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Ladies and gentlemen, good day, and welcome to the Investor Conference Call of Sonata Software Limited. [Operator Instructions]
I now hand the conference over to Mr. Samir Dhir, CEO and Managing Director from Sonata Software Limited and Mr. Jagannathan, CN, CFO from Sonata Software Limited. Thank you, and over to you, sir.
Thank you [indiscernible]. Good evening to all the participants. I welcome you to this conference. Today, we will share our strategy, the progress we have made in the recent quarters, our strategic plan and the financial results for Q3 FY '25, the quarter that ended on December 31, 2024.
Thank you for joining us today. We appreciate your valuable time and support. It is my pleasure to share our progress regarding our vision and our growth trajectory for Sonata. First, I will provide you an update on our strategic goals and then we will discuss our progress for Q3 FY '25.
So let's talk about strategy and goals first. We aim to be one of the fastest-growing modernization engineering companies, powered by a unique Platformation framework and AI. In the current context, while there are macroeconomic challenges, a slowdown of tech spending and decision delays, we continue to build for scale and drive towards our key bets. And our bets include number one, to continue to win large and midsized deals, building on our successful track record, YTD FY '25, we have won 8 large deals so far.
Number two, deepen and diversify our partnership with Microsoft, AWS and other key strategic partners and to help with new logos of Sonata and scale those logos to be the next $10 million, $25 million accounts for Sonata. YTD FY '25, we have added 16 new enterprise-grade logos that will scale over the next 2 to 3 years.
And number three, scale our capabilities continue to build out modernization engineering capabilities with AI across all our competency areas consistently. And we want to achieve our goals in our 4 verticals, which is Healthcare/Life Sciences, Banking, Financial Services, Insurance, Retail Manufacturing Distribution and PMT, which is Telecom Media and HiTech.
We'd investments in Healthcare/Life Sciences and Banking Financial Services verticals, which we incubated in the second half of 2022. And we want to do this across five geographies, which is North America, U.K., Europe, India and Australia. With our differentiated lightning tools, IP and our office, we are steadfast in our pursuit of delivering value to our clients and their modernization needs.
With that, let me provide an update on large deals. Our large deals pursuits are a significant part of our strategy. 44% of our large pipeline is from Fortune 500 clients. I'm delighted to share with you 2 significant wins we had in Q3 FY '25. The first win is from a Finland-based mining and construction technology leader. Our teams will drive modernization and transformation by leveraging AI, dynamics and our integration capabilities. Sonata will deploy the solution across 26 countries over the next 3 years.
The second large deal we won in the quarter, where our client offers technology solutions for transportation and voice management, data management and network optimization. Our teams will be -- we will be a strategic partner for modernizing our client's 20-plus year old SaaS-based platform through an AI-powered cloud and data modernization stack. This is a net new client and a large deal for Sonata book.
In both these deals, our teams have leveraged Sonata's deep AI capabilities for process transformation, modern AI engineering tools and platform-driven data modernization. Let me provide an update on AI, which is our big bet. As stated earlier, we expect 20% of our revenue from AI-enabled services in the next 3 years. We have $58 million pipeline across 100-plus clients on AI.
We enable our clients to leverage AI in 3 different ways: number one, driving efficiencies for them. number two, driving higher consumer experience and modernize sales for them; and number three, driving innovative business models for our clients.
Our Harmony.AI platform is critical for our recent deal wins and subsequent AI model implementations. For Banking Financial Services and Health Care, we're making significant progress in implementing GenAI, using small language models for cost efficiency from fine tuning, we're implementing Agentic AI for driving hyper automation in our transformation programs.
Some of the key programs we are delivering include, for Healthcare client, we are building their GenAI platform, including forming their enterprise-wide AI theory. For our Travel clients, we're building a co-innovation AI lab and implementing modern engineering across their software development life cycle. For our Financial Services client, we're building AI-enabled intelligent document processing capabilities. We are delighted that Sonata has achieved AWS' generative AI competency.
By harnessing AWS' GenAI technologies and advanced AWS DevOp services, we are well positioned to alleviate customer experiences and provide hyperpersonalized content. We are also a proud partner of Microsoft's Partner AI Council. In partnership with the Victorian government, we announced our commitment to set up an AI center of excellence in Melbourne, Australia, to meet the growing demand for GenAI and Data Solutions. The center is expected to around -- to create around 100 skilled jobs in Melbourne over the next 3 years.
Approximately 87% of our organization is now GenAI trained. This improvement demonstrates our unwavering commitment to upskilling and the immense potential of AI across our operations, ensuring that we are well prepared for the future.
The fourth update on scale, and scale to build our capabilities in our verticals and technology capabilities. Our invest verticals of Healthcare, Life Sciences and Banking contribute now to 35% to 40% of our revenue, up from 13.5%, 11 quarters ago. So in 11 quarters, we moved the dial on close to about 14% to close to about 40%, a significant movement, and that's above when Sonata has grown in the last 2 years significantly as well.
