reason for the lower gross margin is the softness in IP revenue, coupled with the fact that there has been increase in head count and slightly lower utilization at 77.9% as against 79.7% in the earlier quarter. So the utilization has an impact of 50 basis points of margin. We also had the seasonality in terms of the visa [parts] for H-1B filing this quarter, which had an impact of 70 basis points. And on the dollar, we see the currency softness impacted margin by 30 basis points.

The EBITDA for the quarter was INR 1,202 million. That's 14.4% as against 15.2% in the previous quarter. As you will have seen, we have made a provision of INR 100 million for the exposure towards IL&FS. And the cumulative provision now stands at INR 282.5 million, which is 66% of the exposure. The depreciation and amortization was 4.6% of revenue as against 4.5% in the previous quarter. The EBIT was 815.76 million at 9.8% of revenue as against 10.7% in the previous quarter.

The treasury income for the quarter was INR 202 million as against INR 283 million during the previous quarter. The income in the previous quarter was higher on account of the higher mark-to-market gains on certain treasury movements. The other part of the reason for your other income was the fact that we utilized INR 167 million towards share buyback in Q1, thereby reducing the present size. The buyback was completed on 27 June, and we have bought back 3.575 million shares. And it still is the same by 30 June.

On the foreign exchange side, the gain was INR 80 million as against a loss of INR 59 million in the previous quarter. The PBT came in at INR 1,098 million at a margin of 13.2% as against 13.4% in the previous quarter.

The effective tax rate for the quarter was 24.9% as against 24.1% in the previous quarter. We expect the ETR for the whole year to be in the range of 26% to 27%. PAT for the quarter was INR 825 million at 9.9% as against 10.2% in the previous quarter.

The operational CapEx for the quarter was INR 172 million. Cash on books amounted to INR 13,401 million as of 30 June as compared to INR 14,975 million at the end of March '19. The value of contracts outstanding at the end of 30 June was $105 million at an average rate of 73.36 per dollar.

Turning to the point Anand mentioned in the brief initial comments with respect to Deloitte. We had proposed the reappointment of Deloitte Haskins & Sells LLP at our Annual General Meeting for a term of 2 years. Deloitte informed us on 23 July that if the appointment is approved by the shareholders for a term of 2 years and not for 5 years, they will not be able to accept the same. So the shareholders, while they have approved the appointment in the AGM, in the process of the meeting, in view of these communications in Deloitte, the same will not be effective. We have started the search for suitable audit firms and shortlisted a few, and we hope to make a decision over the next few days. We will update the shareholders [by having an] Annual General Meeting to appoint the statutory auditors. And as per the relevant provisions, Deloitte will continue to be the auditor till appointment of new statutory auditor.

So that's the update from the finance point, and thanks, everyone, again. And I'll hand it back to Chris.

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [7]

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Thanks, Sunil, and thank you, Sandeep. Thank you, Mark. My observations on my first full-term quarter results, it's been a fascinating quarter to watch the business run. If I look back through the quarter, I can see opportunities to meet many of our clients. I embarked on meeting all of the CEOs of all of our partners, all their significant leadership teams and used that as a way to judge the model of the business. [The first engagement] we had a first quarter '19 large customer deal.

But if you factor through that, what you see is a very consistently running business that has upward trajectory that continues to advance our employee billing, our account depth and our ability to do business in the world. And this, by my own measure and my own experience, it's a healthy, stable business by the satisfaction of clients, the returning clients and the nature of how that work takes place and our ability to richly engage with it.

If you ask me for where I want to understand further the work that we can do, our work has a nature of being very project-oriented in its completeness, whether we're selling software or whether we're doing work with services. We are project-oriented in nature, which means that it has short durability or limited durability. And it must be renewed. And within that, you see some of our business healthiness.

