Sonata Software Ltd (NSE: SONATSOFTW) Q4 2025 Earnings Call dated May. 07, 2025
Corporate Participants:
Unidentified Speaker
Samir Dhir — Managing Director
Jagannathan CN — CHIEF FINANCIAL OFFICER
Analysts:
Unidentified Participant
Mihir Manohar — Analyst
Dipesh Mehta — Analyst
Vipul Shah — Analyst
Amit Chandra — Analyst
Ashish Das — Analyst
Abhishek Gupta — Analyst
Presentation:
operator
Gentlemen, good day and welcome to The Sonata Software Limited earnings call for Q4FY 2024 25. As a reminder, all participant lines will be in the listen only mode and there will be an opportunity for you to ask questions after the presentation concludes. If you need assistance during the conference call, please signal an operator by pressing Start and 0 on your touch tone phone. Please note that this conference is being recorded today. We have with us in the call Mr. Sameer D, CEO and Mr. Jagannathan Chakrabarti, CFO. I now hand the conference over to Mr. Sameer D, CEO of Sonata Software Ltd.
Thank you and over to you sir.
Samir Dhir — Managing Director
Thank you Moderator. Welcome and thank you for joining us today. We appreciate your time and continued support in this session. We will walk you through Sonata’s strategy, the progress we have made over the recent quarters, our strategic roadmap and the financial results for Q4 Quarter 25 which ended on March 31, 2025. It’s a pleasure to share the momentum we are building around our long term vision and growth trajectory. I’ll begin with an update on our strategic priorities and goals followed by a review of our performance in FY25 and take a closer look at our Q4 performance.
First things first, let’s talk about our strategy and goals. Our ambition is to be a differentiated modernization engineering firm powered by a proprietary platform framework, AI driven solutions and modern technologies. We continue to scale and execute across our strategic focus areas of four key verticals which is Healthcare, life sciences, Banking, financial services, Retail, manufacturing and technology, media and telecom which is TMT and across five core geographies which is North America, uk, Europe, India and Australia. We continue to drive relentless investment in modernization engineering with our differentiated IP lightning tools and robust offerings. We remain focused on delivering transformative value aligned to our clients modernization priorities.
FY25 was the defining year. We deepened our capabilities in data, AI and modernization engineering, we expanded our presence in BFSI and Healthcare life sciences and we continue to win large deals, deals which are strategic to Sonata. We made this progress despite facing headwinds in detail and manufacturing, vertical budget cuts in the second half of the year from our largest client and broader macroeconomic uncertainty. While we didn’t grow at the pace of the prior two years, we have built a strong foundation for growth as we continue to diversify our business looking ahead to the next three to five years.
Our ambition is to be a top quartile growth company helping clients achieve their modernization goals. We see significant potential at the intersection of AI and modernization and we believe our pathway to industry leading growth. We aspire to be in the top quadrant of growth in the four industries that we compete in as a firm. With that, let me give you a progress update on our strategic goals. Our success is anchored on three strategic pillars. First, relentless focus on winning large deals. In FY25 we won 11 large deals underscoring our growing relevance and transformation impact that we create for our clients.
Number two, sharp execution across our strategic verticals and geographies through our partnerships with Microsoft, AWS and other ecosystem players Strategic client base and number three, scaling Sonata for the next phase of growth through continued investments in AI building our AI talent while standing our frontline sales and solution experts in the company. With that, let me give you an update on the large deals. Large deal pursuits remain a cornerstone of our growth which you have seen over the last 34 years of our strategy. With 33% of a large deal pipeline comprising of Fortune 500 clients, I am truly pleased to share two marquee wins from FY20 which is a very large deal and a material deal for Sonata.
Go forward. Our client is a leading American TMT company which delivers programs for its clients on a technology platform. Sonata has been selected as a strategic Technology partner to lead a comprehensive modernization program across their platforms, Data services, platform transformation, Workday, Salesforce and Cyber Security. This marks the second largest TCV win in Sonata’s 40 year history. Let me repeat, this marks the second largest TCB win in Sonata’s 40 year History. A proud milestone for all of us Sonatians. The second win is for a global BFSI leader who has chosen Sonata as a strategic partner to modernize and consolidate its data platforms and drive application development and quality improvements.
And quality improvement here includes modernization, tech, debt reduction and evolution to AI. In both engagements our teams differentiated with our AI led transformation capabilities, leveraging modern engineering tools and platform driven data modernization to deliver tangible business value. With that, let me provide you an update on our strategic verticals GEOS and SITL business. We remain confident that our investment verticals of healthcare, life sciences and banking and financial services will scale to $250 million of revenue in the next three to five years time. These two verticals now contribute to 35% of our total revenue of the international business which is up from 13% 12 quarters ago.
So we have traveled the journey of 13% contribution of revenue from these 2 verticals to 35% of our revenue now, a testament to our focus execution and strategic investments. Highlights of performance in these verticals. We closed 11 large deals out of the 11 large deals, four are in BFSI and healthcare. We closed 13 enterprise grade logos. Out of that four are in healthcare and bank BFSI Vertical Industry Recognition in Healthcare Life Sciences HFS recognized Sonata as an enterprise innovator for payer transformation capabilities. In BFSI we were named a disruptor among the best service provider for commercial banks.
Most recently as of last week, HFS included us as the fastest growing firm in both BFSI and HLS during the last 12 months. Our recent new logo Wins and Momentum In Healthcare Life Sciences we onboarded one of the blues as a client to deliver a multi year modernization program in bfsi. We are partnering with a leading global investment banking firm to build their AI and automation coe. In sitl we continue to deliver strong annuity driven growth with an industry leading ROCE of 43.2%. In Q4FY25 we are making rapid progress in SI driven deals Security Operations Center Offerings, Compliance Programs AI adoption across client operations.
