Persistent Systems Ltd (PERSISTENT) Q4 FY23 Earnings Concall Transcript

Persistent Systems Ltd (NSE:PERSISTENT) Q4 FY23 Earnings Concall dated Apr. 25, 2023.

Corporate Participants:

Sandeep Kalra — Executive Director and Chief Executive Officer

Anand Deshpande — Chairman and Managing Director

Sunil Sapre — Executive Director and Chief Financial Officer

Analysts:

Abhishek Bhandari — — Analyst

Sandeep Shah — — Analyst

Mehta Bhavik — — Analyst

Manik Taneja — — Analyst

Pankaj Kapoor — — Analyst

Nitin Padmanabhan — — Analyst

Mohit Jain — — Analyst

Dipesh Mehta — — Analyst

Karan Uppal — — Analyst

Abhishek Shindadkar — — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Persistent Systems Earnings Conference Call for the Fourth-Quarter of FY’23, ended March 31, 2023. We have with us today on the call Dr. Anand Deshpande, Chairman and Managing Director; Mr. Sandeep Kalra, Executive Director and Chief Executive Officer; Mr. Sunil Sapre, Executive Director and Chief Financial Officer; and Mr. Saurabh Dwivedi, Head of Investor Relations.

Please note, all participants line will be in the listen-only mode and there will be an opportunity for you to ask questions after the management’s opening remarks. Should you need assistance during the conference call, please raise hand from the participants tab on the screen. While asking questions, requesting you to please identify yourself and your company. Please note that this conference is being recorded. I now hand over the conference to Mr. Sandeep Kalra. Thank you and over to you, sir.

Sandeep Kalra — Executive Director and Chief Executive Officer

Thank you, moderator. Good evening, good morning and good afternoon to all of you, depending on where you are joining from. As always, we would like to start this call by thanking each one of our 22,750 plus Persistent team members and our customers for their support and continued trust. We are very happy to report yet another solid growth quarter across all major business and [Indecipherable]. Despite the dynamic and rapidly evolving [Indecipherable] This is the first financial year where we have crossed $1 billion in our revenue in our history. Before I and Sunil get into the further details of our quarterly and annual performance, I would like to invite our Founder and Chairman, Dr. Anand Deshpande, to say a few words on us achieving this important milestone. Over to you, Anand.

Anand Deshpande — Chairman and Managing Director

Thank you, Sandeep for [Indecipherable]. It’s a real pleasure and honor to be here at this great momentous occasion for the company as we completed $1 billion year. I consider myself very fortunate to be part of this 33 year journey with the company. And this another [Phonetic] achievement is only possible because of the hard work and dedication of the people involved and the support we got from the fans and other stakeholders. So, I would like to thank all the 22,700 [Indecipherable] employees and another 20,000 [Indecipherable] employees who have all contributed to this. I’d like to thank all the clients who firstly supported us all through the early days, including now. And I would also like to thank all the investors for their support [Indecipherable] thank all of you for your support through this journey.

Every year a milestone like this is important and needs to be celebrated. But having complete $1 billion, I’m sure you’re looking for the next [Indecipherable] I will hand it back to Sandeep to take it from here and explain to you what we have done so far in this quarter and how we look at next years. Over to you.

Sandeep Kalra — Executive Director and Chief Executive Officer

Thank you, Anand. Now, let me get into the details of the quarterly and yearly performance. We are happy to report that the revenue for Q4 came in at $274.55 million, giving us a growth of 3.9% quarter-on-quarter and 26.3% on year-on-year basis. On a constant-currency basis, this translates into a sequential revenue growth of 3.5%. In rupee terms, the growth came in at 3.9% quarter-on-quarter and 37.6% on year-on-year basis. For the full-year FY’23, we achieved a revenue of $1,035.98 million, giving us robust growth of 35.3% year-on-year.

Coming to EBIT. Our EBIT for Q4 came in at 15.4% [Phonetic], this translates into an EBIT growth of 4% on Q-on-Q basis, and 50.7% on Y-on-Y basis.. EBIT margin was consistent with Q3 on a sequential basis as the tailwind of higher pressure building was largely neutralized by higher costs associated with the travel [Phonetic] events related to annual strategic planning, our annual employee event amongst others. The impact of currency largely remained bad during the quarter.

Coming to the EBIT for full financial year 2023. For full FY’23, we achieved EBIT margin of 14.9%, implying 100 basis-points improvement year-on-year. This was on account of a combination of higher cost on travel and amortization pressure intake, as well as lower royalty revenue in FY’23, being offset by SG&A leverage, better pricing, lower attrition and favorable currency movement [Indecipherable] In absolute terms, EBIT rose by 57.4% year-on-year. Sunil will provide more color on the EBIT margin movement later in this call.

Coming to the order book for the quarter. Q4 was a healthy set of order one clerks [Phonetic]. The total contract value for the quarter came in at $421.6 million, with new booking TCV coming in at $250.3 [Phonetic]. This implies a healthy growth in TCV of 16.8% on year on year basis. The annual contract value of this TCV is of the order of 310.4 million of which the new bookings ACV comp [Phonetic] in contributed to 168.3. On a full-year basis, our total TCV crossed $1.6 million [Phonetic] and the ACV component of this is 1.17 million. This translates into TCV growth of 32.8% and ACV growth of 24.1% [Phonetic] for the full year. Please note, that as always, these TCV and ACV numbers include all bookings, small and large, renewals, as well as new bookings across [Indecipherable].

Coming to the customer engagement size. Let me give you some color on the various engagement sizes. To start with, we are pleased to announce that our top customer revenue saw a healthy growth of 30.6% Q-on-Q in USG terms. This is in line with expectations that we had shared with you in the last quarters and this call. This impressive sequential growth as we’ve seen in the context of the decline, top clients revenue by 33.2% credit during FY’23, which was primarily on account of ramp-downs we had witnessed in the previous two quarters. The ramp-downs in the earlier quarters were on account of structure cost savings program undertaken by our customer But I’ve noted in earlier quarters, but on a tiered costings program taken by our customer. Since then, we have partnered closely with them, helped them achieve their objectives while also explore meaningful win-win opportunities for long-term collaboration.