We expect our investment verticals to reach $250 million in revenue in the next 3 to 5 years' time. The following are the key bits to help scale our modernization offerings. Number one, cloud and data. We have continued to progress in the cloud and data pipeline. Now, cloud data is about 44% of our overall pipeline. We are seeing increased demand for our data-driven deals. Our revenue from data modernization has grown from 13% to 26% in the last 11 quarters.
Second, Microsoft Fabric, which we have talked to you about in earlier forums as well. Sonata is proud to be a featured and large partner for Microsoft Fabric, a data analytics platform for the era of AI, which we call as infrastructure for AI, and it was made available in November '23. Since its launch, we have witnessed a significant pipeline build up for Fabric, which is at around about $70 million to $75 million now from across 70 clients.
Dynamics, in Q3 '25, we won one large deal, one I just now talked about earlier, is on Dynamics platform. And we are seeing a good momentum buildup in Dynamics, [indiscernible] and Power Platform across. SITL, our India business SITL, which focuses on annuity sales, continues to deliver strong, consistent growth and an industry-leading ROCE of 48.5% in Q3 FY '25.
Let me share with you some of the awards that accolades our team has got in the course of the quarter. Sonata is now recognized as a disruptor in HFS Horizons, as well as ecosystem service providers. Sonata is now also recognized as disruptor in the HFS horizons, cord factor services for generative enterprise 2024. We're also recognized as an aspirant in the AI engineered services in peak metrics assessment of 2024.
We are also proud to share with you that we recognized a disruptor in HFS Horizon, best service providers for commercial banks in 2025.
With that, let me provide an update on Talent. Our active head count increased to 7,000-plus, up from Q1 '25 for 6,600, and we are pleased to cross the 7,000 mark. It's a significant moment for us to cross a 7,000 headcount mark globally. We added 182 people in the quarter. The last 12-month attrition was 14% and our gender diversity is at 31%.
During the course of the quarter, we implemented a compensation increase for our mid and senior management effective Q3. In addition, we continued with our campus hiring plans despite the market conditions and onboarded nearly 100 campus graduates during the quarter. Sonata University, which has been at the forefront of our capability building initiatives and continues to enable increased usage and acquisition of new skills such as GenAI.
Sonata Spark Hackathon, our annual event, to celebrate technologies at Sonata continues to celebrate creativity, collaboration and innovation at our [indiscernible]. After months of hard work, our talented Sonatians brought game-changing ideas to life using the power of AI and modernization engineering to drive value for our clients.
With that, now let me provide you an update on our Q3 '25 performance. Let me start with the International Services business first. In constant currency terms, we have witnessed 4.4% Q-on-Q growth. Dollar terms, revenue grew by 2.8% quarter-on-quarter. Order booking for the quarter, book-to-bill is at 1.23 for the international business.
In the Q3 quarter, we have witnessed a tale of 2 cities for us. On one hand, we're delighted with the 4.4% constant currency Q-on-Q growth and robust broad-based growth in sectors like BFSI, HLS and U.S. As a percentage of our overall revenue, BFSI and HLS have grown significantly Q2 to Q3. However, on the other hand, during the quarter, we had unplanned ramp downs and onetime discounts for a large high-tech client.
As a result, our TMT vertical degrew due to certain ramp-downs and onetime discounts. This TMT, large client ramp down and onetime discount has 2 impacts on our performance, and I want to share that with you. First, on our Q4 revenue growth. We will have a full quarter impact of these ramp-downs, which happened during the course of the quarter.
In prior quarters, we had indicated to you that Q3 and Q4 would grow strongly. While Q3 has been a strong growth quarter for us. We now expect Q4 to be a degrowth quarter for Sonata, due to sudden ramp downs in this high-tech client and quant seasonally weak quarter.
The second impact of this sudden ramp down is on our Q3 margins. Our EBITDA for Q3 quarter has a negative 3.5% onetime impact due to certain ramp-downs, onetime discounts and the severance payouts that we had to make. These costs are related to onetime discounts, and we do not expect them to occur in the upcoming quarter.
Let me provide an update on EBITDA. We talked about EBITDA earlier. Our EBITDA has sequentially declined to 14.6% in Q3. Utilization remained steady at 87%. Quarter-on-quarter, our headcount increased by 150 FTEs international services. SITL business, the gross contribution in our domestic business grew 16.7% quarter-on-quarter. We are very pleased with our performance in SITL business. The newly formed security operations center in our SITL business will be 20% of our gross contribution in the next 3 to 5 years' time.
In summary, we were and are very optimistic about our long-term growth prospects. In the coming quarters, we'll continue to face the tailwinds and headwinds, the tailwinds due to our large deals, our success in Healthcare Life Sciences, Banking and the headwinds due to the sudden ramp-down in the high-tech customers, specifically in Q4 and general slowdown in retail manufacturing.
Team Sonata remains committed to judiciously accelerating the growth curve and building scale for Sonata. I want to thank all the team members globally for their commitment, hard work, work ethic and the quality of outcomes that deliver to our clients day in and out. Thank you.
With that, let me turn it over to Jagan for his comments on our financial performance. Jagan?
