Infosys Ltd (INFY) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Infosys Technologies Investor Conference Call for the quarter ended June 30, 2004 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. If you do not wish to be recorded, please disconnect now. I would now like to turn the call over to Mr. Sandeep Shroff, General Manager of Investor Relations. Mr. Shroff, you may begin.

Good morning and hello, ladies and gentlemen. Thank you for joining us to discuss the results of our quarter ended June 30, 2005. I hope all of you have had a chance to look at the press release and our fact sheet that are also posted on our Web site at www.Infosys.com.

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

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

With that, I now turn the call over to Bangalore. Mr. Nandan Nilekani -- (technical difficulty).

Thank you, Sandeep. Let me quickly go on the presentation. There are really four parts to it. There's the highlights, which I will do; there's the operational performance, which Chris (ph) will talk about; financial performance, which (indiscernible) will talk about and I will come back on the guidance.

As you know, at the beginning of the quarter, we faced a couple of uncertainties. One was the debate on outsourcing, which had peaked in the months of February and March. Of course, the other was the rupee getting continuously strong. At that time, we had projected a revenue for the quarter of between 314 to 315 million, which would have given us a year-to-year growth between 34.6 to 35.4 percent. (indiscernible) impact the revenue for the quarter has grown to 355 million, which is a year-to-year growth of 43.8 percent and sequential growth of 10.7 percent.

Based on this performance and based on the current environment externally as well as the robust pipeline of business that we see, we have decided to increase the guidance for this fiscal year and we are now projecting the revenue for the year between 1476 and 1485 million, which is 1.47 billion and to 1.48 billion. This means that, in dollar terms, we're giving guidance for a year-to-year growth of 39 to 40 percent.

Now, what is it that has enabled us to do this? I think one, of course, is there has been an improvement in the business environment; our people are out there in the field and there is a healthy pipeline. But more importantly, I think what has happened is that the Infosys business model, which is designed both for scalability and now for differentiation, has been able to respond rapidly to the enhanced business opportunity in the marketplace. Secondly, we continue to see a stable pricing environment, which as you know we have been saying now for two to three quarters. That has essentially helped us to avoid any price erosion. The third important point is that, in the last seven to eight months, we have done some very major internal restructuring, and for the first time, we have (indiscernible) and delegated powers to the integrated business unit level, where we have a strong line of leadership. This leadership is very enthusiastic, is focused on growth and therefore, we've created multiple engines of growth with strong leadership, and that has contributed to the robust business that you see today.

We have also taken a step in terms of defining a new approach to outsourcing; this approach is called modular global sourcing. This was announced in the month of May at the Gartner outsourcing summit in the U.S. Essentially, our point of view states that the old model of total IT outsourcing (indiscernible) hand over your entire IT infrastructure to a foreign company or a vendor has now become obsolete. The new approach is using global delivery as well as modular, in terms of individual components rather than the whole ball of wax.

At the same time, we've integrated business (indiscernible) structure. We have continued our investment in developing new solutions. Every one of our business unit works on a clear business plan and they are focusing as much on consulting end (ph) solutions lead sales as in the traditional approach.

Finally, this quarter, one our highlights has been the focus on integration of Infosys subsidiaries. There are four of them, as you know -- Progeon, Infosys China, Infosys Consulting and Infosys Australia. We're focused on integrating the subsidiaries, the overall strategy and operations of the Corporation.

So, I think we have both seen an improvement in the external business environment but equally importantly, within Infosys, we have made a number of partisan changes, which has put in place the scalable model and has led to this growth and also has given us the confidence and comfort to revise the guidance to say that we will grow 39 to 40 percent this year on top of another good year.

So, with this, I now request my colleague and friend, Chris Gopalakrishnan, to talk about the operational performance. Chris?

Thank you, Nandan. We have added 29 new clients this quarter. The top client contributes 5.3 percent of revenue; it's down from 6.5 percent of revenues in the last quarter. Currently, we have $141 million plans. This has gone up from 131 last quarter. Active clients is 419. So clearly, this increased business volume has added to the number of clients and added to the business from our existing clients. The repeat business is 98.5 percent. The way we compute repeat business is -- you know, it resets every financial year and so first quarter will have a higher number and subsequent quarters will have lower numbers as we go through the year. But 98.5 is a good indicator that we have had strong growth in existing clients.