Moderator, can you hear us?

Operator

Yes, sir, now it’s clear.

Sandeep Kalra — Executive Director and Chief Executive Officer

Okay, let me start from engagement size once again. Apparently, the audio was disconnected for a bit. So let me give you a color on our client engagement size. We are pleased to report that our top customer revenue saw a healthy growth of 30.6% Q-on-Q in USG [Phonetic] terms. This is in line with the expectations we had shared with you in the last quarter’s analyst call. The sequential growth as we’ve seen in the context of the decline in top clients revenue by 23.2% during FY’23, which was primarily on account of ramp-downs we had witnessed whole previous two quarters. These ramp-downs in earlier quarters were on account of the structured cost savings program undertaken by our top customers. Since then, we have partnered closely with them to help them achieve their objectives while also exploring meaningful win-win opportunities for long-term collaboration. This has led to the signing of couple of large strategic deals, cumulatively totaling to 100 million TCV. Our first [Indecipherable] We are hopeful of continuing with a stable and a gradually improving growth profile for our top client during FY’23.

We also saw revenues from our second-largest customer, recover from the furlough impact during Q4 quarter, registering a sequential growth of 7.6%. While the overall portfolio of our top 50 customers grew by 4.7% during Q4, the growth was partially impacted by a ramp-down in a key hyperscaler relationship, which had a ramp-down of approximately $3 million for the quarter, and approximately about $10 million on an annualized basis. This was in line with this hyperscalers overall cost management programs across vendor partners [Phonetic]. We are expecting this hyperscaler account to resume growth for us over the next several quarters. The progression of our clients across multiple revenue threshold continues, but two additional customers moving into the greater than 30 million band from the greater than 20 million band during the quarter and also scaling a number of greater than five million customers to 34 compared to account of five, four quarters back.

Coming to the geographical break up. From a geography perspective, we saw a healthy growth across most regions, led by ramp up of recent yields [Phonetic]. North America grew 4.8% quarter-on-quarter in USD terms, aided by growth in our top one customer. Europe revenue increased 19.7% quarter-on-quarter on account of ramp up of multiple large deals signed in [Indecipherable]. India revenue declined 15.6% quarter on quarter due to the decline in IP [Phonetic] revenue compared to Q3, which had an impact of a.9 [Technical Issue]. The above growth has to be seen in the context of a much lower revenue base in Europe and India as compared with [Technical Issue].

Coming to the people and utilization. In Q4, we added 291 [Phonetic] people on a net basis taking our total employee headcount to 22,889. The utilization for the quarter came in at 77.3% as against 77.6%. The growth in our build person months in Q4 came through a combination of existing experienced employees, deployed on various services engagements, new later [Phonetic] hires, and incremental addition of our freshers to deliver products. You may be aware that we had hired 3000 plus freshers at the start of this connection. They had started entering available pool [Phonetic] from Q3 onwards. All the remaining freshers became a part of this billable pool in Q4, which is reflected in the impeached [Phonetic] billable person months and IP person months in our factories.

A continued deployment of freshers on customer projects will be a good tailwind to our margins for the next [Technical Issue]. On the attrition front, we saw a moderation in attrition, with a training [Indecipherable] attrition for the quarter, coming in at 19.8% compared to 21.6% [Technical Issue]. We believe that the trailing twelve month attrition will continue to moderate going forward, aided by a general moderation of hiring across the sector and better outcomes on our employee [Technical Issue] interventions.

Moving on from operational matrix to other highlights for the quarter. We are pleased to share with you that the Board of Directors declared a final dividend of INR12 per share for FY’23, together with the interim dividend of INR28 per share. Our total divided for FY’23 stands at INR40 per share, which compares to the total divided of INR31 per share per [Technical Issue]. Additionally, the Board has decided to declare a special dividend of INR10 per share. We thank our shareholders for their support on our journey to a $1 billion dollars. This takes the total dividend for the year INR50, including a special dividend. It continues to be our endeavor to maintain a consistent dividend payout ratio while we augment our growth through capability-led [Technical Issue].

Coming to the update on acquisitions and strategic [Technical Issue]. As reported earlier, all our recently acquired businesses have been fully integrated and are coming together as one Persistent to win large deals across our focused [Technical Issue]. We have again become active on the M&A front. Consumer technology, cyber security, generative AI, European expansion and some key domains in financial services and healthcare are the ones that we are looking for in acquisition terms, and a number of these, specifically, consumer technology, cyber security and generative AI, are the ones that we have been incubating for the last seven months. In particular, on the generative AI front, we are looking to invest in software labs and training our employees on things, including large language models, AI paired programming, such as GitHub Copilot and so on. We recently also announced an expansion of our existing Azure Center of Excellence with AI based modern workplace solutions. We’ll report progress on this front over the next several months [Phonetic].

Coming on to the general administrative updates. On the administrative side, in Q4, we did a groundbreaking ceremony of our new Mihan plot here. This will be a new campus for us in [Technical Issue]. We also finalized the site for a 250 seater office in Calcutta, as well as a new office in Jaipur. In the coming quarters, our expansion plans include locations such as Kochi and Chennai in India, Dallas Texas, and Poland in Europe for a nearshore, sea [Indecipherable] delivery center for [Technical Issue]. Our endeavor is to provide a world class delivery network to our customers, while providing best-in-class facilities to our employees in locations close to them and also to encourage them to work from office at least a few days. In summary, we are pleased with our performance in Q4 with continued healthy revenue growth, strong order wins across focused industry segments, good pipeline and improving profitability despite the macro headwinds.

Now, I would like to invite Sunil, our CFO to give a detailed color on the quarterly financials and related matters. I’ll come back after Sunil’s comments to give you some more details on key client wins, analysts awards and other recognitions for the [Technical Issue]. Sunil, over to you.

Sunil Sapre — Executive Director and Chief Financial Officer

Thank you, Sandeep and Anand. And Good evening, good morning everyone. And thank you for taking the time to join us today. Well, Sandeep has briefed you on the market outlook, how the quarter has shaped, let me take you through the details and then some performance for the quarter.