The newly established SOC business in SITL is projected to contribute 20% of gross contribution within the next three to five years. With that, let me provide you an update on scaling of Sonata Scale. Here means scaling our capabilities and our talent. So let’s talk about update on our AI and modernization. We expect AI enabled services to contribute 20% of our revenue over the next three years reflecting strong market traction and focused execution. We’re currently pursuing $34 million pipeline in AI programs across 100 plus clients, helping them unlock value through operational efficiency gains, enhanced customer experience and innovative business model transformation.
This year Sonata proudly achieved AWS generative AI competency and became a member of the Microsoft Partner AI Council, reinforcing our leadership in enterprise grade AI adoption. Some of our key wins in AI in the recent quarter, we opened a new logo in healthcare insurance space for a solution that comprehensively enhances consumer experience using Genai. One of our existing travel clients chose us to improve IT support and efficiency for the regional service desk. For a technology company undergoing transformation, AI is an integral part of a solution to automate contract loading, flexible audit rules and operational analytics.
Let me move on to our investments in cloud and data. Cloud and data deals now continue to make 60% of our total pipeline. Demand is accelerating, particularly around Microsoft Fabric. Sonata is an official Microsoft Fabric Feature Partner supporting data analytics for the AI era. Since its general availability in November 23rd, we have built 31 million fabric pipeline across 70 plus clients. Microsoft Dynamics we continue to collaborate closely with Microsoft on programmatic plays across ERP compete, SaaS compete and low Code no Code Compete deals These deals involve us migrating customers from legacy technologies to modernized Microsoft dynamic platforms.
With that, let me provide you an update on our talent and leadership capability. Our active headcount increased to 6,800 plus, up from 6,619 in Q1 of FY25. Our LTM attrition rate stands at 14% and we maintain a gender diversity of 31%. Despite the macroeconomic industry uncertainties, we remain committed to the future talent investments and we onboarded 95 campus graduates during the quarter. We have restructured our technology leadership by expanding the roles of Hanuman and Manu Swamy to jointly lead our global technology practices. This tuna box model strengthens our focus combining deep internal capability building with sharp execution on client specific AI transformation initiatives.
This change is executed within the CT organization. Both Hannu and Manu will Conti report in Toraj Sonata University continues to drive our upskilling agenda, especially in AI. Today, 97% of our workforce is trained in gen, underscoring a commitment to future ready skills and broad applicability of AI across our delivery, engineering and consulting operations. We also scaled our nearshore presence in Mexico Malaysia with both the centers now exceeding 100 professionals together enabling us to serve our clients with greater agility and geographical flexibility. During the most recent quarter we achieved Silver rating on EcoVadis Sustainability which is awarded to top 15% of the companies.
We were also recognized as the official Microsoft Fabric Feature Partner Update on M and a Quant which is fully integrated into Sonata now and operates as a business unit. Q4 is a seasonally weak and declined quarter for quant and we expect them to bounce to growth in Q1 and scale by Q2. With that let me provide you an update on our Q4 performance. In the Q4 quarter we witnessed de growth in both international and domestic business. As mentioned in our previous call, we had anticipated impact of growth degrowth due to TMT’s large client. The impact was significantly more than what we expected as they continued budget cuts in Q4.
Our forecast is that from Q4 onwards our largest client will come back to marginal growth. Seasonal softness in the momentum for QUANT and SITL Following a strong Q3 for international services business we witnessed 6.6% quarter on quarter degrowth. However on a full year basis revenue grew up grew by 3.7% Y&Y order booking was strong. We closed book to bill of 1.25 which is over 100 million of booking in the in the course of the quarter for the international business in Q4FY25 we won two large deals. We now have eight clients with more than 10 million revenue run rate at a company level EBITDA Our EBITDA grew sequentially as expected grew by 1.9% to 16.5% in Q4 which is up from 14.6 in the prior quarter.
We had guided for that as we announced the results last quarter. Utilization remained steady at 87% SITL contribution degrew by 4.3% due to the seasonally weak quarter and it was anticipated as per our readout earlier. In summary, we remain optimistic about a long term growth trajectory. While the upcoming period will present a mix of tailwinds and headwinds, we are well poised to navigate both. Tailwinds include the ramp up of our large TMT deal over the next two to three quarters along with strong momentum in our healthcare, life sciences and banking verticals. At the same time, we are mindful of the headwinds such as longer deal closure cycles and continued softness in retail and manufacturing sector.
At Sonata, we’re committed to accelerating our growth, judiciously building scale through strategic client relationships, larger deal wins, new market expansion, deeper partnerships and continued investments in our talent. I want to take a moment to sincerely thank all sonatians across the globe for the dedication, hard work and relentless focus on delivering high quality outcomes for a client. With that, let me hand it over to Jagan to walk you through our financial performance and then we’ll come back to take questions.
Jagannathan CN — CHIEF FINANCIAL OFFICER
Jagan thank you Sameer for the overview. Good morning, good afternoon, good evening everyone. Let me walk you through our financial performance for the fourth quarter and the financial year 2025. First, starting with the international services. In financial year 25 our international services dollar revenue stood at $335.5 million, registering a growth of 3.7% in the reported currency and 3.9% in constant currency. Rupee revenue stood at INR 2008 29.7 crore showing a growth of 5.6 percentage. EBITDA margin for FY25 stood at 17% compared to 21% in FY24. PAT for FY25 stood at 246 256.6 crores compared to 319.8 crores in FY24.
In Q4 25 USD terms, revenue stood at $81.3 million, a degrowth of 6.6 percentage quarter on quarter and 0.5% year on year. In constant currency terms it represents degrowth of 7.2% quarter on quarter and 0.3% year on year. Rupee revenue stood at INR 702.3 crores showing a degrowth of 4 percentage quarter on quarter and 3.4 percentage growth year on year quarter on quarter. DIGI growth is due to the seasonality in Quantum and weaker than expected performance from our largest client. Despite revenue decline sequentially we were able to improve The EBITDA in Q4.25. EBITDA before other income and forex reported basis improved to 16.5%.