All of the vertical domains have contributed to this growth. Specifically, we have seen a decline in the Telecom (indiscernible). This is primarily in the product companies who have been on the services side; services side, the growth continues to be pretty strong. Other than that, the rest of the vertical domains have all grown by and large at the same rate.

When you look at service offerings development, is at 26.1 percent compared to 25.6 percent in the last quarter. There's a slight uptick in development. Consequently, the maintenance has come down from 29.9 percent to 28.8 percent. It's too early to say whether the (indiscernible) spending is increasing or not but clearly, there's a small increase in development revenue.

If you look out over the last few quarters, our new services have contributed more and more. One I wanted to highlight is testing; testing now contributes 5.3 percent of revenue; it has gone above the 5 percent mark. This is a service which we've introduced over the last three or four years and it's starting to yield results now.

In terms of geographical data, North America contributed 55.2 percent of revenue, and Europe 22.2. Consequently, we have invested in Europe and Asia Pacific so that our dependence on U.S. revenue keeps on coming down. It seems to be working, because Europe has increased from 20.3 to 22.2 and North America has come down.

By project size, (indiscernible) have come down from 30.6 to 29.7. Again, this is too early to say whether this is a trend or not but in long-term relationships, clients tend to give more and more (indiscernible) projects rather than fixed-size projects because they're quite comfortable working with Infosys and they want the flexibility to look at changes during the course of the projects and not go through a cycle of re-estimation and things of that kind. So that's clearly reflected. It's too early to say whether this is a sequential trend or not.

Our efforts and utilization continues to be in the range we would like it to be. We have already stated that we want utilization to be in the high 70s to low 80s. Our (indiscernible) is 79.7, and our (indiscernible), including training, is 73.4 percent. This has gone up because of less trainee recruitment this, quarter. Overall, we've recruited 2,300 net employees and about 3,200 gross employees. Our on-site personnel base has come down further from 30.5 percent to 29.4 percent and also, it has increased to 70.6 percent from 69.5 percent. As I said, the employees, total number of employees recruited in this quarter was 3,233. Of this, 746 employees were (indiscernible) employees, our experienced people. The total trend is about 28,000 employees across the globe.

Our attrition over the last 12 months is 10.9 percent; it has increased slightly from 10.45. We believe it's still one of the lowest in the industry in India, and we see that Infosys continues to be an employer of choice, because we have been able to add a significant number of employees in this quarter.

Thanks, and let me know hand it over to Mohandas.

Thanks, Chris. Let me take you through the numbers. As you have seen, year-on-year growth of topline revenues, 43.8 percent; gross profit up at 45 percent; net income up by 43.1 percent; basic EPS up by 40.91 percent. Quarter-upon-quarter growth is 10.6 percent sequentially in terms of revenues, 11.6 in terms of gross profit. Net income is up at 7.8 percent. So, net income is up only 7.8 percent because we have a negative other income at $0.24 million as against $3.56 million. We had a negative exchange difference this quarter of $6.78 million as against a negative of $3.10 million. This has impacted our nonoperating income, which is negative this quarter as against a positive 3.56 million last quarter. Therefore, our basic EPS has gone up by 6.9 percent to 51 cents.

In terms of -- if you look at the tax rate, the tax rate has gone up by 8.3 percent as compared to the revenue growth of 7.6 percent, and growth in income before income taxes of 7.8 percent. The tax rate is at 15.3 percent to pretax. The reason is that we had to factor in the decline in other income, which comes to an effective tax rate of 1.3 percent on pretax income.

Now, thank you very much. I will hand over to Nandan for the guidance.

Thanks, Mohandas. Based on all of this and based on an analysis of our pipeline at kick-off, we are now essentially saying that, for the quarter ended September 30, we expect net revenues in the range, on a consolidated basis, in the range of 357 million to 360 million. This, on a year-to-year basis, is a growth of 42 to 43 percent. Consolidated earnings per ADS is expected to be 33 cents per ADS. This is a year-to-year growth of 32 percent.

For the fiscal year ending March 31, '05, we expect consolidated net revenues in the range of 1.476 million to 1.485 million, which is a year-to-year growth of 39 to 40 percent. We expect consolidated earnings per ADS to be $1.37, which on a year-to-year growth is 53 (ph) percent, and that is the guidance that we have given as of today. Now, this is all ADS post the spit, so this is as per the new ADS instead of being traded out debt (ph).

