Infosys Ltd (INFY) 2003 Q4 法說會逐字稿

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Good morning, ladies and gentlemen, and welcome to Infosys Technologies investor conference call for the quarter and year ended March 31st of 2004 conference call. (OPERATOR INSTRUCTIONS) Please note that this conference is being recorded; participants who have any objection should disconnect at this time. I would now like to turn the conference to Mr. Sandeep Shroff, General Manager of Investor Relations. Mr. Shroff, you may begin.

Thank you, Sandra. Good morning and hello, ladies and gentlemen. Thank you for joining us to discuss the results for the quarter and fiscal year ended March 31, 2004. I hope you have all had a chance to look at our press release and our fact she which we have posted on our website, www.infosys.com.

I have with me today from a conference room in Bangalore Mr. Nandan Nilekani, President and CEO of Infosys, and members of his senior management team. We will begin with some comments from the management on the results of the quarter and then open up the call for questions.

Before I hand over the call I have one duty to perform, reminding you that anything we may say in reference to our outlook for the future is a forward-looking statement (indiscernible) listed by us in our filings with the SEC. These filings can be accessed at the SEC's website, www.sec.gov.

With that, I now turn the call over to Bangalore, Mr. Nandan Nilekani, President and CEO of Infosys Technologies.

Thank you, Sandeep, and I'd like to welcome everybody to this call. We're glad to announce the results for the quarter and the year ended March 31st '04. We have given a guidance for the coming year and we expect to grow 30 to 31 percent in top-line growth and 27 percent in earnings growth. We have also announced a stock dividend to ADS holders at the ratio of two-to-one. Consequent to this we expect that the ratio for fixing -- converting ADS and equity shares (indiscernible) for one equity share. We also announced a onetime special (indiscernible) 50 per ADS, which is (indiscernible) dollar one and 15 cents based on the currency prevailing conversion rate, and the final dividend of rupee $7.50 per ADS which is equivalent to 17 cents per ADS at the current prevailing rate of exchange. And these dividends are payable on the ADS's outstanding prior to the dividend.

We had fourth quarter revenues up to 302 million, up 40 percent from the corresponding quarter of the last fiscal. And earnings per ADS had increased to 58 million -- 58 cents from 40 cents in the corresponding quarter last fiscal. During this quarter Infosys added to 38 new clients and had a gross addition of 2,849 employees for the quarter for Infosys and its subsidiaries. And across the board to date Infosys globally we have 25,634 employees. And our outlook is there -- for the quarter ended June 30th we expect revenues between 314 to 316 million, and we expect earnings to be about 58 cents per ADS. And for the year ended March 31st '05 we expect revenues between 1381 to 1392 million and earnings of $2.61, which as I said is equal to a 27 percent growth in earnings.

With this I request my colleague, Kris Gopalakrishnan, Chief Operating Officer, to run you through some more numbers before he hands over to Mohandas Pai, our CFO.

Thank you Nandan. As a Nandan said, we have added 38 new clients. Our revenue from our $50 million clients has gone up to 3 from 2 from the last quarter. We have today 51 $5 million clients and 131 $1 million clients. The total number of active clients has gone up to 393, partly due to the addition of Infosys Australia.

We have assumed pricing to be flat in our estimates for financial year 2005 because we have seen pricing has stabilized in the last three quarters. We have not seen significant change in the revenue productivity. Any renegotiation that is happening are not material, and our investment in Infosys consulting we hope that over a period of time will give us some pricing power.

The volume growth has been very good. We have grown in this financial year 49.5 percent in terms of volume. Our on-site (ph) at first has (indiscernible) a little bit, but it is at 33.4 percent, which means that our strategy of shifting work offshore has actually -- and it continues to work. Our package implementation (ph) is 14.5 percent of revenue. Last year it was 11 percent of revenue. Altogether revenue from services that have been introduced in the last five years is 35 percent, which means that the strategy of adding new services, cross-selling, etc. is working.

Our attrition over the last 12 months is 10.1 percent. It's significantly lower than the industry average. Infosys has the highest number of (indiscernible) employees -- experienced (ph) employees joined during the year. We added 1971, almost 2000 employees. And currently our strength across the group companies is 25,000. One of the reasons for our tailing-up (ph) is course the number of people who apply, and this has caused 1 million applications in the last 12 months.

Our prediction for growth additions this year is about 10,000 across the group with the software services looking at about 8000 people. We have factored in a compensation increase of 17 percent, but the impact of this it is limited because basically we're converting part of the ratable compensation which we gave this year into fixed. In that sense this has already been factored in this year and continues in the next year. So our strategy of moving to a much more ratable compensation is also helping us in this regard.

Now let me hand it over to Mohandas Pai.

