Sonata Software LtdQ2 FY23IT - Software

Sonata Software Ltd

Q2 FY23 Earnings Call Analysis

Management growth scorecard

Revenue

Category 2

Margin

Category 3

Fundraise

N/A

Order

Yes

Capex

Yes

2 of 4 growth signals are positive.

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.

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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→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.

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.

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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