Infosys Ltd (INFY) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Infosys Technologies investor conference call for the quarter ended September 30th of 2004. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Sandeep Shroff, General Manager of Investor Relations. Mr. Shroff, you may begin.

Thank you. Good morning and hello, ladies and gentlemen. Thank you for joining us to discuss the results of our quarter ended September 30, 2004. I hope all of you have had a chance to look at our press release and our fax sheet that are also posted on our Web site at www.infosys.com.

I have with me today from a conference room in Bangalore Nandan Nilekani, President and CEO of Infosys, and the members of his senior management team. We will begin with some comments from the management on the results of the quarter, and then we will open up the call for questions. Before I hand over the call, I have one duty to perform -- reminding you that anything that we say today investments for outlook (inaudible) is a forward-looking statement and suggests to this (inaudible) our filings with the SEC. These filings can be accessed at the SEC's Web site at www.SEC.gov.

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

Thanks, Sandeep, and I would like to welcome all of you to this call, the analyst call for the second quarter of FY 2005. We are happy to announce the results. We have revised our guidance upwards. We expect now that our revenue for the year is going to grow at between 46 to 47 percent.

For the second quarter, our revenues were at $379 million, which is up 51 percent from the corresponding quarter in the last fiscal, and our earnings per ADS has increased to 36 cents from 25 cents in the corresponding quarter last fiscal year. This is after existing for the two-for-one stock dividend which we did in July.

This quarter also has some notable landmarks. We added 32 new clients across Infosys and all of its subsidiaries. This quarter was a record in terms of new employee addition. We added 5010 net employees for the quarter, taking the total employee spend for Infosys and its subsidiaries to over 32,949 employees. We believe that the growth that we have shown and the growth that we have forecast for the year is proof of what we have been arguing for quite some time, that offshoring is now a megatrend in the industry. And as more and more companies leverage their relationship with Infosys to increase their global competitiveness, we think that this is a trend which is going to continue, and not only as a trend which is going to help Infosys to grow, it is also a trend which has good implications for the current structure and formation of the industry.

At Infosys our focus is on combining scalability and you saw the various regular scalability; the number of people we hired; the fact that we're building 3.5 million square feet of office space; the fact that we process a million applications; the fact that we hired 5000 people in the quarter -- they are all instruments or they are all metrics that measure our scalability.

But just as we are using scalability to establish rapid growth, as you are aware, we are now focusing on creating better business value, better client value through differentiation, as well as you know we have made a number of investments, the most prominent being the $20 million investment in Infosys Consulting which will enable us to create what we think is a template of the company -- the future, which is something that combines the best of global delivery, the best of world-class consulting.

So I think this quarter's report, this quarter's results, is one more reaffirmation of our strategic intent, one more reaffirmation of the offshoring trend, and I think it's also reaffirmation of the Infosys ability to execute with excellence in all dimensions towards business.

With this, I will ask hand over to my colleague, Kris Gopalakrishnan, to say a few words and then hand over to Mr. Mohandas Pai.

Thanks, Nandan. Looking at geographical breakup of revenue, Europe and rest of the world continues to be our focus areas in terms of growing non North American revenue. In the last 12 months, Europe has gone from 18 percent of revenues to 21.4 percent of revenues. Rest of the world has gone up from 6.5 percent of revenues to 11.7. Rest of the world contains Infosys Australia, and we did an acquisition in Infosys Australian.

Our (inaudible) excluding Chinese is a healthy 81 percent. Including Chinese is 71.4 percent. We brought in a lot of people at entry-level who are undergoing training. The campus recruits normally join between June and September in India. There is no change in the ratio of fixed price with the (inaudible) project from last quarter to this quarter. We expect for this to be 29.7 percent of revenue.

We saw a significant increase in offshore effort. Offshore effort has gone to 68.5 percent of total effort on track, coming down to 31.5 percent. So this is as a result of proactive initiative we have taken over the last few quarters some work offshore. Offshore has benefited Infosys as well as our clients. We saw increase in the number of $40 million clients from 5 to 7, number of $30 million clients from 8 to 10, and the number of million dollar clients have gone up from 141 to 146. The contribution of revenues from (inaudible) client is 5.5 percent, so (inaudible) 21.6 and (inaudible) is 34.7 -- around the same percentage from previous quarters. So that has not increased.