With that, we come to the end of the formal part of our presentation, and we will now throw open the floor for questions.

Go ahead, Frank. We will poll for questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Julio Quinteros.

Good afternoon, gentlemen. This is Julio Quinteros from Goldman Sachs. I wanted to ask a question. Maybe either Chris or Nandan, you can addresses this one. Strategically, can you talk to us about the focus going forward, specifically with regards to new client additions? Should we expect to see you guys focus more on penetration, cross-sell and sort of existing client base, as opposed to the addition of net new labels? Can you kind of address where the focus is for you guys, specifically as it relates to addition of net new clients versus and increased penetration of your existing client base?

Actually, we are doing both, because you see, we have a very clear strategy of increasing our footprint with each of our customers. Today, we have 141 customers that do $1 million or more of revenue. We think that, in many of these cases, we really have a very small part of their services spending pie. We will systematically go into these customers; we will understand how they spend and we will try to make sure that we garner a larger part of the revenue. We will do that by often going to them with new services that we have, like consulting and testing and SI and (indiscernible) management and so forth.

The second part is we will focus on new sales. In fact, our whole client facing group actually now has two kinds of people; one are called engagement managers, who work with existing customers to harness the full potential of the customer; the second is sales people who really go out there and try to get new customers. We believe that, at $1 billion going to 1.4 billion in one year, we need to do both to achieve our strategy goals.

Can you tell us, Nandan, specifically how many engagement managers you have and how many sales people you have? Have you disclosed those numbers?

Basab will answer.

This is Basab Pradhan. We have roughly 253 exactly, people in client services, all told -- roughly 175 in engagement management positions.

Thank you. I guess my final question then relates to some of the softness in the software numbers that we had seen last week. There's been a couple of pre-announcements. I know that SAP came out at the end of the week and they had good numbers. Can you just talk about, generically, Nandan, about how we should be viewing the weakness in some of the spending trends within the software world, say, relative to your business, which obviously hasn't missed a beat, and also relative to the guidance that you're giving, going forward?

Well, again, I think there is a very subtle, secular shift happening in the marketplace. I think, if you look at the whole IT infrastructure, starting from hardware through the OS through the inner (ph) system software through application software through service and solutions, we think that the value that the customer is paying is migrating to the services and solutions part of this stack. Therefore, software I think is increasingly getting more and more commoditized. This is partly happening because full service providers are giving software away free to get the solution and service capability. It's happening partly because of the open-source phenomenon; it's happening partly because of (indiscernible) of previous licenses by companies who still have committed a lot of licenses of packaged software. So, I think there's a number of systemic problems that affect that sector.

We believe that, going forward, the value is going to migrate more and more to services and solutions, because the stuff below that is going to become commoditized (ph) and customers will try to make the costs of infrastructure and basic software as low as possible and invest all their surplus disposable dollars in better solutions and better services. In that sense, I think there is going to be a different behavior pattern for different segments of this stack, which is why you are seeing such results from the software companies, but as we are revising our guidance for 40 percent growth.

Mashi Petri (ph).

Good morning. Mashi Petri (ph) from S.G. Cowen. I wanted to focus a bit about margin trends. Operating margin had a sequential uptick this quarter. I wondered if this is sustainable, going forward; that's number one.

Did your operational -- did your financials this quarter include any spending or any CapEx on your recent initiative to build a consulting operation in North America as well?

Then finally, I just want to get an update on the status of this ongoing buildup of your new consulting unit in the U.S. Maybe we can talk about headcount and maybe we can talk about pipeline as well.

I will answer the question about the margins. Margins have grown sequentially by 11.9 percent. The gross margin is at 43.4 percent as against 42.9 percent. The salaries have remained almost constant. Overseas travel has gone up; that's because we invested more in getting the visa starting October 1. Our depreciation is down from 4.8 percent -- (technical difficulty) -- 3.5 percent and that has given us a decline of 1.3 percent. But the entire increase in margins is due to the depreciation going down from 4.8 percent to 3.5 percent. Otherwise, I would say that our gross margin has been flat.

The SG&A has remained at 14.7 percent as against 14.6 percent the previous quarter, so operating income has gone up by 12.2 percent, as compared to the previous quarter, at 28.7 percent, up from 28.3. So all of this is studies of financial figures, both at the gross margin level and operating income level. The biggest impact positively has been the decline in depreciation from 4.8 percent to 3.5 percent, and that has resulted in operating income going up by 0.4 percent.