So this was the quarter where — I mean, much awaited $1 billion milestone we crossed. The revenue for the quarter was 274.55 million with a growth of 3.9% Q-o-Q and 26.3% Y-o-Y. You would have seen services revenue growing by 5.5% [Technical Issue] revenue declined by 14.6% essentially due to the seasonality in this business. Our total revenue for FY’23 stood at 1,036 million, with Y-o-Y growth of 35.3%, with services revenue registering growth of 42%, and IP revenue showing decline of 14.8%. You will recall that the IP revenue for last year included royalty revenue from one of the contracts that was restructured at the end of Q3 of FY [Technical Issue] and it was converted into a lesser scope [Technical Issue] because the IP revenue for this year does not include any revenue from that [Technical Issue]. That is partly the reason for the decline in IP revenue. Revenue for the quarter in INR terms was 22,544.72 million, with a growth of 3.9% Q-o-Q and 37.6% Y-o-Y. The revenue for FY’23 was INR83,5054.92 million with a growth of 46.2% over FY [Technical Issue].

On the segmental growth, BFSI growth was 3.1%, healthcare life sciences grew by 4.4% quarter-on-quarter, technology companies, there is a software, hi-tech grew by 4.1%. In the respect of linear revenue, offshore revenue — offshore linear revenue grew by 9.6%, comprising a volume growth of 9.3% and growth in billing rate by [Technical Issue]. The on site [Phonetic] linear revenue declined by 1.2%, majorly on account of decline in volume by 1.3%, while billing rate grew by [Technical Issue].

Now, let me walk you through the movement in key operating expenses and an impact on the fifth orbit. The employee-related expenses increased only marginally in absolute terms, while as a percentage of revenue, it declined from 63.6% last quarter to 61.6% [Technical Issue]. This was on account lesser net addition to technical [Technical Issue] We added 260 [Phonetic] new people as compared to 92 in the previous quarter to technical talent. The freshers, as Sandeep mentioned, added to the talent pool about three quarters ago are now getting progressively deployed on projects. We have also deployed some freshers in the [Technical Issue]. All freshers are now part of the billable talent to — partly from mid of Q3 and balance from mid of Q4, which we’ll find reflecting in the utilization [Technical Issue].

You might have noticed increase in purchase royalty expense in this quarter. Let me give you details around that. So, this particular item traditionally has item which is relating to IP revenue. So, it has got partner IP, which is in form of reseller kind of business and it has also got royalty when we are working with some of the partners. However, in the recent deals we have had licenses as part of delivery, which we are using for the purpose of the long-term projects. The revenue for which is reflected under services. So you will need to bear in mind the fact that the growth in the IP — purchase royalty IP is not directly linked to the IP-led revenue. In terms of the absolute amount that we have there, you may see sudden bump which has happened. This is because of the recent large deals, and this will, as a percentage get moderated as we go along. We don’t expect this absolute amount to increase, let’s expect — unless for the reseller deals that sometimes keep coming throughout the quarters.

In terms of additional expenditure, as Sandeep mentioned, with respect to the annual planning event, impacted margins by about 30 basis points. The currency was flat. So after accounting for movement in all these expenses, you will find that the overall cost, as a percentage to revenue, remained more or less in the same ballpark as the last quarter. And hence, EBITDA at 18.5% and EBIT at 15.4%. They’re at same level as the last [Technical Issue]. EBITDA for the full year was INR15,191.3 million, going at 58.5% year-on-year. EBITDA margin for FY’23 was 18.2% as against 16.8% in the [Technical Issue]. There is obviously higher expense in the form of amortization relating to the acquisitions we had done on a Y-o-Y basis. You will find that increase from 2.9% to 3.2%. Equity for FY’23 INR12,472.3 million, which grew by 57.4% year-on-year and EBIT margin came in at 14.9% as [Technical Issue] for FY’23. But treasury [Phonetic] income for the quarter was INR129.05 million as against INR87.02 million, mainly on account of increased interest rates and increase in treasury sites. Forex loss was INR189.1 million as against being INR105.4 million in the previous quarter. This was essentially due to the dollar weakness that we saw during January and February, which caused loss on realization of receivables as compared to the rate of [Technical Issue]. On a full year basis, treasury income was INR366 million as compared to INR1,052 million in FY [Technical Issue]. The lower treasury income in FY’23 is partly due to lower treasury size post payout for acquisitions done in Q4 of last year and Q1 of this year. That is the acquisitions we did for Data Glove or MediaAgility. For interest from borrowing, wait for acquisition funding and elimination of interest income from [Technical Issue] of INR195 million on consolidation of on piece of [Technical Issue]. So, these three factors led to the lower treasury income in FY [Technical Issue].

Profit before tax for the quarter was INR3,405.9 million at 15.4% as against 14.9% in the previous quarter. BTR was at 26.2% as against [Technical Issue] in the previous quarter and will remain in this [Technical Issue]. PAT for the quarter was INR2,515.1 million at 11.2% of revenue as against INR2,379.5 million in the previous quarter at 11% revenue. PAT for the full year was INR9,211 million as compared to INR6,904 million with [Technical Issue] growth of 33.4%. And in terms of PAT margins, it is 11% of revenue as compared to 12.1% in the previous. EPS for the quarter 33.65 as against 31.90 in the previous quarter. The growth in EPS is 5.5%, while growth in reported PAT was 5.7%. So, the Board of Directors, as Sandeep mentioned, have recommended final dividend of INR12 per share and special dividend of INR10 per share.

The operational capex for the quarter was INR1,232 million. This includes increased facilities in our India locations. Total cash and investments are INR15,199 million as [Technical Issue] against INR15,139 million at the end of last quarter. The cash balance at the end of Q4 was partially [Technical Issue] after the dividend payout. And it is lower because of the dividend payout and [Indecipherable] cost at [Indecipherable].