We added 32 new clients this quarter. Growth has come in all the vertical industries in which we are operating. One sector which stands out is probably telecom. This has seen some revival in growth. We have significantly invested in growing this by diversifying some product companies to services companies. The revenue from this sector over the last 12 months has gone from 15.2 percent of revenue to 18 percent of revenue. We have invested about $7.5 million in various business plans; product development in the banking business unit; the (inaudible) initiative; (inaudible) initiative; (inaudible). This is about 1.1 percent of revenues in the interest half.

So we are continuing to invest in the future of the company. Nandan already talked about investment in (inaudible) of 3.5 million plus (inaudible) underdevelopment, which can take on an additional 15,000 employees. We have scaled up our recruitment training and tried to bring in 5000 employees in one quarter. This is almost equal to the total number of employees we hired in the financial year 2003. In financial year 2003 we hired about 5100 employees. So in just one quarter we have hired 5010 employees this financial year.

Mohandas?

Thank you, Kris. (inaudible) $378.6 million as against 334.6 -- a sequential increase of 13.1 percent. Gross margin for this quarter was 43.6 percent as against 43.4 percent the previous quarter. We did not see a trend in increasing gross margin, except to say that there has been a slight uptick due to many reasons, one of which is the fact that all work has moved offshore.

SG&A expenses are at 15 percent as against 14.7 percent. Sales and marketing has gone up to 7 percent as against 6.8. G&A is at 8 percent as against 7.8 percent of revenues the previous quarter. Traffic in G&A is primarily because of certain charges that we paid to a global consultant for an initiative that we had the corporation this quarter and is not a trend.

Our income before income taxes has gone up 30.2 percent as against 28.6 percent. The reason is that nonoperating income is at 1.7 percent as against 0.1. The last quarter we had a negative impact of marking to market all our product exposure hedges, which resulted in a negative income of 6.8 under nonoperating income. In this quarter we have a positive impact of $1.4 million, and that is why nonoperating income has gone up to 1.7. Operating income is at 28.5 this quarter as against 28.7 the previous quarter. (inaudible) has gone up to 4.7 percent of revenues, effectively 15.5 percent of pre-tax as against 13.3 percent because of the tax on nonoperating income. There has also been a slight uptick in the taxes scalable in India on the income chargeable to Indian corporate tax because of the (inaudible) of the government is marginal. Otherwise, we would stick to our full-year forecast that taxes will be 4.3 percent of revenues added on 14 to 14.5 percent. For the full year, we hope to see such an average.

So the story is we have had a great quarter. Margins have been stable. Pricing has been stable. We have seen a slight uptick in the prices from our new clients, and also a slight uptick because of in renegotiations with existing clients there are some contracts that come up for renewal. And in this quarter, on-site prices have gone up by 1.7 percent and offshore by 0.7 percent. We do not think this is a trend, of course, except to say pricing is stable with an upward bias. We do not see any great discounting in the marketplace at unstable prices. Pricing has been stable with an upward bias.

If you look at our guidance for the next quarter, we have said that the next quarter guidance will be between $407 to $411 million, and the reason for this guidance at $407 to $410 million, the reason for the guidance at 7.9 percent sequential growth rate in the revenues (inaudible) at 17.1 (ph) percent in quarter two and 10.5 percent in quarter one, is that in the current quarter -- that is quarter three -- there are lesser number of working days because of the Christmas holidays and there are not for the New Year. And this is having an impact of about 3.1 percent on total revenues.

We have estimated that EPS in terms of the guidance would go up to about 38 cents for the third quarter, and you would notice that the EPS tends to be equal to a net income of 34.5 percent as against 25.5 percent that is earned in quarter two. The reason for the small decline of 1 percent lies in the fact that this quarter -- that is quarter three -- we're spending $5 million more than we spent in quarter two on our business plan expenditure as per the initial indication made by us. We have stated that we are going to spend $32 million on business initiatives and R&D initiatives in our banking unit, and this is part of this. We are (inaudible) in the spending in quarter three, and that has a marginal impact on our net income. Apart from that, the prices and margins are expected to be stable.