Going forward, we have built in a flat operating margin growth because we've not built in any pricing increases. Within these consolidated figures, we have accounted for the losses of our subsidiaries of about $900,000 at Progeon, $224,000 in China and $770,000 in Infosys Consulting. So overall, nearly $2 million losses at subsidiaries have been factored into our consolidated figures. Chris?

Yes, the CapEx for consulting is a subsidiary company is consolidated into our financials and we are proud about $770,000 of the losses.

This is Chris. Our consulting, at this point, is for first on building the leadership team. We were able to recruit Ming Tsai, who was heading the IBM Global Services retail practice, and he has joined Infosys Consulting. We have added a couple of more people, so today, the spend has gone up to eight and they also started the first project. We have not got any revenues yet, because the billing will start now, but the first project also has been started. There's a good pipeline building up and we hope to convert many of those into projects on an ongoing basis.

All in all, we are happy with the progress we've made with Infosys Consulting to date. The project which we are executing to date is a joint project with Infosys Technologies, the downstream work also. In that sense, it is a good pilot of how we will execute to deliver on consulting and downstream work.

George Price.

George Price from Legg Mason. I guess the first question is just to follow up on the previous questions around enterprise software. Do you see the enterprise software companies being more or less aggressive say than a year ago, in going after the services revenue, based on your comments on commoditization of software?

Well, I think my sense is that not at the moment. I think what is going to happen actually is that part of the reason why enterprise software hit a lull was the huge cost of implementation using the traditional income banks, because for every dollar that companies spent on software, they were spending 3 or $4 on these guys. (indiscernible) actually seeing a situation where our customers were -- made the investment in enterprise software, looking for us to give them a high value for money, effective, high-quality implementation solution. So a lot of the enterprise software (indiscernible) actually turning to us now to see how we can partner them in the market.

So at this point, I think rather than getting to the business themselves, they are looking at how they can lower the total cost of ownership for their customers by partnering with us.

Okay. I guess do you see the trend of your ability to pull traditional package implementation/integration work away from the more traditional consultant systems integrators? Do you see that trend accelerating in any way, or is it about the way it has been over the past several quarters?

Package implementation is one of our fastest-growing service lines. In the last quarter, package implementation has come down a little bit as a percentage of revenue but overall, in the last 12 months, package implementation has gone up from 12.2 percent of revenues to 14.8 percent of revenues, so it has grown. Sequentially, there is a small decline on package implementation, but it's not a trend. We believe that we're taking business from the traditional incumbents in this area.

Okay. I guess what do you think the growth rate, say over the next year or two in the North American market, is? I know, just over the past couple of quarters, the North American growth rate has slowed down a little bit and still growing nicely obviously but -- and Europe obviously is starting to pick up. You know, is North America maturing from an offshore perspective? What's your outlook for Europe over the next year?

(indiscernible), we are investing in sales and marketing more in Europe, Asia Pacific, et cetera. We also did an acquisition of exports in Australia, so as a percentage of revenue, North America has come down from 73 percent to 65 percent now but it's still growing, as you said.

Last question -- you mentioned -- talked a little bit about the recent strengthening in demand and distinguishing between the healthy demand environment broadly but also the company-specific changes to your model. I guess, on the macro side on just the demand environment side, has there been any recent driver or drivers that you can pull out to accelerate things recently? Thanks.

Offshore has become mainstream today. Even with all the debate about offshore, the backlash and things like that, we have seen growth in the last few quarters and it has become mainstream today. It is an integral part of any IT strategy of any large company. So, that is the trend we see today. This has also expanded into business process management. Many of the companies are looking at how do you go to the same vendor partner for both IT as well as BPO. That's the reason why Infosys is playing in that space.

We are also seeing early signs of looking at (indiscernible) management services remotely from locations like India. So the secular trend is offshore becoming mainstream, offshore becoming part of the IT strategy of any organization.

Trip Trawdry (ph).

Hello. First on, congratulations on a very good quarter here. It also seems like you are getting the Who's Who of the consulting world.

I was just wondering, you know, you had about 29 new customers here. How much of those do you think may have been because of your building the Consulting team? How many of those new customers may be driven because of that?

As we said earlier, right now, we basically have no revenue but one project win, so of these 29 customers, none of them are through Infosys Consulting and really, it's very early days. We have been busy building out the team there and we've made several very important hires and we're building our pipeline. So in the quarters to come, that may be a good question.

