高知特 (CTSH) 2003 Q4 法說會逐字稿

Good morning. My name is Lynn, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Cognizant Technology Solutions fourth-quarter and year-end conference call. (OPERATOR INSTRUCTIONS). Thank you. Mr. Bailey, you may begin your conference.

Thank you, Lynn, and good morning everyone. By now you should have received a copy of the Company's fourth-quarter and year-end earnings release. If you have not, please call Penney Cunningham with Financial Dynamics at 212-850-5600.

On the call today, we have Lakshmi Mariah, President and CEO, and Gordon Coburn, Chief Financial Officer of Cognizant Technology Solutions. Before we begin, I would like to remind you that some of the comments made on today's call, some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the Company's earnings release and other filings with the SEC.

I would now like to turn the call over to Lakshmi. Lakshmi, please go ahead.

Thank you and good morning everyone. Thank you for joining us for Cognizant's fourth-quarter and year-end earnings call.

Before we discuss the results and our performance during the quarter, I would like to take a minute to thank Cognizant's co-Founder and former Chairman and CEO Kumar Mahadeva for his great contribution to this organization and for his leadership, particularly (inaudible) of growth for the Company.

We remain focused on and committed to the continued execution of our strategy that has made Cognizant the fastest-growing company in offshore IT Services. I am glad to inform all of you that as previously anticipated the transition in leadership has been seamless. Over the last seven years, we have built a world-class management team, (inaudible) by recruiting and promoting key people in our clients service and (inaudible) organization, which created the foundation of Francisco (ph), Gordon and me to lead the Company forward. As we move through to a global (inaudible) organization, this will further enhance the value of our services to our customers, creating new opportunities for our employees.

Moving onto the results for the quarter. We are pleased to report that Cognizant again delivered a solid quarter with strong financial operating performance. We ended the quarter with sales of $108.2 million, up 10 percent sequentially when compared with the 98.1 million in the third quarter of 2003 and up 61 percent from the fourth quarter of 2002.

Earnings per diluted share were 25 cents compared to 23 for the third quarter of 2002. For the full year 2003, we reported sales of $368.2 million, which is up 61 percent compared to 2002. Earnings per diluted share for the full-year was 84 cents, including the 3 cents per share fixed expense related to the IMS health exchange offer.

We remain very optimistic about our growth opportunities for 2004, and as we have indicated before, we believe that we are still only in the early stages of our rapidly growing gendered offshore outsourcing -- a huge growth opportunity that Cognizant is well-positioned to capture.

During the quarter, we added a total 23 clients to our roster, three of which were strategic clients, and seven of which came through our acquisition of Infopulse. Again, we define strategic clients as those that have the potential to eventually generate 5 to 30 million or more in annual revenues for Cognizant.

During the year 2003, we added a total of 95 clients, including 22 acquisitions. 17 of the clients added in 2003 we consider to be strategic wins. Also worth noting is that our win (inaudible) traditional offshore competitors and the global systems integrators remains quite high and that we are still enjoying a stable pricing environment.

Our operating margins remained stable in the 19 to 20 percent range, and we are confident they will remain at these levels due to the leverage of our cost structure. As a result of our prior investment at much higher rates than our competition into ADS (ph) and sales and marketing, we have the ability to manage end to end a new breed of larger relationships than in the past. Pricing is also stable, and average prices remains stable.

Turning to staffing, we added more than 1500 associates during the quarter, closing the quarter with approximately 9200 associates. During the year 2003, we added over 3000 associates, and we continue to expand with the plans to finish 2004 with over 13,000 employees, with many being engaged at the front-end (inaudible).

I would like to point out that annualized employee turnover was down to just 11 percent during the quarter, largely due to the incentives program, increasing percentages of college hires, and the superior opportunities offered by Cognizant. Attrition intends to be heavily weighted towards the most junior members of our staff in India. Going forward, we expect the attrition percentage to stay in the low teens range.

Our staff is an important differentiator that separates us from our competitors and in large part our continuing (inaudible) is due to the quality of our employees. As already indicated, we increased our total headcount by approximately two (inaudible) during the year, and we continued to further buildout our senior management team with several key hires. One of our major advantages as a multinational company is that ability to attract and retain top local talent in our strategic markets.

Based on the high level of interest in Cognizant as an employer of choice and the consistently high caliber of candidates we are attracting, we are confident in our continuing ability to recruit and retain the best people to maintain our enviable competitive position.

Fueled by strong demand, we recently announced building plans for additional fully-owned Technocomplexes with over 600,000 square feet of office space for 6500 employees with cities (inaudible) and Bangalore in India. We expect work on these facilities to begin in early 2004 and plan to spend approximately $40 million over the next two years on this new construction program. Once fully occupied, these additional facilities are expected to generate annual operating expense savings of approximately $10 million compared to the expanded use of leased facilities. Our anticipated high-growth rate in revenue and headcount provides an opportunity and rationale for us to build on all these additional facilities.

Another aspect of Cognizant's differentiation is our ability to partner with clients in the process we call transforming when performing, which ties in with our chain management business. Additionally our ability to develop and sell multi-year service plans to senior client executors and then guided execution has been a key competitive differentiator. In addition to wrapping up our client's business at the (inaudible), Cognizant continues to see a strong demand for our application management work and we are being looked to by clients for assistance on highly complex large-scale development and integration initiators, helping them find additional ways to maximize their business performance.

Another key differentiating element of Cognizant's approach is the consulting aspect of our process in which our staff are playing an increasingly active role. This is a trend that we expect to grow in significance for our business, and as I indicated earlier, our hiring plans for 2004 include a significant number of those who will be engaged at the front end of consultants.