Thank you, Samir, for the overview. Good morning, good afternoon, good evening to all of you. Let me start to update the International Services business for Q3 '25. Revenue Q3 '25, our International Services dollar revenue stood at $87 million, which is quarter-on-quarter growth of 2.8% and in constant currency terms, it is 4.4%. Our rupee revenue stood at INR 731.7 crores, which is quarter-on-quarter growth of 3.4 percentage.
Coming to profitability. International Services, EBITDA before ForEx and other income stood at 14.6 percentage, down from 18.2 percentage in Q2 2025. The 360 basis points decline was mainly explained by the following factors: large tech line, sudden ramp down in Q3 for onetime discount given to the them, impact of salary hikes was offset by SG&A savings and leverage we got in this quarter.
EBITDA after ForEx and other income stood at 16.1 percentage in Q3 2025. PAT for international services stood at INR 56.9 crores, against INR 62.2 crores in Q2 2025. International Services PAT decline was mainly explained by the following factors. EBITDA dropping by 360 basis points, benefits include ForEx onetime tax benefit, unwinding of interest on deferred consideration and volume increase.
At International Services level, Q2 2025, ROCE stood at 16.9 percentage, Q2 was 20.3% and Q3 RONW stood at 19 percentage, Q2 '25, it was 23.5%. Now moving on to the update on Domestic business. Our revenue in Q3 2025 stood at INR 2,111.1 crores, which is 44.4 percentage quarter-on-quarter and 17.3% year-on-year.
Gross contribution for Q3 '25 stood at INR 81.9 crores with a 16.7% Q-on-Q growth and 14.9% year-on-year growth. PAT for Q3 2025 stood at INR 48.1 crores, I mean, INR 44.3 crores in Q2, with 8.5% quarter-on-quarter and 12.8% year-on-year growth.
The DSO for Q3 '25 is 45 days compared to 35 days in Q2. DSO increased due to 28% of invoicing being in the last month of the quarter. ROCE for domestic business improved to 48.5% in Q3 compared to 45.2% in Q2 '25. Consolidated EPS of Q3 '25 was INR 3.78 per share, Q2 was 3.84 per share, decreased by 1.5% quarter-on-quarter. At consol level, Q3 '25 ROCE stood at 23.1% compared to 24.7% last quarter, and RONW stood at 26.3% compared to 28.4% last quarter.
Now coming to cash flow update. This quarter, we delivered exceptional collection of INR 3,138 crores, including $100 million, INR 842 crores. Collection achieved in the international services. As a result of a gross cash balance stood at INR 672 crores and the net cash balance stood at INR 115 crores.
Coming to this -- coming back to the update on operational metric. Total headcount moved from 6,908 in Q2 '25 to 7,019 in Q3 '25, net headcount addition of 182. Utilization in Q3 '25 stood at 87%, Q2 was also 87%. We added 11 new customers in Q3 '25. Top 10 clients contributed 66 percentage in this quarter, compared to 63% last quarter. Number of clients greater than 3 million run rate in Q3 '25 is 21 customers compared to 22 last quarter.
Vertical mix is as follows. TMT's 29%. Retail and manufacturing is 25%. HLS is 11%, BFSI is 30% and Emerging as 5%. Revenue by top go-to-market, our data is 26%, dynamics is 24% and cloud is 37%. Q3 '25, order book bookings stood at $114 million and 1.23x international services revenue. Our International Services DSO for Q3 '25 is 47 days compared to 45 days last quarter. In summary, we remain optimistic about long-term growth prospects.
Thank you. With that, let me turn back to the moderator for question and answers.
[Operator Instructions] We'll take our first question from Mihir Manohar from Carnelian AMC.
So I wanted to understand this. I mean when we see the International revenue, we see growth is at 4.4%. Now there is a client ramp down, which has happened this quarter because of which the margins are in impact. So how to understand is, I mean, why is the revenue not down despite the ramp down and there's only margin impact?
Yes, the ramp down happened towards the end of the quarter. And this is going to have a 1-month impact we had in the customer for this quarter in revenue terms. But we had a cost impact because for the actions we have to take to reduce the cost. This will have a full run revenue impact in the next quarter.
Okay. But the margin impact was for the full quarter?
No, the margin is one time. Because we have to do a settlement to the employees.
Understood. Okay. Because 350 basis points kind of an impact, I mean if we go to INR 20 crores kind of a number as an impact, is that understanding correct?
Yes. The revenue growth had a 1-month impact, and next quarter is going to be a full quarter impact. Margin had onetime because of the onetime costs we incurred in -- particularly in the nearshore location. We had an impact on the margin.
Okay. Understood. Also [indiscernible] how long ...
We had a salary increase also.
Yes, sure. How large would be this account and with geography or what kind of challenges are there in this account? I don't know why is it ramping down, is this completion of the program or some vendor change or change, how to understand that?
No, this is a decision taken by the customer to cut down their cost due to the AI implementation and optimize it like 25%, 30% of bringing down the cost, they have taken an action on that.
Okay. Understood. And my last thing was just on when you see [indiscernible]
Can you use your handset mode, please? Line is not very clear.
Is it audible now?
It is better. It is better now.