Also, you did expand your presence in China. Any (indiscernible) like (indiscernible) or projects (indiscernible) that branch of your company may be doing?

Not yet. As we have already told, we're looking at China from two different angles; one is the resource pool of our developing projects out of China to the clients all over the world; the second is the ES (ph) space in China is what we want to focus. We are in discussions with our existing clients. Many of them have shown a lot of interest for delivery out of China. This quarter probably, we will start delivering for two projects for our existing clients, worldwide (indiscernible) China (indiscernible).

The ES team is getting strengthened there and we're going to focus on ES space to generate some revenues starting this quarter.

Again, congratulations.

Mayank Tandon.

Good morning from the U.S., Janney Montgomery Scott. I just had a question for (indiscernible) regarding the rupees impact. Could you walk us through -- I may have missed this if you said this before -- but how the rupee impacted your operating margins and your earnings in general.

During this quarter, we have seen the rupee appreciate by about -- rupee depreciate by about 1.4 percent. The average rupee/dollar rate for quarter four was 24.68 (ph) rupees to a dollar and average for this quarter is 45.31. Those (indiscernible) rates of 43.1 and 45.99.

The impact on operating margin has been to the extent of 0.6 percent. It has been a positive impact, but the net impact overall, because of the fact that we've had forward contracts at much lower rates and you need to mark them to market, has been negative at $4.86 million. So, we've seen a turnaround of $4.86 million from whatever was the position last quarter to this quarter. The negative impact has been 1.5.

Going forward into our guidance, we have built in a rupee/dollar rate of 45.67 for purposes of guidance. This basically means that we get more rupees to meet our local rupee expenditure every time we bill in dollars. When you translate back into dollars for purpose of reporting under U.S. GAAP, the Indian rupee expenditure becomes less in dollar terms. So overall, net/net, means that there is a benefit and out of the benefit, we're spending about $21 million on additional investment back into the business. The benefit is estimated at the cost level at around maybe about $30 million, and we are spending $21 million out of that in terms of going back into our business so that we could escalate growth drivers, going forward. Because remember that our functional currency is the rupee and if the rupee were to appreciate, in dollar terms, it means that the rupee expenditure becomes more; if the rupee depreciates in dollar terms, it means that the rupee (indiscernible) becomes less when you translate.

Right, okay. So in just going back to this quarter, you said 1.5. Is that 1.5 million or 1.5 percent net negative impact?

1.4 percent of revenues.

Negative impact?

Yes. No, it's a positive impact

Okay, for the Company as a whole?

No, let me explain again. The rupee depreciated by 1.4 percent. It lead to a 0.6 percent positive impact on the operating income.

Okay. On a net basis for the Company total -- (multiple speakers)?

On a net basis for the Company, it was a negative impact of $4.86 million. Because if you look at other income, the exchange differences were negative this quarter as against the lower negatives the previous quarter.

Okay, I'm clear. Also, Mohandas, could you comment on the receivables? The number ticked up a little bit relative to the last quarter. Is that just a one-quarter phenomenon, you know, one (indiscernible) client related or is there a trend here?

I don't think there's a trend here. It's just that the milestone (indiscernible) for fixed priced contracts happened to be more in this quarter. In the last month of this quarter, we had a much higher billing and that is, of course, not collectible. But if you look at the quality of the debt, the quality of the receivable, you find that 84 percent is less than 30 days, so it basically shows that the quality is very good; receivables more than 90 days is lower, so overall, it's not a cause of worry.

I also wanted to ask about the on-site wages, given the environment here is improving incrementally in the U.S. and that could put some pressure on on-site wages down the road, especially given the curves on H-1-B visas. How do you think about it as you model your business, going forward, in terms of on-site wage impact?

We've given the on-site wage impact of about 8 percent for our customer pacing group already and we've available competition (indiscernible) get an upside. As far as our softer development folks are concerned, there has been an average increase of about 3 percent, so average increase of -- average increase of 3 percent. You must remember that our average cost for everybody in the U.S. is about $71,000 because the minimal we pay is about $60,000. You need to add to that social security costs and the average comes to about $71,000. So, (indiscernible) market is (indiscernible) firming up; we are above the average in the market for software engineer.