Q4 reported patch stood at 62.3 crores for the international services RoC stood at 16.3% in Q4.25 against 16.9% in Q3.25. The RONW stood at 19.3% in Q4. 25 against 19 percentage in Q3.25. Starting Q4.25 the methodology for calculating DSO has been revised to align with industry practice. Under the revised approach, DSO is calculated using trailing twelve months revenue and the current data balances. Our international Services DSO for Q4.25 is reported at 61 days which is 3 days improvement from 64 days in Q3.25. Now let me provide you an update on domestic business. In FY25 our domestic business revenue stood at 7340.6 crores which is a year on year growth of 23.4%.
Gross contribution for FY25 stood at 299.1 crore compared to 260.4 crores in FY24. A growth of 14.8% year on year. Pad for the full year stood at INR 178.1 crore compared to 166 3.4 crores in FY24 year on year growth of 9%. Domestic business revenue for Q4.25 stood at 1918.2 crores with a degrowth of 9.1% quarter on quarter and a growth of 26.6% year on year. Graph contribution for Q4.25 stood at 78.4 crores with DE growth of 4.3% quarter on quarter and growth of 21.1% year on year. PAT for Q4.25 stood at 45.2 crore again 48.1 crore in Q3.25 with a degrowth of 6% quarter on quarter and growth of 12.7% year on year for our domestic business Also we have updated the methodology of DSO calculation in line with industry practice based on the new methodology.
DSO for Q4.25 is 46 days as compared to 51 days in Q3.25 reported ROC and RONW for the quarter stood at 43.2 percentage and 41.8% respectively. Update on consolidated business in FY25 our consolidated business revenue to debt 10157.2 crore depicting a year on year growth of 17.9% PAT before the exceptional item for the full year stood at 424.7 crores compared to 483.2 crores in FY24 PAT. Post exceptional items full year stood at 424.7 crores in FY25 compared to 308.5 crores in FY24. Consolidated EPS reported for FY25 to that rupees 15.3 per share against last year’s rupees 11.12 per share.
Final dividend we have announced we have recommended rupees 4.4 per share. Cash generation for the year continued to be strong with operating cash flow to EBITDA improved to 93.3%. The closing balance of cash stood at 707 crores for the year. For the quarterly update, Consolidated revenue of Q4 stood at 2617.2 crores with DE growth of 7.9% quarter on quarter and growth of 19.4% year on year pad before the exceptional item for consolidated business stood at 107.5 crore against 105 crore in Q3.25, growth of 2.4% quarter on quarter and a 2.6% degree growth year on year.
Consolidated EPS for Q3.25 was rupees 3.87 per share and Q3 it was 3.78 per share increased by 2.4% quarter on quarter reported ROC and RONW for the quarter stood at 21.9% and 25.2% respectively. Updates on some of the operating metrics Total headcount moved from 7090 by end of Q3.25 to 6810 at the end of Q4.25 with attrition remaining at 14% which was same in Q3.25. Also on site offshore revenue mix has changed to 51% and 49% in Q4 versus 56 and 44 in Q3.25. Utilization remained flat at 87% quarter on quarter. We have added 14 new customers in Q4.25.
Top 10 clients contributed a revenue of 61% compared to 66% last quarter. The number of clients more than 3 million run rate in Q4.25 is 21 numbers. It remains the same as it was in Q3, 25 for 425 order books stood at 101.6 million which is a book to bill ratio of 1.25x. In summary, we remain confident in our long term strategy and committed to driving sustainable growth and shareholder value. Thank you. With that let me turn to moderator for question and answer.
Questions and Answers:
operator
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead. I’m sorry, we cannot hear you.
Mihir Manohar
Yeah. Is this audible?
operator
Yes, now it is. Please go ahead.
Mihir Manohar
Yeah, sure. Congratulations on the deal wins. Having a couple of good deal wins over there. Lastly, I wanted to understand on this large TMT client which we have so I mean publicly different TMP clients have called out that the AI investments that they have made in as of Now, I mean 20 to 30% of the product codes are written by the EA Investments which they have made in. They are talking about taking this, taking this automation to 80 to 90% over a period of five to seven years. Now fundamentally does this pose challenge to us from the business model that we are operating in? I just wanted to get a clear, some clarity around that issue from a three, four year perspective.
If these high tech companies are talking of increasing their coding from AI investments that they’re making, how does our business model stay in that situation? Some color on that will be really helpful.
Samir Dhir
Yeah, a good question. I think there are two ends of the spectrum here. Clearly the. If you think of the deal that we just won, the second largest deal that we just announced, the AI investments and AI differentiation is part of the deal. So that’s very much locked in from a differentiation perspective and one of the reasons we won a very competitive deal in a very tough environment against some stiff competition, very proud of our capabilities in AI that we have been able to create and differentiate in the market. But broadly speaking for our largest tech client and other tech clients that we see, yes, there is more adoption of AI on two fronts.
There is definitely an adoption getting into the customer support side of the equation where the adoption of AI is increasing and we are definitely seeing that and across our large clients in the TMT space. We are seen as an AI company, so we are really leading that wave for them as they double down on AI investments in that area. So we’re definitely leading the chart there in our mind and we are doing well. The second side I would say is still marginal is the adoption of AI in the software development life cycle. From an engineering perspective, that’s still very much early days.
Right now it’s not gone fully mainstream. We do see adoption in automation, type of things, testing Type of equations, GitHub, Copilot Adoption in development cycle. But it is not a very significant part of the push from the customer because there are concerns around security, there are current concerns around compliance, etc. With the customer. So it’s not gone fully deep as yet, but we think in about six months to one year’s time this might go deeper than what it is today. But definitely as we sit here right now, clearly the customer support side of the equation, the more manual type of equation, people are really adopting the agentic architectures and agentic frameworks that Sonata has to offer to differentiate.
And that’s really part of the reason that we won the second largest deal that we just recently announced. I hope that answers the question.
Mihir Manohar
Perspective. I mean based on a broadband basis, can I. 3 to 4% of the revenue.
Samir Dhir
Maybe. We can’t hear you. Well, your voice is little muffled.
