Infosys Ltd (INFY) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Infosys Technologies investor conference call for quarter ended 30th September, 2003. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session. This call is being recorded at the request of Infosys Technologies (indiscernible) objections to such recording may disconnect at this time. I will now like to turn the call Mr. TR (indiscernible) Investor Relations officer. You may begin, sir.

Thank you very much, Monica. Good morning and hello, ladies and gentlemen. Thank you for joining us to discuss results in the quarter ended September 30th which is the second quarter of our fiscal year 2003 - 2004. I do hope you have all had a chance to take a look at our press releases and the fact sheet that we've recorded on our web site www.Infosys.com. I have with me to discuss the results for the quarter and our prospects for the quarters ahead from a conference room in Bangalore, India. Mr. Nandan Nilekani, president and CEO of Infosys and members of his senior management team. We will begin with a short comment by some of them on the results of the quarter and then after their talk we will open it up for your questions.

Before I hand over the call to Mr. Nilekani, I have a duty to perform and remind you that anything we say about the future is a forward-looking statement and must therefore (indiscernible) with (indiscernible) we face (indiscernible) statement available with our SEC filings at www.SEC.gov. With that I now turn the call over to Mr. Nandan Nilekani, President and CEO with Infosys Technologies.

Thank you and I would like to welcome all of you to this earnings call. Let me briefly go over the highlights. The revenues for the second quarter came in at 25.77 million which is up 38.31 (ph) percent from the corresponding quarter in the last fiscal and earnings for the year have increased from 36 cents to 49 cents for the year's corresponding quarter. This quarter we added 29 new clients and we have added (indiscernible) addition of (indiscernible) employees (indiscernible).

And we have given our guidance for the quarter and for next quarter and for the year. For the quarter we've given guidance of 258 - 260.2 million. And consolidated earnings for (indiscernible) 50 cents. And for the year we have given our guidance of between 1.8 billion to 1.15 billion. And earnings per year 1.95 and so our revised guidance for the year for (indiscernible) revenues exceed $1 billion in this financial year.

Our growth continues to be strong. We believe that offshoring is becoming mainstream. We believe that most corporations across the world are looking at our offshore and using the global delivery model to help introducing cost (indiscernible) and bringing a high quality of performance.

(start scoping)

Infosys as the brand in market data in this market is really poised to take advantage of this incoming trend of outsourcing. We are also seeing pricing stability in the last quarter. In fact, we have had improvement in our price productivity -- on-site price productivity has gone up by 1.4 percent; offshore price productivity has gone up by 2.2 percent; and, on a blended basis, there's no change, because this quarter ended a significant achievement -- that the onset of (indiscernible) issue has changed and the on-site effort has gone down from 34.4 percent to 32.6 percent.

So I think it's been a good quarter. We've been able to (indiscernible) our target. We've been able to grow. We've been able to get some price stability, and I think we are well-poise both to grow and differentiate our business. With this, I will request my colleague Kris (ph) Gopalakrishnan to go over some of the highlights, and then Mohan to go over the financial numbers.

Good morning. Good evening, everyone. This is Kris Gopalakrishnan. Looking at the (indiscernible). Europe has seen a slight increase as (indiscernible) the rest of the world. Looking at service offering, we see that maintenance has gone up in this quarter to 31.6 percent of revenues, compared to 26.9 percent last quarter.

The other service business that we introduced over the last two years -- services like packaging (ph), implementation, (indiscernible) testing, and engineering services, etc., -- give us a revenue of about 34.4 percent this quarter. So definitely, our strategy of introducing these new services, expanding the portfolio, expanding the footprint was to our advantage. Repeat business continues to be very high at 95 (ph) percent.

In terms of verticals, we have seen increased growth from the banking and financial services as well as in the telecom area. In the telecom area, this is primarily from the service provider segment. We have seen increase in the recent revenue from clients. The top five plants constitute 24.6 percent of revenues. The number of million-dollar clients, the number of $5 million, number of $10 million clients -- all these numbers have gone up this quarter. As Nandan already mentioned, the offshore -- at first has increased to 67.4 percent, compared to 65.6 last quarter, an increase of 1.8. And we have also been able to reduce the number of subcontractors we're using and replace them with our employees. These two factors have actually helped us improve the margins this quarter from an outpatient (ph) perspective.

Let me now hand it over to Mohan to continue with that analysis.

As already said, we grew sequentially by 7.5 percent to $250.76 million. Our gross margin increased to 43.8 percent from 43 percent. The reason for the gross margin increase lay in the decrease in charges paid to subcontractors from 2.4 percent of revenues to 0.7 percent of revenues.

SG&A was at 15.3 percent, as against 15.1 percent. The increase was due to a 0.6 percent increase in (indiscernible) for accounts receivable due more than 180 days. This does not mean that all this (indiscernible) is for receivables which have gone sour (ph). It just means that, as a matter of policy, any due more than 180 days gets (indiscernible). (indiscernible), we are well within the target of reducing SG&A expenses.

We also increased amortization of (indiscernible) to $3.3 million this quarter, from $749,000 previous quarter -- an increase of about $2.5 million. And the reason was we re-estimated the useful life of intellectual property and we wrote off $2.5 million dollars. Therefore, our operating income was at 37 percent -- $67 million from 37.5. (indiscernible) 1 percent increase in amortization, it would be at the bottom -- 28 percent, sorry.