I wanted to broadly know I mean when we see the Healthcare at the start of the year, the June quarter, Healthcare vertical had a client ramp down, now TMT vertical facing some challenge. So what broader set of learnings or how to understand that we will try to mitigate such kind of ramp downs going ahead? So if you could provide some clarity around that.
Yes, these are all very large -- the Healthcare client was a new client, and we were investing on to get the customer and then we had a challenge on that. But this is like an existing customer, one of the largest customers. So because of the size and because of our size, the impact is felt immediately for us.
Understood. And what could be the impact [indiscernible]...
These kind of events in the uncertainty in the market and uncertainty with the customer can happen if it is but very rarely, it's not that it has happened in the -- now regularly it happens, but this CMP customer is like a onetime happening.
What sort of impact should we consider for 4Q for this account?
This is Samir. I think you've multiple questions. You've crossed your questions. So this is a client that we are going pretty steady in the first half of the year. And in second half of the year, they decided to take some cost optimization efforts for their own budgetary reasons. And hence, we had an unplanned ramp-down.
I'm sorry Samir. You are not audible -- the problem is with me only sorry.
Is this any better Mihir or no?
Yes, this is better, yes.
Okay. So I was saying that for this large customer, we have very good growth strategy in the first half of the year. In the second half of the year, we started seeing some ramp down, which is due to largely because of their cost containment effort that they wanted to do to manage their own costs. So we had a ramp down mid to late November, early December time frame.
And now, we'll see a full quarter impact. This is a very stable customer, but we are going through a sort of the seasonal change with them at this point in time. We think this effect will last fully for Q4. It might spill over to Q1, but we can't comment on it today, but this will come back on broader trajectory in a couple of quarters back again. This is not a permanent damage. This is a short-term blip that we're taking right now.
Sure. Sure. So point taken. What could be the impact in 4Q because of this account?
Like we said, I think we expect a degrowth right now because this customer is still in a very much a decision-making mode. So it's very hard to predict how much the impact will be. Jagan will answer the overall.
Yes. Overall, we are expecting about 2.5 to 3.5 percentage of degrowth next quarter, including a seasonal impact.
Okay. At the company level?
Company level, correct.
International IT services -- for the international IT services?
Yes, yes, yes.
We'll take the next question from the line of Hasmukh Devji Vishariya from Tata Mutual Fund.
Just to follow up on the previous question, right? So here, if you look at all these high-tech customers are spending huge money on AI, right? So, in that case, how one should predict all this [indiscernible] coming in, because this looks like onetime, but probably because of future investment, we may ask for further discounts or cost rationalization. So how we should this about that?
Yes, thank you. Hopefully, I'm audible. So third customer, like I said earlier, Hasmukh, was growing quite well for us in the first half. Very stable customer, one of the large -- it is the largest customer for us in the high-tech space. We don't anticipate this effect to last long. We think it's 1 or 2 quarters' discussions that they're having.
And then post that, the growth will resume in this customer. But having said that, the reality remains in this current market, industries are going through cyclical effects. If you recall one year back, banking was in a slowdown, now banking is up. One year back, TMT or high-tech customers are doing well, now TMT is down. So we are definitely seeing in a year cyclical effects of some of these industries. And that's one of the reasons that we have diversified Sonata over a period of time, so we can have multiple bets in the market. That's why the 4 verticals that we have talked about is really important and core part of our strategy.
But right now, the impact -- because it is the largest client of Sonata, the impact is pretty deep for one or two quarters for us from a growth perspective. But are we worried about long-term prospects of the growth from this account? Absolutely no. We know we'll bounce back to growth either in later part of Q4 itself or maybe sometime in Q1, hard to predict exact time line, but in the next 4 to 5 months, we should be back on growth.
Got it. So because after Deep Seek, this high-tech customers or large high-tech customers might have being taken back. As far as the huge amount they are spending on, let's say, GenAI, right? So in that case, there may be in future possibility of rationalization of costs additionally to what we have done in last one or two quarters.
It is possible. I mean, what you said is absolutely right, but it's also possible that they can decide to ramp up and fight the Deepseek technocrats harder. So it's really hard to predict customer, to be honest, but it is possible. That's why the industry is going through cyclical cycles right now because, as you know, the innovations are happening usually every once or two months. So people are adjusting and adapting their strategies in almost realtime business right now.
We'll take our next question from the line of Vipul Kumar Anupchand Shah from Sumangal Investment.
Sir, employee cost has also gone up substantially quarter-to-quarter and year-over-year also. So that is due to it is attributed to this client. So what explains that?
Exactly. This explains to the onetime settlement to the employees for the client. And also, there is a salary increases there.
So can you quantify both the factors, sir, if it is possible?
Yes. Salary increase had an impact of around 75 bps on the -- in this quarter in our EBITDA, the rest comes from this onetime settlement.
So onetime settlement means, the employees, which were earmarked for this project -- so you let them go with onetime payment? I mean how it worked?
Yes, yes. Yes. They are in a different geography, nearshore geographies. So as per the regulation, we have to give a notice period for them, and we have to pay the money for them in onetime. To rescue the impact of the downtrend, we have settled with the employees and given them the money.