Mihir Manohar
I think I’ll run back in the.
Samir Dhir
Yeah.
Mihir Manohar
Am I audible now?
Samir Dhir
Yes, please. Yeah.
Mihir Manohar
So on the large account we are having a headwind on other side this particular new deal if you assume a given distribution. So from effort matrix perspective, can we have mid single digits to high single digits kind of a growth for the international IT business. How to see that?
Samir Dhir
I’m having a really hard time to your question, but I think I probably get a broad sense you’re asking, so let’s just divide it into two parts. So the deal that we won recently, that we announced, the $73 million deal that will scale up over the next two to three quarters. We started ramping up gradually in Q1, but Q1 will have a very small effect of the deal, but largely will be in Q2 and fully in Q3. That’s how we see the deal playing out in the next four to five to six months time. The largest client.
The largest client. I’m sorry, go ahead. Yeah, just completing a thought here. The largest client that we discussed with you guys last time around, where we see softness in second half of last fiscal year and in Q4, that result we just announced has a full impact of that ramp down and impact of that whole issue that we had back in November. I think we believe that we are going to turn the corner in Q1 unless there is something new that we don’t know at this point in time. We think we’ll turn the corner in Q1 and be back to marginal growth, flat to marginal growth from this quarter onwards.
So the headwinds of that, the worst news hopefully has been absorbed at this point. At this point in time, we think we’ll be back on growth on that account as well. Back to you Operator.
Jagannathan CN
Hello? Hello? Able to hear us? Are you able to hear? Yes, we are able to hear you.
operator
Chorus theme can you check?
Jagannathan CN
I think Quora team has dropped off. Can you please check with them? And I’m checking with them also.
operator
And at least also are they able. To hear you. Alone? Sir, are you able to hear me?
Mihir Manohar
Yeah, yeah. Now? Yes.
operator
Okay. We are like checking right now. Just give me a moment. Mr. Dipesh, can you hear us? Just give me a moment sir. Mr. Dipesh, are you able to hear us? Please give me a moment. I spoke to them. They are able to hear us, but. We are not able to hear them. Ma’am, just give me a moment. Hello, Dipesh, are you able to hear me?
Dipesh Mehta
I can hear you sir, are you.
operator
Able to hear us?
Dipesh Mehta
Yes, we can hear now.
operator
Yes, go ahead.
Dipesh Mehta
Am I audible now?
Samir Dhir
Yes please.
Dipesh Mehta
Okay. Yeah. So I have a couple of questions starting with quarter four I think beginning of. I think at the end of quarter three we indicated some range for quarter four and in the April we indicated about some further weakness. So if you can help me understand how much is fully attributed to top client related softness and how much would be let’s say outside of top client particularly on quantity. Just want to understand and in top client what factor led to let’s say incremental weakness. If you can give some color around it that is Question one Question two about quarter one how one should look.
Let’s say now quarter four is behind where we have a sizable diploma how one should look Quarter one playing out for us considering the deal intake what we have seen as well as some of the seasonality of quant returning back if you can give some sense about quarter over and subsequent period. Similarly on margin side we earlier indicated about returning back to 20 plus margin in Q1 Q2 are we on track for that margin 6 and last question about domestic business Now Microsoft also likely to let’s say cater to some of the top client how one should look Gross contribution, profit outlook for next fiscal earlier we always used to say mid teen is a good range to look at it.
But considering some of these things how one should look gross contribution outlook in domestic business. Thank you.
Samir Dhir
Yeah Dipesh the first question about the impact of the revenue degrowth what contributed more the from that percentage of degrowth what we guided earlier to what has been reported majority portion was from the large client. There was a small proportion on from quant customers also but majority of the portion was with the large client. And your second question on quarter one outlook the large client as Sameer was mentioning we have reasons to believe that we are turning around and start will start a small amount of flat T shot a small amount of growth in quarter one the degrowth at least we believe that as of now whatever it stands we believe that it has stopped degrowth as turned around for us in the last climb.
Your question on the margin we have at present we will be our outlook for reaching back to the earlier group we may take. There can be a 1/4 of delay to that but we are in the track of reaching there. This is particularly due to the uncertainty in the market at present above us one based on the recovery whatever is the recovery with the large customers in quarter one we will be able to comment about the full years on the EBITDA recovery path. Regarding the quant customers recovery as Sameer mentioned quarter one will be better than quarter four and the quarter two will be scaling up to reach the revenue growth whatever they are planned for on the citrull business.
The current outlook is there is we are also waiting and watching on it as of today. We have also taken various measures to manage the risk for the business. We have mentioned it earlier also we are also in the process of seeing the impact of any any any impact that comes in in case the execution or implementation of of the change strategy happen. We expect there can be some short term impact for it. The size of the impact we will be able to give in the coming days. Dipesh.
Dipesh Mehta
So let’s have two questions follow up. First about quarter when you indicated about one client only I just want to get things about overall companies on international IT services considering we have a sizable decline in quarter four. Whether some of those weakness particularly let’s say retail and manufacturing remain fairly weak. Similarly delete decision making cycle and other thing which we indicated. Are we now confident on let’s say bouncing back softly or you expect very gradual recovery from where we ended in quarter four. Second question about margin where you indicated about a quarter delay kind of thing.
So whether it would hinge on let’s say your growth returning back to some level. Then 20 is foreseeable. And last question about depreciation and amortization. This quarter is a sizable decline. Whether the. This is a neuron rate. Thank you.
Samir Dhir
Yeah. So the the first is quarter one. The. The banking financial services. We expect a recovery from Q4 to Q1. But the full recovery will happen only start happening only from Q2. May not have the full recovery of BFSA. Your second question on the margin improvement. As we mentioned, it will be at least one quarter delayed. But it also depends on the revenue growth and the impact of the turnaround in our large customers. So we have to see how much of turnaround happen and that will actually influence the margins, what we are able to achieve and how fast we are able to achieve the recovery of margin.