Folks, (indiscernible) just talk about our fourth quarter. We had a sequential growth rate of 9.7 percent for the fourth quarter at $302.67 million from 275.89. On a year-on-year basis revenues grew by 40 percent, gross margin was 42.9 percent (indiscernible) 43.5, almost flat. Year-on-year it grew again by 40 percent. Our operating income was at 28.3. We saw an up-tick in the operating income because SG&A came down, and operating income went up by 43.8. Non-operating income came down because we had a translation loss. (indiscernible) was negative at $3.10 million as against $3.57 million in the previous quarter. So overall, non-operating income came down by 35 percent from 3.2 percent of revenues to 1.2 percent. Income before taxes was 29.5 percent for the quarter, as against 30.6 the previous quarter. And net income was 25.4 at $76.76 million, 58 cents, on a consolidated basis. So we grew earnings in terms of EPS by 43.9 or 44 percent for the fourth quarter year-on-year.

For the full year we grew revenues by 41 percent to 1062 million. Our gross margin grew by 37 percent to 460 million at 43.3 percent as compared to 44.6 percent the previous year. The SG&A was at 15 percent. We had said earlier that SG&A could come down by 100 basis points, but as revenues grew in the year we increased the investment on SG&A, so SG&A stayed put almost the same place. Our operating income was at 27.6 percent from 29 percent. It went up by 34 percent. Non-operating income for the year was 2.6 percent. Our profit before income taxes 30.2 percent with net income at 25.6, so we ended up at $2.06 -- 38.5 percent increase in EPS with profits at $270 million.

We had a great year and we have tried to see (ph) the year ahead, and we're giving a guidance now saying that the top line for Infosys -- the top line would grow by an amount of about 30, 31 percent and the earnings would grow by about 27 percent. The top line and the earnings are not growing together for two different reasons. The first reason is that the rupee has appreciated in the last quarter this year by four percent, and if you factor in the rupee application as an average decline in the value -- average appreciation in the value of the rupee by about 5.3 percent in fiscal 2005 with average for fiscal 2004. More than that, in this year we're spending about $11.24 million on three broad initiatives -- our China initiative would cost us $2.6 million in terms of a hit to earnings; Infosys Consulting will take about $3.6 million; and deploying an initial $5 million into a banking (ph) product to make it more global. So overall we're spending $11.24 million as part of our expenses, which has an earnings impact of about nine cents. If you add that back to revenues, you will find the top line and the bottom line will grow at the same pace of 30, 31 percent. So this year the margins were despite the rupee appreciation constant compared to previous year, but (indiscernible) strategically to spend an additional $11 million, which is an EPS of nine cents for various initiatives to make sure that the growth continues for the future.

We have had good cash flows, and we're seeing that cash flows -- a substantial part of the cash has been invested into the business. In the current year, fiscal 2005, we will be investing about 140 to $175 million. We will be adding within 10,000 to 12,000 seats. We will be completing a global training center at Mysore -- (indiscernible) in Bangalore at a cost of $60 million, which could train 4500 employees in a single sitting, along with a 2000 room, 4000 bed hotel (ph). (indiscernible) substantially to create the room for growth, and we think that the investment that we make back into our business would make sure that we have good growth prospects for the year.

Like always, there are three factors which impact our margin. The first factor is pricing, and for the current year, fiscal 2005, we expect pricing to be stable. Pricing has been stable for the last three quarters. Price renegotiations have not been material. We don't see much of that going forward.

The second has been the wage inflation. In the current year -- that is fiscal 2005 -- we have seen an increase in salaries paid in India by 17 percent. Indian salaries made up 13 percent of revenues for the last fiscal, out of which 2.1 percent is approximately $23 million which is paid out as a onetime bonus to celebrate the $1 billion occasion (ph). And if you strip out this onetime element which is provided over the last four quarters, our wage cost in India as a part of revenues would be 10.9 percent. A 17 percent increase on that would give you 2 percent. So what has happened is the variable cost the previous year has become a part of the fixed cost for wages this year, so the impact of the wages is not being felt in fiscal 2005. We have seen wage increase at the mid-level. At the entry-level wages have just been flat. At the middle level wages have gone up by 15 to 20 percent because this is the most valuable section of the entire value chain where we need more project managers, and there is a shortage because of the rapid growth made by the industry.

The third point which has been impacting us has been the rupee. The rupee has appreciated by 8.7 percent over the last year -- in the last one year; 5.3 percent on an average basis. And rupee appreciation of 5.3 percent in fiscal 2004 has had an impact of 2.65 percent on our entire operations. So we think that the rupee would appreciate in the future, and we shall look at strategies to hedge going forward. For our position for the guidance purposes we have taken the rupee cost to be 43.4.