Non operating income was at 4.1 (ph) percent, because of the favorable exchange difference of $4.9 million. And this arose primarily because of the hedges that we had. Therefore, non operating income rose from 2.3 percent to 4.1 percent and tax (indiscernible) increased from 4.8 percent to 5.3 percent because of higher taxes on exchange differences. Our guidance for the future does not include any positives or negatives from exchange differences even though we have a forward (indiscernible) of $139 million. It'll be (indiscernible) appreciated during this quarter by 2.2 percent. And it will be (indiscernible) appreciated some more (indiscernible) the end of the quarter. So we ended up with 49 cents for this quarter. Total cash on hand as on this quarter end was $474 million -- we added to cash (ph).

Forging on, our business process (indiscernible) had the revenue of $3.7 million, as against $2.7 million the previous quarter -- an increase of more than 35 percent. It added 156 people net, three clients. Right now, it has 10 clients with four clients live in terms of VPO work; four clients in transition; and two clients in the discovery phase.

Progeon is guided for the next quarter at $4 to 4.2 million. Progeon is profitable in this quarter and had a profit of $260,000. As Progeon speaks (ph) to its guidance of 15 to $18 million for the entire year. This is our official highlights for this period, and if you have any further questions, we will be most delighted to answer - over to you, (indiscernible).

We will now take questions, Monica.

(Operator Instructions). Julio Quinteros (ph) from Goldman Sachs.

Good morning or - I should say - good afternoon, guys. First of all, Nandan, I wanted to ask your really quickly about pricing. And the commentary that you made about pricing suggests a fairly-stable outlook for the rest of fiscal '04. I guess my question is -- as it relates to pricing, can you talk a little bit about the re-negotiation cycles and how that would impact pricing in fiscal '04? And, as it relates to re-negotiation cycles, what makes you so confident that the pricing won't further deteriorate or show any pressure in fiscal '04?

I think, first of all the -- I think this whole pricing re-negotiation has taken on a far bigger dimension in people's minds than it should. We have several hundred customers and only about 15 of them have actually re-negotiated prices in the last six months. And what happens, though, is that, typically the re-negotiations that happen, happen when the volume of the customer goes up. And to that extent, because they tend to be larger customers, we, in fact, so something (indiscernible) more than that.

I think that what happened in the past was that we had a certain amount of prices which were not reflective of the current market enrollment, so they've gone a little out-of-sync. And until (indiscernible) all customers who had been with us for quite some time and who had a fairly large volume of business -- and they rightfully said that they deserve to get a better deal on the prices. And we rightfully believed that, in the interest of the long-term relationship, we should give them that benefit. So that is how it happened. So, I think to that extent, a lot of that bubble pricing, if you wish, has been removed from the system. And therefore, I think, the prices have now come to a more quiet and equilibrium point. To that extent, we feel that it's really -- we have essentially absolved the removal of some bubble pricing in the system, and I think the key thing is that we have been able to bring it down to a more-moderate level. And, therefore, I think going forward, it is not really a (indiscernible) thing. It is really an adjustment of something that is happening.

The second thing, I think, is that -- I think the Indian players, in general, are becoming more price-disciplined. I think people are beginning to realize that outsourcing is going to happen and it's going to be plenty of demand and everybody is going to get his piece of the action. So, there's no point in going and shooting yourself in the foot as some people have done in the last year or so. I think they'll learn quite quickly that it is not a good way to do it. So I think people are observing more pricing discipline. So that's the second point which gives us confidence.

The third point generally, I think, is that -- based on the macroeconomic indicators; based on the fact that most economists expect 3 to 5 percent growth at (indiscernible) the second half. Hopefully there will be more IT spending and demand will go up. It is not like it was earlier where, really, the focus was on cost-cutting. So I think these are all the indicators that we have, which leads us to conclude that we will have price stability going forward. And I think the important point is that -- people have to realize -- is that in spite of achieving price -- pricing at a lower price point -- I mean, price equilibrium. In spite of fairly dramatic (indiscernible), we have been able to reconstruct our business model, move stuff offshore, reduce our cost, become more efficient and still being able -- a decent margin in this environment. It is actually the key thing that we need to all recognize.

Great. And one follow-up question for Kris. Can you give us a sense from an operational perspective on what the impact has been of the arrival of Avendancies in India, if any at this point in time? And just kind of get your perspective over the next twelve months -- what this means to wage pressure if anything?

We have increased our salaries this year. We have increased it primarily as variable (indiscernible). That is the employee benefits as well as the company benefits that we do well (ph). And we have projected if there is a downturn and things like that. That has been the philosophy over the last two years for the company and we (indiscernible) implement that.

We have seen some increase in attrition (ph) in the last (indiscernible). It has gone up from 7.6 last quarter to 9.1. But most of this is in the two- to five-year expedients (ph) range and traditionally, this has been -- the group has looked at higher education, looked at making a transition after having some experience, and things like that. So we are able to manage that.