So in fourth quarter, employee costs will normalize?
Yes. Except for the salary increase impact, other things will normalize.
We'll take our next question from Surabhi Saraogi from Smith Capital.
Sir, my question is, can you quantify the onetime expenses incurred during the quarter and also can you give some revenue and margin guidance for the next quarter and next financial year?
Yes. The total impact, we said is 3.6 percentage impact this quarter. Index at 75 bps is because of salary increase, the balance is because of this onetime settlement. And next quarter, just now added that we have a revenue degrowth, degrowth is at company level. This is because of this particular customer full quarter impact as well as Quant seasonal impact. So we will have a degrowth of 2.5 to 3.5 percentage for next quarter degrowth. So margin, while all this onetime, we are expecting it to bounce back next quarter.
Okay. And sir, next year?
Next year, we'll comment during the year end time madam.
[Operator Instructions] We'll take the next question from the line of Mayank Babla from Enam AMC.
Yes. Sir, given the recent unfortunate and unforeseen developments and revenue ramp-down, by how many quarters can we expect the $500 million aspiration to be pushed back by -- earlier it was FY '26 and mid FY '27. Now, that would be delayed, right?
Yes, Mayank, great question. I think candidly will provide an update after the quarter. We're just waiting for these customers ramp down to stabilize right now. I think there will be a one or two quarter impact we expect. But we provide you probably a more formal answer on both the next earnings call max. We think at this point, start of the quarter, it will impact.
And my second question would be these large high-tech sort of plant that we've seen impacting our business. These companies are with very deep pockets. So can you help us reconcile that why would they cut down IT spend to and shift them to sort of CapEx on AI, you can help us reconsider and understand that.
Yes, it's a great question, again, Mayank. I'll tell you, I think actually what we think it is happening, we're not so sure, but I can give you our estimate on this. So most of these high-tech customers are buying hardware to drive AI from NVIDIA chip buying perspective and processing power bank perspective. The consumption is really going there. So they are paying a lot of capital on the OpEx side to buy the hardware capability because it's a race to build a hardware engine at this point in time for many of them.
Now given what has just happened recently, the question that came up earlier on Deepseek, how will that impact? How will they calibrate? It's hard to predict. But that's the cyclical nature of the world we are living in right now, that at one end, they got to accelerate their spend to improve their customer experience using AI. On the other hand, they want to buy hardware to have more capability from a processing power perspective.
So right now, we are on a cycle that the hardware purchase has a bigger premium in their world for the next 1 or 2 quarters, but we're pretty sure that at some point in time the tile will turnover from the software development side yet again. But that's casually the situation as we see. These are cash rich companies. They're not customers in distress or in trouble. They are just diverting their investment dollars to a pocket of investment that they want to make in the short term.
And they're really recalibrating, I'm sure you're seeing it the recalibrating across literally every quarter. And that's why companies like us have to adapt with the needs -- and unfortunately, while in the first half of the year, we gained. In this second half of the year, we're going to lose out, but that's the nature of doing the business.
We'll take our next question from the line of Prolin Nandu from Edelweiss Public Alternatives.
So, yes, so a lot of contradiction, right, Samir, on the call. At one side, we want to be leaders in AI. On the other side, we are losing customers because of their spend in AI. So do you think this is something which will continue going forward? Or does it require a very critical assessment of our clients, the quality of our clients? Because, see, this unfortunate event has happened twice, one on the new deal side, now on the existing client site.
So we understand that you are a smaller company in overall theme of things versus our peers. But that kind of things we haven't heard from any peers, right, that high tech is slowing down or customer doing a sudden kind of a withdrawal. So how should one think about it? And does it require a very deep internal introspection about the quality of clients that we have and at the same time, how do we think about new deal wins as well, right? I mean, what -- how should one deal with this contradiction?
Yes. So I don't know that I would call it contradiction. I think I will call it uncertainty candidly. The client that we're talking about has been with Sonata for over 30 years. This is not a net new client. Now, as you know, every enterprise in the marketplace is really figuring out their strategy with AI. Did we -- any one of us knew Deepseek 4 weeks back? The answer is no. Did any one of us Autonomous Copilots 3 months back? The answer is no. So I think as these newer technologies coming, customers are going to adapt and we have to react with them.
This is a sprint and not -- this is a marathon and not a sprint for us. We have to stay in the game with the customers for the long term because some of these customers -- when they go back, you tend to enjoy. And companies of our size and scale, we are relatively a smaller sized company compared to many other countries that you calibrate against. But also keep in mind that we have grown faster than many of the industry peers. [indiscernible] to grow faster, you will have [indiscernible] this year earlier with the healthcare client and now with the high-tech client. But those are expected, if you want to play in that league. But if you have to play safe, then I think there are other ways to play safe out.
And like I said earlier, this is not a net new client. It's not like we're adding to the risk profile of the business. It's as of unfortunate that in a year, we had 2 customers, one at the beginning of the year, one at the tail end of the year where we had some ramp down. So I wouldn't call it contradiction. I just think it's an uncertainty that we face.