The third question is about the depreciation and amortization. It will not be to that extent the amount of reduction what we had. This is a fair valuation of the of the liability. Hence this reduction happened. However, in this in the coming coming day. The current position the one time impact of that. Because the power validation we normally we do in the year end time and quarterly. It may not have some amount of increase can happen and that will it not be fully go back to the old number Will not happen. It will be somewhere in between that.
But there can be an increase in the depreciation and amortization value from here. Because we had a lot of credit coming in this quarter. There can be some amount of increase from here in the immediate quarters. After that it is stabilized 1/4. There will be after that.
Samir Dhir
Is it linked with the count or not? Because last time you. Whether now we have finalized count or not. Yes. Yes, it depends on that. And based on the total liability and total valuation. Whatever we have to do depends on that valuation only. Depends.
Dipesh Mehta
Yeah, but can you provide some detail what is the point or not?
Samir Dhir
We finalized no quant or not for the for December 2024 period. It is in the process of we are discussing with with the current CEO. We still the discussion is going on. Along with the discussion, we will also be able to finalize the the. The amount payable for December 2024. As I mentioned, this is also we are planning to have at least three years extension of contract. Hence the depending on the extension contract, the value of the liability will also change. It is still in under negotiation. Once it is finalized, we will be able to update you in Q1.
Dipesh Mehta
Thank you.
operator
Thank you, ladies and gentlemen. In order to ensure that the management is able to address questions from all participants. We would request to please limit your questions to two per participant. If you have a follow up question you may rejoin the queue. The next question is from the line of Vipul Kumar Anupchand Shah from Sumangal Investment. Please go ahead.
Vipul Shah
Hi, thanks for the opportunity. So my first observation is your call was going to start at 5:30. Until 5:35 results were not uploaded on the Exchange website. So how can investor be prepared to ask the questions when you have not posted results and presentation before the call start? This is not a very healthy practice and this has happened in 1/4 results last year also I recall. So I would request management to look into this and possibly keep the call on next day if you are not able to post the results in time before the call and so it is very difficult.
So I cannot understand such a large decline in international revenue because I have not been able to go through the results. Would you explain once again in detail what has gone wrong why such a large decline in international revenue? And this is on top of already you had downgraded the guidance once in last year.
Samir Dhir
Okay, so thanks for your input. We’ll definitely take your input and work on it. We will avoid this kind of last minute updates in the coming quarter sir. We’ll definitely act on that. Thanks for your input. The the question is about the international business degrowth. We have updated in December quarter itself when we had a analyst call that there will be a degrowth in this quarter and about 1520 days back we have given a press release also saying that the degrowth in revenue is more than what we expected. The reasons are twofold. One is seasonal impact for the customers of one customer every year January to March quarter they will have a degrowth and because of the nature of the contract signed with the customer which will be low in January to March quarter because by the time they get the po, they get the contract it will be almost like a middle or end of February.
Hence they are not able to harvest the full revenue of the contract. Whatever they have achieved with the customer every year this happened and that was one of the first major reason for us for degrowth. The second reason was as mentioned by Sameer quarter three in FY25 we had an impact of ramp down in our large customer and in quarter four the degrowth was increased incremental degrowth happened because of the ramp down was more than what we estimated during the end of quarter three that we have given a press release also before the board meeting that it is more than what we expected.
So that ramp down is also impacted us. These two coming together in January to March quarter hence the degrowth looks substantial.
Dipesh Mehta
So are you expect are you witnessing any other ram downs from any other customers in view of the ongoing tariff uncertainties and due to that the collapse in consumer and corporate confidence in us? So are you witnessing any ram downs in any of your other like this? What are your comments, sir?
Samir Dhir
Okay. The largest customer is an impact industry wide impact. Many, many players have this has mentioned about the large customers ramp down the other customers. There are uncertainties in the market. As of today we are not expecting anything. But with this uncertainty that’s the there can be a new development happening in the coming months and because of this that can also happen. I’m not ruling out that but as of now whatever information we have as on today we don’t expect any major degrowth in other customers. But situation is uncertain. Anything can develop in the coming months.
Vipul Shah
Okay, thank you very much. But I would request you to schedule your call next time in such a fashion that everybody gets a chance to look through the results and presentation. And please don’t take this as a criticism. This is a suggestion, sir.
Samir Dhir
Definitely sir. We’ll definitely take it in a positive way and work on that to avoid this kind of challenges.
Dipesh Mehta
Thank you very much.
Samir Dhir
Thank you.
operator
Thank you. The next question is from the line of Amit Chandra from HDFC Securities. Please go ahead.
Amit Chandra
Yeah, thanks for the opportunity. I’m audible. Yeah, yeah.
Samir Dhir
Yes sir, you are.
Amit Chandra
Yeah. So my first question is on the large deal win that had. So if you can, you know, provide some more color in terms of, you know, in terms of the client from which we have, you know like won this deal. It’s a, you know like net new spend for that client. And also is there any rebuilding element involved in this deal? Also can we see some margin impact associated with a typical large deal? Because in other large deals also we had some margin impact or initial investment that actually goes into. So how to read the margins in conjunction with the ramp up of this deal.
And also we can comment in terms of the pipeline, are we having such large deals in the pipeline and how is the pipeline looking?
Jagannathan CN
Amit, this is Sameer. Let me try and take your questions one by one. So the work involved here, Amit has multiple parts. So this customer has a technology platform that they provide in a B2B environment to their other customers. And there are two, three parts of this work. So part one of the work is to replatform that technology into A more modern, modernized platform. So part one is to just re script it out, rebuild it out as a new platform which is more futuristic, ready, AI ready, etc. That’s sort of one part of the work.
The second part of the work is to as we build the new part out, hold the old part and sunset the old part or take significant features down from the old part and build a new part. That’s the second part of the of the work and third is essentially doing continuous modernization for the other application stack that they have. This is, that’s the scope of the work. It is under transition right now and we expect the transition will go in waves. That’s why we think the deal will fully ramp up in the next two to three quarters.