Coming to DSO, the DSO came in at 68 days against 67 days in the previous quarter. During the month of March, as a result of the crisis at Silicon Valley Bank, which is one of the banks we banked with. We requested our customers who were paying into our SVB accounts to redirect payments to our other bank accounts. Since there were three weeks in that particular month left before exchange could be accommodated by the response [Phonetic], there was some spillover of collections into [Technical Issue] which impacted DSO by two days. Forward contracts outstanding at the end of March for [Indecipherable] at the average rate of 82.8 [Technical Issue].

With that, thank you all again and I’ll hand it back to Sandeep.

Sandeep Kalra — Executive Director and Chief Executive Officer

Thank you, Sunil. I’ll now talk about the key wins [Phonetic] for Q4 [Technical Issue]. Coming to the software and hi-tech and Emerging industries, Persistent was selected by a Fortune 50 technology company as the engineering partner for its data warehouse products [Technical Issue], as well as its mobile application development [Technical Issue]. This is a $100 million deal over a five-year period and involves execution on a product [Technical Issue], as well as migration of end-users to customers, next-generation backlog, which we will also be involved. Along side supporting the current and forward-looking roadmap, as a part of their need [Phonetic], we have a license [Indecipherable] of providing extended support for the earlier version of the product, our enterprise customers who do not wish to [Technical Issue]. Persistent was selected by a leading marketing technology and solutions company, provide engineering and infrastructure services for its backlog. This is a large double-digit million TCV [Indecipherable] through our private [Technical Issue] go-to-market [Technical Issue]. Persistent was selected by a leading company in the supply-chain analytics [Technical Issue] for our product modernization and online [Technical Issue].

Coming to banking, financial services and insurance.Persistent was selected by a leading, private equity organization to develop a procurement and contract solution for its procurement group, as well as modernization of its enterprise [Technical Issue]. Persistent was selected by a leading company in the fractional trading and embedded finance to develop an integration back on-boarding and servicing [Technical Issue] for its customers. On the insurance side, Persistent was selected by a leading company in property and casualty insurance [Technical Issue] to build a cloud-based data analytic support policy administration, claims analysis and prediction of [Technical Issue]. On the healthcare and life sciences side. Persistent was selected by one of the largest Pharma and Diagnostics company to build and integrate genomic work [Indecipherable] tools for all of its acquired businesses, leading to significant [Technical Issue]. Persistent was selected by one of the largest companies in scientific instrumentation [Phonetic] to build an enterprise data backlog, to streamline governance and operations across multiple business groups, tuning procurement, supply-chain, finance [Technical Issue]. Persistent was selected by one of the largest global providers of kidney dialysis services to build a patient experience management application, to educate and improve patient satisfaction scores.

Coming to the awards and recognitions for the quarter. Q4 saw us get continued recognition from industry-leading analyst homes and business solutions. To mention a few, Persistent was included in the Constellation shortlist for innovation services and engineering the first calendar of — for the first-quarter of calendar 2023. Persistent was named a leader and 2023’s Zinnov Zones intelligent automation services. Persistent won a number of awards from ISG, including being named as the Rising Star in ISG Provider Lens for US 2022, for Google cloud partnering Persistent. The Rising Star in ISG Provider Lens for AWS Ecosystem partners for US region for 2022 and winner in the 2022 ISG Digital Case Study Awards for its credit learning solutions. In summary, we continue to deliver healthy revenue and profitability in Q4 despite an increasingly difficult macro [Technical Issue].

With this, I would like to conclude prepared comments and like to request the operator to open the call for questions. Operator?

Questions and Answers:

Operator

Thank you sir. We will now open the call for the Q&A session. [Operator Instructions] First question is from Abhishek Bhandari.

Abhishek Bhandari — — Analyst

Yes, hi, good evening, everyone. Sandeep, I have two questions. The first question is on your growth outlook. You mentioned about good deal wins, what you’re seeing in terms of ACV and TCV growth? Also, finally, the growth returning to a top account. At the same time, you also mentioned about some bit of uncertainty given the macro-environment, could you tell us when do you intend to go back to your 4% to 6% quarterly growth number in FY’24?

Sandeep Kalra — Executive Director and Chief Executive Officer

So, Abhishek, we don’t give forward-looking guidance. But let me give you a color on the rest. If you look at the trailing 12 months ACV booking you look at the quarterly bookings, all of it has shown a healthy trend. So from that perspective, the booking should translate into growing revenues over the quarters. In terms of the range, look, we have said, in good times, we have delivered upto 9% quarter on quarter as well. Here, we are looking at, in the subsequent quarters, anywhere between 3% to 5%, 4% to 6%. That is the range and we’ll [Technical Issue].

Abhishek Bhandari — — Analyst

Got it. Second question Sandeep is on your margin outlook. Bulk of the improvement, what we have seen in last 12, 18 months is on back of SG&A. And finally, we have started now seeing some bit of utilization play coming into picture, could you tell us going-forward on the margin side, what are the key levers beyond improvement on utilization, which you think could help you on both gross margin and EBIT level?

Sandeep Kalra — Executive Director and Chief Executive Officer

So, we have multiple levers, Abhishek. So, if you look at it, whether it is scaling our existing at launch [Phonetic]. We have been consistently scaling the existing at launch. [Technical Issue]. We have taken freshers, even today, a significant amount of freshers are not necessarily good [Phonetic], right? And they have been in the system anywhere between nine to five months at-or even more in some cases. That is the other one.

If you look at the newer areas that we are getting in, whether it is generative AI, whether it is on cloud side where we continue to grow expertise. Those are areas where we are able to get better pricing than otherwise as well. So there are many different levers along with scale that are there. And we have said, our station [Phonetic] is, over the next two to three years to go back to 200 to 300 basis points and [Technical Issue].

Abhishek Bhandari — — Analyst

Got it. Thank you, Sandeep, and all the best.

Sandeep Kalra — Executive Director and Chief Executive Officer

Thank you.

Operator

Thank you. Next question is from Sandeep Shah.