Thank you very much, and we will now be happy to answer any questions that you might have.

(OPERATOR INSTRUCTIONS). Moshe Katri, SG Cowen.

Great quarter. I have a couple of questions. One, during your earlier call, you mentioned a 4 to 5 percent bill rate increase in the field. Maybe you can comment on that. And maybe what is your view in terms of the sustainability of some of the pricing flexibility that you're seeing in the market?

Next, it seems that we have seen a year-over-year growth acceleration in terms of North American comparisons in terms of revenue growth. Maybe you can comment on that. And then maybe you can comment about wage inflation and turnover for the quarter. And then do you have any view about wage inflation looking into 2005?

And then finally, maybe you can talk about your future plans for increasing the ADR floor here in the U.S.. Thank you.

Hello, this is Basab Pradhan, Head of Sales. I will take the first two questions. The first one was on pricing, and the second one was on the share of business from North America.

On the pricing, in the last few months we have seen new emphasis. That means emphasis with new clients. They have been done at a 4 to 5 percent premium over our average MSA rate. We hope and expect that the new clients that we signed on will continue to be at this higher level. However, our existing clients -- rate increases there will have to really follow a cycle of contracts expiring and renegotiations, and that will happen at the right times when the contract expires and it needs to be renegotiated. Our attempt at that time will be to fine-tune -- to tune those rates to come at or above the average rates for the contracts that are below them and to keep some rate increases for the contracts that are already above-average rates. So that's basically the direction we will be going in on our rates on rates immaterial to clients.

Now this does not -- I did not talk about our service mix and all the work we are doing in expanding into services that have higher bill rates and so on. That is actually being very successful, and we hope to see some bill rate increases because of that as well.

Into your next question on the share of revenue from North America, this quarter does give us a feeling that there is a bounce back in the North American business. But I would just caution before we lead too much into that, we still expect our European and rest of the world business to grow faster than the North American business simply because of the large numbers. North America is more than 70 percent of our business.

If you look at the last 12 months' growth rate, North America is 30.1 percent growth over the same period in the previous years. Europe is 72.4 percent and the rest of the world is 127.2 percent. So that's a fair bit of difference there. We expect that to continue. We did have a quarter in the past where we had a blip in the North American business, which as we pointed out on the earnings call was due to a particular dip -- a dip in a particular client which since has been collected. So it was not really a trend there. So that as for as the North American share of business is concerned.

I will hand over to Mohandas for the other question.

There are two questions left. One is on wage inflation. The other is on the ADR. On the issue of wage inflation, our position has been and remains based upon factual evidence that various wage inflation at the middle level because of growth, there is not much wage inflation at the entry-level. It is regularly flat. We are able to source a lot of talent; however, we need to invest in training such talent, and the situation has not changed.

As regards to ADR, at the time of the listing around the end of July last year, we had said that we will not do an ADR for 18 to 24 months from the date of the listing, and that position remains true even today. Thank you.

Mohandas, can you comment -- sorry -- about turnover, and I am all done. Thanks.

This is (inaudible). The attrition percentage is 10.8 percent for Infosys Technologies. In fact, there is a slight dip from the last quarter.

Mayank Tandon, Janney Montgomery Scott.

Great quarter. I just had one question. Mohandas, if you could, or if Nandan could talk more about the turnover at the senior level. We have heard some rumblings about management turnover across the industry across both sides, both offshore companies hiring from the multinationals and vice versa. So if you could provide some clarity on that issue, that would be helpful.

(inaudible) again. We're not seeing significant turnover at the senior level because, very much in keeping with the industry trends, people have left, if they have, to start off their own companies or to run a consulting business of their own. Some of them have joined other companies, but it is very much in keeping with the trend in emphasis in the overall number percentage. It is lower than the attrition percentage which we have at junior level. And in Tier 1, (inaudible).

Trip Chowdhry, Midwest Research.