And it's also visible, like I said earlier. If you recall, a year back, the entire industry was talking about banking is slowing down, and there was a big discussion on banking. I'm sure you recall that. Now including our commentary, banking is going well for us. But can anyone else us predict in 6 months, where banking industry will be? I think it's really hard to predict right now because the demand pattern and the industry patterns are changing quite dramatically. That's how candidly we see. We don't think it is adding to the risk profile, like you illustrated. I think it's the nature of the business that we are in and the industry that we serve in.
And the client also is not a small client. They are one of the largest clients in high-tech space.
Yes. I appreciate that, Samir. So just since, let's say, we heard from this client, have we been able to talk through some of the other clients and assess that this is a risk which might be developing in some of the other clients, some of our other relationships as well? Have we been able to do that since we have heard from this client on the direction in which they want to go?
Yes. No, it's a great question again. See, in our TMT vertical, we have a total of 5 clients. So we don't have -- again, based on our size, it's not a big spread. Now the other 4 that we have, we don't see that risk right now. Because this is the largest client in that TMT sector. But have we assessed the same risk for other clients? We have.
But to be honest, if you look at our largest banking customer, our largest healthcare customer, tomorrow, they want to build up their own data center and start buying NVIDIA chips, of course, there's strategy can change and hence it can have still a trickle-down impact on us. Candidly, can you predict that? I don't think the answer is yes, because it is a very customer-specific decision at this point in time.
Do we expect AI to continue to have a little bit of this impact off and on in some clients? We do think it will happen, especially for the larger companies. Most of the clients are Sonata candidly by and large the mid-tier market customers. So we don't see those customers having this impact, but the larger customers will, of course, have their impact, as they calibrate and recalibrate and recalibrate the strategy.
Next question is from the line of Dipesh from Emkay Global.
I just want to get first about the demand environment. I think if you can help us understand any change or weakness in demand environment. And it would be preferable if you can give sector-wise some comments about demand compared to, let's say, 3 months there?
Second question is about the margin. Now the top -- one of the large clients which you said in Hitech is likely to face some headwinds before their AI productivity kind of thing. Any implications you're expecting margin on a sustainable basis in that account? And how one should expect your Q4 margin trajectory compared to where we are?
And last question is about our expectation about this earlier H2 to be better than H1 and then growth to accelerate entering into FY '26 and returning to low 20% margin. If you can give some sense around it, how you have to grow to play out overall?
Thank you, Dipesh. Let me cover, I think there's lots of questions and then let me try and answer one by one. So from an industry point of view, the demand pattern is very different, Dipesh. If you look at our current results as well as if you look at slightly one or two quarters ahead, we think Healthcare, Life Sciences and Banking Financial Services will continue to do well for us. So we feel pretty good about those two verticals right now.
And Healthcare, Life Sciences, we have maintained that trajectory for at least 3, 4 quarters. We think for the foreseeable future, we don't see any significant headwinds coming our way, in fact, good growth coming in our way in Healthcare, Life Sciences.
Banking Financial Services, we think we are going to have a solid growth in the next 1 or 2 quarters. So that sector is looking pretty well for us. Keeping aside the cost seasonality of Q4, in general, the banking will continue to be strong for us. There will be a short-term impact in Q4 because of Quant seasonality, but going into Q1, I think banking will be in a solid platform again.
Retail industry is casually under a lot of pressure right now. The retailers are talking about it. They are -- essential retail sales are down. The high inflation impact continues within the retail industry. So we don't expect retail to bounce back any time soon. I think we'll continue to see flattish or marginally up growth in the retail sector.
The fourth sector is TMT. TMT for us is a tale of 2 cities. We have one large client and maybe 4 or 5 other smaller clients. In the smaller clients, we expect growth to continue the way we have been growing. But the large clients, at least for a quarter out with Q4, we think there's a demand pressure.
And hence, what Jagan talked about minus 2.5% to 3.5% growth for the company level next quarter. It'll be premature for us to talk about what will happen to this client in Q1. But we think sometime late Q4 or early Q1, they should come back on track, but we'll probably provide a more finite update in the next quarter. So that's on the first part of the question, Dipesh.
The second part of your question around the margin profile for Q4, like Jagan said, I think we expect the large part of the margin recovery happened next quarter, except for the compensation related that we have seen this quarter. The large part of the onetime impact will not be there next quarter. So we should be coming back on our high-teens EBITDA profile going into next quarter. And that should be pretty -- that should be doable for us.
As far as the H2 is concerned, yes, you're right. I think we talked about in H1 that H2 will be stronger. And candidly, Q3, we have a 4.4% constant currency Q-on-Q growth, which I think is -- we're pretty pleased about that -- had this large client not ramped down, which was an unexpected thing to happen in mid- to late November. We would have probably clocked a very strong Q4 as well. But minus of this large client, we have pretty good growth going into next quarter, but this one significant impact is diluting the overall results of the company, which is unfortunate, and we couldn't have predicted it, but that's what we're faced with.
You have many parts of your question. I hope I answered all of them. If I miss anything, please follow-up.
