Any current/future new fundraising through debt or equity?

Sonata Software plans to repay acquisition-related loans within 12 to 15 months, which will reduce interest expenses. No explicit mention of new fundraising through debt or equity in the current quarter. The company is focused on paying off existing deferred acquisition payments by February 2024 and beyond. Interest on deferred consideration and loan interest costs will start coming down from Q1 of the next year (April 2024 onwards). The financial strategy appears centered on managing and unwinding existing financial obligations rather than raising new funds currently.

Any current/future capex/capital investment/strategic investment?

Sonata Software continues to invest strategically in AI, Gen AI, and Microsoft Fabric, expecting these investments to continue for about 18 months, with quarterly investments around 1.5% to 2% of EBITDA. The focus is on modernization engineering, app modernization, data and cloud modernization as core areas for growth and acquisitions. Investments include scaling the Quant Systems acquisition fully integrated for sales, delivery, operations, and bench aspects. Significant bets in AI and Gen AI are aimed to transform customer interactions and drive business growth. Planned acquisitions target c

Future growth expectations in sales/revenue/volumes?

Sonata aims to achieve a consolidated revenue of $1.5 billion by FY 2026 with an EBITDA margin in the early 20s. The company expects growth fueled by its focus on modernization engineering, including app modernization, data, and cloud modernization. Large deals currently in transition are anticipated to ramp up over the next two quarters, contributing significantly to revenue. The large deal pipeline has grown substantially, now comprising 40% of the total pipeline, up from mid-teens the previous year. Quant acquisition is fully integrated and is expected to propel growth, with a strong synerg

Future growth expectations in earnings/operating earnings/profits/EPS?

Sonata aims to achieve consolidated revenue of $1.5 billion by FY’26 with EBITDA in the early 20% range. The company expects to maintain top 25% quartile industry growth performance through investments in modernization engineering, AI, and large deals. Large deals, currently in transition, are expected to accelerate growth as they ramp up in the next couple of quarters. The Quant acquisition is fully integrated and contributing to revenue growth, with a $100 million synergy pipeline and 7.2% quarter-on-quarter revenue growth for Quant. Earnings per share (EPS) showed growth of 5.6% quarter-on-

Current/ Expected Orderbook/ Pending Orders?

Q1 FY24 order book normalized (excluding large deals) showed a strong book-to-bill ratio of 1.2x. Large deals are excluded in normalization since they can skew the order book, and booked revenue replaces the large deal value to keep figures conservative. The total order book is approximately USD 93 million (TCV including renewals and new deals). Order book includes both renewals and net new business. Large deals constitute about 40% of the total pipeline now, up from mid-teens last year. Several large deals (ranging from multi-year contracts worth $5M to $160M) are in transition and expected t

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Sonata Software LtdQ2 FY24IT - Software

Sonata Software Ltd Q2 FY24 Earnings Call Analysis

Revenue, margin, capex, fundraise and order book outlook from management commentary.

Price: ₹307P/E: 14.7Market Cap: ₹7.5K CrSector: IT - Software

Management growth scorecard

Revenue

Category 2

Margin

Category 3

Fundraise

N/A

Order

Yes

Capex

Yes

2 of 4 growth signals are positive.

Full analysis

Revenue guidance

Category 2

→Sonata aims to achieve a consolidated revenue of $1.5 billion by FY 2026 with an EBITDA margin in the early 20s.
→The company expects growth fueled by its focus on modernization engineering, including app modernization, data, and cloud modernization.
→Large deals currently in transition are anticipated to ramp up over the next two quarters, contributing significantly to revenue.
→The large deal pipeline has grown substantially, now comprising 40% of the total pipeline, up from mid-teens the previous year.
→Quant acquisition is fully integrated and is expected to propel growth, with a strong synergy pipeline exceeding $100 million including large client deals.
→Continued investments in AI, Gen AI, and Microsoft Fabric are expected to be key growth drivers over the next 18 months.
→Domestic business and BFSI, healthcare Life Sciences verticals show strong growth potential.
→Despite macroeconomic challenges, Sonata has delivered industry-leading growth, remaining optimistic about long-term prospects.

Margin guidance

Category 3

→Sonata aims to achieve consolidated revenue of $1.5 billion by FY’26 with EBITDA in the early 20% range.
→The company expects to maintain top 25% quartile industry growth performance through investments in modernization engineering, AI, and large deals.
→Large deals, currently in transition, are expected to accelerate growth as they ramp up in the next couple of quarters.
→The Quant acquisition is fully integrated and contributing to revenue growth, with a $100 million synergy pipeline and 7.2% quarter-on-quarter revenue growth for Quant.
→Earnings per share (EPS) showed growth of 5.6% quarter-on-quarter and 11.3% year-on-year in Q1 FY’24.
→Continued investments in AI and Microsoft Fabric, estimated at 1.5%-2% of EBITDA quarterly, are expected to drive future growth.
→Margin pressures from integration and investment costs are expected to unwind over the next few quarters, improving profitability.

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Fundraise plans

→Sonata Software plans to repay acquisition-related loans within 12 to 15 months, which will reduce interest expenses.
→No explicit mention of new fundraising through debt or equity in the current quarter.
→The company is focused on paying off existing deferred acquisition payments by February 2024 and beyond.
→Interest on deferred consideration and loan interest costs will start coming down from Q1 of the next year (April 2024 onwards).
→The financial strategy appears centered on managing and unwinding existing financial obligations rather than raising new funds currently.

Order book

Yes

→Q1 FY24 order book normalized (excluding large deals) showed a strong book-to-bill ratio of 1.2x.
→Large deals are excluded in normalization since they can skew the order book, and booked revenue replaces the large deal value to keep figures conservative.
→The total order book is approximately USD 93 million (TCV including renewals and new deals).
→Order book includes both renewals and net new business.
→Large deals constitute about 40% of the total pipeline now, up from mid-teens last year.
→Several large deals (ranging from multi-year contracts worth $5M to $160M) are in transition and expected to ramp up revenue in coming quarters.
→The pipeline includes a mix of multi-year contracts of varying tenure (2.5 to 10 years).
→The order book is largely executable over the next 12 months.
→Ongoing investments in large deal accounts and new deal wins are expected to sustain order book growth.

Capex plans

Yes

→Sonata Software continues to invest strategically in AI, Gen AI, and Microsoft Fabric, expecting these investments to continue for about 18 months, with quarterly investments around 1.5% to 2% of EBITDA.
→The focus is on modernization engineering, app modernization, data and cloud modernization as core areas for growth and acquisitions.
→Investments include scaling the Quant Systems acquisition fully integrated for sales, delivery, operations, and bench aspects.
→Significant bets in AI and Gen AI are aimed to transform customer interactions and drive business growth.
→Planned acquisitions target companies with clients in healthcare, life sciences, BFSI sectors, especially in US, UK, and Europe.
→Large deal transitions and modernization initiatives require continued capital allocation but should normalize after a couple of quarters.
→There is also targeted investment in strengthening sales, marketing, and domain capabilities in key verticals.

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