Thank you. Congratulations on a fabulous execution here. Two questions. First, regarding the package application implementation. I was thinking if you can give us some color, like what are the customers doing? And how is Infosys adding value?

The second question I have is on your banking product. Some of my research is showing the pilots that you're running have a lot of traction. I was wondering when you think you can monetize the initial pilots? Also some competitive reaction that is maybe happening because you are entering the product rather than just field services? Any dynamics from that will also be appreciated. Thank you.

I will take the package implementation question. Our enterprise solutions practice, which is what has been entrusted with the package implementation business, is actually where we think hurt the incumbent consulting firms the most, because that is really the sweet spot of the big consulting system integrators.

We have in the past few years that has been one of -- actually the highest growth service. It is now also one of the two largest units, practices in the Company. We have basically created a model of delivering package implementation in the global delivery model, which is extremely disruptive to the incumbents. There is a huge play there on the bill rates that they have and the bill rates at which we can make handsome margins, and we're taking full advantage of that. And this is across the board. All the industries and all geographies.

Shibulal, do you want to add anything?

Yes actually. This is Shibulal. I will add the fact that we do full end to end implementation. We do commercial upgrade, and we also do multicountry rollout for some of the customers, and we have operations across the board. It is all global rollout, and it also was standardization of one single template in multiple countries and localizing them for the local needs.

And in running your banking products? When do we think the pilots can be converted to moneymaking machines?

Our banking business unit has been in existence for quite a number of years. Products constitute 2.9 percent of revenues, and that is a very small group within the Company.

Having said that, we are making significant progress. It is one of the leading banking products in India. It is over 70 percent market share in the large banks. It is also gaining market share in certain geographies and developing markets like Sri Lanka, Napal, Nigeria, and Asia and (inaudible) markets, and also moving into developed markets like Europe and the U.S..

We are investing in this project. We are investing about $10 million in internationalizing this product for the developed markets and adding new features. And in the product face, the revenue recognition happens as the product is implemented and used. So there is some sale to the product revenue. Plus, of course, we get maintenance revenue from the product also.

Excellent. Thank you.

Jonas Vassey, Jefferies.

Terrific quarter, gentlemen. A couple of questions here.

Clearly from topline acceleration here this quarter, if you could comment on if you're seeing any leverage in the topline this quarter perhaps from maybe some bill rate increases passing into the business, or was the topline strictly linear growth?

And then secondly, if you could comment a little bit on the mix moving offshore, if we continue to see that as a trend and what would be driving that?

And then thirdly, if we could talk a little bit about if you're seeing any more business risk to the business given the significant hiring this quarter and the ability to manage so many new programmers kind of on a headcount basis?

This is Shibulal. I will comment on the offshore part. There has been a lot of focus on moving less offshore over the last few quarters, so the impact on the sales saw a lot of activity which evened out over the last two months. We also believe that that is the only way we can add higher and higher value -- one of the ways to add higher and higher value to our customers, as well as to emphasis.

It is also important to note that some of the new services like testing, which is predominantly offshore-centric where we can have offshore effort of maybe 80 to 90 percent, is growing at a faster pace. If you look at it last quarter, testing was about 5.3 percent of the revenue. This quarter it is about 5.7 percent.

So the portfolio mix (inaudible) focus more on offshore has been centric in the current number.

You asked a question about the pricing impact in this quarter's revenue. But on (inaudible) prices have been up by 1.7 percent sequentially. Offshore has been up by 0.7 percent. However, since more work has been done offshore because of volume growth at 15.3 percent offshore as against 7.1 percent on-site, the blended great has slightly come down because the mix has changed.

So it essentially means that offshore revenues sequentially have grown by 16.1 percent for software services. On-site revenues have grown by 8.9 percent. The revenue for services has grown to $358.33 million out of $379 million, the balance coming from products and the BPO business. So the revenues have grown by 12.2 percent sequentially, and there has been an uptick in the pricing.

Now, regarding the last question on risk because of our size, we have been doing a lot of things over the years in terms of creating systems, processes to scale the organization, to manage the growth from quality systems -- the use of quality systems -- the use of systems to manage every single processing during our software development process instrumental to training, etc.. The creation of a theater of managers and leaders through our internal training program. We have three separate training programs. One in terms of technology and methodology, second in terms of manager training and third in terms of leadership training.