I think as Sandeep and Mark have endeavored to point out, we see elements of what's going on inside the company today, where we are building longer-running business models and the ability to do significant transactions, both in the way that we are building our industrial sector business to the highlights that Sandeep gave around Salesforce, BFSI and healthcare and life sciences as core industries where we emerged more as a leader than just a provider of work. We intend to capitalize on this and focus on how to ramp this up.

We've executed our structural changes in terms of the management team as well as our management style. We'll go through that process as well as we have aligned process and procedures for how we will treat our segment-oriented businesses of presenting how we will reconstitute marketing part of the story of who we are and the types of things we can do for our clients. And we have doubled down and restructured our sales focus inside of these teams. And that work, that organization and the structure that is carried out, we enjoy the art of learning and teaching ourselves the new processes that are now in place. That is the work that's in front of us. And we believe that work has deposited trajectory for Persistent as we look forward, and we're in the middle of that cycle right now.

So those are some of my observations as well. And with that, I believe there's a question-and-answer period. And I'm going to go ahead and open up the phone for those questions that you have for us.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Manik Taneja from Emkay Global.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [2]

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I just wanted to get some sense on the services side of the business. Apologies that I have not been following the fortune of the company for some time. But I -- from what I understand, the servicing business was built from the position of the business that we're doing with the technology companies, the software product companies. And over the last few years, we have focused on the enterprise sales market. So Sanjay (sic) [Sandeep], in that respect, now can you please help us understand from a go-forward strategy where is our focus? That's number one.

And the other question was for Sunil in terms of medium- to longer-term outlook on margins, given the transition on the business side.

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Sandeep Kalra, Persistent Systems Limited - President of Technology Services & Executive Director [3]

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By the this is Sandeep, not Sanjay. That's fine. That's absolutely fine. And with respect to the strategy, we at Persistent have had a very rich history of doing product development and then platform development for the company. And today, if you look at the level playing field that had impacted the operation of product development, it is very similar to modern application development and our investment in modern application development platforms, whether it is updating our systems, coupled with [IT icons] and so on, our investments in [FSDC], both on [SCR] and the platform side.

So today, those are equally vibrant in the enterprise market space. And that basically opens up a huge amount of addressable market for us where we can compete with our biggest peers, whether they are of local origin or they are of global origin. So from our perspective, yes, we will have, as we talk about, total solutions for the team. We are selling them to put together solutions which can be long range with the partners that we have at scale. And if you look at the number of acquisitions that we have done, they are basically on a strategy of [people first] where we are reinforcing our capability. Even in at a larger scale, if you look at it, we have the Sales Cloud. We have the Service Cloud, coming with advice-based in the Marketing Cloud.

So overall, our story is very relevant, both up in the [automotive sector] and the enterprise market, which we are really going to see at scale. And that's why if you look at our segmental reporting because we started to -- those segments in terms of BFSI, healthcare, technology, new side of it and emerging verticals. So hopefully, that answers it.

So we are bullish on it. Obviously, we have to work it out. But that's where our energy is going to be going forward. Sunil?

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Sunil Sapre, Persistent Systems Limited - CFO & Executive Director [4]

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Yes. On the question on margins, so this quarter, there is softness coming from the EBITDA margin, which came in at 13.4%. So finally, this was on the back of lower IP revenues. So as you know, both in the Accelerite portfolio as well as in the IBM portfolio, the IP revenue has got more than proportionate impact on the margin. So structurally, we are keeping a very close control on costs. While we have 130 people, that utilization will come back. And we believe that Accelerite will play out well. We believe that will develop on the margin trend.

As far as H1, H2 of the parties concerned, as you know, the quarter coming is the quarter when we have the pay hike. So obviously, you will find certain impact of the pay hike. Typically, it has an impact of about 250, 275 basis points on margin. But it is expected that some of it is we'll put through the growth in revenue line, of course, the fact that we have certain benefits coming in from the hedges that we held for this period, which were taken at good rates in the earlier year.

