Infosys Ltd (INFY) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Infosys Technologies investor conference call for the quarter ended December 31, 2004. 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.

Thank you, Sandra. Good morning and hello, ladies and gentlemen. A very happy new year to all of you. Thank you again for joining to discuss the results of our quarter ended December 31, 2004. I hope all of you have had a chance to look at our press release and our fact sheet that are also posted on our website, www.Infosys.com. I have with me today from a conference room in Bangor, Mr. Nandan Nilekani, President and CEO of Infosys, and members of the senior management team. We will begin with some comments from the management on the results and then we 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 for the outlook for the future is a forward-looking statement and is subject to the risks such as the ones we have listed in our SEC filings. These filings can be accessed at the SEC's website, www.SEC.gov.

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

Thank you, Sandeep, and I would like to welcome all the folks to this call on the occasion of the third-quarter results of Infosys. As you know in quarter 3, our revenues have grown by 53 percent and we have given guidance for the year end and for the year we expect revenues to grow at 50 percent.

Our third-quarter revenues came in at $423 million and our earnings for the ADS have gone up to 42 cents. This year has also been -- this quarter has also been a good quarter in terms of client additions. We added 38 new clients and employee additions have been accrued to exit on a net basis and (indiscernible) employees at December 31 was 35,249 (ph).

We expect for the quarter ending March 31, '05 we are giving a consolidated revenue guidance of $452 which means the guidance for the year is between 1.589 million to 1.591 million and earnings per share for the third quarter at 44 cents. We believe this has been a good quarter. We have been able to essentially act upon all our investments for the last 12 to 18 months where we have entered a new sub series and some new services especially in (indiscernible). We believe that all of this has paid dividends (ph) and resulted in 3 quarters of double-digit growth.

With this, I request my colleague, Kris Gopalakrishnan, to give you some highlights and then he will hand over to Mr. Pai, our CFO.

Thank you, Nandan. The number of $1 million relationships have gone up from 146 to 156. The number of $5 million relationships from 60 to 65; the number of $50 million relationships from 3 to 4. Our top line is 4.9 percent of the revenue; top 10 relationships is 90.8 (ph), top (indiscernible) is from 21.6 (ph) and top 10 is 32.1. What this means is that we have broadened our client base. We have deepened our relationship with our existing clients; are able to cross sell many of the services as the relationship grows. We are telling them how to produce their (indiscernible) and our strategy of broadening our services, going into solutions is paying off and increasing our penetration. 80 (ph) percent of our business still continues to be repeat business.

In terms of employees, (indiscernible). This is 3164 gross additions of 1865 people that are up as expedient. The attrition has come down marginally from 10.8 to 10.3 percent this quarter. Currently we have 6.5 million square feet of space and about 30,000 employees and we have 3.2 million square feet under construction. We can house an additional 15,000 employees so we have plans in terms of increasing our infrastructure available.

Our growth has come from all the geographies. Europe is 32 percent; U.S. is 6 percent and the rest from Asia and India. India has gone up marginally to 3.1 percent. In terms of services, the services which are not our traditional, that is development, maintenance, engineering, they constitute 37 percent in the last 12 months. It means that again our investment in starting new services have given us new growth engines.

With this, I will hand over to Mohandas.

Thank you, Kris. We are growing sequentially by 11.8 percent in revenues to $423.36 million from (indiscernible). Gross margin is at 43.2 percent as against 43.6 percent the previous quarter. This has been basically stable. SG&A has come down to 14.2 percent from 15 percent growing by 6.3 percent sequentially. Operating income has grown by 13.3 percent. Nonoperating income is at 2.5 percent of revenues. That is against 1.7 percent because we have about $4.72 million in nonoperating income as exchange differences.

Our income before income tax has gone up to 31.4 because of the increase in nonoperating income as also the decrease in SG&A. Margins for taxes is at 15.8 percent of pre-tax and the increase from 15.5 the previous quarter to 15.8 is because of the increase in the exchange difference compared to the previous quarter. In our guidance we do not assume any revenue from any nonoperating income from exchange differences. So, $112 million at 36.4 percent of revenues, giving us and EPS of 42 cents.

We have spent about $57 million in capital expenditure in revising our guidance for spending on CapEx from 125 to $190 and around 130 to $160 million because we are executing our capital spending in a slight manner this quarter. Overall pricing has been stable. We have since some uptick in pricing from existing clients; nothing to impact the entire basket of revenues.