Sandeep Shah — — Analyst

Yes, thanks. Thanks for the opportunity and congrats for the good execution continuing quarter after quarter. Sandeep, the first question is, some of your peers have started talking about project cancellation, project ramp [Phonetic] downs, streaming, start of the project [Technical Issue] So does this worry you entering FY’24 where you believe the leakage of project completion within the revenue could be substantially higher versus FY’23 and that keeps you growing your order book higher and higher, otherwise the growth may get impacted? Does that worry?

Sandeep Kalra — Executive Director and Chief Executive Officer

So, look, there are times when the market was good and we were growing at a fairly significant — that we have grown [Technical Issues]. The growth has moderated. And so that is partly a reflection of all what our peers are also seeing and so on. So, have there been things like ramp-downs? If you look at our own top customer, we saw the ramp down happen three quarters back. We have worked very hard to get it back. Like that, we talked about the hyperscaler where we have seen a certain amount of ramp down even in this current quarter. But look, the endeavor that we have is — this is part of the game [Phonetic], we can’t expect the market to be good to us all the time. Now, we will have to learn to live with the uncertainty [Phonetic] and even then grow the order book and deliver the best possible growth rates that are there. Rest assured we are committed to that and that’s what we are working on. There will be puts and takes.

So, like, for example, this top customer that we had ramp down on the hyperscaler, we didn’t have any forecast of that coming in, those were order [Indecipherable] that was their decision. But we have still grown, if you look at our historic track record, grown despite this and that. That’s exactly what we are committed to. We will keep bringing in more so that even if there is leakage, whatever best we can do, and it will be higher than the industry. And before you ask us what the industry growth is, [Indecipherable] will be higher, much higher.

Sandeep Shah — — Analyst

Thanks. Thanks. I have a follow up. In one of the large deals which we have signed from European [Indecipherable], last week, there was some M&A event, which has been announced where the controlling stake could be owned by a private equity. So, does that worry you in terms of any change in the structure of the deal because that deal has started ramping up and might that client enter within your top 10 accounts list as a whole? And I have two follow ups with CFO as well.

Sandeep Kalra — Executive Director and Chief Executive Officer

Sure. So, Sandeep, it doesn’t worry us because the same private equity had earlier done a [Indecipherable], which is basically — if you look at the company record, so the private equity is not new to that company. And when we hit our deal, they were actively kind of there as investors. Second, the deal construct that we have, it is basically a fixed kind of a construct for the next five year. So, that is where the thing were.

Sandeep Shah — — Analyst

Okay.

Sandeep Kalra — Executive Director and Chief Executive Officer

And if the deal was to be restructured, there are obviously restructuring piece attached to it. So, I’m not worried. And again, it’s a relationship thing if you have to open the contracts — it’s a different ball game. But we are not worried about it. So, the rest two questions, I’ll let you ask Sunil.

Sandeep Shah — — Analyst

Yes, just two tipping questions to CFO. Sir, if I look at the gross rates on the software, for nine months it was INR12 crores, and at the end of FY’23 it is INR51 crores, so almost INR38 crores, INR39 crores have been added in the gross block of software in the Q4 itself. So, what is the nature of that? And second, in terms of your purchase and royalty costs, is it fair to assume the absolute amount may also decline on a Q-on-Q basis going forward?

Sunil Sapre — Executive Director and Chief Financial Officer

Yes. So, on the first item, the increase in software block, it’s actually [Technical Issue] investment that we have in the cyber security area for Persistent as a company, right? So, that is one important item. The amount in respect of purchase royalty, you’re right, there is — I mean as a percentage to revenue, of course it will moderate. In absolute terms, I mean there’s a slight decline. But as you know, this item has got multiple components as I explained. So, in absolute terms, it is hard to say because it may be regulated particularly on the resale side. But as steady state, yes, there will be a slight moderation that’s going with them, not a whole lot. In absolute terms, it would stay in the — maybe a little lower than this, but in percentage terms it will definitely reflect the moderation.

Sandeep Shah — — Analyst

Sir, cyber security software, we are capitalizing [Technical Issue] product development, which is under the WIV [Phonetic]?

Sunil Sapre — Executive Director and Chief Financial Officer

That — I don’t know you are referring to because this third party software which is bought for our own business as investment in strengthening our own cyber security position.

Sandeep Shah — — Analyst

Okay. Copy. I will come in the follow up. All the best.

Sunil Sapre — Executive Director and Chief Financial Officer

Sure. Thank you.

Operator

Thank you. Next question is from Karan Uppal. Karan, requesting, yes. You can go ahead, Karan. Okay, we’ll take you back. Next question is from Mehta Bhavik.

Mehta Bhavik — — Analyst

Thank you. So a couple of questions. So, firstly your — the headwind, what you saw in the hypercare account, how is right now the portfolio trending? Have you seen any ramp downs in [Indecipherable] in some other clients as well over the course of last quarter or maybe this month? And the second question is, going back to the license, made what you explained, because of the large deals, is it possible to quantify the impact because there is also a kick in the revenue, so that will help us understand what was the real underlying growth outside of the licensing. Thank you.

Sandeep Kalra — Executive Director and Chief Executive Officer

Okay. So, Bhavik, two parts to it. So first on the ramp-downs. Look, ramp-downs, there is no other significant ramp-downs, if it was, we would have called it out. We’ve been calling it out whether it was a top customer or even this particular case with the hyperscaler, we had proactively caught it. There is no other significant material thing. There will be obviously projects that end, projects that start. So, nothing to be worried about.

Now, as far as the large deal is concerned, look, the revenue from the large deal is all services. There are two parts to the services. One is the ongoing product development that we will be doing for the current product, next generation product, migration from the current product to the next generation product. So, that is one part of services. Second is this customer does not want to provide services to the prior versions of the product because they are more interested in investing in the next generation and then building their own vehicles and so on. So we have taken the license, so-so license, and we are, because of that, starting to win large enterprise customers for the extended support of this product. People who do not want to wish or who don’t want to wait for the next-generation of the product and want to possibly look at extending this for the next few years before deciding on the asset. So, overall, services revenue, you should see significant increase and profitability. So keep in mind, this is — we are not saying that this is a cause for profitability concern before you kind of think anything on those lines, and we are committed as we said before. For the next two to three years, we are committed to taking our profitability up systematically, quarter by quarter, and take it up to by 200, 300 basis points. I can answer any follow ons.