So we have looked at what possible risks as we scale up and we have tried to create an organization which can scale up. And the proof of the pudding is in the (inaudible) rate. So you can see that we have been able to recruit 5010 people. Assimilate them. We have been able to maintain the margins and have significant facilities in work in progress. I am talking about work in progress.

Our repeat business is also very high. 96.3 percent is repeat business.

Thank you and then maybe just one quick follow-up. Clearly a very large net higher number here in the quarter. What would your expectations be on transferring these people to billable assignments and what kind of timeline might we be looking at?

Most of them undergo 3.5 months training after they join the Company, and then they get absorbed into projects over the next three to six months where they learn the business.

David Grossman, Thomas Weisel Partners.

Thank you. I am looking at the guidance vis-a-vis the actual results for the quarter. Can you help us understand was the upside just conservatism entering the quarter with some concerns perhaps around the U.S. election and how that may impact the (inaudible)? Or perhaps you can give us some insight into your guidance vis-a-vis the actual results for the quarter?

David, this is Kris. Currently maybe the clients are reluctant to talk about what they are doing, but we can see from the growth numbers that they are significantly moving work to offshore either to the work they do with Infosys or setting up captive units and things like that. So businesses have increased offshore in a big way, and it is primarily due to the economic benefit they derive without any loss of quality. It increases the flexibility. All the normal reasons why this has become a big trend today.

We are not seeing an impact on the business. So in the public eye this is being difficult in the particular (inaudible).

So you did not see anything particular in the quarter that led to higher results that would be driving the acceleration of the trend offshore in your business, other than I guess the pricing increase that you talked about earlier?

Yes, we are not seeing negative. It is always possible that something could trigger some legislative changes are things like that. No, you can not completely predict this thing to control this thing.

So that risk is always there. Public opinion can change or influence business in the future, but right now we do not see anything.

Maybe, Kris, you could talk a little bit about the H1B situation? Obviously it looks like the (inaudible) allotment may have been absorbed immediately in the new fiscal year and obviously you have a pipeline of visas to accommodate your growth this year. But just looking into fiscal '06 and beyond, can you help us better understand some of the options available to you, if, in fact, the H1B visa situation becomes a gating item?

Yes, it is an interesting situation. We have anticipated in some sense that at some point it will get exhausted. In the last year, I think it went through February. This year on the first day it got exhausted. Also, the numbers have come down. It affected the availability of about 58,000 or 59,000 since available.

We have the requested number of results for the next 12 months right now. The utilization is about 55 percent in terms of the total number of visas we have, so we have some flexibility here. These visas are valid for three years to six years, so there is some flexibility.

Going forward we have to plan. We have to prepare ourselves. What we have done is started up our scalability initiative. We have created systems. We have captured every employee's employment data electronically so that visa applications can be filed or printed in the U.S. online, etc., and we use the time taken to apply. Then it goes into the processing and things to that, and that takes its own time. But whatever we can do internally to prepare ourselves, we have done.

What is it? I guess specifically should we expect if, in fact, the demand for visas continues to increase and the limit does not go up, what is it that you can do to kind of mitigate the impact of your available visas going into -- as we get through fiscal '06 and you absorb a lot of the backlog or inventory, if you will, of visas that you have on-hand right now?

One, of course, you know we prepare ourselves in trying to anticipate the plan. But normally a longer-term trend would be that more businesses will move offshore. Our offshore effort could go up. We would be recording more employees in the local markets, which we are already starting to do. We are doing campus recruitment.

One clarification I want to do, portability does not come under the capsule. You can move a person from one location to another location and things like that. Flexibility is available. If you're recruit an excellent person in the U.S., you can move his or her visa to the new company. So that flexibility is also there.

So there are some flexibilities built into the (inaudible) itself. But I think the consequences would be companies in the U.S. embracing offshore (inaudible) in a significant way, maybe working with companies like Infosys setting up captive units. Some of the companies are faced with a situation that they are not able to recruit in the campuses because they cannot get an entry visa for the person.