Turning to our mix of services. For the third quarter in a row, application development on integration continues to grow faster than the applications management at the sequential rate of 13 percent compared with total revenue growth of 10 percent. This growth in development speaks highly about our ability to execute large and complex programs as a part of our transforming well performing approach.

Client satisfaction with our services is exceptionally high, and (inaudible) outsourcing is driving the (inaudible) further leverage the offshore market. Clients initially choose to work with Cognizant because of our depth of expertise and knowledge, extensive program and project management experience, our responsiveness, high quality and fast turnaround. It is our quality of work, solid execution and detailed product pool that then allows us to effectively cross-sell our services and win additional new business from existing strategic clients. Over 85 percent of revenue in the quarter was from retail clients who have worked with Cognizant for at least one year.

I would now like to focus on our progress with our CRM capabilities -- customer relationship management capabilities. This was recently rated by Gartner as promising -- the highest rating received among India-based field group in the newly published MarketScope rating based on extensive research, including numerous customer interviews. Gartner reported that our CRM customers provided positive feedback compared to other offshore funds claiming CRM capabilities. Our clients heightened field sales (inaudible) and technical skills add overall strength in this area. Clearly our successful acquisition earlier this year and subsequent smooth integration of Basis (ph), a small company that specializes in CRM solutions, highlights our successful strategy for small tuck-in acquisitions which I will speak more of in a minute.

Additionally our CRM capabilities are a prime example of how our high-value offerings where our unique enlistments in our U.S. and European operations and the seamless integration with (inaudible) delivering capabilities (inaudible). It is clear that our enlistment in our work (inaudible) practices is also paying off. We continue to see strong growth across all of our vertical business segments with vertical strength in the financial services and healthcare markets. We also see increasing trust in our services from the retail and manufacturing segments.

To give you some color on the geographic trends that we are seeing, we continue to see momentum growing in the UK. In addition, continental Europe continues to show strength as our financial services clients begin to wrap up their projects.

As you will recall, we recently acquired Infopulse, a Netherlands-based IT services firm specializing in the banking and financial services investors. This small tuck-in acquisition allows Cognizant to better serve customers in the Benelux (ph) region by adding local client partners, specific industry expertise and local language capabilities. This and our recent other acquisitions highlight the success of our tuck-in acquisition strategy, which gives us access to a client base, (inaudible) expertise and in particular knowledge of local markets to spearhead our expansion strategy in certain markets.

During the past year, we began working with global clients in Japan and China. By working with our global customers and defined projects to meet their growing needs around the world, we can closely manage the potential risks that are normally associated with developing operations in new markets.

In conclusion, I am pleased to report that Cognizant finished the fourth quarter and full year with strong momentum and solid performance across our entire business. Our pipeline of new business remains very strong, and we are seeing the number of visits from prospects and customers dramatically ahead compared with prior quarters. We continue to further solidify our position as a highly differentiated premium provider of offshore outsourcing services and demonstrate to clients the significant value of working with our organization. We expect the momentum to continue and fully expect to be able to grow the business faster than the industry's growth rate.

I would now like to turn the call over to Gordon for a more detailed look into the financial performance and guidance going forward. Gordon?

Thank you, Lakshmi, and good morning to everyone. I would like to provide some additional information on the quarter and then discuss our financial expectations for Q1 and full year 2004.

Revenue for the fourth quarter significantly exceeded our prior guidance due to continued application management ramp up of clients won over the past year or two and greater than anticipated strength in discretionary development spending, which is the trend that started for us in the second quarter of last year. Revenue grew 10 percent sequentially and 61 percent year-over-year. Our core businesses remain solid and performed well, our pipeline is robust, and we are confident in our ability to deliver healthy sequential revenue growth in 2004.

This quarter application management represented 57 percent of revenue and application development and integration the remaining 43 percent. Both services grew in Q4. On a year-over-year basis, application management grew 55 percent, and application development and re-engineering grew 71 percent during the quarter. As Lakshmi mentioned, on a sequential basis, development grew faster than maintenance for the third quarter in a row with application management growing 8 percent sequentially and development growing 13 percent sequentially.

Our key industry sectors grew on a sequential basis. The largest growth driver in the fourth quarter was financial services, which includes our practices in insurance, banking and transaction processing. It grew over $8 million sequentially and represented 48 percent of revenue. Healthcare grew $500,000 sequentially and was 21 percent of revenue for the quarter. Retail and manufacturing grew about $1 million sequentially and was 15 percent of revenue, and information services was 9 percent of revenue. The remainder of our revenues came primarily from other service-oriented industries, as well as our alliances.

During the quarter, approximately 88 percent of revenue came from clients in North America. We are now starting to see an increasing interest level in Northern Europe for offshore services, both from the European divisions of our global clients, as well as from an increasing number of local clients. European revenue was 11 percent of total revenue for the fourth quarter.

We added 16 new customers during the fourth quarter in our core business. In addition, we added seven customers through the acquisition of Infopulse. Our active customer base increased to 153. Three of our clients won during the quarter were considered to be strategic and have the potential to become significant revenue sources for us in the future. We ended work approximately at 10 clients during the quarter, almost half of which were very small low profit clients acquired as part of our second quarter acquisition, Basis, which did not fit our business profile.

Turning to cost. Cost of revenues increased 62 percent for the product as compared to the fourth quarter of 2002. The increase was almost entirely due to additional technical staff both on-site/offshore required to support our revenue growth. We increased our technical staff by over 1400 during the quarter and ended with close to 8500 technical staff. This is a net increase of close to 2900 from the beginning of 2003.