In essence we've been asked this question as to what is the meaning of a difference between Indian GAAP growth rate and US GAAP growth rate, because for Indian GAAP purposes we said growth would be 24 percent top line, 20 percent bottom line; for US GAAP it will be 30 percent to top line and 27 percent bottom line. The difference arises because we make our budget in dollars and then translate them into rupees for guidance purposes. So when you budget in dollars this year lesser (ph) rupees. So the growth rate in rupees would be lesser. But the volume growth that we (indiscernible) for fiscal 2005 is around 30 percent. So volumes and revenues will grow side-by-side, growing in parallel upwards at 30 percent this year, and that's an impact of the rupee appreciation of the last year. We think the rupee might appreciate. We have to be cautious about this, but we shall take steps to hedge. We right now have hedge positions in forward sales of $203 million at 44.6 rupees to the dollar where the rupee is currently quoting and 43.6 rupees (indiscernible) today.

With that, I hand you over to Nandan for a further statement and then questions.

Thanks Mohandas. Once again, welcome all of you to this second conference call and I request Sandeep now to throw the floor open to questions.

(OPERATOR INSTRUCTIONS) Mayank Tandon, Janney Montgomery Scott.

Good morning here from the US. I wanted to ask you about SG&A. And the SG&A came down in absolute dollars. Could you give us a little more insight into what were some of the factors behind it?

Are you talking about SG&A in the fourth quarter or --?

Yes in the fourth quarter, sorry. Especially selling and marketing related expenses came down. I just wanted to get a sense of where you were able to cut back and manage your expenses.

Sales and marketing expenses were at 20.57 percent as against 20.83 and G&A expense were 23.47 as against 24.57 the previous quarter. So sales and marketing has come down from 7.5 percent to 6.8, and the primary cut back has been in the bonuses because we have -- our bonus payment is linked to growth in revenues and growth in (indiscernible) based upon a target. And obviously this quarter the growth has been about seven percent. Organically in revenues we have grown by 9.7 percent, and if you exclude the growth because the acquisition Australia, it has been 7 percent. So obviously the bonus payable for the sales have been less in the first two months of this quarter than the fourth quarter of the year the growth was not so great. The last months saw some good growth. So overall sales and marketing has come down because of the huge bonus payments.

Okay. And could you also provide us with an update on the competitive landscape in terms of not just from the Indian players, but also what the US firms have been doing in India and how they're competing with Infosys in the marketplace right now?

I think one thing that has clearly emerged this year is (indiscernible) acceptance by competitors, customers and generally analysts that our model is really the model of the future, and anybody who really wants to be a sellable (ph) player in this game has to adopt to our model pretty rapidly. I think that (indiscernible) very clearly, and therefore we are seeing some activity by global companies either to respond on their own like IBM and Accenture have done or through acquisitions like IBM did with Daksh (ph) the other day.

But we personally feel that essentially the end game is very clear; the end game is a Company which combines the excellence and execution and business model of Infosys with world class comparating (ph) skills. And toward that direction we made a decision last week and announced Infosys Consulting (indiscernible) very much here. And we believe that he has really put together a blue-chip team of four people, two from Deloitte, one from Cap Gemini Ernst & Young and one from EDS. And we expected this nucleus now to create a very high-performance team which will integrate totally with Infosys and create a value proposition of high-class consulting with high-quality global delivery.

We think that for the incumbents the challenge is much more complex. They essentially have to completely redesign their insight (ph); they have to displace a lot of people; they have to cut costs dramatically; they have to change their entire organization structure hierarchy, the sign of control and all that (ph). And our understanding is that the kind of change that they have to go through is causing enormous turmoil and anguish in these organizations.

So while we do see some activity from global multinationals we think that fundamentally our model by growth is really the way to go, and we believe that this model is going to be successful going forward.

So at that point when you bid for new projects are you competing primarily with the offshore vendors right now or do you also see the multinationals in there competing for these global delivery projects?

Well, we do see them in some situations, especially where they have incumbent plant (ph) relationships and stuff like that. But I think the important thing is that our model is organically developed. For example, if you have a manager who is managing resources in four countries, all of them report to him. But as their model is (ph) really what they have in India is back office kind of thing with a different management structure, so then you have all the issues of whether India is a cost center, India is a center, how does the pricing happen, how do you do transfer pricing. There are a whole host of issues. And the seamlessness that we can give is something that is difficult to replicate.

And has the buyer made up the mind to go offshore, and then they call you in? Or do they also call you in on more global type projects?

Now they're calling us in for more global type projects and we expect that trend to increase with our consulting product.

And my final question has to do with the wages again. If, Mohandas, you could kind of break down the wage increases again, I think I missed a few numbers.

Let me give the numbers again. For fiscal 2004 salaries paid in India were 13 percent of revenues. The 13 percent of revenues included 2.1 percent -- $23 million -- for a onetime bonus that we paid to our employees today because we are celebrating $1 billion day today -- it is right now going on in the neighborhood and we're here talking to all of you. And if you strip that out, India salaries to total revenues is 10.9 percent of revenues. We have seen a 17 percent increase overall in the fixed compensation for fiscal 2005 on 10.9 percent of revenues (multiple speakers) 17 percent of 10.9 percent is 2 percent. So India salaries this year would be 13 percent of revenues, the same like last year.