So what happens is now instead of recruiting in the U.S. they will recruit in India and set up offshore facilities, offshore (inaudible), etc.. That could be an unintended consequence of limiting (inaudible) visas. (multiple speakers).

There is also pressure from the industry in the U.S. to India as a limit to (inaudible).

Actually can you just provide us an update as of the end of September what the number of visas you had both in inventory as well as in process?

We have about 11,000 visas, which is including (inaudible), etc., and currently (inaudible) is about 55 percent.

Okay. Wondering --?

At any point, David, we have about 30 percent of the employees outside on projects, short-term assignments, etc.. About 65 percent of our business comes from the U.S., so you can calculate how many people it comes to. It really comes to about 6000, so that is the 65 percent.

Okay. Thank you. And I am wondering, Mohandas, looking at your guidance for the year, I assume that is basic EPS guidance. Is that correct?

Yes, David. We always give basic EPS because the --

So would that nominally kind of adjust to about $1.42 for fiscal '06? (multiple speakers)

Well, the guidance is $1.46 -- $1.46 for this year. I mean I am talking about our financial year. That is March -- March '05.

Right, and them I am just wondering on a fully diluted basis, is it about running about a penny a share per quarter?

Yes, it is running at about penny a share.

Okay.

A penny, a penny and a half, yes.

And just one last question. Could you provide just what the Progeon revenues were for the quarter?

Yes, I will talk about Progeon. Progeon -- let me give you the revenues of all the subsidiaries.

Progeon did $9.12 million in quarter two as against $7.16 million. For the full year, they are expected to do around $36.5 to $38 million. In quarter two, Progeon earned a net income of $1.13 million as compared to a deficit of $900,000 the previous quarter.

There has been a turnaround. The turnaround has been because last quarter they had an impact of a Forex movement against them, and this quarter there is a slight positive, and that has been part of the turnaround. They also increased their utilization and they managed to make sure that the costs remained almost the same.

Infosys Australia has done about $17.24 million, but at Infosys Australia, part of the work that Australia does is also work done for the parent. So if you take the net impact, they would have done something like $7 million. Infosys Consulting has earned its cost revenue, $320,000. Infosys China had a small revenue, a small revenue.

So overall the subsidiaries are doing well. Progeon is earning a profit. Infosys Australia is earning a profit. Infosys Consulting is in a growth phase, and it is having a net deficit. Infosys China is having a net deficit. Overall, for all the subsidiaries taken together, there is a net deficit this quarter.

George Price, Legg Mason.

Thank you very much and again congratulations on some very nice results. I guess I wanted to just pursue a couple of questions again. On the wage inflation side, you guys have talked about more mid-level -- seeing more wage inflation around the mid-level, not too much on the entry-level. Can you give us a sense of I guess a weighted wage inflation rate considering the number of people that we're talking about at the different levels? And I guess I'm looking to see the assumption as to whether the 4 to 5 percent that you are getting on incremental new projects, new work, is covering that weighted wage inflation rate.

Yes, I think this wage inflation issue should be explained properly because for you there it looks like a very large number, but (inaudible) is an acceptable number.

Wage inflation could be an entire basket between 15 and 20 percent, but the market is essentially in India. Wages paid in India cost you about 13 percent of total revenues because you must remember we work on-site, we work offshore, and for the on-site part -- that is work done outside India -- for the total revenues the wages are about 35 percent.

So on 13 percent, even if you have a 30 percent hike, it is 2.6 percent of revenues. So our strategy is that this is manageable. We expect to go up the value chain by changing the mix to do more work in packet implementation and possibly consulting to make sure that we get the higher margin which will minimize a part of the wage inflation. And two, we will see some economies of scale in reducing the other costs of revenues apart from wages and the SG&A so that this could be neutralized. This is our game plan going forward, and we do think that we can work at this very strongly and it is a feasible plan.

Also, 20 percent of the total offshore wages are variable. So 20 percent of 13 percent rate is variable. It is linked to revenues. It is linked to margins. It is linked to individual performance. But there, too, in the case of a downturn, there is protection, and when you increase the wages by 15 to 20 percent of the basket, a large part of that increase is variable.