Gross margin was 45.8 percent for the quarter, a decrease of 20 basis points compared to our gross margin in the third broader of 2003 and the fourth quarter of 2002. During the quarter, gross margin was negatively impacted primarily by lower offshore utilization due to the high number of trainees, continued appreciation in the Indian Rupee, and a slight shift towards on-site work related to the increase in development spending by our clients.

SG&A expenses, including depreciation were 28.2 million, up from 17.6 million in the fourth quarter of 2002. As a percentage of revenues, SG&A was 26 percent in the fourth quarter. During the quarter, we continued to strength our vertical expertise, we aggressively hired client partners to manage and grow our customer base, a key differentiator for Cognizant, and we further expanded into Continental Europe to position ourselves for the emerging opportunities in that region.

Operating income for the quarter increased 61 percent to 21.4 million, and our operating margins was 19.8 percent, up approximately 20 basis points sequentially and flat compared to the fourth quarter of 2002. During the fourth quarter, we continued our long stated strategy of reinvesting any margin above our targeted 19 to 20 percent range back into the business.

Interest income for the fourth quarter increased to 770,000 compared to 500,000 in the fourth quarter of 2002. Interest income increased due to the higher global cash balances and an increased balance of European currencies, which earned slightly higher interest rates, partially offset by a significant drop in short-term U.S. rates. We had a $79,000 foreign exchange loss during the quarter. Our tax rate was 19.7 percent for the quarter. This is slightly lower than the rate we initially anticipated. We expect our 2004 tax rate to be approximately 20.2 percent.

Turning to the balance sheet, our balance sheet remained very healthy. We finished the quarter with over $194 million of cash, an increase of 34 million for the quarter. Operating activities during the quarter generated 37.9 million in cash. Financing activities, primarily to exercise stock options, generated an additional 6.5 million. These amounts were partly offset by $9.7 million of capital expenditures, including expenditures on our Indian construction program and $4 million for the acquisition of Dutch-based Infopulse, which strengthened our presence in Continental Europe. In addition, we generated $3.8 million, from currency translation adjustments, primarily the strengthening of the British Pound.

Our collection of trade receivables during the quarter was exceptionally strong. Based on our $62 million balance on December 31st, we finished the quarter with a DSO, including unbilled receivables, of 53 days. Excluding unbilled receivables, our DSO was 44 days. The quality on our receivables portfolio remains exceptionally strong. Of our total AR balance, less than 4 percent is over 90 days old.

We do not believe that the Q4 DSO level is sustainable and expect DSO on an ongoing basis to be in line with our historic trends. Our unbilled receivables balance was 9.5 million at the end of the fourth quarter, up $1 million sequentially and up $5.2 million from the end of 2002. The increase in unbilled receivables resulted from several factors, including the timing of milestone completion on several large projects, volume associated with our strong sequential revenue growth, and an increase in the percentage of revenue coming from fixed bid engagements.

57 percent of December 31st unbilled balance was billed last month in the month of January. During the fourth quarter, overall 27 percent of our revenue came from fixed bid contracts, up from 26 percent in the third quarter of 2003 and 21 percent in the fourth quarter of 2002. When we look at (inaudible) solution type during the quarter, 33 percent of our development revenue and 23 percent of our maintenance revenue came from fixed bid contracts.

Turning to headcount, at the end of the fourth quarter, our worldwide headcount including both technical, professional and support staff, totaled 9240. This represents a net increase of approximately 1500 for the quarter. The addition is our combination of recent college graduates and lateral hires of experienced IT professionals. As previously indicated, we expect to finish the year with more than 13,000 employees globally worldwide with the majority of the 2004 additions being recent college graduates who will participate in our entry-level training program.

Annualized turnover, both voluntary and involuntary, was 11 percent during the fourth quarter and 12 percent for the full year. Over 90 percent of Cognizant's turnover occurs in India, resulting in on-site annualized attrition rates of under 5 percent. In addition, attrition is heavily weighted towards the most junior members of our staff. Attrition rates dropped significantly from the spike we experienced in the third quarter of 2003. Going forward, we targeted an attrition rate in the low-teens, which is in line with our historic levels.

On-site utilization was just over 90 percent for the quarter. Offshore utilization, excluding recent college graduates who were in our training program during the quarter, declined slightly on a sequential basis to 75 percent from 77 percent in the third quarter. Including trendings, offshore utilization experienced its normal seasonal decline and was approximately 60 percent during the quarter. We had approximately 1200 people in our training program at the end of the year -- almost double the number we had at the end of the third quarter.

I would now like to comment on our growth expectations for the first quarter 2004 and the full year. We are comfortable with our ability to deliver revenue in the first quarter of at least $115 million. We continue to have significant revenue visibility due to our high-level recovering revenue and the long-term nature of our customer relationships. In fact, today we have customer commitments for well over 90 percent of our first quarter revenue guidance.

For the full year of 2004 based on the strong demand environment for offshore services and our favorable experience with ramp-up rates, we now expect revenue of at least $520 million. As has been typical in prior years, we expect the majority of our growth in 2004 will come from the ramp-up of clients won over the prior 24 months.

During 2004, we intend to continue to closely monitor our spending and expect our operating margins to remain in the 19 to 20 percent range, in line with our historic margin level and prior guidance. With this expected level of revenue growth and our expected operating margins, we are currently comfortable about with our ability to deliver EPS of approximately 26 cents in Q1.

This guidance includes the anticipation of a Q1 share count of slightly over 71 million shares as a result of the recent stock price appreciation. In addition, this guidance assumes a tax rate of 20.2 percent. Based on current business trends, we expect EPS for the full year to be at least $1.16. This guidance includes the anticipation of a full-year's share count of slightly over 72.3 million shares, in addition to a tax rate of 20.2 percent.