And if I'm correct, you're able to offset that by managing your SG&A expenses net-net, assuming no impact from the rupee-dollar exchange rate. Would that be fair to say?

No. The point I'm making is there is no impact on the cost of revenues in fiscal 2005 because of salary increase.

I understand. Okay. I get it. Thank you.

But the impact is what to do with the rupee being at a higher rate than the previous year. The rupee is 5.3 percent higher for fiscal 2005 at the beginning of the year compared to the previous year.

Okay. I'm clear. Thank you.

That has an impact on the cost of revenues, and that is being offset by a lower increase in SG&A.

Okay. Thank you very much.

Moshe Katri, SG Cowen.

Nice quarter. A couple of questions. Can you talk a bit about your North American revenues during the quarter? They seem to have been sequentially flat. I think they may have been down sequentially -- a bit down sequentially in local currency. And in that respect, looking also at your new client additions -- I think you had about 36 -- is there any way to break them down by geography? What I care about is just breaking them down North America versus Europe. Thanks.

The North American revenue is more or less flat quarter-to-quarter. By and large, looking at quarterly trends on part of the Company revenue it doesn't give us any conclusive evidence of any trend and there is no trend in the North American business that would indicate that. There, however, were a couple of large accounts where the ramp-ups in Q4 were not as expected, and the rest of the business could not compensate for that. That's a onetime thing and we don't expect that to continue in the future.

Ramp-up was not as quick as expected, is that what you're saying?

Yes, there were some accounts that ramped down and other accounts which would have compensated in that -- some projects that ramped down and other projects in that account did not ramp up to compensate for that.

So you're saying it is just timing, basically?

Yes, it's just a onetime thing. It's not even a trend in that particular account, leave alone the rest of the North American operation.

Okay. And then can you go through the second part?

Just to add to that, in some customers what happens is they closeout their budget at the end of the year -- of the calendar year -- and then reopen that at the beginning. And they also had some changes in the people. So it took some time to get the new work orders released, etc. So partly that is also the reason for this.

Kris, is there a way also to break down the new client additions by geography?

No. We don't have that. That question came up before also, so we will prepare that and put that out (indiscernible). Right now I don't have that number.

Finally, it seems that looking at the June quarter you're looking for flat EPS numbers. Can you provide us some more details for the assumptions that get you to that flat EPS number?

The flat EPS number has got to do with the rupee because we start the quarter with the rupee at 43.4 at the beginning of the quarter, whereas for the fourth quarter the average rupee price was much higher. So there is an impact there already because of the fact that we have a rupee at a much lower rate in the fourth quarter. There's an impact. And to counteract that impact we need to grow revenues because you cannot totally cut SG&A cost. And that's why despite the revenues going up (indiscernible) sequentially we're projecting -- we are giving guidance for a flat EPS.

Thanks.

Lou Miscioscia, Lehman Brothers.

I was hoping you could actually talk about the tax rate a little bit -- it looks like it was lower in the quarter, maybe down to a 13.9 percent from where I was expecting about 17 percent -- and what you'd expect for fiscal '05. And then also the tax rate -- I think as per the tax holiday it slowly would be eliminated through 2009, and just what you expect to that to (ph) flow out, whether it's going be a ramp on an annual basis or a cliff where it just all happens in one year.

The tax rate was slightly less than we budgeted for the simple reason that there was a pricing impact overseas (ph). The cost structure overseas increased, and therefore the tax table overseas came down. That's point number one. And point number two was that in non-operating income which is taxable in India we had more of tax-free income, and this made sure that the tax rate came down. These are the two issues which reduced the tax rate as originally budgeted. So the tax rate came down from 17.7 percent in fiscal 2003 to 15.8 percent. It is marginal. But in the current fiscal -- fiscal 2005 -- we project the tax rate at about 4.2 percent; 4.2 percent would be 14.7 percent on pre-tax income, and the decline is essentially because of the fact that we did not take into account in our guidance any income from exchange differences. We had 0.7 percent of revenue from exchange differences on which we paid tax; in the guidance there is no exchange difference included, so non-operating income has come down from 2.6 percent to about 1.6 percent in the guidance, and the 1.6 percent is basically interest income -- (indiscernible) the interest income, much greater in percentage than earlier, would come from non-taxpaying interest sources, and therefore the taxes is a credit (ph) come down to 14.7 percent of pre-tax income from 15.8 percent.

Okay, so for fiscal '05 you're looking for 14.7 percent taxes overall?

Yes.

What about fiscal '06? I know that's a little bit out there, but just looking at the tax holiday eventually going away, will it then start to ramp up substantially in '06 or do you think it will be more of a cliff and not taking until the end of the tax holiday?