Yes. So broadly, let's say, on the margin part. Now we indicated by Q1, at least we will be below 20. Are we confident to return that to low 20s kind of margin profile in Q1 or because of the client-specific challenges what we say, now low 20 may get delayed. And last part is about earn-out related thing. If you can give some sense about, let's say, what kind of revenue you made in calendar '24 and how one should look on now kind of thing. If you can provide some clarity because considering the target what we said for earn-out when revision earlier, whether we expect any reversal to happen?
Okay. For the first part of the question, debate about early 20s margin. We are still making an assessment of the impact of the large client. We will get a clarity during the course of Q4. We will keep you posted about that when we are coming back in Q4 itself awarded, Q1 reaching the margin level. At present, we will, as I mentioned earlier, the onetime impact we will recover back in Q4, but reaching to the leverage 20 because of the large client impact, we will wait for the full impact to be known in Q4 and then come back to you and update you on that debate.
The second part of it is about Quant turnout. We are still working with Quant earlier management to extend the SPA. We are still negotiating with them. We will give -- once the negotiation is over, and we get into a concrete area about their -- the near -- the future impact of that, we will come and update you on what is that they have achieved and also give an update to you.
Since the process is not complete, we are waiting for that process to complete. The SPA is still March 2025 already the old one. So we will wait for the full completion of the SPA negotiation and give an update to you on that. The third question, can you repeat again Dipesh?
Sir, I just want to understand what would be the revenue of Quant, calendar '24, because that is what we indicated $100 million kind of target what we gave today to get the earn-out. If you can give us what is the actual number they achieved?
No, it is still -- the audit is going on Dipesh. Once it is completed, we will give an update. For the Quant purposes, limited review purpose, they have seen it. But for the whole year, the audit is going on. So once the audit is complete, we'll give an update on that.
This also depends on the future negotiation in the base. So let both be completed before March, we are expecting it to complete. So we'll come back and update you in Q4 results time, we will give an update -- full update on that.
We take the next question from the line of Mihir Manohar from Carnelian AMC.
I wanted to understand this, I mean, how does it work. There is this -- So we have the employees are going out, which are there for those particular client. We are paying them onetime cost. Now, does it get reimbursed to us or it doesn't get reimbursed. Because ideally, there could have been -- I mean its a basic question. But there should have been a notice period or a reimbursement happening. So, how does that work?
Yes. Actually, there is -- the client doesn't compensate for this because that's how the model works for it. We have to -- whenever the opportunity comes in, we will be able to deploy people and take it up with the people. It's not exactly a P&M model. It is actually like a fixed price kind of a model.
So there will be -- when the project is ramped down, our project is stopped. So we will have a very short notice period time. But this is being a foreign geography and nearshore geography, there are regulatory requirements. So we have to settle with the employees. That is a kind of risk embedded in the margins of the projects whenever we have taken -- and this is how the operations happen. So we have taken the -- we have been to abide by the regulatory requirements of that particular geography.
And for the best practices, we have taken a settlement with employees and then close that. And there will be some notice period and some amount of benefit flow also for us in this. That is why the revenue was not that much impacted in this quarter from the customer. The full quarter impact will be known only by next quarter.
Sure, sure. You mentioned next quarter, 2.5% to 3.5% growth, considering Quant as well as this account going down. So if this account going down, what would be the growth?
Pardon?
I mean how could we see the growth next quarter ex of this ramped up? I mean considering the Quant seasonality -- but without considering ramp down of this account, what can be the growth in fourth quarter?
No. This is like difficult to tell you now what will be the total impact of it. We have made an estimate as of whatever data we have access in. The Quant will be the major portion of it in this and this customer will also have an impact on this 2.5% to 3.5%. If not, it must have been much lesser, the impact is.
Okay. So the impact is whole driven by ...
Mihir, I request you to join back the queue, please, as we have other participants waiting.
The Quant definitely had an impact, which we know. If without this customer, we may not have bought this kind of degrowth.
[Operator Instructions]. We'll take our next question from the line of Abhishek Shindadkar from InCred Capital.
My first question is to Samir. Samir, just wanted to understand the time lines in terms of the communication from the large client in terms of ramp-down and projects cancellations , so on and so forth. Can you just help us understand the timelines? Was it like towards the start of the quarter, mid or towards the end? That is first quesion.
The second question is to Jagan sir. Is this a new margin reset for the company? And -- or do you think margins can go back to at least 17%, 18%? Just third bookkeeping question is -- was there any deal transition cost that we incurred for the business that grew in the quarter?
Let me take the first part, Abhishek. So the time line of this was pretty much very progressively in the course of the quarter. We started seeing the discussions start in November time frame. And then we were, of course, negotiating with them because there was a ramp down as well as a discount.
And it built up progressively. I would say this impact started trickling in towards the latter part of November and a full part in December. That's a broad way to think about it. Because it was, like Jagan said, on-site geography is not in India. We have to handle the employee and their severance-related costs in the course of the quarter. So that's how it's progressed. I'll turn it to Jagan for the second and the third question.