So overall, if you look at the investments that we are making, the kind of efforts to the market in terms of deepening client relationships, as it plays out over a period of next few quarters, we should be having that conversion happening into the margin. Thank you for that.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [5]

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One more question. I just wanted to understand if the usual seasonality of business on the IP side, we expecting to continue. And would we -- and with customers on your IP side increasing, do you have to once again focus on some new IP acquisition to existing pipe growth or probably it will be more by selling the existing portfolio of IP initially?

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [6]

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So I'll address the last question first, which is all our acquisitions are done as part of the strategy to grow in categories we think they are rich and will have growth on their own. And we have capability. We have people. And we have the geography reach through those. So our acquisitions augment, they're not the primary mechanism for stabilization of people -- or stabilization of growth. We believe that's part of the strategy.

We already see emerging in the market around how to create value with our customers, both in many of our technology services areas, such as either security of data or cloud and really in the industry verticals that we invest a lot of expertise in, which would be BFSI, healthcare and life sciences and industrial sector at the same time.

So that is our strategy, and I suspect you'll see us continue to look for the right value, the right place that provides this extension of our current strategy and really accelerates the results in the market [ready to be tapped into].

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Anand Suresh Deshpande, Persistent Systems Limited - Founder, Chairman & MD [7]

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I think [that maybe you] have not been as in touch with us. You can reach out to us separately because we have a lot of questions from other callers.

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Operator [8]

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The next question is from the line of Apurva Prasad from HDFC Securities.

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Apurva Prasad, HDFC Securities Limited, Research Division - Research Analyst [9]

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And so my question is more on the growth aspect. And you talked about focusing more on large annuity deals as well as -- focus on large deals. Any milestones or targets that you can talk about? How should we be tracking it for this year? Or do you expect this to play out over a more long haul?

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [10]

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So we expect it to play out over time without a doubt. We looked at both the composition of IP-led and services revenue as part of that discussion. We likewise are looking at the major industry verticals we expect those deal to come from. And you'll find in our fact sheet for the first time, some additional information on how those verticals have been represented in the end of this year such as BFSI continuing to uptick. So we'll use those as milestones.

Certainly, that you'll see as long as deal composition and a deal that is synergistic of IP software and services are also great things that we'll be watching as well. So that is an idea of how we feel about that. I think that -- Sandeep, why don't you talk a little bit about large deal?

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Sandeep Kalra, Persistent Systems Limited - President of Technology Services & Executive Director [11]

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Sure. So Apurva, this question is from your side. So 2 things. When we announced the deal win for this quarter as well, we talked of multi-million dollar multi-variance, both the deals that we talked about in financial services. The one with the Indian banks are run with the private equity global fund. It's actually investment firm. Both of them are 3- to 5-year deals and they are different size deals. So our journey has started.

If you look at the things that I talked about setting up a large deal team, setting up a team to go after sourcing advisors, private equity firms, all these are initiatives in that direction. Obviously, as Chris pointed out, these are early days of these investments. These teams coming together. So we are hopeful with time we'll progress, and we will progress report all these to you and you will also see these hopefully in within the quarters to come.

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [12]

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I think Mark made an interesting point also that's another indicator that we watch, which is we pivoted around our largest customers and also reselling their software. I've got an interesting point. I want to make sure [I brought to light] why we made it, which is we've engaged a just a company of our largest customers to also begin selling their software as well into industrial sector.

This positions us in the category of the industrial sector as a VAR, which is different than go-through for work and institution than just being a reseller or passthrough mechanism on software by itself. We broadly point out as well as Mark mentioned, that we've been doubling the number of transactions we've been doing out of industrial sector. These are all indicators of our ability to reach the customer in a bigger value way and also position ourselves as the primary keeper for the value of software that they're starting to implement, both to do the services as well as to do the software that our partners provide as well as to provide our own IP underneath the cover at the same time. And so we intend to keep this model across the company.