It would ramp up more in '07 and '08 because that's when a few more of the software technology parts would go off the tax holiday, but in '06 got there would be not much of impact -- we have to wait and see, but we don't think there will be a very large impact. In '07, '08, '09 there will be some impact.

There's obviously a lot of press about the hiring that's going on offshore. You also, I believe, are doing a substantial amount of hiring here in the US. Can you comment as to the number on that. And just curious if you actually have put out a press release showing that actually not only are you hiring obviously in India, but you're also hiring here in the US.

I think there are two things. One is Infosys itself will be hiring in the US for various roles. But (indiscernible) the thing you're referring to is the announcement by Infosys Consulting, our new wholly-owned subsidiary which is going to provide world-class consulting in the US. And they intend to hire 500 people over the next three years. But I will request Steve Pratt, the CEO, to give you more about that.

We do have aggressive hiring plans in the US, so initially probably in four areas. It will be in Northern California, Southern California, in Texas and in Boston, will be our initial hiring locations.

Great, but my comment actually had to do with also hiring people to just work with the different accounts because I assume that as your business just goes up that you're going to also have to increase some of your US headcount. Or is that actually not the case?

As we grow we would increase our headcount. Outside India today we have 655 non-Indian employees. Some of these non-Indian employees will be in our development centers outside India. We have started hiring in China. In fact, some of the employees who have been hired in the US were actually for the Chinese operation; they joined us in the US to be posted to China. So the US could actually be a hiring location for other locations also.

But no number on that?

No. The total number we have given is gross additions of about 10,000 people across all the group companies of which 8000 is Infosys Technologies.

My last question has to do on page 7 where you talk about gain on forward foreign exchange contracts. Could you just review how that actually plays out in a comparison of Indian GAAP versus US GAAP?

Under US GAAP you need to mark-to-market. So the gains under US GAAP would be larger in case the gains are available (ph). Under Indian GAAP you have to amortize them over the entire period during which you have taken the forward cover. So in quarter four we had a forward contract gain of $5.6 million; we had a translation loss of $8.7 million, so we had a net loss of $3.11 million. We had a translation loss of $8.7 million because the rupee appreciated 4 percent in the last 15 days of the year. Basically the last 4 days of the year it went through an appreciation phase. And since we have foreign assets outside India, when you translate them back into dollars -- I mean back into rupees -- you get lesser rupees, and therefore you take a hit to earnings. So the item that you see there on exchange difference (indiscernible) two items, one is a forward contract gain and translation loss, and the translation loss (indiscernible) this quarter because of four percent appreciation in the rupee.

We do have a regulatory constraint (ph) in India about this. One could (indiscernible) as to why don't we hedge our entire US dollar exposure forward for the year (indiscernible) constraints we're working with the regulator to minimize this. (indiscernible) $203 million forward cover at the rate of 44.60, which is much more than the current rate of 43.6.

Which line does this fall in? Does it fall into cost of services or somewhere else?

This item is reflected in non-operating income called exchange differences because essentially exchange differences arise because of the difference between the booking date and the receipt date. It does have an impact on the operating income too. It does have an impact on the cost of revenues. And if you work that out, overall there is an impact. But critically (ph) what one could say is that out of every $100 that we receive, $20 -- $100 of revenue -- $20 we receive in a currency which is apart from the US dollar. We've seen that the euro and the dollar don't move in sync -- one goes up while the other comes down. To the extent we have a natural hedge to the extent of 40 percent of revenue. On the balance 60 percent (ph), 30 percent is spent in the same currency so is a natural hedge (ph). On the balance (indiscernible) to India on which we will need to take forward cover, and thus on translation our revenues get impacted.

Thank you.

Sameer Nadkarni, WR Hambrecht.

Congratulations. I'm not sure if I missed this, but I was wondering if your forward guidance includes any contribution from the new Infosys Consulting subsidiary, and if you could provide any color on that.

Right now we have not given any guidance for Infosys Consulting, but our revenues do include a small percentage of revenue from Infosys Consulting. The focus is to make sure that the model is right, make sure that the integration with the rest of Infosys is done properly, and that's the reason we have not really given any guidance for Infosys Consulting.

And also, in terms of the metrics for the fourth quarter, could you talk a little bit more in terms of the utilization and the offshore mix? The offshore mix seemed like it was a little bit lower than the usual range, so I would be curious of any thoughts you might have on that.

The on-site offshore mix for the fourth quarter was slightly skewed in favor of on-site because it is on a consolidated basis and includes the effect of Australia. Essentially have there some revenues in Australia which essentially came out of a customer contract -- the last contract. We saw the on-site ratio go up to 33.8 from 32.2. Apart from that there's been no material difference in the previous quarter and the current quarter -- fourth quarter. It was (indiscernible) in fact it will almost be flat.

And any comment in terms of the utilization? It seemed like that was lower than the usual range also.