Infosys has added 2,025 employees last quarter, net. Gross, about 2,500. In attrition, about 500 people, which is a significant number. And if you look at the last half year, we have added about 4,000 employees. So if you then look at what the (indiscernible) have as a number of employees in India, we have grown actually faster than many of them -- many of the total (indiscernible). So that shows that we are seeing volume growth. We are able to attract employees and we're able to grow.

Great, thank you. And I am going to let Mohan off the hook this time -- I will come back to you personally.

Amed Karana (ph) from (indiscernible).

Could you give us a sense of the -- in terms of numbers and in terms of percentages of the kind of record (indiscernible) that you have done in the last quarter?

This is (indiscernible). On a net basis, we have added 20/25 in this quarter. On the gross basis, we have added 25/95.

I'm sorry -- let me clarify this. I'm looking at in terms of (indiscernible) and (indiscernible) equipments.

Of the software professionals who joined us, out of 2,533 software professionals joined us, of which 2,200 were (indiscernible) and 325 were lateral (ph).

Okay, now if I looked at this (indiscernible) in tracking the (indiscernible). (indiscernible) employees in the (indiscernible) of three to five years have been the most renewable in the larger Indian IT companies, especially with(indiscernible) setting up shop. Is this something that you would have experienced internally?

Kris mentioned, just before me, the attrition traditionally has been in the two- to five-year segments. And yes, those are the people who have been quitting to join other higher studies; to do higher studies. Or to join another company. That pattern (ph) is the same.

Okay. My last question is addressed to Balasubramanian (ph). . Balasubramanian, could you give us a sense that there is an explanation at our end to try and explore what you will be pricing (ph). (indiscernible) rupee/dollar parity. Is this something that we have tried or -- and what's been the experience from the client perspective?

Well, with the pricing currency, most of our clients are in developed markets with the multiple (ph), currencies. And they are far more comfortable with being billed in their own currency. So it's really not very likely for us to be able to negotiate a rupee billing kind of a framework.

My question was (indiscernible). It was in terms of (indiscernible) pricing. Let's say the appreciation of the (indiscernible) -- the appreciation benefits or losses being shared between you and the client. (indiscernible) happening on the media (ph) front, but is that something happening on software services as well?

No it's not happening. Part of the discomfort with the currency that's not one-market currently is precisely the changes in value in order -- not as a convertibility, but also the exchange rate. And they don't really track the rupee, actively. So, you know, it's not likely that they will -- yes, (indiscernible) -- it is not likely that they will accept the rupee -- any kind; whether it's the rupee billing or any kind of a variability linked to the rupee.

Okay. Fine. Thank you.

David Grossman from Thomas Partners.

Thank you. I got a couple of questions. First on the -- Nandan, in the context of your pricing comments -- I think last quarter we talked about margins degrading about 100 to 150 basis points throughout the fiscal year. I guess what you're seeing in pricing - do you still think that you'll see that kind of drop, and I guess, likewise, do you still think that you'll see about one percent sequential decline in pricing throughout the balance of the year?

David, Mohan here. What we are seeing now is that we are not seeing a drop in pricing in this quarter. And pricing will be in the (indiscernible) stability in the pricing. We may not see a steep drop. But the stability -- it does not mean that it will not go down 0.5 percent from where we are now, but the trend is not downward -- the trend is more towards the flat line.

And what would, then, the implication be for the margin guidance that you talked about three months ago? Would we expect margins not to drop the 100 - 150 basis points by the end of the year?

We estimate that the margin, which is now for the half year, at something like 27.2 percent, would remain. In the (indiscernible), i'd say maybe about 26.9 to 27.4 percent; in a 0.5 percent (indiscernible).

Okay and then, just in terms of the volume growth, it looks like you had again strong sequential volume growth in the 10 percent range. Are you anticipating, based on the visibility you have in the pipeline, that you can maintain that through the balance of the year?

Yes we are anticipating strong growth but we must remember that this quarter is the quarter where Christmas comes, New Year comes in. (indiscernible) some billing of ours will be impacted in December. And in January -- January, February, March - it is traditionally a period when people start the new year markets. The new billing cycle starts -- new budgets are opened. So, it quite possible that in the first month, there could be some softness. We are seeing strong growth, but prefer to be cautious in our guidance.

Just one last question. I guess in terms of your comments about some kind of nonrecurring item in SG&A and amortization -- so is the net kind of nonrecurring impact on the quarter $5 million of foreign currency less than $2.5 million of that amortization?

Amortization next quarter won't be $2.5 million. To an extent, I think, the model that we see now, there may not be an impact. We have not factored in the $5 million increase in operating income and the increase in the taxation levels for the next quarter. For the growth that we see, which should give us enough profit (indiscernible) of flat, maybe 1 cent more compared to this quarter of the (indiscernible) of this (indiscernible) one-time event.

Okay. Great, thank you.

Moshe Katri, SG Cowen.

I have a couple of small questions here. So just to clarify on the repricing process -- should we assume that the process is completed by now? That's point No. 1. Point No. 2 -- you had a turnover rate uptick during the quarter, slightly up from last quarter. Maybe you can address that as well. And then, finally, you did talk a bit about the amortization of intangible assets. That did have a pretty big spike this quarter to about 3 million, as you said? Obviously, if you normalize this item, your operating margin would have jumped at 28 percent. Maybe you can talk a bit more about this. And then, should we assume that this spike is a one-time event and should be back to the normalized levels going forward? Thanks.