Starting this quarter some marginal revenue will trickle in, but I think it will be fully baked up by end of Q2 early Q3 time frame. @ this point in time to your question about margins, the deal is a five year contract. It is accretive deal to sonata over the term of the five years but in year one there might be some marginal impact. We don’t expect any significant impact to margins in this year, but they’ll be because of the transition involved. There’ll be some marginal impact in the course of the first, especially in Q2 and maybe partly in Q1, but that’s the extent of it.
It’s not going to be a significant impact. There might be some marginal impact because of the margins. As far as the question about pipeline is concerned, yes, we do have other deals that are under pursuit right now. Clearly not as large as this one that we announced. We have a couple of them of this scale as well. But generally speaking we calibrate our large deals to be above 5 to 10 million range. TCV there are several of those deals in the pipeline. Like I mentioned earlier, about 35% of our total pipeline is large deals. So that gives us confidence that we have a few other deals which are under pursuit.
But as you can imagine we’re seeing an industry wide pattern right now. Amit the retail manufacturing customers are much more measured in taking decisions so we are seeing some delays there. But the tech customers, the banking customer, the healthcare customers are slightly more aggressive and more agile in taking decisions. So it’s a little bit of industry sector model that is going on given the tariffs that are coming from us. But that’s really what we’re seeing at this point in time. Hope that answers your question.
Amit Chandra
Yeah Anthony, my second question was on the ramdown that we had with the top client. So whether the Ramdown was more broad based or it was with a specific program that had an impact and in terms of the recovery that we are anticipating in this large client. So is it based on the confidence that we have some newer engagements or we are working on certain newer projects with that client or is it just on the assumption that the host is over and maybe it will recover from here?
Jagannathan CN
Yeah, so I think the Ramdown was in a particular area, not the broad based Ramdown. It was one particular area where the ramp down had taken place and especially because it was in newer geographies that we have started, especially Mexico where we see ram down. So it had a bigger top line impact because it was more on site revenue that went out. The second part of your question, where are we with the client and what momentum we see? Like we mentioned for this client in several of their lobs, we are now getting into the preferred status.
So we believe as they consolidate their vendors, Sonata will gain out of it. Their fiscal reset happens on 1st of July. So as they get into their new fiscal year, we expect our wallet share to increase gradually as we win business form. Unless something new happens that we don’t know at this point in time. We think we bottomed out in Q4. This quarter will be a flat to maybe marginally growth quarter somewhere in that neighborhood. And from Q2 onwards we should be back. We should be getting back into more growth as we move forward. That’s really the current outlook.
We will be like always keep you guys posted as to how we make progress in this account. Okay, good.
Amit Chandra
Thank you and all the rest.
Jagannathan CN
Thank you.
operator
Next question is from the line of Ashish Das from Midas Capital. Please go ahead.
Ashish Das
Hi. Thank you for giving me opportunity. So my question is on your outlook. I just wanted to understand your FY26 revenue growth because see you you are mentioning that the your Q1 could be a weak quarter or flattish quarter. Now what I see that retail and manufacturing remains sweet and your large field would ramp up from Q2 and Q3 onwards and Quantum will have a seasonality in Q4. So my here I want to understand like FY26 growth. Okay better than FY25 and if S what are the vertical would drive the growth.
Jagannathan CN
Good question Ashish. I’ll start which again can add to it. So the way we think about this Ashish is it’s very much an industry story. We think in the FY26 the healthcare business will continue to scale and will be a significant part of a growth go forward. As well was a significant part of a growth in FY25 will continue to scale. We feel pretty strong and good about where we are in our healthcare business. We also believe our banking business in general will scale although the ramp from here on will be slightly slower but will scale and get to peak numbers in Q2.
Q3 may not have a full impact in Q1 but will scale from Q2 onwards in a significant way. That’s the two sectors on the growth side, the retail manufacturing is really hard to predict and as you know the tariffs are still very much out there. The current US administration is working deals out when those deals will pan out. What impact it will have on the retailers is very hard to predict. But at this point in time it looks like tough days ahead in retail market in general, retail clients in general. So we are really factoring in de growth in the retail sector in Q1 and Q2 at least things might change but right now that’s what we think that will likely to happen.
On the tech side, given the large deal that we have won. We think that that tech sector will do well for us given the large deal as well as the large client, the largest client of Sonata that we have which is. Which has bottomed up in Q4. So I think the tech sector will also do well for us. So in general as we look in getting into the year we’re reasonably confident about healthcare, we are quite confident about banking. Tech sector is doing well. Retail is uncertainty right now that we don’t know really about. We are factoring in our in our estimates that retail will degrow in the first half and as market and situation evolves we’ll we’ll be sharing with you guys.
Hopefully that answers your question.
Ashish Das
Yeah, that helps. Just wanted to understand one thing. See in FY23 we also announced a large deal of US$168 million. Also in Q2, FY25 if I’m not wrong. We also announced a deal in the manufacturing vehicle from Australia. I believe so, but I don’t see any growth in that. Currently we see the weakness in the retail and manufacturing but even if I look at the quarter’s numbers for last five second quarter so I don’t see any growth. So just could you just explain me what happened? Manufacturing particular.
Jagannathan CN
Yeah, so the deal that we announced in manufacturing vertical was in Europe and that is factored into our numbers now. It’s fully ramped up at this point in time. But we have seen in the last one or two quarters the retail manufacturing vertical has been under stress. So that has offsetted the ramp downs or the project closures have almost offsetted the new win that we had and hence you’re seeing those things almost canceling out to marginal growth numbers in the retail side.
Ashish Das
Okay, thank you so much for answering.
operator
Thank you. The next question is from the line of Abhishek Gupta from Access Asset Management. Please go ahead.
Abhishek Gupta
Hi sir. So my question was with these margin improvement which you saw which was very good, like what was all the debugs based off this margin improvement in international services?