Yes. Utilization including training (ph) 70.4 percent as against 73.1 percent. The reason is that we had a large quantum (ph) of hiring in the third quarter. The folks we hired in the third quarter completed training and went into that delivery part of the business in the fourth quarter, but they're not fully billable because billing 2,500 folks who come into delivery in the same quarter takes some time. The tool exchange (ph) utilization came down. But we always said that utilization excluding trainees could be in the high 70s and the low 80s, and we are within normal range that we have.

That make sense. Thank you.

Mick Dillon (ph), Arete Research.

I just wanted to confirm something. You were saying before when talking about US revenue that this quarterly trend was not something that could be relied on. However, when you go back and look at the numbers, only one quarter in the last six years has the US ever been down, and that was in the immediate aftermath of September 11th. So can you just talk a little bit more about what you're expecting, and if in fact this is not a backlash that you're seeing in the US?

I think this is not a secular trend or something like that. We had a specific instance of a customer who ramped down in the months of January and February, and therefore -- and it was a fairly big customer of ours. So we did take a slight decline in revenue there. That's really the principle reason for that. I don't think it really portends anything for the future.

But if you look at your customer billings, you have seen the number $50 million clients actually rise in the quarter and the number of $40 million clients flat. So it's a bit difficult to see where this client is.

Well, I don't want to name the client except to say it was a $40 million client became a $50 million client. The run rate (ph) was very good. And I think we're not seeing any material change there between the last quarter and the fourth quarter.

Okay, but that single client saw your quarterly run rate revenues fall and it was a one client responsible issue?

Could you repeat the question, please?

I was just trying to confirm that it was a single client that caused the fall and if we had excluded that client from sales last quarter we would have seen organic sequential growth.

Yes, that's right.

If I could just grab two numbers please. One is can I confirm that you said CapEx for FY05 was going to be circa US$145 million?

140 to $175 million.

And then the last one was the bill rate, if you could just give the quarterly bill rates please?

The bill rate is expected to be flat. (multiple speakers) we do not see any decline. It is expected to be flat because we think that pricing decline has stopped. We also are seeing an increase in our revenue from higher value work. If you look in the fourth quarter as compared to the third quarter you find that package implementation has gone up to 16.5 percent of revenues as against 14.8 percent in the third quarter, a sequential growth rate of 22 percent. That's the highest growth rate among all streams of revenue. So to that extent we think going forward in the year we will see good growth in package implementation where the rates and margins are much greater. So we think pricing is going to be flat for fiscal 2005.

Sorry, I was just looking for the fourth quarter of last year, the on-site and offshore bill rate. I know that offshore I believe was 4502, but I was just wondering what the on-site number was please.

The on-site is the 10,804 as against 10,856. It's 0.5 percent. This is very marginal. It's not something to worry about.

That's perfect. Thank you very much.

Cynthia Houlton, RBC Capital Markets.

Just a follow-up on some of the geopolitical stuff that's been out there. Have you seen any impact on some of the larger deals or some of the more US-centric multinationals? And what's kind of the push-back, if there is, on some of the noise out there in terms of off-shoring positions?

(indiscernible) Can you repeat the question? We didn't quite get it.

I just wanted to understand if there was -- have you seen any slowdown in customer decision-making based on some of the geopolitical noise in the US on sending jobs overseas? And has that impacted the rate of customer decision-making? Has it changed any of that?

Let me just address it as not in large deal (ph), but in terms of growth of existing accounts and intentions of companies to either grow or enter the whole offshore services game. And I would say that while people are -- they like to exercise utmost caution about how to manage the change with their own employees, as well as with the outside public. But there is no weakening of resolve -- at least we have not seen that amongst our clients today -- to actually increase the work that they're doing with on/offshore (ph) services with us, as well as for companies who actually want to start doing it.

So you haven't seen any change in new customer decision?

So far, we haven't.

And then on kind of the more outsourcing initiatives, can you (indiscernible) a little bit what you're finding more on that front? I know that is something that's been discussed in terms of expanding into that area, but what's kind of the updated status on that?

Could you repeat the question again please?

On kind of more into that BTO arena, is that something -- any update on what you're status is there?

In the BTO arena we're seeing continued interest from customers, despite the backlash and noise in the American press. We have not seen significant slowdown in customer interest or ramp up activity.

Thank you.

Ashish Thadhani, Brean Murray.

Could you provide some details about the more significant initiatives that should support margins over the next year despite wage and currency pressures?

First of all, I think one of the principal reasons why we do not expect margin decrease from the regular business is because we are getting economies of scale in SG&A which is being offset against some of these expenses. So that's the primary thing.

Having said that, I think we a number of initiatives to differentiate ourselves. Today, for example, one of our fastest-growing groups is the enterprise solutions. We're aggressively going there and getting projects in Oracle, SAP, PeopleSoft and other implementations, and that continues to be a strong growth area. We believe that that is an area which has a lot of room for growth because that's also the soft underbelly of our competitors. And we expect to see a lot of business there.