Okay. That is very helpful. And I guess the second question I wanted to ask about is, given the drive offshore, a lot of clients scaling up the amount of work that they are doing, while it still may be small as a percentage of the overall spend, do you see clients' interest in their own captive units increasing at all? Is that kind of trend anywhere on the radar screen?

Yes, captive units are increasing, increasing in size. Some of the captive units are actually being sold off also. More on the BPO side. Even some small ones (inaudible) also have been sold off also, even in the last six months the recording census where we have seen that the captive units were actually transferred to the service provider. So that is part of the trend.

As the offshore becomes mainstream, we believe that it will have characteristics very similar to the U.S. market where some part of the work will be done in-house, equaling the captive units. Some part of the work will be done through outsource partners through companies like Infosys.

Sandra Notardonato, Adams, Harkness & Hill.

You mentioned something on consulting that you were operating at a net deficit. Can you talk a little bit more about your initiative there, how many people you have, what you're doing for clients and also what the pricing differential is on your consulting practice in comparison to your average price?

This is Stephen Pratt on the consulting. Yes, it was actually a great quarter. So the real highlight of the quarter was building up the leadership team. It was our first financial quarter. So we were able to recruit -- you know we had our strategy of recruiting top 10 percent talent from consulting firms, and it looks like that has proved that this quarter. That we have used personal networks and there are other ways of finding candidates. And we have a really terrific leadership team in place now. So that has translated into our first revenue, which was targeted for this quarter and happened.

Just to give you may be a couple of examples. One was one client was in the financial services industry. It was a project directly for the CEO that was helping to redefine the business model. They were trying to expand internationally. So we went in and did a slight competitive analysis, and we did the process design for the core processes of the Company. And now that is translating into some fairly large-scale technology implementations that we are having over the next few quarters.

We are also working with a transportation company. That is basically the board has decided to invest about $120 million in transforming the Company, and they have hired us to lead what they are calling the transformation management office to help figure out how to reinvigorate the Company and to create competitive advantage. So that is just a couple of examples.

So how many people in the consulting practice now?

So, within our team, if you take the smallest view that it would be just our core team, if you count the number of people who have started and accepted, we are at 34. But if you take the larger -- what we're planning is that there is a larger community within Infosys with which we can work, who have very deep expertise in domain consulting group, the consulting within the business units, and the enterprise solutions. And if you add up all those people, it is about 1300 people. So I think if you look at the scale that we have to go against the incumbent, that is probably a more accurate view of it from just a pure consulting skills.

Okay. And the pricing differential on your consulting practice, if you have that in comparison to the average price at Infosys?

Actually we're comparing it more to the global majors. Although we think we deserve more, we are probably -- we're trying to price at the market for the major consulting firms.

The two --?

Just to -- actually this is Kris here. The way we develop consulting is going to be different. The consulting will also leverage the global delivery model. So we were able to reduce the overall costing, even though surplus and billing rate will not be different as we have mentioned.

Also, the downstream work, if you take the total project, will also be done at lower cost because again it will be leveraging the global delivery model. In fact, if you look at our package implementation service, it is exactly the same kind of work many of the global system integrators do, and we're able to do that at much lower total cost of ownership for our client because we're doing about 50 percent of the work from offshore, and this is one of the fastest-growing services for Infosys.

Just to follow on that quickly, things like financial analyses, competitive analyses, training development, some of the communications planning and so forth can be done around the world. So that is proving to be very effective. And our general model, for like if you're putting in a large customer service application with all the customer service processes, our model would be about 40 percent of the work being done on-site and 60 percent being done around the world, as opposed to most of our competitors where it is maybe 90/10. (technical difficulty)-- a big difference to the client.

It is. The two examples that you made, the financial services client and the transportation client, was there an existing consulting firm that they were working with, or were these clients of yours that you sold new consulting business to?

The financial services client, the incumbent was IBM, and so we replace them. And at the transportation company, this is a new initiative. So they had experience with a lot of consulting firms, but they chose us.

Okay. Just a couple of other questions then. How many contracts were renewed in the quarter overall for the company?