Jagannathan CN
Great question. I think Jagan can build on this. Again feel free to but I think like we said in Q3 when we gave you the the ramp down news, we told you this, there was a one time discount sitting that time. So part of the recovery was because it was a one time impact in Q3 so that impact went away in Q4. So part of the recovery happened there. I would say about 40 to 50% was like that. And the other was largely the operational improvement that we have done because as the ramdown hit us for the largest client in Q3 we had cost but no revenue and in Q4 we were able to operationally correct that out and hence that cost went away as as much as the revenue went away in Q3 itself.
Those are the two big items but there are small other items from operational efficiency etc but those are two big part that really helped us recover the margin by 2% and we were very confident if you recall in our Q3 commentary Jagan was talking about that we will be able to recover about 60 to 70% of this margin impact in in Q4 which is what exactly happened. So the idea was last time there was a one time cost of settlement for a near shore location as well there were people we couldn’t complete the ramp down that was completed in this quarter. Hence we were able to save the cost and that helped us to improve the margin and as expected we also we were able to improve the margin in a decent shape in this quarter.
Abhishek Gupta
Got it. So answer on the domestic side I see there is a very robust growth year on year on fourth quarter but I’ve seen this margins seems to be declining around 50 to like 5 to 10 weeks on quarter. On quarter like earlier it used to be around 3.5 to 4 but now in this year, full year we have been seeing a lower end of the margin the domestic side. So what kind of sale of software we are doing like that is impacting our margin there.
Jagannathan CN
Okay, please don’t see the margin percentage as mentioned earlier, we have to measure the business on the, on the gross contribution, absolute amount of gross contribution. Because depending on the product mix, depending on the requirement, and depending on the change in the change in the requirements of customers and also product offered by the oem, this is also can change. There is a lot of changes happening in the market and lot of new requirements are also coming in. So with this, the change, the percentage is not a measurement at all for us. This is absolute amount of gross contribution growth.
That’s what we monitor. Plus we will continue to focus on the ROCE. What is the business gifts. If it is above 40%, it can be. It is, it is good for us. So that’s, that’s a broad view. We have.
Abhishek Gupta
Got it. So that is from my side. Thank you so much.
operator
Thank you. The next question is from the line of Roland Nandu from. Go ahead.
Unidentified Participant
Yeah, hi. There would be some noise in the background. I hope I’m audible.
Jagannathan CN
Yeah, yeah, you’re audible.
Unidentified Participant
Hello. Yeah, yeah, thank you so much. Yeah, yeah. So just one thing, two questions, right? On its domestic part, right? I mean to the earlier question on what is happening on the gross take rate, so to say. Now what we understand is that again there also your large client is thinking of going directly to the client, right? In some sense. So when you say that, what in discussion is this discussion happening with the that large vendor or is it happening with our clients? And how much of the revenue is this proportion going to be for us? Right, because we understand it substantial.
So what are the negotiations which are going on and by when can we get the clarity on this? Because it’s a very high ROC business for us. Right. So how should one think about the. This risk of the vendor going directly to our clients on the domestic side of it?
Jagannathan CN
Okay, that’s a, that’s a, that’s a good question, y’all. I also like to have the clear view now, but it is an emerging view. They have broadly taken a strategic position, but there is a gap between the strategic position and the execution. And the execution only when it happens, we will be able to exactly know what will be the position. May take couple of more quarters for us to have a clarity. As of now, we expect that we continue to do business. We continue to expand with new customers. We continue to expand the product and license now from OEMs, different OEMs also.
But having said that, we have taken measures for the management of this risk. However, the actual execution by the OEM will decide the. Decide the impact for us. We have to Wait and watch for some a couple of more quarters.
Unidentified Participant
Understanding correct act is OEM that we are talking about and the execution that we are thinking about and how it will play out at least a 60% of our domestic revenue and that is where the. The. The picture is emerging yet. Is that quantification of correct?
Jagannathan CN
Not exactly. We cannot comment about the percentage there are there will be an impact because it going to be about few large customers for them. For us also this is not the numbers what you mentioned. I’m not able to comment because that is not the number what we are looking for. As I mentioned there is a not a very clear. I cannot completely say that this is a number or this is going to happen. It is still there is a gap between the strategic intent of the OEM and execution. We have to wait and see how it emerges.
Unidentified Participant
Sure, sure. Thank you. And also on the services or international part right now you mentioned that this issue that we had with a large client was largely. So just we wanted some assurance from you that this is nothing to do with let’s say a client asking you to probably pass on some of these productivity gains. Right. Which is probably going to be the very cold nature of any new engagement or any existing engagement that we have. Right. So could you just let us know a little bit more in detail as to why do you think this is a one off and not a structural issue that might crop up might not crop up in the future.
Probably just did try but with other kind of clients and other kind of engagement also that we have. Can you please help us to probably get some assurance from this point please?
Jagannathan CN
No. That’s again these questions as of now what we expect is we are seeing that that opportunity any of these kind of changes threat or kno always comes with an opportunities also. So what we see this there are newer opportunities opportunity some green shoots are there. We believe that we may have turned around from the degrowth to a flattish or a milder growth in the in the coming quarters. Having said that will that not happen in future? Nobody can answer that. Market is very uncertain and we don’t know what will be the situation emerging for in the future.
As of now what we have information we have updated you. We are not seeing this kind of threat in the coming in the near future as of today what information we have. But. But you cannot comment about what will happen in future now.
Unidentified Participant
Sure, sure. Can I just push for one more right. Just one thing. You mentioned that you’re thinking about new opportunities, right? That there might be some emerging Opportunities that might come out of whatever challenges that we or the industry is facing. Is it fair to comment that maybe, I mean when it comes to all the service providers, maybe most, I mean not all of them will be able to capture, I mean, you know, capitalize on this new opportunity that you’re talking about and then probably that would be something of a, I mean to look at as a positive side of this disruption that we are talking about.
Is that, is that the right way to look at it?