We're also focusing a lot on solutions, both horizontal solutions. For example, with our Microsoft alliance we have an accelerated XP rollout solution that is quite successful, gives us better margins. With our verticals we have many solutions in our retail and other IBOs (ph).

So I think a combination of solutions, alliances and getting into ES -- enterprise solutions -- implementation is a way that we expect to be able to deliver the margin.

That is helpful. Also, could you refresh my memory -- when did the Australian acquisition close?

First of January 2004. You have seen the Australian acquisition in the first quarter impacting revenues.

So excluding this acquisition, what would your net client additions, what would that number have been -- the 38 that you announced?

Just one minute. Out of 38, 14 is due to the Australian acquisition, so 24 is due to organic growth.

Thank you very much.

Trip Chowdhry, Midwest Research.

Congratulations on a good quarter here. I was just wondering regarding the package applications, what kind of implementation are you seeing? Like are they new projects or still maintenance projects or just new modules being implemented? Any color on that will be good.

I think it's all of the above. I think fundamentally what's happening to our large global clients is that they have spent hundreds of millions of dollars with traditional suppliers and really have a situation where they have absolutely different versions of packages running all over the place and now they want us to come in and help clean that up, to put a single instance (ph), to have a standard template and roll it out. So I would say it is things like template definition, rollouts, product support from India, and essentially helping them to clean up the mess they have.

I'm was also thinking (ph), you know package applications are a good first step; have you thought about taking the next step and also uniforming some more strong alliances with system management companies like, say, Computer Associates, BMC or maybe a IBM in terms of Tivoli (ph)? Any thoughts on those?

We actually are in discussions with a couple of the people you mentioned.

Lastly, it seems like the investment you're making in the facility in Mysore is quite exciting. Is it your global training center or will it be just regional? When I say global center I mean will the consulting that is going to be created in US will also get trained in that facility and your expansion into Mourishas (ph) and probably China are also going to be trained there? Or how do you see that being executed?

It will be a global training center for China and Mourishias (ph) and India. as for our consultors' goals (ph), let me ask Steve.

One of our key strategies for keeping our consulting rates low is and keeping our costs low is to leverage as much of the existing infrastructure as possible. And I think getting to -- our consultants getting to know the awesome capabilities of aventi (ph) are very important, and I think it's a great opportunity. If you have seen the facilities, they're really amazing. So yes, we would plan on using those resources. We're still putting the details around all the training, but yes we would.

Thank you.

Edward Caso, Wachovia Securities.

I was curious if you could elaborate more on what's going on in the BPO (ph) market, first IBM and now Citigroup. I was wondering what else you're seeing, whether that's going to change; your philosophy of this sort of cautious approach to BPO.

The first thing to understand is that our BPO strategy is not a call center strategy. And what you have seen with IBM is IBM has bought possibly the second-largest call center in the country. So in terms of the work that was being done by the company bought by IBM and the work being done by us is quite, quite different. It's also quite evident because in the pipeline deals that we've got that is not a company we used to see quite often as competition. But having IBM come in I guess will change it somewhat. It will be interesting to see. One of the things I think will definitely start happening is the rates will start going up, which is good for us.

I think competitively it really doesn't make any difference to us. I think two things. One is having it just validates again and again in the minds' of our customers that (indiscernible) is going to be here. And once the concept is validated, then obviously (indiscernible) like to know who are the real guys that deliver outsourcing. In that sense I think it is good news for us. Secondly, as US companies invest more in India I think (indiscernible) bonding between US and Indian companies, and therefore it helps us improve the outsourcing (indiscernible). All in all I think it is good for us.

Can you talk a little bit more about your pipeline, particularly in the US, what you're seeing and any implications of extended sales cycle given all the political noise and headlines?

I answered a similar questioned earlier. We don't see really any impact on pipeline or decision-making from whatever is happening this year in the US because of the elections and jobless recovery and so on. However, we do sense that clients and prospects want to tread cautiously, especially on the change management issues internally, as well as how they address this from an (indiscernible) perspective. But frankly, it has now become so center-stage -- offshore global services -- that there are some industries like financial services where CEOs are justifying this internally saying that the cost structure, the inherent -- the industry cost structure is changing because of the use of global services and if they didn't do it themselves they would become uncompetitive, and that's where we like them to be.

Since maintenance work often implies moving jobs where development might not are you seeing any up-tick in the development pipeline?

The up-tick in the -- development depends on IT spend trends because it corresponds to discretionary spend, and we know that IT discretionary spend has been lower and most of the effort in IT is to extract more value out of baseline trend and then divert that money to discretionary spend.

So far if you look at the fiscal year, we grew by 25.7 percent in development and 30.1 percent in maintenance. I think that largely reflects our growing market share in both these service offerings. This year we think we will see an up-tick in discretionary spend -- perhaps a very small one -- which should play nicely into our enterprise solutions business, as well as development and re-engineering.