Let me answer the last question first. Next quarter, we could see the impact of an appreciating rupee, to an extent operating profits may be, impacted. And that impact would be to a downward spiral. That will be offset, possibly, by lesser amortization -- amortization came because of the reduction in the useful life, and that period would lead to (indiscernible) of amortization next quarter, but not with the same extent as this quarter from what we see at this point in time. So there will be some two (indiscernible) facts. In this quarter, we had a $2.3 million (indiscernible) for accounts receivable, which was a one-time thing, because of increases in dues of more than 180 days. Part of the dues have already been collected, but to an extent they could be -- we will not see the steep increase. If you net up all these transactions, along with exchange differences as we've done in our model, then we would get an estimated earnings per share of about 50 cents. And this is exactly what we have said. But the key point to watch out for the next quarter would be the -- rupee (indiscernible). We have about $139 million in forward sales, that's 46.67, or thereabouts, and that should afford us some protection.

Twenty percent of our receivables are in currencies other than the dollar. So, the dollar will depreciate (ph) and the rupee appreciate. It would also mean that 20 percent of (indiscernible) goes up, but to an extent there's some kind of a natural set-off against the rupee appreciating. But we need to watch out how steep the rupee appreciation could be. And that is a key issue that we cannot predict.

So from a dollar basis, the amortization of intangible items could actually come down on a sequential basis next quarter?

Yes.

Okay. Can you address the other two issues that I had.

Can you ask it again please.

(indiscernible) asked about the pricing. And I think that the other question was about attrition. Right?

Yes.

(indiscernible) I will answer that.

This is Balasubramanian (ph). On the pricing/repricing question, I think the contract period end is -- while they are bunched towards the end of the year and they do offer an opportunity to us for price decreases, and for (indiscernible) price increases. But, really, our plans have the option at any time to ask for a rate increase or for us to actually go and ask for a rate decrease -- I'm sorry, the other way around. If rates get out of sync with what the market reality is -- and that's precisely what happened in the past few quarters, the impact of which has been felt in the past few quarters. Our current rates are very much in line with -- on the market rates. And that's why we don't expect -- or we expect prices to really stabilize.

Okay, can you talk about turnover? I think it had a minor spike -- maybe a spike on a sequential basis as well.

Hi, this is Hema here. Our turnover last quarter was 7.9 percent. This quarter, it is 9.1 percent. We have seen similar trends in the past years as well. Quarter 1 and Quarter 2 are big periods for turnover, primarily because of some of the reasons for which we have turnover. One of which, very significantly, is higher studies. And that's the period of time when people go for higher studies. Reason for turnover -- the top 3, really, are higher studies, moving to another company or better opportunity, and, of course, personal reasons like wanting to move closer to home location, etc. Those same trends as were in the past continue.

So we really shouldn't worry about this trend just because it is a seasonal trend more than anything?

Hema Ravichandar Yes.

Okay. Thanks.

Punesh (ph) Sun (ph), CSFB.

Congratulations on good reserves. On our business side, I was wondering whether -- what business trend are we seeing? Are we getting more business now from strategy offshore contracts (indiscernible) businesses? Or is there still the regular sales model (indiscernible)? Is there some changeover there?

Just about -- our channels of revenue generation (ph) continue to be the same. We obviously get a lot of our business through offshore outsourcing -- sourcing kind of initiatives that our clients launch, as well as from in the solution space where we're offering technology solutions to our business problems. And I think what has happened over the last few quarters -- really the nature of it has not changed much, but the increased interest in the global delivery model, whether it applies to offshore outsourcing or to solution space -- that increased interest has led to greater demand for our services and the result of which you are seeing.

Also, can you put a percentage to that -- how much percentage is coming from strategic sourcing and other (indiscernible) to the rest?

No. We really -- it is not easily differentiable. We sort of -- under the strategic outsourcing umbrella, we offer a lot of solutions. When we get into an account on a solution platform, we always try to make it into a strategic sourcing account. So we really don't tag our business that way, but we know that they differ in the way they are sold and bought. That's about it.

And also, in this quarter, we saw that (indiscernible) picked up significantly, while development consulting businesses remains weak. Any explanation of that -- why this happened or is it just a quarter-on-quarter (indiscernible)?

It's more-or-less quarter-on-quarter changes. But I think that the only thing that you might see which is a trend is more related to the fact that our clients are spending less money in a down economy on change-the-business kind of work, which is application development, package implementation, and re-engineering. Our package implementation side is doing well, but the application development, where we are fairly strong -- we have been historically strong -- because of lower spends in that area. That isn't growing as rapidly as maintenance, where our clients are looking at reducing the spend to run the business, because that does not add a comparative advantage to the company (ph).

If I remember correctly, management has (indiscernible) calls -- that maintenance has better pricing specials compared to (indiscernible). So with this shift in business, what exact (indiscernible) now?

Well, we -- strategically we have not -- moving into maintenance. It just so happened that our clients are more interested in those kinds of services. So it's not actually intentioned to move more into maintenance --and the result that you are seeing is not because of that. So -- but to the rest of your question, we are able to -- even in maintenance, through methodologies and processing that allow us to offshore more-- we're able to eke out the higher margins, and we continue to use other techniques that can better our margins on the maintenance side.