Also, by October 1, we should have a large number of visas coming online. Already, we have about 8,300 visas and we have applied for about 3,000 visas and a large number of that has already, online. So from October onwards, we will have many more people who could travel abroad on their (indiscernible) Visa program.

Okay. Would you say that the pressure on on-site (indiscernible) is there or is that still not a factor really when you look at your business?

Right now, it's not factor for us at this point in time, but we need to watch what happens. The one remaining factor is that, by October 1, we will have a large number of visas coming live and that will give us greater flexibility. (indiscernible) supply increases

Now, I mean 3000 incremental to the 8000 that you have currently, right, the number of people on visas?

Well, there's approximately -- yes.

Okay. Just a final question on pricing -- I wanted to get a little bit more color on what the pricing environment looks like. Pricing picked up a little bit offshore. Is that a function of mix, or are we seeing higher prices on newer deals?

It's a function of mix. We're seeing flat pricing impact on scheduled (ph) decline by 0.9 percent (indiscernible) flat. Because of the mix overall in the blended side we have to seen a decline of minus 1.2 percent, a decline of 1.2 percent. So, it's staying flat at this point.

Given how strong demand is and Nandan talked about raising guidance in the pipeline, one would think that there would be some pricing leverage in the business. Can you maybe talk about why we're not seeing the pricing leverage, given how strong demand is?

Actually, if you look at any kind of (indiscernible) survey that's been recently done, the IT spend, growth in IT spend for this year at 3.2, 3.3 percent is just a tad higher than last year's 2.2, 2.3 percent.

The other thing that you will notice in those kinds of surveys is that the pricing environment is by and large stable and especially on the outsourcing side of things, the pricing is expected to be stable according to those surveys. That's exactly what we're seeing in the market; pricing in the market is very stable. It will probably take a little while for the excess supply to get mopped up before there really is any significant impact. There's a lot of competition as well, and that keeps things on and even keel as far as pricing is concerned.

Okay, thank you. Great quarter.

David Grossman.

David Grossman from Weisel Partners. Mohandas, can we just go back to the margins just quickly? It looks like sales and marketing was flat sequentially but obviously, it's down from the trend last year for the first three quarters of the fiscal year. You talked about depreciation being down. Could you maybe just expand a little bit on what's going on in the sales and marketing line and just what are some of the underlying reasons for depreciation being down so much? I'm not sure if that was sequentially or year-over-year, but again, why the depreciation numbers are down and how sustainable that is?

David, yes, last year, quarter-upon-quarter, we had the rupee appreciating and the last quarter of the last fiscal, it really appreciated by 5 percent. This year, in the first quarter, it has come back by 5 percent, depreciated down by 5 percent, so the fourth quarter of last year and the first quarter of this year, we have had losses in exchange differences but going forward, in our projections in the guidance, we assume the rupee/dollar rate of 46.67 as against a rate of 46.99 as of the last quarter end. We're seeing this rate -- it basically means that, compared to a guidance of 43.4, we are seeing an increase in the rupee/dollar rate and that should give us higher profits in rupees. It should also give us a benefit because the rupee expenditure, when it translates back to dollars, is much less.

What we have done, David, is that in normal circumstances this quarter lead to an expansion of the margin, but we have decided that the extra money that we get in rupees we will spend on enhanced marketing, enhanced solution creating and enhanced capacity building within the enterprise, so that we will have many more engines of growth; we will enable these engines, going forward. So essentially, we're looking at flat margins with flowing back about $21 million of the benefits back into the business.

Right. I guess specifically though on sales and marketing, I assume those are mostly dollar-denominated expenses and your depreciation is largely rupee-denominated. So I guess I'm wondering, A, if the rupee worked against you I think last quarter and for you this quarter but as a percentage of revenues, sales and marketing have stayed relatively flat but down substantially from where it had been. So I guess again, I'm wondering what the underlying dynamic is there, independent of currency, and I guess the same for depreciation.

Well, the (indiscernible) marketing is almost flat sequentially, but here what you are seeing (indiscernible) marketing is essentially in dollars, but G&A is in rupees. Part of the cost of revenues is in rupees and then we get the benefit and that benefit is going to be flowed back to be spent in dollars. A large part of this expenditure of $21 million is going to be spent in dollars (indiscernible). Five million of the 21 million is going to be spent on our banking group in terms of the enhanced R&D and product development. We're going to spend that back in dollars outside India to create a solution capability.