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Apurva Prasad, HDFC Securities Limited, Research Division - Research Analyst [13]

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Sure. That's helpful, Chris. And Sandeep, just another follow-up on the IBM piece. So you see any opportunities coming out of, especially as Red Hat is complete now, any opportunities for Persistent coming out of that transaction there? And also, there was a decline in the top 6 to 10 accounts. So if you can explain that too?

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Mark Simpson, Persistent Systems Limited - President of IBM Alliance [14]

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Mark here. Absolutely. If I look at moving forward over the next year or so, our largest opportunity with our biggest customer is definitely helping them with that integration of Red Hat into IBM, obviously, but also -- and maybe more importantly, is helping their clients. This is a very large market. It's going to be something that perhaps could be disruptive, but at the same time, it's going to create tremendous opportunities. So outside of the push we have on the industrial sector, this is the second most important thing that we'll be doing with this.

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Anand Suresh Deshpande, Persistent Systems Limited - Founder, Chairman & MD [15]

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Can you go ahead with the next question?

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Operator [16]

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The next question is from the line of Madhu Babu from Centrum Broking.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [17]

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Sir, hiring has been strong over the last 4 quarters, though our growth has not been that much. So what is the profile of the hiring? Is it more a pressure? And -- so just wanted to view on the hiring momentum, which has been strong.

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Anand Suresh Deshpande, Persistent Systems Limited - Founder, Chairman & MD [18]

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Do you want to try it?

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Unidentified Company Representative, [19]

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Well, on the hiring front, so last -- particularly last 2 quarters, you would have seen that we have added a fair amount of strength, both on the offshore side in terms of pressures and very selective on the lateral front. We are also taking active, we can say, help of the Persistent University, which is an internal learning and development currently that we have. Wherein, now that we have a -- you can say, focus on both technology as well as the verticals, we are training people internally so that we can reduce the dependence on lateral half. So while we may have added people be in terms of the actual cost in absolute terms, it is not a very phenomenal number. On the U.S. side, the hiring has been very selective to meet the gaps in terms of skills and locations that basically people are required to deliver to clients.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [20]

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And secondly, on the advisor-led deals, which we plan to target. So I understand we are strong on the, like, sales for an Appian kind of implementation solution, kind of. So in the advisor-led deals, would it be like a end-to-end stack, which would include traditional services as a part of the deal?

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Unidentified Company Representative, [21]

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We would go selectively after the advisor-led deals. And nowadays, if you look at the trends, the advisor-led deals earlier used to be massive, like 100 million, 200 million, 500 million single deals kind of encompassing all the different parts of the stack. Nowadays what we have seen is, people are looking for niche providers, the defectors, if I may call so. And they are looking at decoupling application development, which looks like these, like product developments, and undertakes platform development because every company today is trying to become a platform/software-driven company.

So we have seen enough appetite for the services that we have to offer, with the servicing advisory channel to be able to go and sell them to our strength. So we will go selectively, but we do see enough -- good amount of market on those lines.

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Operator [22]

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The next question is from the line of Rajeev Agrawal from DoorDarshi Advisors.

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Rajeev Agrawal;DoorDashi Advisors;Founder, [23]

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My question, first, is in the past the company has talked about a growth rate, especially with the stack of around 15% to 20%. While in this call, we have not talked anything about the growth rate. So can we give some sense of what is it that we should be expecting in financial '20? And maybe if you want to look even further than that. Can you give a sense of what you -- your assessment and the new management team's assessment is? And what you think is possible?

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [24]

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It's Chris. If you look at Persistent's performance through '19 and to our first quarter here, we clearly have a healthy running business and we have a healthy set of clients. We've enjoyed selling to those clients in different capabilities as separate service and separate software and working with our largest client. We have taken a deliberate strategy to work the integration of those capabilities towards the larger deals and towards the total value discussion that we can have either in our horizontal technology area to our larger vertical areas, and we're tuning accordingly to go with that. That's involved some of the -- and the people who are here with me on the phone today as well as some of the structural elements, talked to you about around what we've done with our businesses shape through our marketing focus and inside of sale.