Mehta Bhavik — — Analyst

No, thank you. That is helpful.

Operator

Thank you. Next question is from Manik Taneja.

Manik Taneja — — Analyst

Hi, good evening. Thank you for the opportunity. Sandeep, I actually wanted to pick your brains around the commentary that one heard from some of your global peers in terms of saying that they are seeing, that they expect a significant increase in offshoring from hi-tech customer-base, given the kind of cuts that they have done at their own organization level over the course of last six to nine months. That’s question number-one. And the second question was for Sunil. Basically, we have seen a significant reduction in our subcontracting expenses this quarter, how should we be thinking about this line item going-forward?

Sandeep Kalra — Executive Director and Chief Executive Officer

Okay. So, on the Hi-Tech thing, I would tend to agree. And this is what we have been saying for the last many, many quarters. Part of the ramp ups that we have been seeing is by making sure that we have top of the hi-tech customers that we have, and even, for that matter, even enterprise customers. In the hi-tech segment, specifically. here is what has happened. You have seen whatever is happening on the hyperscaler side, whether it’s Microsoft, whether it’s AWS, whether it’s Google and so on. Everyone has been laying off people. trying to restructure their cost base in line with the macroeconomic [Technical Issue]. There was a significant amount of hiring that happened in the post-COVID era and that is being kind of calibrated.

Now, on the other side in the market, if you look at it, there are mid market companies that went public. These are companies that were private equity owned or were, like, more importantly, venture-funded owned, which went public at huge valuations. Now, when the revenue growth is taking off — and they were earlier also growing very fast, but they were not profitable. The profitability is coming under even more pressure. So, with revenue growth [Indecipherable], profitability under pressure, and a number of them not being globalized, that is the phenomenon that is leading to larger deals for people like us. And anyone who is differentiated on the engineering side, will be a tailor of this [Technical Issue] you have been a big gainer of this [Technical Issue]. And so that will continue at least for the next few quarters and we should definitely see more happening in terms of offshore [Technical Issue].

Now, second question, Sunil, if you want to go ahead and address.

Sunil Sapre — Executive Director and Chief Financial Officer

Yes, sure. So on the subcontracting side, Manik, it is essentially the combination of two factors. One, of course, structurally, we have been trying to work on reducing the dependence on subcontractors [Technical Issue] mobility has improved. So that is one aspect. The second is of course linked to the ramp-down, we saw in one of the [Technical Issue] So, for this quarter you may see the percentage significantly lower. But on a steady-state basis, we think that the way we are winning projects and required to ramp-up sometimes, we do depend on subcontractors to fill in the skill gaps. So somewhere at 12% within our percent of revenue is something that we should factor for. And sometimes it has gone up all the way to 13.5%, 14% or during the times when travel is not easy. But that’s what — so currently, the percentage is up 11, it may not be okay to think that it will remain at that kind of a level. But the structural difference from 14% to 12% is what we are working [Technical Issue].

Manik Taneja — — Analyst

Sure. And if I can chip in with more, if you could share your thoughts around region comments for FY’24? And when do you plan to implement that [Technical Issue]?

Sunil Sapre — Executive Director and Chief Financial Officer

Yes. So, wage increments are a function of the way outlook on inflation and currently if you see virtual moderation is happening, which is affecting in all the central banks reducing the commentary regarding further interest rate hikes and so on. So it would be a tad lower, maybe couple of percentage points as compared to the last year where we were in, let’s say, 89% offshore and about 3% to 5% for on site, but we are working on it still, where our region hikes are effective July 1, and we will [Technical Issue] as we go along.

Manik Taneja — — Analyst

Thank you and all the best for the future.

Operator

Thank you. Next question is from Prashant Bellur. Prashant, please unmute yourself. Okay, next question is from Pankaj Kapoor. Pankaj, can you please unmute yourself?

Pankaj Kapoor — — Analyst

Yes. Hi, thanks for the opportunity. My question is on the cash flows. If I look at this year, we had close to 50% revenue growth, but it is translating to just 13% growth in our operating cash flow. So, looks like your working capital has been under a lot of pressure. Maybe if you can just take us through what is causing this, and how you’re planning to improve things in the FY’24?

Sunil Sapre — Executive Director and Chief Financial Officer

Yes. So, Pankaj, the way it panned out was that during the period of the pandemic, the release of cash that happened within the course of FY’21 and FY’22, led to a significant bump-up in the ratios with respect to cash flow. In FY’23, what has happened is that it has to an extent normalized on one side. There is structural, you can say, situation we faced, it is because of the SVB crisis in the last quarter. Had that not happened, cash flow would have looked a little better. And thirdly, we had announced in Q2 and Q3 that increase in DSOs that had happened from levels of 62, 67 last quarter was on account of deals in the IP area with large enterprise customers, which have a deferred credit arrangement. So this would take — so there are no fresh deals in that bucket happening, but it would take some time before [Technical Issue] these are amortized payments. So, with every quarter we do receive some payments and this will moderate over time. So, structurally we are not extending larger payment terms, except for some very, very large customer. So I don’t think there is a working capital blocking that is happening in a significant manner. But we are conscious of this. We will work towards improving the cash flow and bringing down the gap between both, the DSO side and as well as the [Technical Issue] side.

Pankaj Kapoor — — Analyst

Understood. So, can you just tell us what kind of DSO trajectory you are looking at in the next three, four quarters? Do you expect it to remain flat or may be improve by a couple of days as I believe you were hinting at the start of the call?

Sandeep Kalra — Executive Director and Chief Executive Officer

Yes, sure. So we would be working towards getting it back to 64, 65 kind of levels. That would be the trajectory.

Pankaj Kapoor — — Analyst

Okay, thank you and wish you all the best.

Operator

Thank you. Next question is from Nitin Padmanabhan.