What is the question?

I'm sorry. The question was how many contracts did you renew in the quarter? You talked about new clients. I'm wondering how many clients renewed in the quarter?

So I would be able to tell you that we have about $5 million in revenue. We renewed three contracts. Below that there have been several which I don't have the numbers for.

Okay. And the renewals were they also at 4 to 5 percent premium that you talked about on the new MSAs, or what was the pricing on the renewals?

Yes.

They were at increases?

Yes. There were two of them that were in the range, and one of the renewals was in our existing (inaudible) were well above the average. So we couldn't justify an increase.

Okay. Just another question on pricing. And that is, what is the differential that you see for the multimillion, the 40 million plus client in comparison to a client that is $5, $6, $7 million? Is there a difference in what you are charging these customers, and can you give a little detail on what that difference is?

Well, you know it depends a lot on the kind of work, and also it depends upon where we started out. If we started out with hire rates, generally they tend to be a little sticky. But by and large as the size grows the clients start expecting a better deal for volume discounts and so on.

And what about pricing on the custom application development side? Pricing as well as what competitors are you seeing that are most effective in the marketplace today?

Well, custom application development is something we are trying to move away from application maintenance and sell more bundled with business values, so combine it with consulting and sell it more as a business value project.

So I think that piece of the business is really in play right now. We think we have a pretty good shot at defining how that will get done and how it will get sold and delivered and actually priced if we can come up with value pricing mechanisms. We have a lot of play on the margin so that it gives us a lot of room for some innovative pricing mechanisms there.

I am curious why the transition on the custom application development business given that the industry researchers are saying that in 2005 there should be an area of very rapid growth. What is driving your decision there?

Well, it is an area of rapid growth sure. It's also an area of strength for us, and that is the place where we do want to see added value to our clients, as well as some more value to ourselves.

And who are the strongest competitors in the area in your opinion?

It is both the incumbent, the big consulting firms, as well as some of our Indian competitors. I think they are coming from both sides.

Can we take one last question?

Yes. Julio Quinteros, Goldman Sachs.

Good evening, guys. One quick question for Mohandas. Just in looking at the financials, I am noticing a little bit of just something I wanted to get some clarity on. In the statement of cash flows on the U.S. GAAP, you report amortization of intangible assets of $1 million, and then in the U.S. GAAP income statement, the same line item amortization of intangible assets is zero. Can you just walk us through what the discrepancy is there, or is it bundled in some of the other expense items?

It is because of rounding off the millions. It is just that is a rounding up of the millions that is there, so when you round it off, this is what is happening. It is no trend. It is no trend or anything like that.

No, it's not even rounding. There is nothing in the (multiple speakers).

No, there is no -- nothing in intangibles that you have now. It is just a rounding up.

Okay, but why is there $1 million in the statement of cash flows?

It is in an Australian subsidiary. Somewhere we acquired an Australian subsidiary. There was intangible asset there which tends to be amortized for a particular period and that is what it is. In the parent company, we don't have any intangible assets on the balance sheet.

Okay, got it. I think you guys have pretty much answered everything, so I am just going to leave it at that, and I will just follow-up with Sandeep over here in the U.S.. Thank you.

Mohandas, just one more question for you. The breakup of the $6 million other income breakup in investment income and FX (inaudible)?

If you look at nonoperating income and you want to breakup this quarter the total nonoperating income is 6.4 -- yes. It is $6.4 million, of which the interest income is 4.8. There is something called other which has small item, 0.2, and exchange differences are 1.4. In the same quarter last year, it was $16 million -- 9 million for interest income, foreign exchange gain or loss was about 7 million, and it was 1 million from (inaudible). This is for the six months ended September 30th.

Remember that this quarter we had $6.4 million. Last quarter it was $0.2 million, and the net is about $6.2 million for the six months. If we look at our financial statements, the figures are on a six-month to six-month basis. And the last quarter being negligible, the whole things shows up at $6 million in the financial statement.

Good explanation. Thank you, ladies and gentlemen. This is the end of this call. (inaudible) the quarter end in early January for our next quarter (inaudible).

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.