With those changes cutting through, we're in the process now of getting those changes to take hold. And it's early to tell you what our immediate growth rate is going to be for this quarter or for the next quarter. And it is probably early to tell you what a year would look like at this point in time. We've got a good measure of our client success. We've got a good measure of our client traction. We've got a great set of clients, particularly in the repeat business with us. We have a stronghold inside of our largest customer, and they are now settled down to -- those do work on their own, which was a distraction. And that has us optimistic that the business is there. It also has us working hard to build patterns and structures around how we can sell on the repeat sale in these segments that we've described to you. So we're doing that work, but it's early for us to give you numbers.

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Rajeev Agrawal;DoorDashi Advisors;Founder, [25]

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Got it. And is the expectation that over maybe the next few strategy will be able to? Or is it where you would not be guiding forward?

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [26]

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It's absolutely our expectation. We will bring clarity on how we're progressing.

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Rajeev Agrawal;DoorDashi Advisors;Founder, [27]

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Got it. And also we have been acquiring quite a few smallish companies, the Salesforce, the Appian and so on. So is -- can you talk a little bit around the strategy around how those acquisitions helped broaden our offering? And how that fits into the broader scheme? Obviously, there is one big client and it seems like we are putting a lot of effort around that.

But then on the size or on the separate trajectory, we are now building up these channel partners and trying to work with some of the big vendors. So just talk a little bit about how you think that strategy plays in with a -- on a big client on the other side?

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [28]

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I think you got 2 questions in there. And if I missed 1, just please clarify with me. But I heard 1 question around the acquisitions. And the second question, I heard was around channel partners.

So first, I'll talk to the acquisitions. I'll be exemplary in my description and we just picked up over in Germany a company named youperience, Salesforce Practice, a boutique well-known inside of Germany is well-known by Salesforce themselves, seen as a trend setting leader of being able to work with business of the implementation of Marketing Cloud as well as to do the implementation of Marketing Cloud, which is a consultative capability that they've developed as well as the ability to technically install marketing cloud at the same time.

So why is that interesting to us? It's interesting because it complements our acquisition of PARX, which we did a year earlier and provides us with significant hold of Salesforce in Germany, which is a significant growth area for Salesforce itself. It secondarily just complements our hold in Europe, which is small but we intend to continue to progress forward on and gives us an in-country delivery capability that's already established and it brings us a selling team that speaks the natural language that knows how to progress inside of one of the largest economies in the world. Third, it builds a stability and it will take consultative capabilities and teach the rest of our salesforce practice that we have, which is a top 20 practice as accounted to by Salesforce and be able to teach them how to do consultative capabilities worldwide. So future teams that are doing Salesforce today in Australia, in India, in the United States, how to do that at the same time. This is a great looking boutique for us because it brings this much richness to the table in terms of progressing so many of our agendas. And these are the types of things that we look for when we do this.

And I'll take the second question you asked was around partnering with our channel partners and what we see that's slightly different. When we move -- when looking at your channel partner who builds software, somebody that you can find on one of our partner webpages to ask them if the work we're trying to build value around them. If you focus on category expertise, where they are also trying to apply expertise. So many of the companies, Sandeep mentioned, for example, are clients in healthcare or in banking or applying themselves in industrial sector, and Mark mentioned one of them. And they want to advance their business with either [advanced source]. We construct the right value solution and we gain the attribute of them being willing to take you to market. We gain the attribute of them seeing, it gets up and somebody that gives us work around install. And we gain the attribute of them providing marketing and the lift to you at the same time.

This is something that I've enjoyed in my career of working with channel partners. Sandeep has the same experience and Mark does as well. And as part of what bring to the table as a management team in terms of how we would like to see the value progression take place from Persistent, which is to provide lift for our partners so they provide it back. And it's a little bit of a different focus than just doing [basic] time and materials from the way that we apply this pressure in the market. And so I hope it will give you a picture of both of those 2. I think I got your 2 questions. If I missed something, let me know.