New clients are coming in at higher rates as in the past and costs have been under control. Margins are stable and we have grown this quarter 11.8 percent, at the higher rates than guidance that we gave at the year. Thank you very much and we now open up for questions.

Thank you. (OPERATOR INSTRUCTIONS) Mayank Tandon from Janney Montgomery Scott.

Thank you and congratulations on another very good quarter. Mohandas, I had a question for you on the currency and other income. If you could walk us through how the currency impacted your numbers specifically. And also what currency level are you building in for your expectations for the next quarter? Thank you.

The currency that we took into consideration, currency value for purpose of our guidance end of the second quarter was 45.91 rupees or dollars. We got an average of 44.30 for this quarter and for the next quarter, that is the fourth quarter, that is January to March of '05, we are taking 43.27. Because 43.27 is the closing rate being the new buying rate on the 31st of December '04 in New York.

So overall compared to the currency rate that we took for our guidance in the third quarter, there has been a decline on an average by about 3.5 percent and that has impacted our margins to the extent of 1.1 percent after evening out exchange differences. Since we're taking 43.27 rupees to a dollar for the current quarter, we have built that into our guidance for the fourth quarter.

What was the offsetting impact in the other income line related to the foreign currency gains?

Well, I will just explain how this is accounted. The revenue every month is accounted at the closing rate of the month, that is the closing rate is 44 rupees to a dollar, we take that. If the rupee is at -- 46 rupees to a dollar the previous day, we ignore that because it's a snapshot as of the particular date. So the revenue of the rupees are going to be impacted by the closing rate. And since we have an exchange (indiscernible), we have taken foreign exchange hedges which we have a $302 million and in a market to market, the portion that seek through a hedge comes in as an addition to nonoperating income at the nonoperating income level.

So you see a decline in the fee revenues which gets converted back into dollar revenues which we present you. At the same time, the decline is offset by any hedge that we have at the nonoperating level. This is the major impact that you see in the financials in terms of the revenues and it comes to the cost. What we do is that the cost is accounted at the rate at which the cost is incurred on the day it is incurred in case you operate to a foreign exchange account. For example, if you maintain a dollar account and spend money in dollars, the accounting rate would be the average rate for that year that you do on a daily basis. So end of the month, we accumulate all the transactions and transfer them into rupees as an average rate because we operate from a dollar account.

It is a complicated mechanic, finally because our functional currency is the rupee whereas we get revenues in dollars. We convert those dollars into rupees, account for it, and prepare our financial statements, then the financial statements are then converted back into dollars to present under U.S. GAAP. So in appreciation of the rupee could mean that the revenues in rupees become less and thereby you see the difference in the rupee revenues against the dollar revenues.

Too, we see that the rupee expenses when converted back into dollars will be converted back at an average rate and the rupee appreciate will be more in dollars if the rupee were to change because the dollar would have depreciated. And this has been the impact and going forward it depends at closing rate.

Thank you, that helps a lot.

Julio Quinteros from Goldman Sachs.

Good evening. Maybe if I can just ask this quick question to Nandan. Nandan, can you just address the situation on pricing a little bit more directly? It sounds like on some of the newer stuff you are talking about seeing some price increases, looking at the numbers for this quarter, it is obviously still not translating. What would be the sort of first quarter that you expect to actually see the price increases begin to flow through your numbers?

Let me just give you some point of view and then maybe allow Basab to join on that. First of all, we have talked about getting some price increases with new customers and this is on the order of maybe 3 to 4 percent over our existing prices and in some cases we have been getting price increases by virtue of renegotiations with our existing customers. But the point is that when you have a business model were you have 95 percent of your business and you'll find that if you require a fair amount of price increases both on new customers as well as renegotiation for it to start having impact on the average revenue productivity that you see, which is why we have said that pricing is stable with an upward bias. It is still not reflected in the revenue per employee that you see. With that, I will ask Basab to just add to that and maybe if Mohandas wants to add something.

I think that was a pretty good description of the situation. The current situation on pricing is it favors a stable to upward bias and I think that will continue. We see that continuing to the rest of this quarter as well. So other than that I really don't have anything to add to what Nandan has said.

Maybe just to sort of follow up on that then, is the fiscal year '06 the first year where we actually see this translate, the upward bias translate to the numbers or does it take longer than, say, another 12 months before we actually see the numbers translate?