I see, okay. Maybe if we could just take a look again at the revenue growth, it looks like you are -- (multiple speakers).

David, sorry, I missed one of your questions, why the depreciation has gone down, yes. I'm sorry, I'm not able to hear it clearly. Depreciation has gone down from 4.8 percent to 3.4 percent, it's true, but you will notice that every quarter in the first quarter, depreciation is less than the fourth quarter of the previous year. It's a natural occurrence because we have a two-year time limit for amortizing of technology assets and since the amortization comes to an end every two years, what happens in the first quarter depends upon the capitalization two years ago.

Also, we have the amortization policy that assets costing less than $100 apiece is charged to the revenues the same year on a pro rata basis. So, if you buy those assets in the second and third quarter, the charge is much higher. So, we will see the percentage of depreciation going up in the second, third and fourth quarters, compared to the first quarter, on account of account of the enhanced capitalization and also because of the impact of purchases made earlier.

Okay. Looking at just the revenues, the unit growth has been substantially outpacing the revenue growth, and you talk about flat pricing. Can you just help us understand what components of the mix (inaudible) into that dynamic?

David, I didn't catch the question.

It looks like your unit growth is tracking at over 50 percent while your revenues are growing slightly over 40 percent, and it sounds, with flat pricing, that that's probably attributable to mix. I am wondering if you could just help us understand what's going on in the mix that is leading to that dynamic where unit growth is substantially outpacing revenue growth.

David, we're seeing an enhancement of the offshore going up because it is in our interest to push work offshore, and we have been pushing work offshore. You'll notice that, in the previous quarter, the on-site revenues went up in double digits. This quarter, the offshore revenue has gone up in double digits. The reason is that we have this (indiscernible) develop more work offshore and we've seen an increase in that.

Going forward, we would expect our volume growth to be in tune with our topline growth because we expect flat pricing. It's quite possible that, quarter-to-quarter, there could be some variation in our pricing, within our revenues and volumes, and that could arise because of sequential growth rates for differential business lines.

Just one last question, just a follow-up on (inaudible) few questions earlier. It looks like you were flat sequentially in ERP-related revenue, which obviously is a shift from where you had been growing. I think maybe it was Chris who said that you don't think that it's an ongoing trend. Maybe you could talk a little bit about what happened in the quarter and why your European revenues were flat, and where you saw pretty strong sequential growth throughout the rest of the business.

The package implementation business is much more transactional than the maintenance or some of the other services we have. So quarter-upon-quarter, there could be slight variations because some projects have come to an end and will take a little bit of time to start another project. So, if you look at over the last 12 months, package implementation has gone from 12.2 percent of revenues to 14.8 percent of revenues. You know, it's been going up constantly, so (indiscernible) year 2004 package implementation was 14.5 percent of revenues and this quarter, package implementation is 15 percent of revenues. So, we see that package implementation as a growth area and based on the pipeline, based on the business inquiries we're getting, we feel that that will continue to be a growth area for us.

Did you see anything, though, hit an inflection point in the quarter, relative to the ERP business in the quarter, in terms of bookings and demand trends?

It's more because it's much more transactional than other businesses, that's all.

Thank you very much and congratulations on a nice quarter.

Sameer Nadkarni.

From WR Hambrecht. Congratulations on a great quarter. Most of my questions have been answered; I do have a couple left over. I wanted to get your thoughts first of all on the -- I know your guidance is based on a certain rupee exchange level. I'm just curious about your thoughts on the rupee exchange trends, going forward, and then the risk of potentially the rupee appreciating back to something at the 43.5 or 43 level. That's my first question. I do have one or two follow-ups after that.

We're taking the rupee conversion rate at 43.67. As far as the chance of the rupee appreciating, we have spoken to many analysts here. People do feel that the rupee will move sidewards in a very narrow range for the next couple of quarters. The reason is that we have a government which is left of center right now, and they're some issues about falling investment floors; there are issues about divestment. Last year the rupee appreciated because we had about 12 to $13 billion of foreign institutional flows coming in, which are now not coming in in same quantum (ph). Quantum is a number that dollar interest rates are rising outside India and this obviously is an attractive investment avenue for all these points.

So most people are certain that the rupee will be moving sidewards with lesser possibility of any appreciation over the next few quarters. I think we shall monitor that on a quarter-to-quarter basis and we have accepted this argument for our guidance.