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Operator [29]

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(Operator Instructions) The next question is from the line of Ravi Menon from Elara Securities.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [30]

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Chris, if you look at the IP revenue, it's been a little soft this quarter, and that has a significant impact on the margins. And Q1 is typically a very seasonally strong quarter for IBM revenues as is Q3. So is it the IBM IP portfolio that is weak this quarter? Or was it was an actual rate? And if it is IBM, how do you see that? Is this just a one-off this quarter? Or should we expect that this is kind of where the revenues will trend from now on?

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [31]

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We have IT revenue in a couple of places. The specific area that was weak for was our Accelerite business and in IP revenue.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [32]

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All right. Great. So then could we expect that in Q3, the normal seasonality for IBM should come through and we should see a bump up in revenue by then?

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [33]

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I think the IBM business will continue to run in its normal seasonality that we've already talked about and talked about in prior sessions. I believe the Accelerite business will continue to be one where we'll be gaining the capability with that software and combining it more with our services going forward. And we'll talk to you about that strategy as it evolves.

Accelerite to us is selling software as a stand-alone brand. And our focus as we go forward, as we've talked about is to build, I'll call it, a combination of packages. And whether that's doing a large asset associated services deals or deals that are designed around creating value in a certain industry. You'll find us applying Accelerite more of that than as a stand-alone software company. And so we're expecting a growth that we project to come, both from the work that -- Sandeep is doing and the work that Mark is doing.

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Operator [34]

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The next question is from the line of Rahul Jain from Dolat Capital.

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Rahul Jain, Dolat Capital Market Pvt. Ltd., Research Division - VP of Research [35]

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First of all, if you could say, what are the current challenges and action plans to revive the digital business revenue? And secondly, if Chris or Mark, you could share your perspective in terms of how we could leverage a deep reach into IBM ecosystem to drive various business opportunity for Persistent going forward?

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [36]

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Okay. So if I could get a clarification on the first question, which ecosystem?

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Unidentified Company Representative, [37]

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Digital.

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [38]

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So if you look at the current digital number that we've got there, this to me is not yet as the way we track that number emerged as an indicator that's given a positive or a negative. I understand the way the number looks today, but I found digital almost all the business that we're doing. And I found that we're advancing the cloud storage or the cloud progression and the march to SaaS in nearly every facet of our business. And so I don't put a negative into Persistent in a digital business context or in a SaaS context, or actually which will engage us in our offerings that are across the board, whether that's an industrial sector, the banking and finance, the data to the cloud. All working with partners that are wanting to advance digital business and I'll say the prime provider of that.

So I'm bullish on our digital capabilities and around the total digital approach here. I see -- in fact, I see it in nearly every sector. And I am -- I in my first quarter with this company are not paying a heavy guidance one way or the other to that number that you may see on paper. And it's just my current education of where I am and we can talk more on that, as you'd like.

And with the relationship to IBM, Mark, perhaps, you want to talk about maybe 2 items, which is how we interlock with IBM in terms of the internal business. And then second, how we interlock with who we want to sell to from our own perspective?

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Mark Simpson, Persistent Systems Limited - President of IBM Alliance [39]

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Yes. Sure, Chris. So from our kind of, I'll call it, traditional business, working directly with the IBM team is the big opportunity is Red Hat. We've talked about that before. And that's really something that we think we can do quite well in.

And the second area, which is around more of the ecosystem, if you think of the long success we've had with IBM, starting with time and materials, innovative business models. We've innovated again, and we're selling directly to their ecosystem in the market in kind of 3 or 4 ways. And we do have a backup where we already have a relationship and do work for them, especially our IP arrangements royalty, where we had 3 significant elements to that. We resell their software, which gives us top line revenue growth. We have kind of top line professional services revenue on top of that. And then finally, we're developing our own IP, that's very complementary in that ecosystem. So Chris likes to call that stacked revenue, where we get the product revenue from the royalty, we resell their software, we have world-class professional services and very relevant IP.