We expect the vast majority of our Q1 and 2004 growth to come from existing clients, particularly the numerous strategic deals that we won in 2002 and 2003. Based on the feedback we have been receiving from these clients about their intention to leverage the advantages of offshore, combined with the strongest sales pipeline we have had in our history, we are optimistic about the outlook for this year and believe we are exceptionally well-positioned to once again deliver a strong year.

Now Lakshmi and I would like to open the call for questions. Operator?

(OPERATOR INSTRUCTIONS). Adam Frisch, UBS.

If you could just go over the ads, it seems like the headcount growth is going to continue to be pretty robust. Can you just talk about your plans for the mix between college and lateral and how that could impact revenues and utilization rates from quarter to quarter? It seems that you were relying more on lateral last year, and now it looks like the ship might be turning a little bit.

I think that is a very important point. Typically we target about 70 percent of our global recruiting to be recent college graduates. Because in 2003 demand significantly exceeded our original expectations, we had to go out into the market and do a lot of lateral hiring. So we had a mix in 2003 that was more weighted towards lateral hiring. We fully intend to return to a model of the significant majority of our hires will be recent college graduates in 2004. So you will certainly see a shift back more towards the normal model of high-level college-related recruiting.

That has a lot of advantages. The advantages include it is a little bit lower cost base because obviously these people are a little bit less expensive, but much more importantly, it allows us to put the people through a full training program, a full six-month training program, which means people can learn both our culture and our processes, and it allows for lower turnover rates, better quality -- all things we think are good for the business.

It does translate into throughout the year has an impact on utilization. But very little impact on margins because these are very junior people, so from a cost impact, it is not big numbers. But certainly shifting back towards the recent college graduate model.

Great. Okay and then a follow-up question. I don't know if it was something that got caught in your throat or you were trying to the stretch the (inaudible) part in your guidance. Could you talk about what your inputs are in terms of pricing trends with existing customers and renewals and also the wage inflation so we can gauge how conservative those numbers might be?

Sure. Especially focusing on full year, we clearly did stress the word at least on the full-year number. As development spending comes back, obviously you don't have as much visibility a couple quarters out on development spending as you do on maintenance spending, so once again we've taken the philosophy on full-year guidance being relatively conservative in terms of our expectations about the strength of development spending until we see it materialize because obviously that is a little bit shorter cycle work.

When we look at some of the key assumptions, let's start with pricing. our pricing assumptions are average pricing will be flat to up very slightly, basically just enough to cover wage inflation. So an average pricing up, very low single digits overall.

Wage inflation in India, there will certainly be wage inflation. We are planning that will be in the low double-digit. On-site wage inflation once again we expect to be quite modest based on both what competition is doing on-site, as well as what is happening in the domestic labor market. So our strategy is essentially to get enough price increases to cover the offshore wage inflation.

As you will recall, offshore wages only represent 17 percent of our global cost base. So even though we will have a meaningful wage increase offshore, which we have known about now for about six-months and we have been talking about for a while, it does not take a whole to cover that from a rate increase prospective.

Utilization. We clearly target to keep utilization on-site in the low 90s, and that is very important because that is where the big costs are. Offshore, excluding trainees, utilization tends to run the mid to upper 70s. Including trainees, there is a fair amount of seasonality where fourth quarter/first quarter you have the largest number of trainees in the system, and then it gets smaller in the second and third quarter as the people that we had hired become billable.

And then on the pricing, if you could give a little bit more granularity on the existing customers and the renewals on the new customer ads? What you're seeing there.

There are really no surprises with renewals. Overall up very slightly, flat to up very slightly. Just enough to cover the Indian wage inflation. On new deal pricing on an apples-to-apples basis, for a same size deal now compared to a year ago, clearly pricing is more healthy today. That is partially offset by obviously bigger deals get lower prices than smaller deals. When you mix that all up, it comes out to pricing is stable to up slightly, which is right in line with what we are expecting.

Right. I will turn it over. Thanks, guys.

Julio Cuanteros, Goldman Sachs.

First of all, a housekeeping items. Gordon, can you just give us the specific bill rates for the quarter and then the on-site offshore mix as well, please?

Bill rates were essentially unchanged. Average bill rates just over $68 on-site and right around $24 in our offshore. Mix between on-site and offshore shifted very slightly towards on-site, which is driven by the increase in the mix towards development. We were at 31 percent on-site in Q4 and 69 percent offshore.

31 and 69?

Yes. Compared to 30 and 70 in the quarter before.

Got It.Okay. Can you talk a little bit about one of the sources of pricing running that we have been hearing about over and over again is clearly at the mid-level project management level. Are you expecting something along the lines of an uptick in the mid-level project manager wage inflation for calendar year '04? I am not talking about the college graduate, but more specifically your more experienced people. Can you talk a little bit about what the competitors are doing there as far as competition for that labor is concerned and your expectations for wage inflation in that (inaudible), please?

As far as the wage inflation is concerned, it is typically cut into two segments. The wage inflation that Cognizant pointed out in the on-site market in the U.S. and Europe is negligible. Whereas, there is a certain wage pressure in India for the resources. The wage pressure is negligible at the entry-level. The college graduates, there has been no increase at all the last couple of years as far as the competition is concerned.

However, there is pressure in the mid-level. There are people with about between three to about eight years of experience in the industry, and there is a fair amount of churn as far as (inaudible) is concerned. The pressures are primarily 1) the nature of what they want to invest in -- that is the number one thing that they run with, and the second one is as far as the competition is concerned.