Okay. This question is to Mr. Pai -- Sir, if you can give us our cap expense for the rest of the year?

As far as CapEx goes, we have said all year that we would be spending between $80 - $100 million dollars. Now, we want to up that to between $100 to $120 million, because we added on more people than we had at the beginning of the year and we allocated more funds for (indiscernible). You can see that we have about 7,500 (indiscernible) under construction and we have to spend substantially. We're operating at near-100 percent in terms of (indiscernible). And we prefer to be at about 75, 80 percent at any point of time.

And so how much of 120 million you have already spent in the first two quarters?

What is the question?

Of this CapEx (indiscernible) full year, how much have you already spent -- (indiscernible)

(indiscernible) we have spent about 128 (indiscernible) in the first two quarters. We spent (indiscernible) in the second quarter. In terms of dollars, we spent about $15 million dollars second quarter, $12.4 million in the first quarter. (indiscernible) we spent about $27.4 million.

Thank you.

Andrew Steinerman (ph), Bear Stearns.

Thanks so much. And Nandan, I wanted to jump into your point No. 3 before about that the Indian players are becoming more price-disciplined. I was wondering -- are you making the observation that some of your competitors are becoming more price-disciplined or is emphasis leading the way with more disciplined metrics on what type of work emphasis is willing to take on. And what type of work we're willing to walk away from?

I think Infosys, by and large, has always been much more price-disciplined than anyone else. And what we have done, of course, in that area is bring in a little more process and other disciplines, but, by and large, Infosys has been price-disciplined. Our view has been that, in the last one year, several of the companies have really not been so focused on the pricing. And our sense is that they've taken business at rates below what are advisable. And I think that, in spite of that, they are being fulfilled and I think they have also put in much more stringent processes on the pricing front. And also, (indiscernible) not so much to offset as to our competitors.

Also, I think people are realizing that this offshore thing is now mainstream. And there's a lot of business coming down the pipe. So there's no need to throw yourself at the customer in terms of pricing and you can observe discipline. So I think that is the realization that it is coming. So I think at the top, a few (indiscernible) companies prices (indiscernible).

But you find that Infosys is walking away from a fair amount of business that it doesn't feel is in the company's interest or that's not the case?

We are absolutely walking away if we feel the deal is not worth it.

And is that something that's been true for the last couple of years or more true now?

No. I think we have always been a little more picky than most people. But, I think -- I won't say -- I'll say maybe it's a little more now in the last few months.

Okay. Thanks for all your comments; I appreciate it.

Kevin Mayer (ph), Fiduciary (ph) Trust.

I was wondering if you could comment a little bit on competitive dynamics and, specifically, your win rate within package implementation. That business seems to be going very well for you while we're seeing the U.S. folks struggle. Any specifics you could offer in terms of who you're doing better against and any kind of abnormal actions, pricing-wise, you are seeing by the competitors? Thanks.

Okay this is Balasubramanian. (indiscernible). On the package implementation side, our business is growing as a percentage of our revenue, as well as quarter-on-quarter quite rapidly. And most of it is driven by wins that are fairly large, significant implementations, rollouts, globally from major Fortune 1000 companies. And our ability to be able to propose a solution that combines our domain understanding, our functional understanding, as well as our understanding of that package --(indiscernible) Oracle, or whatever that package is -- is increasing as we get more experienced with these kinds of projects, and as we hire people who have these experiences in the past.

So I'd say this is going to get better and better in our ability to compete and win against the big system integrators. It's certainly going to increase in the future.

Just a quick follow-up. Can you talk about your interest, and if it is an interest, in moving into some of the large-scale outsourcing deals? There was a comment made on the earlier call about -- you know, at this point, you weren't necessarily going after P&G outsourcing deals like we saw a few months ago. Is that a goal at this point for the next year or two?

No. We are participating in some of those (indiscernible). We will not go whole hog in the sense that we will not take a lot of them, but definitely want to test the waters; we want to do it slowly -- one or two of, these. And understand the dynamics of how it works, how to bid for those, how to manage those, how it impacts our margins, and things like that. And we see this as the next opportunity to increase our penetration into these larger (indiscernible).

Also I think there's a lot of disenchantment with the old model of outsourcing. You know, where companies just handle the (indiscernible), then send them to an IT company, and then abdicate the strategic direction. And they have this 500 page contract and everything has to be negotiated. I think people are realizing that no company can afford to outsource its basic IT strategy, its management, its alignment of business. And what is required is selective outsourcing of different functions of that, but not really the whole kaboodle. And I think this so-called second generation outsourcing is now taking a lot of interest, and we're finding many, many (indiscernible) of our customers who actually began with the whole idea of total outsourcing are now coming back and saying, "that doesn't work for us. We'd rather do it on a selective outsourcing basis." So I think the whole model of the new generation of outsourcing, which is coming, which is a much more open architecture of outsourcing, and which is heavily-based on using global delivery -- and that's where we play.

Final question -- Just related to your comment there. Within Progeon, who are you seeing most often competitively?

Sorry, could you repeat that question, please?

With your Progeon activities, who are you seeing most frequently in terms of competition?