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [40]

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And this is where you talked about us doubling the number of clients we sell to and...

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Mark Simpson, Persistent Systems Limited - President of IBM Alliance [41]

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That's exactly right, Chris.

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Operator [42]

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The next question is from the line of Sandip Agarwal from Edelweiss.

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Sandip Kumar Agarwal, Edelweiss Securities Ltd., Research Division - VP [43]

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Sandip here. So a couple of things. One, Christopher, you are already there for last few months, and I am sure that you would have met most of the clients. So what is the sense which you get when you meet the client? What is leading to we remaining a little behind in the growth path compared to industry and in spite of our robust capability? Number one.

Number two, how long do you see this pain to continue? I'm not asking for a specific guidance or outlook, but I just want to try to understand that. How much more time it will take before we return to our growth commensurate with our capability?

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [44]

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It's a good question to ask. So I've met with multiple clients. I'll be observational in a sense and then I'll be somewhat quantitative at the same time. And as I've met with the clients, having enjoyed a rich career around software and software projects, you learn to how to listen for key indicators of success and also lack of success. And I'm yet to have a lack of success how with any client nor yet to have one of my teams come in the room and use the CEO as the backstop to save a client deal.

While it's anecdotal in its nature, it is an expectation in a software industry that you will have work that you'll have to do around key projects for clients to make sure that they're satisfied. And some of those are normal business as unit -- as usual, well measured corrective actions and some of those are emergency procedures done in the urgency of dark at night. We are amazingly in control of our clients and our projects and the satisfaction that they have. And numerically as I checked against that from my first visit, I found that our client base is rich and returning at a project level. And this is a key phrase to use because they're coming back to us repeatedly for the next project and the next project. And we have, along with the clients that they repeat business with us, and generally, we for them are regarded as their provider of health of choice.

We -- to move to growth, over to your second question. We need to progress into understanding their total business more and building total value for them more and how we can help them. Often, we see the total scope of where they're heading. We let them go to the point of telling us which projects they didn't want us to employ on. When we could get in often and consult and advise on appropriateness of how to go all the way through a total program or a total architecture or a total initiative. And this is the category expertise that you've heard myself, Mark and Sandeep talking about developing and applying more applicable services.

So we've hired business leaders, who inside of each of our traditional technology categories and our market industry categories, who are now addressing those areas we think are significant areas that we should be applying the main value and going for larger segments of the clients' business as well as more leadership as well as more clients.

And so as I mentioned, we've done the tooling for this in the past quarter. One of my colleagues would have phrased as the stitching phase, which is now getting it to work and bringing up examples. We have examples in banking. We have examples in industrial sector. We have examples in Salesforce, where we see this taking hold today. It's getting it to scale, that is the time that we're putting in. I anticipate that over the coming quarters, you will see us bringing in more incremental progress, more incremental examples, and those will reflect our results as we go through the next several quarters as well.

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Operator [45]

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The next question is from the line of Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [46]

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Just wanted your thoughts on the margin profile, considering that the IP revenues have actually come down quite a bit as a percentage of revenue. So compared to what it was before I think it's down 24%. In that context, do you think that the margin profile is -- will sustainably be at a lower level than what it was in the past? Or do you think that there's significant room for IP revenue to grow from where it is today?

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Unidentified Company Representative, [47]

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Yes. Hi, Nitin. So in -- so far as the IP revenue stream is concerned, there are multiple nature of IP deals. So one is the deals that we do on our own products, where we have ownership of these products in the Accelerite pack. That has got a very significant impact on the margin because our costs are already built in there. The second element is what we sell in terms of licenses with our partners. So all the sell-with business whether it is on the IBM retailer ecosystem or with players like Appian, OutSystems and so on, there is a license cost that is involved in the purchase. So when there is a -- so currently, what we find in terms of the Y-o-Y dip in IP revenue is because of the fact that last year in the first quarter, we had a significant reseller deal. So it was of the tune of almost [$67] million, which was one lumpy deal that we had in the last year first quarter. So what actually impacts margin is the business that we do on the non-retailer side, where it has got disproportionate impact on the margin.