The recent changes in competition that we talked about, which leads to about the low-teens increase in offshore competition, is primarily this segment. In this segment where the opportunities are for these people to go out and work with some of the people, some of the other larger organizations who are setting up shop in India. They usually attract people away from the known organizations like us with the hire competition.

So in order to keep in line with the market conditions there, we have had to increase the competition in India for the middle level people. This is consistent with the competition changes with the other peer group of players that the offshore segments are making. At the senior levels, there has been no competition increase or relative pressure because most of these people as far as Cognizant is concerned are adequately covered through performance-based incentives and stock options that we can expect. The challenges of the work are far higher than the responsibilities that they shoulder keep them in the system.

Going forward, we will expect the wage pressures to be (inaudible) at the three level, continue to be slightly modest at the mid-level and practically nothing at the senior level.

Okay. Great. The ramp-up of the headcount that you were talking about for calendar year '04, is that a first half of the year or a back half of the year event, meaning that the contribution that we are going to get from the new headcount in '04 is really an '05 event as far as your revenue and earnings contribution is concerned?

Part of that will depend on where final headcount ends up. Obviously we said we expect to be at least or more than 13,000 because that is based on the recruiting of primarily the college-related kids who go through a training program. So the big driver of revenue in '04 will be the 1500 people I hired in the fourth quarter of '03 as they come out of the training program. So a lot of people we hire in '04 will drive revenue in the back half of '04 as well as '05, and the driver of the revenue in the first half of '04 are the very large number of people that we hired late last year. So there is a little bit of a lag effect because they have to go through the training program. And then obviously if revenue -- if we see unanticipated high-level revenue, then we would go on and do more lateral hires again, and they would become billable after about two weeks, and obviously that is what happened in 2003.

Can you talk real specifically then about the application maintenance and sequential growth at about 8 percent on a quarter over quarter basis? Why did that number come in at below double-digit range on a quarter over quarter basis that you reported on a total basis?

I think it is a series of things. One, obviously I am not sure there is any single factor, but fewer billing days in the December quarter. And it always balances around a bit quarter to quarter because in reality it is half a dozen accounts each quarter that drives it. But clearly we have a very good stable of strategic accounts that we have won in the last two years because remember these accounts take three or four years to fully ramp up. So we have a very good stable of accounts they are continuing to ramp up their application management plans with us.

One of things we felt good about coming out of the budget cycle with our clients over the last two or three months is that they have a lot of savings baked into their budget from the offshore programs, which means they need to make sure that they had their goals of getting work offshore.

Are they wrapping up ahead of your expectations or just in line or below?

Generally if I think about Q4, we ramped up -- we beat our expectations by about $3 million, and a portion of that was certainly driven by application management. So certainly in 2003 they ramped up ahead of our expectations. We always tend to be fairly conservative in setting our expectations, so if the trends continued that we saw in 2003, then we will certainly update people as the year goes on.

Ed Caso (ph), Wachovia.

Good morning. Can you talk a little bit about the impact on operating margin from a sort of an increased amount of applications development work, which tends to have a little bit of a more onshore mix? Does that give you a little bit less flexibility to manage your 19, 20 percent operating margin?

At the operating margin, really there is no impact. The reason why it's a little more on-site but we can fix a little bit more of it, so you end up getting a little bit higher overall billing rates. And also because it is a little more on-site, we don't have to provide as much offshore infrastructure, which is a savings.

So at the operating margin level, it is very similar. At the gross margin level, there it bounces around a little bit depending on the on-site/offshore mix, but we consciously price these deals -- both management and development deals --so at the operating margin level they come in very consistently.

Can you talk about the uptick in depreciation and amortization from Q3 to Q4?

Sure. That is primarily related to our additional buildings came online from our first construction program.

Was that the new run-rate based run-rate?

That is the new base -- obviously it will increase based on buying PCs and stuff, but that is the next big jump would be when the next phase of construction comes in line, and that would probably start to happen end of this year.

Andrew Steinerman, Bear Stearns.

My question has to do with visas. As as we speed to emigration lawyers, there definitely seems to be a lot of chatter in an election year. I just wanted to get a sense of what you're hearing, what your trade association is helping you think about, and how many H1Vs did we already get ahold of? Is there any risk -- not litigation -- but proposals out there will hinder our growth?

The visa situation that concerns us, this is something that we keep tracking, both the (inaudible) year, as well as the visas that are available in the system and likewise the stability of the (inaudible) visa basis. The expectation this year is that the quota, which has come down to about 65,000, would probably run out by end of March by 30 April.

Our planning assumption for getting the visas for our people to be able to come here and work, based on the assumption that these results are (inaudible) month of March or April, so that is the planning assumption. Apart from slight delays we have seen in this process in order to get these visas, we have not had any issues as far as the availability or the rejections objections or any of those things are concerned. We feel that based on the numbers that we're looking at for this year we are adequately covered as far as people with availability of visa is concerned for accounting purposes.

Andrew, remember that as part of our business continuity, we always keep a large number of people in India Visa ready, and obviously we have increased that number some more. So as the caps hit, we basically have a lot of people who already have visas in hand.

In addition, we qualify for the L1 program for certain people, so the combination of the two of those things. Plus, a meaningful increase in local hiring here in the U.S., either U.S. nationals or people already over here on existing visas. For the past couple of quarters now, I have already significantly increased that local hiring number and certainly have the ability to increase that further.

If you go back a couple of years ago, local hiring was difficult because we did not have enough scale, and therefore, we ran into utilization problems. Now we are big enough that local hiring is not a problem, so that gives us a lot of flexibility.

Lakshmi, we feel like one of the proposals that we hear about in Congress, it is chatter? There is nothing out there (inaudible) that would hold us back, right?