It's a (indiscernible) mix. I think in some cases we see Indian companies, but in a number of cases we see global competitors as well. If I look at my pipeline, there are at least two deals where we're in the final shortlist of two names and we're one and the other one is an international company.

Thanks. Nice quarter.

(indiscernible), UBS.

Congratulations on a great quarter. Most of my questions are answered, but this is more of a longer-term question -- as my investors are starting to address, which is more FY '05, FY '06. With your hiring rate currency running at about -- you're adding basically about 40, 45 percent new employees. 1 to 2 years out, your base is that much larger, and your attrition is going to keep picking up with the (indiscernible) competition in the 2- to 5-year range. So my question here is -- what plans does the company have to manage the volume growth that is needed for the quality of people to be hired. And is the quality available out there?

Let me answer the (indiscernible). I remember about 4 years ago, 5 years ago, somebody came and said "will you be a consultant for some company?" And we answered to them and said "look, there is this big company out there, which is a, competition, with 60,000 people or 80,000 people. Today, we have 20,000 people, and we are managed to hire 4,500 people gross in the first half of this year and we said that we will hire about 3,000 people in the second half. That makes it 7,500 people. So we have demonstrated our ability to scale up in terms of hiring people, in terms of training people, in terms of selling, in terms of growing. So, no doubt, the base will drop in the future. We cannot talk about figures, but we do think that we have the ability to manage. And as far as the quality of people in India, this year about 275,000 Indian (ph) graduates will graduate. And the (indiscernible) and (indiscernible) quality, we are told, is something like 350,000. So 4 years hence, there will be maybe 325,000 people graduating. There's a huge pool of people. The key is to get good people and to train them. That is the challenge.

I think what we're trying to do -- one is, of course, while we grow, we will also have these employees in a distributed global environment; they are not really all going to be staying in one place. They will be all over the world, in our development centers in India, development centers in Europe, in Asia, Australia and so forth (indiscernible) and so on. So, in that sense, I think there is going to be distribution.

The second thing is that we're also looking at how to create -- you know, within Infosys, creating business units, which are really smaller groups. And (indiscernible) a good example of that -- where we will have multiple leadership teams and our intent (ph) will be to combine the scale benefits of Infosys, which really come from size, (indiscernible), longevity, financial markets (ph) and so forth -- and combine that with lean, smaller business units that are focused on a particular service offering or a particular market. And they will empower to move quickly to address the market and satisfy the customer. So I think we will try to evolve models to which we can (ph) combine the strength of a large company with the nimbleness of a small one.

Just a follow-up question -- Your onshore/offshore mix is actually increasing more on the offshore side. Is this partially related to any sort of Visa restriction? And the additional question to this is do you expect in the next 3 to 4 quarters that your revenues offshore could get up to 50 percent plus?

Well, our offshore (indiscernible) is going up, because we are doing it consciously. And we have been articulating that in these forums for the last 3 or 4 quarters, because we believe that offshore works for the customers. We're able to offer the lower blended rate without sacrificing our profits. So it's a win-win for us and the customers. We're able to manage (indiscernible) and much better. And, of course, there's also the added benefit that the (indiscernible) will be less. So all those factors have played a role in offshoring. And I think that's the way to go. What was the second part of that question?

Just do you expect this mix in terms of revenues to get to 50 percent plus over the next few quarters?

50 percent?

The revenue mix for offshore -- do you think, your offshore --?

Yes. I think we can assume that as a ballpark, but at the same time, I think, we don't want to take it to the extreme where we lose out on customer intimacy and customer satisfaction. So, obviously, we will be very watchful on that front.

Great. Thank you so much and congratulations on a great quarter.

Ashish Badani (ph), Breen Murray.

Yes. Good evening, gentlemen and an excellent quarter. Looking at your revenue guidance for December -- it would seem to apply a sequential deceleration. Would that be explained by the holiday period that you talked about or is there something unusual in the just-concluded quarter?

Yes. I mean the number of working days that you can bill in this quarter would be less than the previous quarter, because you are on-site billing. So, we have factored that in and that reflects our guidance.

Is there any other reason to explain the number? Or just basically the billing days?

It's just that we're inherently cautious in our guidance because market is (indiscernible) marketplace. We can value several of the (indiscernible) There is no way anybody can value all uncertainties (ph).

Understood. And in your guidance, is it fair to assume, based on the prior discussion, that you baked in a flat pricing scenario?

Yes.

Okay and then one housekeeping item -- What sort of effective tax rate should one be using going forward in the next few quarters?

Well, I think we're going by 4.8 percent of revenues and its gone up to 5.3 percent of revenues this quarter for the simple reason that we had a one-time spike in other income. And we have not factored in this one-time spike going forward.

So if you take this 4.8 percent of revenues as a benchmark to come to something like, I think, 15.3 percent on pretax, as against 15.6 percent of pretax as against 16.6 right now.

Thank you. That's helpful.

Trip Coultry (ph), The Lehrer (ph) Research.

I had a quick question for you guys -- In terms of package applications, there are many various windows like Oracle, (indiscernible), PeopleSoft. I was wondering, would you give us a sense about where you're seeing more activity among these packaged-software vendors?

We're seeing, actually, the major packages like, I said, the Oracle, PeopleSoft and Siebold -- kind of mostly similar growth rates.