So your question is right, that yes, if the overall IP revenues are less, would it impact margin significantly? The answer to that is not significantly, it will only impact to the extent that reduction is on the significant margin conversion kind of IP business, which is not significant. But yes, we have to package the whole Accelerite portfolio in a better manner along with services and utilize those IPs in a little more, you can say, comprehensive deals than rather selling just the licenses on Accelerite portfolio.

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Anand Suresh Deshpande, Persistent Systems Limited - Founder, Chairman & MD [48]

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Let's do so maybe a couple more. This may be the last question.

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Operator [49]

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The next question is from Neerav Dalal from Maybank.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [50]

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A couple of questions. One is that there was a decline in the top 6 to 10 clients, the revenues. So any -- could you slightly -- this is for same?

And second is, if we could reconcile the IBM piece in a sense that the -- as a client, IBM has increased. So non-IBM has seen a decline. So I just wanted your thoughts on that.

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Unidentified Company Representative, [51]

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[Neerav, can you state your] question again?

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [52]

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Top 6 to 10 clients has declined -- absolute decline in revenues Q-o-Q. Reason for that? Is it 22% -- to 22% Y-o-Y decline, 20%, 21% Q-o-Q decline?

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Unidentified Company Representative, [53]

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Maybe we'll declare to you separately because this may be some fact detailed question.

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [54]

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We don't see an absolute decline.

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Unidentified Company Representative, [55]

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In total, it might reflect but absolutely not.

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [56]

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Our absolute number doesn't...

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Unidentified Company Representative, [57]

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We'll take it off-line, Neerav.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [58]

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Sure, sure. And the other part is, in terms of Accelerite, should we now expect further decline in the Accelerite portfolio, the thing that we've seen in this quarter?

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [59]

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I think Accelerite is -- the Accelerite is joint -- a stable set of clients. And those factors -- and the numbers that you see are reflective of the stability of those clients. I think -- as Sunil mentioned, the [offset] we mentioned earlier. Accelerite tends to provide, and we've noticed this when we looked at the patterns when we included it with our services. The Accelerite products were included with our services team tend to provide a rich value, a more extensive value to our clients as a total package of software and services combined together than by themselves.

So the current number should be representative of the clients that we have and we anticipate maintaining that base. The future trajectory will be to enjoy Accelerite as an asset combined with our services to provide what we think is a greater value to our clients. And that's a little bit of a pivot we're making, so it's not to the detriment of today, this Accelerite number.

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Neerav Dalal, Maybank Kim Eng Holdings Limited, Research Division - Analyst [60]

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Right. So because where I'm coming from is that the top line has increased. You've seen ISP business revenue being flat and the IT revenue being flat. So this would mean that Accelerite has actually seen a $2 million to $3 million decline in revenues. So that is where I was coming from.

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Anand Suresh Deshpande, Persistent Systems Limited - Founder, Chairman & MD [61]

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That's it.

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [62]

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First, I think we're at the end. I want to thank you for the quarterly call. You know how to reach us, should you have questions that you want to reach out and further gain advice or input on. We remain available to you in all these phones, and thank you very much.

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Unidentified Company Representative, [63]

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You can reach out to, [Saurabh].

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Christopher O’Connor, Persistent Systems Limited - CEO & Executive Director [64]

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Or you can reach out to [Saurabh] now and he will help collect the questions you have.

With that, we're going to close the call. Anand, thank you very much for kicking us off. Sandeep and Mark, thank you for joining us. Sunil as always, thank you for all of the financial input. And with that, we're signing off.

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Operator [65]

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Thank you very much. On behalf of Persistent Systems Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.