Yes. While it is a little early to say, that is the assumption with which we are going. First and foremost is the (inaudible) factor on the new piece. This administration is likely to be in the (inaudible) contracts -- the federal and the state government contracts -- in which we do not participate, and our revenue exposure there is 0 percent. So that is one issue.

As far as the corporate factor is concerned, our belief is that the corporate factor (inaudible) a responsible manner as far as the '02 thing is concerned. (inaudible).

Mashi Coutry (ph), SG Cowen.

A couple of questions here. One, talk a bit about Europe. It seems that Europe is following the U.S. in terms of the adoption cycle if you will. How do we make sure that you guys will be able to ride this wave? That is number one.

And then you have ended the quarter with an incredibly high amount of cash. Talk a bit about what you are planning to do with it, talk about CapEx requirements and maybe projections for '04? And then any possibility for a dividend payment down the road? Thanks.

As far as the trend in Europe is concerned, certainly there is an uptick there. Traditionally continental Europe has been way behind as far as adoption of offshore outsourcing is concerned. UK has been far closer to U.S. as far as adoption is concerned.

What we see there is the UK is in line with the U.S., and we see some of our (inaudible) customers operations in the U.S. expanding their project work relationship with the UK faster than earlier.

As far as Continental Europe is concerned, there is an increased level of interest at this stage. A number of prospects, a number of customers in the financial services area are looking to starting some offshore initiations. These tend to be predominately in the application development side when they invest in new projects, new applications to be created when it is going out and hiring people, they are looking at partners like us as an opportunity to develop these new applications.

With a little work in the application management area, it is not of significant interest to them because this leads to displacement of labor, and as you know, the labor laws do not -- they prevent them from growing aggressively to the application maintenance site. But we see certainly Europe coming along.

More specifically, we see the level of activity very high in the Benelux countries, in Holland, Belgium and also in Switzerland, followed by Germany and then the trailing country there is France. I will let Gordon talk to you about the cash situation.

Obviously we had a great cash flow quarter. We are up to over $194 million in cash. Having a healthy balance sheet is very important in this business. As customers are now looking to doing very large deals with our offshore partners with many hundreds of seats, they want to know we are going to be around on a long-term basis. So we don't have to use our cash to win deals, but it is very helpful to have a strong balance sheet when winning deals so clients feel comfortable that we are a survivor. So, therefore, we want to continue to keep a strong balance sheet.

The CapEx in 2004 we are still finalizing the numbers, but also it will be the high 30s, maybe 40 million, that ballpark. A lot just depends on how quickly we do the construction program, and because of the strong demand, we are trying to accelerate a little bit from the original plan. But as I said, the high 30s number, maybe 40 million at the upside.

We will use some cash for small acquisitions just like we did in 2003. We think these small tuck earned acquisitions for particular technology needs such as SAP, geographic needs, UK, Switzerland things like that, if we could find those deals, we would certainly like to do them. So I think we will continue to strengthen our balance sheet as we generate cash. There is certainly no near-term plans for dividend.

Then finally, Gordon, can you to remind us what is the actual number for the strategic clients that you have onboard today?

Sure. We won 17 during 2003, and we have a total of 37, probably 38 strategic clients in total --

Out of these, how many reached their full potential so far?

That is one of the things that makes us so optimistic about the business. It takes about three or four years to really mature. The only ones that are mature are some of the ones from almost the old P&B (ph) days. So of the 37 or 38, probably four or five are mature. That is all. Then overall we are maybe 20 to 30 percent penetrated in the strategic accounts compared to where they want to be with us.

George Price, Legg Mason.

Good morning. I just wanted to get a little bit more detail on the hiring. First of all, should we expect a similar quarterly pattern I guess in 2004, a little bit back half loaded coming out of the schools? Maybe you can give some indications of what you think in terms of net hires for the four quarters?

Sure. I don't think it will be as back-end loaded as it was in 2003. Remember 2003 one of the reasons it was so heavily back-end loaded is in Q3 and Q4 we went out and did a lot of latter hires.

So the only way I think you would see it back-end loaded would be if demand just exceeds our wildest expectations, and we have to go out and do massive hiring in the back half of the year to meet the demand before the more recent college graduates come out of the training program. It certainly won't be smooth, but it will go back -- it will certainly have net additions in Q1 an Q2 and then higher level in Q3 and Q4. The exact numbers I have not worked out yet.

But as you can see in the press release today, we said we were over 9500. So we are already up 300 net in the first five weeks of the quarter.

What was the exact global headcount?

It was roughly 8475 ending, not average. That includes trainees.

Okay. In terms of -- one of the things that you mentioned is more is more people that you are going to be hiring being upfront -- on-site consultants, etc.. Can you talk about what implications -- is that just based on your existing service mix? Are you anticipating a broadening of the service mix and if so how? To add to that, if you can also maybe talk about that in terms of hiring expectations locally versus in India to come over here? You may have mentioned that before. but I had to jump off for a second.

This is essentially the nature of some of the contracts that we are getting into and more large volume relationships. Earlier we felt that the relationship size with some of our strategic customers would go from about 5 million to about $20 or $30 million. Now we see many of these opportunities going beyond that level, maybe $50 million or more.

So to manage those kinds of relationships with some of our strategic customers, we require capability in large program management, large contract management, (inaudible), some consulting skills, which we need to hire most in India, but a significantly large number in the U.S.. These are client services teams, some domain experts. There are some people we hire from the consulting organizations who provide the front-end capabilities, the relationship management and the consulting capabilities to support the back-end level of the maintenance work.