Jagannathan CN
So this is, let me answer that part. So look, we cannot comment what others are doing. We can comment what we are doing in this client. We are clearly seen as a, a partner who is leading the AI journey for them. The to your first question, the impact that we saw was definitely one off and you can see that in our margin recovery as well. We’re not overtly concerned. Yes, it was a, it was a setback for us in second half of the year which none of us are happy about. But we think in coming times, in coming quarters, we’ll be back to growth.
And given that we are seen as very favorable AI adopting partner for them and really in the top class for AI adoption, we think we’ll have growth in others. That’s our current view and hence we are generally speaking more optimistic about what will happen in the course of this year in this client. Now the only thing which is unknown at this point in time is what the ramp is from here. Will we see a full recovery in one or two quarters? Very hard to say. But in general we are more positive about what will happen in this client in the coming quarters.
That’s a broad picture we can paint for you.
Unidentified Participant
No. Sameer, thank you so much. Thank you for this.
Jagannathan CN
Thank you. Thank you.
Unidentified Participant
Thank you.
operator
Thank you. Ladies and gentlemen, this will be the last question for today which is from the line of Meet Makariya for an individual investor. Please go ahead.
Abhishek Gupta
Hello. So Sabir, you happen to mention. The. Guidance for HLS and BFSI three, five years out. So I missed the figure. So can you please repeat the same?
Jagannathan CN
Yeah, so it’s, it’s not a guidance. I think what we’re saying is we feel that this business which was about 13% of our business about about three, two, two and a half to three years back, is now about 35% of our business, banking and healthcare combined. We feel that in time to come, three to five years time, this could be about a quarter to quarter, quarter of a billion type of a business, 250 million type business in about three to five years time. So we are very optimistic where we are in this business. We are taking market share away and that’s what I was talking about earlier.
This is not a guidance but this is more of a directional statement. We think this business can scale for us and we are quite given where the market is today, we think we’ll gain more market share, more wallet share compared to the competition. That’s what and that’s what our past trend has been just to level said this was not a business Sonata was in formerly about three years back. This was a new two verticals we created. And given these are new verticals we have been quite successful and very pleased with that performance.
Abhishek Gupta
Okay, okay, okay.
Jagannathan CN
And where are we on The, I mean 1 billion plus half billion, you.
Abhishek Gupta
Know, estimate that we had for FY27? So where are we on that? I mean of course we have a broad picture from the IT services but are you that confident from the domestic product service? Domestic products as well now? I mean given the concerns raised by earlier participants.
Jagannathan CN
So we are basically look we put, we had put out three years back a directional number at that point in time that we want to be one and a half billion in about three to four years time. That’s a directional long term goal post that we have been working to. But candidly if you really pare it down, the way we think about it is that in a year at least more quarters than not, we want to be in the top quartile growth which is what we have been talking about for several quarters now. So our view is as market goes up or market goes down, irrespective of the market is we want to be in the top four or five publicly listed mid sized company.
We want to be in that zone. And that’s really what our aspiration is now if you consistently perform in that zone of being a top quartile company, we believe in four to five years time, which is what we said when we started this, we will be able to build and a half. So that’s a long term aspirational goal. But the short term I think the way you should think about us is are we coming in the in the top four or five top quartile companies in the market in the public listed company. Clearly in the second half of last year we did not.
But we believe as we turn around some of these headwinds that we had in the coming quarters we will probably catch up and be in that in the position we were in for the first two years when I, when I came on board.
Unidentified Participant
Okay. Okay. Yeah. And just one last question for Jagannathan sir.
Abhishek Gupta
Yeah. Yes. Thank you, Sameer. Thank you. So one last question. I mean for both of you that earlier, I mean, you know, earlier years I’ve been holding sonata for last 10 years or so. So you know earlier we had a payout ratio of upwards of 50, 60%.
Jagannathan CN
And as we declare the dividend for. This year, you know I am seeing that it has kind of dropped to half. And I also happened to, you know watch an interview of Sameer in which he had mentioned that there are no acquisitions on the Anvil. So I mean has there been any change in the dividend distribution policy and what is the thought process there? Because we have 700 crores of cash. And we will be distributing I think. 120, 125 crores of dividend this year.
Unidentified Participant
So I mean correct me if my numbers are wrong but.
Jagannathan CN
No, the policy aspect, we have not changed it. However, considering the debt we have taken for the acquisition of Quant, the board decided that let us know, manage the cash in such a way that we are able to pay off the debt as early as possible. That’s the idea we have. So that the interest cost and all this, no impact of that will be less for us in the financials in the coming, in the coming in the medium term. This is like a few couple of years. The, the pressure on cash flow will be there because of the debt.
The second aspect to it, as mentioned to us to all the investors during the acquisition of Quant we had a procedural issue with RBI because of which I’m not able to remit money from India. So that also actually has stopped us from utilizing the cash for the debt. So that’s where we were carrying a debt. We were carrying a cash also but net of debt. We are, we are still in positive zone but the amount size of the cash and net cash may come down substantially because of the debt. What we carry. Our focus is to repay the debt as early as possible.
And this RBI issue, we are in the fag end of the issue and we may come out of the of the issue probably in a quarter span, in a quarter time. So we believe that this is the right strategy to focus on so that we are not hampering the investments what we need in the era of fast technology changes. So that’s the idea.
Unidentified Participant
Okay. Okay. Okay. Thank you for this RBI update as well. Thank you. Thank you.
Jagannathan CN
Thank you.
operator
Thank you ladies and gentlemen. That was the last question for today. I now hand the conference over to the management for closing comments.
Jagannathan CN
Thank you Operator and thank you for all the participants for joining in and listening to their results. I just want to take this opportunity to thank to all of you for your patience and the feedback that we got of posting our results slightly earlier is well noted. We’ll take care of that. And I also want to take this opportunity to thank all the Sonatians globally for their extreme amount of hard work and really keep the Sonata flag flying high as we as we aspire to become the fastest growing company and be in the top quartile.
Thank you all of you we speak to in a quarter’s time.
operator
Thank you on behalf of Sonara Software Ltd. That concludes this conference. Thank you for joining us and you may now disconnect your lines.