Abhishek, as we mentioned earlier, the onetime costs that we will recover back in Q4. To that extent, the market margin recovery will happen. So as I mentioned, out of 3.6% degrowth -- drop in margin this quarter, 0.75% is because of salary increase, and the balance is because of onetime cost, that we're expecting it to come no recover back in Q4. What was your third question, Abhishek? Any deal...
Was there any ...
No, no, we are not incurred. Abhishek, we are not incurred.
We'll take our next question from the line of [indiscernible] from Swan Investments.
One thing more, so with regards to the vertical split. I do see there is some slowdown specifically in retail and manufacturing also. Could you talk about what is exactly happening there? And in the headcount, if I were to see sequentially, it has increased. So were these people not are payrolled? Or how should I understand specifically for the projects which have been ramped down?
Yes, [indiscernible]. So, like I said earlier, in the retail, so step-back, health care and banking are on a good growth trajectory for us. We have maintained that. And I think we continued that growth momentum to continue for the foreseeable future.
Retail because of the high inflation, we have continued to talk about that Retail is going slow for us. And Retail manufacturing, by and large, given the portfolio that we are, they're pretty much intertwined, and we think that will contribute under stressed and pressure in time to come as well.
Will it degrow? No. But will it grow significantly? No. I think it will be a marginal growth in retail. We'll see significant growth in Healthcare and we continue to see significant growth in banking. That's how we think about the industry pattern. There was a second question that you had, the sorry I forgot. What's the second question?
As to the headcount, so I see sequentially the international business, there has been a growth, but those people who have been ramped down or have moved out? But then not only payrolls or how could I...
They were very much part of the payroll. They were pretty much part of the payroll, especially non site geography. If you recall, we've talked earlier around in the second half of the year will grow well for us.
So while you're seeing 150 FTE increase, it would have been significantly more if this unplanned headcount -- unplanned number didn't happen, and that would have continued to contribute for a full quarter impact of our growth. That's what the -- what we are seeing. But in the last one or two months, we started seeing this ramp down hitting us. So what you see is a net ramp-down after this impact. Otherwise, the headcount would have been slightly higher than what you're seeing right now.
We'll take the next question from the line of Dipesh from Emkay Global.
Jagan, just want to understand from business operated higher margin than company average. Considering the seasonality what we are highlighting about next quarter, do you expect the margin benefit will not be fully reflective of the one-off cost recovery concerning the Quant seasonality?
Yes, Dipesh, there will be an impact of Quant revenue drop on the margin to some extent. But we are not able to make a full assessment of that now. But most of the onetime costs, we will require a backup debate.
So considering the margin trajectory, I think where we are already reached, how one should look at it? Because low 20s is what we aim for. Now single client-related plus minus is one or two quarter is fine, but your headcount addition is let's say, way ahead of your revenue growth, if I look from that perspective.
Utilization also I'm not sure how to look at it, but you added Q-on-Q head count while you expect significant growth next quarter, in terms of revenue. And some of the other lever also in terms of on-site offer and other mix if I look at it. So considering some of those things, how one should look your margin trajectory. And you also say low 20s, we will revisit, entire end of Q4 kind of thing. But over medium term, do you think any risk to low 20s kind of margin profile would we always aspire to be? Or you are comfortable for medium term, low 20 kind of margin profile?
Dipesh, One thing we want to highlight to you is, on the Quant margin profile was there, the rest of our -- because of this particular customer ramp down, our on-site revenue portion is onset mixes coming down and offshore is going up. That will also help us to recover some margin back next quarter debate. So secondly, is the onetime cost is going to help us some bounce back, which is almost like a major portion of the 3.6 in that. So that -- we are expecting that recovery to fully happen in the next quarter.
Some impact of the Quant revenue degrowth for next quarter can be there on my margin, but we don't expect that to be a major element on the recovery part of it. But there can be some impact, some fall impact can be there. So we expect that we will come very, very close to the quarter to EBITDA margin levels in Q4, very close to that, plus or minus 50 basis points is the range debate. We are expecting that to come near.
And from there, we will be able to grow the margin in Q1. Once we know the exact situation of the particular customer, where are we heading? We will give an update towards the early 20s by end of this quarter Q4.
We'll take a last question from the line of Vipul Kumar Anupchand Shah from Sumangal Investment.
So my last question is regarding -- we don't have any legal protection regarding this ramp down, sir?
No. This is a customer regular commercial contract on all these -- because they are a very large customer, they will -- these kinds of protection may not have. And we are -- the prospect with the customer is very high. We don't want to do a short-term problem by doing something until the business in the long-term angle. Because they are going to continue to be a large customer for us, and they will continue to grow in the good prospect for us in future. These are all very, very short term and impact of that. We expect this will settle down in a quarter or 2 and then we may recover back the business soon from the customer.
Ladies and gentlemen, we'll take that as a last question for today. I now hand the conference over to Mr. Dhir for closing comments. Over to you, sir.
Thank you, [indiscernible], thank all the participants for dialing in today. And I also want to take this opportunity for all the Sonataians globally for their hard work and diligent efforts to keep moving Sonata forward. And we'll connect with all of you in a quarter's time again. Thank you. Thank you all.
Thank you. On behalf of Sonata Software Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.