So that is the type of hiring that happens. This is something that increased during the last two quarters, and we see this phase continuing over the rest of this year. We are not talking about very large numbers in comparison to the totals we expect to add this year.

These are smaller numbers. The bulk of the recruitment will continue to be at the level of (inaudible) entry-level people, but they bring in a different type of skillset that we require as we get engaged with some of the large programs and larger relationships with (inaudible) customers.

Okay. And then the last question, I wanted to get your thoughts on BPO and what the status of your initiatives were in that area, and maybe in general what you have seen and heard from clients given some of the announcements out there about (inaudible) bringing some stuff back?

As far as BPO is concerned, it is broadly in two categories of activities -- the low-end call center and data entry type of work, which is more than about 60 percent of work that happens in India today. That we believe is commoditized, low margin business that is overcapacity in India.

We are watching that cautiously. No intention of doing BPO just exclusively in that segment. However, the opportunities to participate in the higher-end administered processes owned specialized processes, the opportunity is very high. And here most of the customers that we are talking to, they would like to have their own capture facility or would have something built and be transferred to them over a period of time. That represents an opportunity for us because we have been able to use of the process knowledge to make a different stand. So that is an area we are evaluating and we look to work in that area once the customers decide to make an investment in that aspect of the business.

As regarding the call center, yes, there has been back and forth news about that. While that is growing, it is also growing more on a captive basis and much less on a (inaudible) basis.

Is there anything imminent on the transaction processing side in terms of something that there might be a coinvestment?

There is not anything imminent that we can talk about.

Ashish Thadhani, Brean Murray.

Good morning. A couple of quick questions. What was the contribution by Infopulse in the quarter? Also, how many employees did you take in from Infopulse?

Sure. Contributions during the quarter was a couple of hundred thousand dollars. The number of employees we took in, I think it was 35, somewhere in that ballpark.

Okay and then a question on long-term margins. Is it reasonable to expect that your operating margin can move beyond the 19 to 20 percent range given that most of the industry is a little bit higher? Again not in the immediate future, but thinking a longer-term horizon?

I think it could, but you should have absolutely no expectations that it will. We made the very conscious decision that until this industry matures and obviously when the industry eventually matures, which we think will be quite aways out, but when it eventually matures, there is margin pressure on everyone. Until then, we want to reinvest in it so we can grow faster than the rest of the industry. That strategy is working. So this is not a leverage play. It is purely a topline play, and our goal is to grow clearly faster clearly faster than the industry and faster than our key premium competitors.

So essentially no change over there. Very quickly, top 10. What was the contribution?

Very little change there. 38 percent top five, 54 percent top 10.

Excellent. Thank you very much. Good quarter.

Mayank Tandon, Janney Montgomery Scott.

I had a couple of questions on the wages. You mentioned that wages would go up about 10 to 15 percent offshore. Is that correct across the board?

On average, it will be in the low double digits. Some levels get much higher. Others will get much lower, but on average, that is a good assumption.

Given that you are hiring mostly at the graduate level or entry-level or wrapping up, would you expect the blended impact to be more like 5 to 10 percent assuming that 10 to 15 percent wage hike offshore?

Clearly one of the things that helps us fund the wages in addition to average price going up a little bit is the pyramid flattening a little bit because it got a little out of tilt last year because we had to go do lateral hires. But that is good (inaudible) obviously.

Partially offsetting that is all these colleges kids have to go through six months of training, so it negatively impacts utilization a little bit, and it all kind of washes out and gets back to where we are now.

And then in terms of the on-site workforce, I think you mentioned in response to another question about the L1 Visa program that you would do some local hiring here, but that would not have an impact on on-site wages, practically given that you have been paying comparable levels for your L1 workers, too?

That is the key thing. We already paid prevailing wage to our foreign nationals who are here. So whether we hire someone locally -- assuming it is same level person -- or bring someone over, they are going to earn the same thing. Now often we will hire a more senior person over here, and obviously they will make more. But where we hire on an apples-to-apples basis, wages are the same.

In response to a previous question, also would you expect the on-site offshore headcount mix to basically remain more or less in line with this quarter for modeling purposes?

I think that depends on what the solution mix is as the year goes on. Obviously we have a pretty good handle on the maintenance side. Development is a little bit more of a wild-card, and we have been fairly conservative in what we have assumed. If development really takes off -- and remember development projects can ramp up really quickly if you win them -- so if development really took off, that would move the mix a little bit more on-site. But for modeling purposes, at this point, I would use probably going to 32 percent on-site.

Okay.

(inaudible). It might be a little bit higher or a little bit lower depending on (multiple speakers)

One final question on competition. As you look at the competitive landscape right now, are you once again primarily competing with the offshore centric vendors, or now are you seeing on your competitive bids a lot of the domestic players here in the U.S. also compete with an offshore on-site centric model?

We see both type of players. Although I would say the type of situations that we compete in, we see a dominant mix of the offshore players. Having said that, some of the smaller-sized engagements we see companies like an Accenture and an IBM also playing. We see them in different situations, but our competition is prominently still with the (inaudible) players or the offshore players.

I am trying to get a sense of the bidding process. So when the client thinks about offshore, are they actually putting out a project that is offshore-centric, or they just looking out for the best solution and looking for different kinds of bids that may be on-site centric or offshore-centric in different vendors?

It really depends on the strategic initiative driven top-down by the client organization. What we are looking out is a partner with a broad range of capabilities with the offshore capability, with the on-site capabilities, so this partner (inaudible) can work on maintenance (inaudible) work end to end. That is one kind of approach.

Where (inaudible) strategic initiator, there are some large organizations that do one of the divisions of that corporation would like to experiment with offshore outsourcing. We have been looking at very very specific capabilities. They are looking at purely the offshore capability.