And in terms of geographies -- I know you're having some good presence not only the U.S., but other parts of the world, too. Any sense on where you see some activity level increasing or stagnant or falling off?

All geographies are growing, but (indiscernible) we have seen, actually, Europe pick up mostly from UK. And in Asia-Pacific, Australia is picking up for us.

And, locally, in India, itself, there have been some reports that various states in India are embarking on (indiscernible) (indiscernible) issues, initiators. (indiscernible) I was wondering how tightly involved is Infosys with bringing these initiatives to fruition in India?

In India, Infosys is primarily percent (ph) through our banking business units. The banking business unit has a complete range of products for the retail and complete (ph) banking activities, called Finacle. We are involved in some of the e-government's (ph) initiatives, more as individuals -- you know, in a more of an advisory capacity rather than as a business venture.

Thank you, all the best.

Edward Casa (ph), Wachovia (ph).

My questions revolve around the changing in the Visa limits in the United States -- how that may affect your business -- both the drop in the quantity of H1Bs, and as well as the possibility of tightening of the rules of the L1. Is this going to force you to change your business model or raise any issues meeting your guidance for this year?

Short-term, we have sufficient research (ph), and we believe that, over the next one or two years, it will not have a significant impact. But, we are watching the situation, because we have come to realize that there may be further legislation in these areas. But short-term, we do not see this as an impact.

We are also looking at how we can increase our recordment (ph) in the local market, as well as convert some of the visas in the four men wristbands (ph) in the U.S.

Does this have any -- if the applications development part of your business picks up, will the visa issue be of greater concern? Could possibly acquisitions in the United States be a way of addressing it?

If application development picks up, it will not have any significant difference, because we are able to do a lot of work from India. Typically, we're able to do 70 percent of the work from India in application development.

In terms of acquisitions -- we are always looking, both in the U.S., as well as in Europe markets.

My last question is with regards to the visas -- does it affect companies that are more staffing augmentation-oriented -- as opposed to Infosys, which I think is a little but more consulted, development-oriented? And, will that be a competitive positive for Infosys?

Yes. We think that it would impact more of the staffing companies than companies like Infosys.

Thank you.

Mayank Atundon (ph), Jennings (ph).

This is James Vessel on behalf of Mayank. I had to hop off the second call, so I apologize if this was already covered. But I just wanted to ask if you could talk about the discussions in the news that some of the multinational corporations that are your competitors have been offering 50 to 60 percent higher salaries at the entry-level, and 30 percent higher salaries at sort of the middle management level.

I was wondering if you would be able to kind of confirm or deny those ranges? And, in general, if you could provide us with some more color on what you believe wage inflation may look like in the future?

Yes, in some instances, the globally-size (ph) are offering higher salaries, that is one way in which they can kind of jump start, because they don't have a recruitment, they don't have a training engine, which is established and set up as to training. So, if they want to accelerate, that is what they will have to do.

It does not have a significant impact on Infosys right now. We are looking at how the salaries would move over the years. We have increased salaries for our employees this year. We have done promotions this year. By and large, we have made this increase variable, so that if the company does well, the employee gets more. And, if there is a downturn, then the company is also protected. So we have moved to much more of a variable stay (ph) in this bazaar (ph).

Thanks. Congratulations on a good quarter.

We do have a follow-up from Moshe Katri, SG Cowen.

Already been answered. Thanks.

One question that came in on the e-mail.

We actually have no questions in queue at this time.

I'll ask a question that came in on the e-mail. This is from Mr. Rajmohan (ph) from management. Infosys has been talking a lot about end-to-end solutions kind of work. When Accenture was recently questioned on pricing, they mentioned that 80 percent of the work they do is non-commoditized-solutions based, which does not have pricing pressure. Currently, where is Infosys at present in terms of percentage of business where it can say that it is in a non-commoditized form?

Part of the reason of pricing decline has been that in the last two or three years, especially in the internet bubble, the year 2000 (indiscernible), there was some bubble pricing and things like that. Now the pricing is more kind of uniform. It is more market-fixed (technical difficulty) market-led and things like that. So, that is part of the reason why there has been a pricing decline. We have seen stability in pricing, and we believe that -- just in the next six months, we believe that prices will be stable.

Okay. Thank you. Do you think with consolidation happening in the vendor (ph) side of the industry, there is a possibility of a time that the front end will lose its importance? If so, when do you see this happening?

Can you just repeat that? (indiscernible)

The question is -- with consolidation happening in the vendor side of the industry, is it possible that, over time, the front end will lose its importance, and execution and delivery will become more important? And, if so, when do you see that happening?

It's already happening. I think -- today, in the whole IT industry, the focus is on execution and excellence. And it's about delivering high quality on time, with the least number of defects. And that is why the change in the market is playing towards the stance of people like Infosys.

One last question is -- traditionally, a lot of the RP (ph) implementations, the RM (ph) implementations have been thought of as being primarily on-site. However, Infosys' model is a primarily global delivery market. Can you talk a little bit about the successes they have had globalizing services in that area?

We have been able to offshore about 50 percent in some cases. And the way in which we do this is, for example, when it comes to bridge (ph) programs, when it comes to interface programs, when it comes to data conversion and data transformation programs, we can write them offshore. Once the global template is created, then we can support that global template from an offshore location. So the maintenance of the package can be done from offshore.