Okay, great. On the new accounts, you had mentioned new sales teams and also the organizational structure is getting more streamlined with more decision authority sort of moving into the integrated business units. I'm just curious. As you work with the newer accounts, is there any change in terms of the size, the complexity or any other aspect of the initial projects on which you engage with these accounts, the new accounts?

I think, as a secular trend, we're seeing an increase in both size and complexity of deals that are on the plate, that we did for, both on the consulting system integration side, as well as the outsourcing side, so I think that's a secular trend. The reorganization and the restructuring and adding into this consulting are our new model on outsourcing (indiscernible) model, global outsourcing. All of these things improve our ability to address these larger, complex deals. We hope to be able to keep improving ourselves and our ability to win them.

The last one is, in terms of your -- obviously, you have a strong market presence but as you compete with the incumbents, U.S.-based vendors, what kind of change are you seeing, if any, in terms of your ability to be invited, your participation in the broad range of projects out there? Do you feel like you are present in the broad range of projects there or do you feel like you still need more coverage, either from a field standpoint or from other aspects, to be able to participate in the broad range of projects (indiscernible)?

With every quarter, we are improving our ability to gain access to the right decision-makers who make decisions on these kind of large, complex deals, as well as our market presence, our brand salients, everything is -- every quarter, we see some new things that we haven't seen in the past. We see this thing only increasing. We are going to be competing against the incumbents more and more as we go along, no question.

Great. Thanks a lot, guys, and congrats again.

Nick Dylan (ph).

I just want to ask you a quick question on staff attrition. You've seen it consistently rising over the last year and it's now 10.9 percent on a trailing 12 months basis. Where is that on an annualized basis? Has that settled down now or is it still sort of rising as the trailing 12 month figure is?

Secondly, if you could talk about the sort of tax rate you expect for the rest of the year as well, please.

This is (indiscernible). I'm the (indiscernible) for Human Resources Development. For the last 12 meant months, attrition is at 10.9 percent. It's a very marginal increase from what we reported last quarter at 10.45 percent. There are various reasons for attrition. They continue to be to other companies, higher (inaudible) and personal reasons. Also, we find traditionally that in the quarters one and two, when our employees pursue higher studies, the attrition trends are usually slightly higher than in the quarters three and four. Industry attrition rate in India right now is running at about 20 percent according to (indiscernible). Some of the leading players are reporting numbers in the range of 17 to 18 percent, so we are following the trend of traditionally being half of the industry's attrition in reporting figures of 10.9 percent.

Sorry, the question was you've seen 12-month trailing attrition go up from 7.9 percent a year ago, 9.1, 10.0, 10.5 to 10.9. Where do you guys see these going to and what is the current annualized figure?

Current annualized figure, if you take it only for the quarter one, is 11.7 percent. That is only quarter one annualized for four quarters.

So where do you guys see the 10.9 going to? Are you expecting it to continue to trend on upwards, I take it?

We don't see a very significant --.

It's very difficult to say. All we can say is we're trying to do everything possible to keep it as low as possible. When we compare to industry averages, we are much, much lower. The environment has changed to an environment of high-growth and that also pushes attrition. A year back, you have to remember that the industry was growing much slower and there was all-around talk about where is industry going, et cetera. Today (indiscernible) we've seen 40 percent growth I think for that, so the environment is very different right now and that's why the attrition has gone up a little bit.

The tax rate for the full year?

Going forward, we assume the same tax rate as we spoke about in the guidance, of around 14.5 to 14.7 percent on pre-tax.

So you're expecting quite a step-up in the second half of the year on tax? Okay, thank you.

Thank you, everybody. Mohandas, there is one off-line question on the other income line which has come in at minus $236. Can you break that out in terms of -- (multiple speakers)?

Yes, Sandeep, interest income is $5.91 million positive. Others is (indiscernible) is $0.62 million positive. Exchange difference is $6.78 million negative. Whereas last quarter, we had $6.31 million positive for interest, others were $0.54 million positive, exchange difference of $3.10 million negative and provision for investments of 0.18 million negative.

Thanks a lot.

Any last comments, Nandan?

Thank you, everyone, and we will see you on time in the next quarters. Thank you very much.

Thank you, ladies and gentlemen. This marks the end of this call. We will be in touch again during the quarter and early October for next quarter's earnings. Thanks.

This concludes our conference for today. You may all disconnect at this time.