The process that they follow for these two is very very different. Where it is strategic, they look at (inaudible) capabilities through (inaudible) but top (inaudible) players, maybe two or three of the multi-national corporations, the large ones. (inaudible) driven at a divisional level, it tends to be a much better mix of the Tier II, and we also get to participate with more players from on-site in the process of development.

So what are you seeing more of right now in the marketplace right now in terms of the two approaches?

In terms of the two approaches, I would say that we see equal numbers in both situations. If you look at our own pipeline, you see opportunities in both. The way to compare it, say a year and a year and half back. Certainly the strategic initiatives have gone up. It is higher than it used to be.

How do you fair versus the competition in that category?

Our success with that has been quite good in both the categories.

In the industries where we participate.

Is it pretty comparable across the board approaches, your win rate?

I would say the win rate would be comparable across the spectrum. It is probably slightly better than competing against the India offshore vendors (inaudible) larger ones.

Mayna Singwai (ph), J.P. Morgan.

Good morning. My question relates to your sequential revenue growth, and if you look at the Q2, the past three quarters have actually been coming down from 17 to 12 to 10. If I look at the guidance for next quarter, you are talking almost 6 percent sequential revenue growth.

Putting this in the context of much larger competitors, most of them (inaudible) revenue stream at a much faster pace in the December quarter. I am just trying to understand what is happening here, and why is the growth going down?

Thank you for the question. The 17 percent we experienced in Q2 when we had it, we made it clear that was an anomaly. What drove that was in Q1 there was very little development spending because of the war, and so we saw a dramatic rebound and almost a catch-up in development spending in Q2. It grew 25 percent sequentially. So I certainly would not have the expectations that a 17 percent sequential growth rate is sustainable for anyone with scale.

I think in Q4 our sequential growth, depending on who you want to compare it to, was certainly at or above generally where others were. When you look out to '04, obviously we have used the words at least with our full-year guidance. As we get additional visibility, I think it will be an industrywide question of how much development work really goes offshore for the offshore industry? Obviously the last couple of quarters were very good. I think all the offshore players are looking to see now does that trend continue? How much momentum does that trend have? But we continue to be very pleased with our sequential growth rates.

Are we seeing any bettering out of growth from some of the large (inaudible) customers? Is that a trend that we have seen, or are we going to still see a good quarter (inaudible)?

Clearly the growth is being driven by the strategic deals that we have won over the last two years. Now in any quarter, some quarters grow faster than others, and they come back and forth a little bit. But the growth is being driven by the strategic deals. No question about that.

one last question. Can you give a bit more about the (inaudible) side? You said earlier we would like to go back to customer and global pricing increases. So as we look out into 2004, what is the program deal getting price increases, and what (inaudible) could that be up?

I think it varies by customer and where their rates were. Overall average pricing is going up a little bit in '04.

Would that be 5 percent, 10 percent?

No, no. Average pricing certainly would not be going -- low single digits.

Ashwon Schvarer (ph), Smith Barney.

Good morning and congratulations on the solid quarter. Nice to see you keeping conservative guidance as usual. The question is on risk management. In terms of what your plans look for and the signed contracts or put out bids, is there still the same level of risk management prospective that they put in what they ask for, not just India-centric, but also other locations from where your provide services? Could you comment on that?

The expectations in this new situation is a concern. Customers would like to know what our strategy as far as (inaudible) locations are concerned. Not from a risk prospective, it is more from a long-term liability of alternate locations resources, out-sourcing could be done efficiently, as efficiently as from India to the states.

So that is something that most customers would like us to address. The risk perception of doing work in India I would say is the same as before has come down, and it has been effectively addressed by us in terms of continuity planning and the other factors that we have put in place.

An unrelated question talking about your acquisition pipeline, you have done two small tuck-in type acquisitions in the past year. Do you have an active acquisition pipeline, and if so, what does it look like in terms of areas you are going after?

Without a doubt, we have an active pipeline, especially as offshores become so mainframe. More and more small companies are saying, hey, it really makes sense to partner up with an offshore company.

What are we looking for? Very specifically we are looking to strengthen some of our horizontal capabilities just like we did an acquisition of Assis (ph) in the second quarter to strengthen our Seibel (ph) capabilities, we would like to do a small acquisition or two in the SAP space to strengthen our capabilities there. Just like we did the acquisition of Infopulse and Benelux, if we can find it, we would love to do a small acquisition in the UK, a small acquisition in Switzerland, maybe in Germany.

(inaudible) the strategy is to choose the acquisitions to fill in very specific niches. We have plenty of revenue, so it is not an issue of buying revenue. But rather it is a build versus buy decision to get the footprint in Europe or to strengthen some specific horizontals. Obviously we are always looking out for vertical capability, but that is much tougher to find.

A final question if I may. Given that this is an election year, not just in the U.S. but also in India, could you comment on perhaps what investors should expect from any changes in policy or something like that the investors should expect as the fallout of the elections?

I don't think that there should be any changes that you should expect (inaudible) (inaudible) certain discipline of a certain target in the press about the offshore, etc.. This is more about -- this is about execution, the strategy would remain firmly (inaudible) from this place continue to execute on the plan that we have had. We have not in areas of (inaudible) business that are likely to be impacted, if at all, there is a backlash against that.

As far as the India situation is concerned, the stability in the political environment always is good for business. So we hope that the stability will continue.

Okay. Thank you and once again solid quarter. Congratulations.

Thank you and thank you to everyone. I know we are a few minutes over. Once again, we appreciate your joining our fourth-quarter conference call. We look forward to speaking with you again in April. Operator?

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