Nitin Padmanabhan — — Analyst

Yes. Hi, good evening, Sandeep, Sunil, Saurabh. Couple of questions. So one is, see, we have had these client-specific issues considering the environment, not surprising. But the way you see going-forward, are you seeing things getting better or you see things getting worse? So that’s the first one.

The second one was, see, if you look at the deal wins. Basically, we had $168 million of net-new ACV, that includes the last deals as well of a 100 million. Do you think that — and I think it wasn’t — you didn’t have such large deals in the prior quarter, so I just want — is it getting difficult in terms of the kind of sizes of deal wins, overall, in terms of quantum that we are consistently booked? Do you see that getting tougher on a going-forward basis? That’s the second.

And third, on the purchase and royalty costs, if it is a pass-through, then is there — has there been any equivalent revenue booking, or is there some revenue cost mismatch out there? All right. Those are the three questions. Thank you so much.

Sandeep Kalra — Executive Director and Chief Executive Officer

Sure. And then, I’ll take part of the question and then I’ll have Sunil answer the rest. So in terms of the environment, it is getting tougher, the [Indecipherable] is tougher. And if you look at the color commentary that comes in from any of the peers who have announced so far, you will figure that out. Now, is it going to be tougher forever? We are expecting it to be tough for the next one to two quarters, and then it should kind of start getting better and so on. So, and even in tougher environment, we are not saying there is lack of opportunities, there is good opportunities, and we will have to just be at it. Our order books are a reflection of that. Now, one correction I would do is the 100 million is the TCV on the deal, the ACV on the deal obviously is different because it is a 100 million over five years, so you can extrapolate that. Now in terms of order book/pipeline [Indecipherable] pipeline, there are definitely deals that we would have liked to book last quarter which [Technical Issue] the deals are taking a longer period of time. But there are opportunities even in a tougher market. And it is going to be tough for the next one to two quarters and thereon hopefully it gets better and comes to a normal kind of a scenario. Sunil?

Sunil Sapre — Executive Director and Chief Financial Officer

Yes. So, leaning on the purchase royalty side, what we should look at is — so this is not in such a pass through kind of a form. This is at normal margins that we would expect for the company to have on large deal like this. Only thing that is happening is that out of this purchase royalty, I would say about 40%, 45% of the amount presents a expense in form of purchase royalty which has corresponding revenue with adequate margin on the services side. So what you would find is, there is a mismatch in that sense that while you may see this item reflected as — you could have otherwise reported it as other direct expenses. So in the fact sheet, we don’t presently have that kind of a category [Indecipherable] to mention it in that form. But that is the — where you need to look at, and there is no pass through or without margin kind of [Indecipherable]. I hope that helps you understand that structure.

Nitin Padmanabhan — — Analyst

Yes, sure. So, basically you’re saying that whatever cost is there, there is an adequate margin in line with company modulus and there is no really revenue cost mismatch for the quarter, which should come later. Fair understanding?

Sunil Sapre — Executive Director and Chief Financial Officer

Absolutely.

Sandeep Kalra — Executive Director and Chief Executive Officer

And Nitin, to add to that, I mean, we are successful in scaling our support business for the extended support, this should be a significant margin and [Indecipherable] and we’ve already even won our first deal in extended support. So, as it builds up, this is a pretty good business model, along with obviously the services revenue that we are getting on developing [Technical Issue].

Nitin Padmanabhan — — Analyst

Sure. Perfect. It is very helpful. Thank you so much and all the best.

Operator

Thank you. Next question is from Mohit Jain.

Mohit Jain — — Analyst

Yes. Sir, two questions. One is the increase in IP-led person months I think after a long gap, is there some change in thought process there or is it also related to the deal that you were explaining in the previous question? That’s one. And the related part is, is it really part of billable when you calculate billable? Or these guys are separate who are not billable, because they’re part of IP?

Sandeep Kalra — Executive Director and Chief Executive Officer

So, IP business, we don’t — so, IP business is IP business. It is not like a [Indecipherable] that — it is basically, you can correlate the IP enabled person months to that quarter’s revenue 100% directly. It doesn’t work that way. So, it is basically, sometimes you are investing in forward looking IP and doing extensions of the industry products or in this particular case, it is both. We are working on developing extensions to whatever products we have, whether it was [Indecipherable] products or otherwise. And we have done a significant amount of investment in building a practice around EBA, which we also did a press release with Microsoft a few days back. And we are also integrating that with open AI. So, that is our forte in terms of getting into the next generation technologies and so on; whether it is on the employee productivity, whether it is on generative AI and so on. And so, that’s where we put our money to work where we want to.

Mohit Jain — — Analyst

But is it also related to some product development? Like, are you guys starting to develop some new product as well on the IP side?

Sandeep Kalra — Executive Director and Chief Executive Officer

Yes. So, see, the generative AI component and the Aviva things that we have developed, these are like reusable components. These are not full blown products. But they need people to be put on to a focused way of developing these and enhancing this and that is how we will differentiate ourselves in the market. So, these are not going to be full blown products that are branded as full blown products, but these are reusable components that we will take to accelerate our services go-to market, and even sometimes charge a fee.

Mohit Jain — — Analyst

Understood. And on the utilization, are they billable? And I am assuming if they are not billable, then if you could give some number for employee edition FY’24?

Sandeep Kalra — Executive Director and Chief Executive Officer

So, okay, as far as the employee edition for FY’24 is concerned, look, that will directly be in line with the revenue growth that we expect to come. And since we don’t give forward-looking guidance and we’ve already talked about it earlier in the call, you can [Technical Issue] on it. In terms of fresher hiring, I can give you a number, roughly about 850 to a 1,000 freshers is what we will hire in the next quarter — in the next year. So that is where it is. And from a what even higher in the next got in the next year. So that is where it is.

And from a [Indecipherable] perspective, yes, we do cost this, whatever we are putting in the IP side as billable, somewhere we are putting that cost towards the product development to actually use our component.

Mohit Jain — — Analyst

800 to 1,000, is that direct [Indecipherable] for fresher intake?

Sunil Sapre — Executive Director and Chief Financial Officer

Fresh hires. Yes.