Last question. Can you talk a little bit about the visa constraints, particularly with the H1 and if that has impact of your business or may impact your business in the coming months?

You are really talking about the visa situation, right?

Yes.

We have a sufficient numbers of visas. For example, we have 7800 visas at any point of time; probably about 3000 people will be in the US on short-term basis and things like that. Obviously we're watching the situation. If the numbers are not increased sometime in the future, we will have to look at recruiting more locally or looking at converting some of these people to permanent residents and things like that. But right now this is not an issue for us.

Thank you.

Vadim Kovshov, Discovery Capital Management.

Good morning gentlemen or good afternoon. I have three questions, if you could comment briefly on all of them. Number one relates to sort of the IT cycle in the US and how do you think we should be thinking in terms of volume growth. Is it in terms of the purely acceleration of the outsourcing trend, or in terms of cyclical IT budget growth, or any other terms? That's number one.

Number two is you mentioned in your press release, and I think for the first time, that you actually had a deal with one of the software developers here in the US who started outsourcing their work to you. Is it time to sort of say that this could be a substantial or significant part of your growth going forward and to what extent do you see it as a potential opportunity?

Number three is given the huge disappointment yesterday -- and granted they had their own reasons for disappointing on the results -- but can you sort of see a three-year differentiation between the Tier 2 companies and Tier 1, being yourselves, in terms of capturing the market share of the outsourcing business? And is this gap widening or is it staying the same? What's going on in there? Thanks a lot in advance.

Our growth is primarily coming from our traditional business, our relationship which we have built over many years, -- companies looking at outsourcing part of their IT -- not they're entire IT -- to offshore companies or to IT services companies with the global delivery model capability; the large outsourcing deals which involve taking over employees or taking over capital assets. We're looking at this, we are bidding on some of them, but we have yet to win anything significant in that area. So the growth is coming from our traditional business, repeat business; continues to be -- it is 89 percent -- 88 point something -- 89 percent. So continues to be very high for us. Traditionally there's been 85 percent plus and that continues to be there.

For the second question, we have worked with a software product companies, hardware manufacturers for several years now -- actually for the past 10 plus years -- the likes of telecom product companies or software product companies. We have just announced one this quarter, that is all. But this has been a service for us for many years. Approximately about slightly less than 10 percent of our revenues come from this area. Progeon itself has grown 400 percent this quarter, and it's one of the fastest growth areas for us. And I think it's probably the fastest amongst the Indian companies. In that sense I would not say that it has grown slowly at all.

What about differentiation and sort of (indiscernible) market share gains between Tier 1 and Tier 2 players?

What we're doing, and I just want to go back also to what Kris said about large deals because that is where really we will bump up against Tier 1 players, both on the consulting and system integration side and the outsourcing side.

On the consulting and system integration side, Infosys Consulting is our answer to how we're going to compete against global consulting system integrators. We think we will be able to differentiate ourselves by putting together the next generation model for consulting and system integration which is intrinsically built on a global delivery model. It brings together the world's best consultants and an excellent global delivery model to deliver value, which clients have forgotten what it feels like.

On the outsourcing side, we actually have a point of view on large-scale outsourcing, which is that again today clients are not getting the value that they should be. So our differentiation there is going to be more in terms of a different model of outsourcing which is based purely on the global delivery model, which is based on treating IT as a strategic competitive advantage for businesses and not something that you abdicate and hand over to an outsourcer which is the typical model for large-scale outsourcing today.

That is the outsourcing model that we will be taking to the market. We already have a huge amount of success with our existing clients in that very same model. So we're very confident that we have the answers to that as well.

Basically I think of the landscape has changed because the important thing that has happened over the last one year is the complete and total acceptance by everybody in the marketplace that this business model is the future. And I think all of these deals you see with multinationals expanding their presence is merely an acknowledgment that this is the future model. And we believe that we have the brand and the market share and the mind share to take it forward, and all the investments we are doing with it in the strategic outsourcing of consulting are really to develop that company of the future which we think combines the best of global model which we have with the best of world-class consulting and outsourcing.

In terms of modeling your growth going forward, how much of the current acceleration -- the pick up -- do you attribute to cyclical forces versus secular drivers? And what should the picture be 12 to 24 months forward? Clearly you are factoring in some slowdown in volume growth, but how should we be thinking about that?

When we talked about on $1 billion how we're going to grow at 30 percent in dollars terms, we're not assuming any outsourcing and (indiscernible) in that revenue. It's really from secular growth with our existing customers.

Thanks so much.

Ladies and gentlemen, this marks the end of our call. If there are any follow-up questions you can e-mail them to us or call us. I'd like to hand the floor to Bangalore for any closing comments.

Thank you folks. All right. Thanks, ladies and gentlemen, for participating in this call. We look forward to speaking with you during the course of this quarter and then after that when we announce the results of the current quarter in early July. Thanks and have a great day.

Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.