So over the total lifecycle of the product, from implementation to support and things like that, we're been able to achieve 50 percent of the work being done from an offshore location.

Monica, if we have no more questions, we'll terminate the call at this time.

There is actually one more question that just popped up (indiscernible) Anjelpundat Dahera (ph), HSBC India.

Thanks. I was actually wondering, if you look of the business model -- with the (indiscernible), we understand that the higher you move up the value chain, which means from application, development, vintage work (ph), if you move up to system integration, IT outsourcing -- revenue per employee might go up, but margin per employee might come down, because the wage overcharge (ph) reduces as you move up. Will I be correct in this assumption?

No. When you say the labor oversize (ph), are you seeing because of more of it is on site, or because the people are higher paid?

Actually, both. The work is more on-site centric because the closeness to the client required by larger and more complicated work, and also because build (ph) does not -- cannot incorporate equal number of freshers (ph), probably.

Well, you know, I think, we are -- really on a global (indiscernible) basis, we are at the beginning of globalizational services. Our view is that -- if you take every service and decompose it into components, items in the value chain -- every service, to different degrees, is capable of being mediumized (ph). For example, today, in enterprise services we do more high-end work. It's about 50/50, as opposed to minimum (ph) wage (ph), maybe 20/80.

So I think there is a lot of room for improvement there. And we (indiscernible) almost all IT services -- whether high-end or low-end or medium-end, opportunity (ph) you want to take it -- are amenable to this. So, I think there is a lot of theme (ph).

You are right in saying that some of these newer services maybe more on-site centric. But even so, there's enough of full capacity in them to create a competitive differentiation.

I appreciate that. I apologize for butting in, but I'm saying relative to what we do today, because I'm looking at delta change for our company. I appreciate the fact that there is inefficiency in the system today, and that can be offshored away. But, relative to us, would I be correct?

Well, I think we have to keep finding that equilibrium point. And it may vary here and there. But I still think that it won't be a substantial variance from today's point.

I just want to add (indiscernible). If you look at the outruns (ph) we put (ph) in the package implementation, it's about 13, 14 percent. Consulting has gone up about 5 percent. And we have been able to maintain the margin -- and pricing decline across the board of zero over the last three or four years -- last two years. So we have been able to maintain the margins, actually. So that shows that -- you know, it has to be managed, hopefully, and then you will be able to do this.

Right. Just a follow-up questions, likely at a different time. (indiscernible) We understand the making (ph) quarter's guidance on pricing. And I understand that, commenting on pricing going forward from there may not be appropriate right now. But just to understand the process -- when you do your assumptions, or when you can do a spreadsheet, is it the U.S. expend (ph) number you look at? Or is it more internal marketing feedback, which gives you the confidence to articulate pricing, going forward?

Basically, where I am coming from is -- if you look at the general consensus for next year, the CIO polls and some of my competitors -- the average increase in tech spend is anywhere between 1 to 3 percent. What I'm basically trying to understand -- is this kind of tech spend increase -- that magic number which will likely result in price increase for all your (ph) services? Or is there something more?

Even though the tech spending may be flat, or even declining, we have seen trends like offshore are also spending increasing. If you look at the analysts like Gartner (ph) or Forrester -- if you look at the financial analysts like you (ph), all of you are seeing that offshore -- the friend (ph) who works (ph) offshore is more mainstream, and that's where the growth is coming from.

When we talk about pricing itself, it is based on the feedback from our clients. When we compare our prices with them, they (indiscernible) as competitive prices and things like that -- we feel that there is some stability in the pricing. (technical difficulty) We really feel prices will be around a narrow band of where they are today for the rest of the six months and the financial year in our market.

Sir, this is Lux Rekon (ph) from HSBC Juskondamim (ph), just one last question from our side. (technical difficulty) What can actually take prices higher in the current environment? We have seen over three or four quarters ago, the low (ph) prices were trending downwards. Now we are seeing pricing stability. If I were just try to figure out the next step -- in some x quarters hence, if pricing has to go up, what would drive that? Would it be, for instance, you know -- if the recoodmerdines (ph), the ability of the top-tier companies to recruit a certain number of people, and if they're either constrained or they're -- can back (ph) the source of pricing increase, people realize that, you know, we can only process probably 5,000 people per annum, or 10,000 people per annum. If we are getting more work than that, then we can charge higher -- is that one way it is going to happen? Or maybe, as Anifon (ph) said, maybe tech spending environment could improve. What (indiscernible) what can actually lead to price increase?

There are several factors -- supply and demand, like you said. Economy improving, tech spend growing, major technology change, this surface (ph) technology coming in, (indiscernible) coming into the act. There is a -- in a possible deal, there ar government regulations requiring that(indiscernible). A lot of possibilities, including three to price (ph). And it's difficult to say right now what will happen long-term. We are looking at over the next six months right now.

So, anyway, I see we have run out of time. So let me thank all the people to participate in the call. We really appreciate you showing interest in the company. And, we really enjoy interacting with you every quarter, and looking forward to interacting with you next quarter, also. Thank you.

Thank you. Ladies and gentlemen, this does conclude our conference call. You may now disconnect, and thank you for participating.