Sandeep Kalra — Executive Director and Chief Executive Officer

850 to 1,000, fresh shirts. Laterals will be obviously as we need.

Mohit Jain — — Analyst

And you do not see much scope of increasing utilization? This will be in sync with the revenues — revenue growth?

Sandeep Kalra — Executive Director and Chief Executive Officer

We have a good scope of — that is definitely a lever for us. Right now, we are pretty much, if you look at it, at 77% or there about offshore. We can, over a period of time, with a disciplined approach, there is enough to be done to take it to 82%, 83%, offshore and even on site we have levers. Now, obviously, keep in mind, this utilization figure that we are talking about, includes our freshers [Phonetic] that have been brought into the available pool over the last quarter and earlier quarters. So, as these freshers get to be productive, that is a significant margin lever for us and it will show up in the utilization metric as well. So, there is definitely that inventory we are carrying. The new inventory will build up over the years with the freshers we will have. And then whatever laterals we need to hire, we will hire. That should also give you the overall color commentary on what is the total headcount addition for the next.

Mohit Jain — — Analyst

Perfect, sir. Thank you very much.

Operator

Thank you. [Operator Instructions] Next question is from Dipesh Mehta.

Dipesh Mehta — — Analyst

Thanks for the opportunity. I just wanted to get sense about the M&A. It was indicated now we are back to active kind of thing. So the priority in terms of trucking versus scale acquisition. And if you can provide some perspective, last time we hear some [Indecipherable] kind of thing in some of the areas earlier you highlighted. But if you could give some sense about what we intend to do with the M&A from overall strategy perspective? Because in one of the things you highlighted from a strategic perspective super sizing existing account [Phonetic]. So, if you can give some holistic answer. Thanks.

Sandeep Kalra — Executive Director and Chief Executive Officer

Sure. So, look, we’ve always said we will acquire for capabilities and not for revenue. So, in simple terms, we are looking at adding more capabilities, which we can take to our existing customers and build more revenue in those existing customers, as well as, through that, if we get more newer customers that we can mine for our capabilities, that would be a great [Technical Issue] That is what we have done earlier when we required comings of the HO side, on the CP side and so on. And just to give you a context, for example, we won a $70 million deal in the last quarter. That was a combination of our data integration capabilities which was built on our capabilities, along with the [Indecipherable] acquisition that we had done. It also had a significant amount of Google stacks [Phonetic], so our MediaAgility acquisition that we have done, which is now our Google business unit, a combination of our Persistent capabilities in Google world [Phonetic] and MediaAgility. So, those two plus a few other combinations led to that $70 million plus. So, from that perspective, we are looking at a string of pearls in areas whether it is consumer technology, cyber security, generative AI, or in specific areas within healthcare or BFSI, and from a geography perspective in Eastern Europe, or delivery perspectives. That is the landscape. That is what we are looking at. And we will do a [Indecipherable] acquisition wherever we get, and the right capability, over a period of time.

Operator

Thank you. Next question is from Karan Uppal. Yes, Karan, go ahead. Okay.

Karan Uppal — — Analyst

I’m not able to hear you [Technical Issue] within last five years. How are you thinking in terms of capital allocation in medium-term when the macro is tougher?

Sandeep Kalra — Executive Director and Chief Executive Officer

So, we lost the first part of your question, if you can repeat the question, please?

Karan Uppal — — Analyst

Yes, I was asking in terms of capital allocation, the payout has been quite handsome this year at 42% versus the average of 28% in last five years, so how are you thinking in terms of payouts for — in the medium term when the macro is tougher?

Sandeep Kalra — Executive Director and Chief Executive Officer

So, look, from our perspective, this year was a special year. So in our company’s 33 year history, this is the first time we have hit a $1 billion from an annual revenue perspective and we wanted to thank our investors as well, so that is the reason the payout ratio is higher. We have a very defined policy on payout ratios. And as we have said, we will do a good combination between providing dividends and doing tuck in acquisitions for growth. And that also should answer the question that is there on the chat. So, from that perspective, rest assured, our focus is to bring in the right capital allocation towards acquisitions, which will aid our growth, and which will also fuel our, obviously, various different parameters for the company.

Karan Uppal — — Analyst

Okay. Thank you so much.

Operator

Thank you. We will take our last question from Mr. Abhishek Shindadkar.

Abhishek Shindadkar — — Analyst

Hi, thank you for the opportunity. First a clarification, the hyperscaler revenue, is it lost or it is delayed?

Sandeep Kalra — Executive Director and Chief Executive Officer

So, it is a existing project which was ramped down, so it is lost in that part, right? And there are — at the same time, there are many other discussions where we have said very clearly over the next several quarters, we will recoup that amount of revenue and build even more. So that is where it is. So in simple terms, it’s lost.

Abhishek Shindadkar — — Analyst

Okay. Got it. And on revenue growth, Sandeep, you mentioned that you expect a key softness to last for two quarters, and then you also kind of highlighted a 3% to 5% kind of growth. So, if I reconcile those two, are we looking at a back-ended growth with softness in H1? Or we are expecting consistent growth across all the four quarters?

Sandeep Kalra — Executive Director and Chief Executive Officer

So, a consistent and a growing trend is what I want.

Abhishek Shindadkar — — Analyst

Okay and just one follow-up on earlier question. It seems like it is — we are going back on the end-of-life cycle product investments, to the earlier question of Bhavik, if I’m correct, is this a change in strategy that from a pure OPD focus that we were running for the past two years, are we going back to the end-of-life cycle product investment strategy? Thanks.

Sandeep Kalra — Executive Director and Chief Executive Officer

So from a strategy perspective, no. From an opportunistic perspective, if it is at a company profitability and better and gives us access to enterprise customers where we can go and mine and sell many other services and it makes business sense for us and our stakeholders, absolutely, we will be opportunistic about it. But from a strategy perspective [Technical Issue].

Abhishek Shindadkar — — Analyst

Thank you for taking my question and best wishes on a great quarter.

Sandeep Kalra — Executive Director and Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]