We really can't say because the way the rates impact the average bill rate is very complex. It depends on how many accounts you've actually (indiscernible) by, what is the share of new accounts and the business for new accounts because the new accounts are coming in at like 4 to5 percent above average bill rates. And then also it depends on the whole account portfolio and mix. Where is the growth coming from? Is it coming from the low rate accounts or the high rate accounts or maybe evenly distributed? It's really hard to say. We think for now any impact will be very slow to be seen.

Okay maybe if you can address this one, either Basab or Nandan, the current quarter the development versus maintenance mix we were a little bit more weighted toward maintenance work in the current quarter. How does that impact pricing and should we expect the current mix between development and maintenance work continue or would be expect to see development work pick back up? Is there anything on the development side that we need to be concerned about given some of the software pre-announcements recently? Thank you.

I think while development work has come down marginally, I think when you look at the quarter-to-quarter basis, we should draw too many conclusions. I think what is more important is the fact that 37 percent of the revenues coming from new services that were introduced in the last 5 years. I will ask Shibu to just to add on that.

This is Shibu Shibulal. One of the things which we have done over the last few years is to manage the (indiscernible) portfolio. We have added a number of the new rules (ph) in the last 4 or 5 years. In fact, if you look at our revenue mix 5 years back, it would probably be only development and maintenance. We're not (indiscernible) business things like enterprise solutions, consensing, testing, engineering, infrastructure management. On an LTM (ph) basis, the percentage of these new service contributions has gone up from 34 point something to 37 point something percentage which means that we are -- even the growth accounts the accounts that have been with us a long term, we are introducing new services (ph) and managing the portfolio mix. The new (indiscernible), many of them are of higher revenue productions and higher margins. So that is how the mix is changing. We don't expect it to change much ahead of the narrow band.

But this isn't just a 1 quarter to phenomenon with development. I'm looking back for a couple of quarters and it has come down from 33 percent all the way down to 22 percent.

My one other observation is that when the economy tightened, (indiscernible), it didn't tighten. While the economy has picked back up and the economy is seeing good results for the last 3, couple of quarters, the loosening of the decrease in spend is going to show up on mass scale.

And what about with regards to some of the software pre-announcements this week? How should we think about that impacting development revenues, if at all?

Can you repeat the question please?

Sorry. The last part of my question was just related the software pre-announcements that we've heard this week, if that would impact development revenues at all in the coming quarters? How should we think about that?

This is Basab. We will have to look at that closely before giving further comment but broadly speaking, package implementation or enterprise solutions is really -- that is the piece of the revenue that is tied to the future or how SAP and PeopleSoft and Oracle are doing in the market because those are the practices that get that revenue. Obligation development is all tied to more infrastructure products related business. I don't know which when you meant when you said software pre-announcements.

SAP, I was talking about SAP. Okay, thanks.

Trip Chowdhry from Midwest Research.

Thank you, Operator. Congratulations again on a fabulous execution here. I have two questions. First, the package application environment is getting restructured I would say with the acquisition of Oracle and PeopleSoft. I was thinking how does Infosys see an opportunity in that changing competitive landscape and does this impact either positive, negative or indifferent to your relationship with SAP?

This does not impact our relationship with SAP. We have a good relationship with Oracle also. We see this as probably a positive opportunity from -- if companies wants to migrate or if companies want to change their vendor or things like that. From just a software professional I would say maybe less (indiscernible) is not that good.

I just want to add one more point here because we're trying to correlate the software licenses of SAP with our business and what I wanted to say is that in a large number of our customers the challenge is not buying more licenses but actually getting more effective use of the licenses than we have. We recently spent 2 days with one of our large customers which has a very large portfolio of SAP licenses and the whole focus was on simplification, consolidation, and integration. It was not really about buying licenses but there are huge service opportunities there for all of us to simplify, consolidate, and interoperate within the (indiscernible). Therefore, I think while licenses may be affected I think the need to get more juice out of existing licenses will still drive services.

Also recently we had -- I think a there was (indiscernible) who visited your headquarters in Bangalore. I was wondering if you could share some light into what kind of business relationships were discussed anywhere beyond that part.

Microsoft is an important LANs partner for Infosys. We have significant revenues coming from Microsoft technologies, working on Microsoft technologies. We have some good market programs of Microsoft. In that meeting we also talked about -- and this was in the press release -- talked about working together in mainframe migration, transforming organizations from mainframe. Those are some of the things we talked about. What we publicly disclosed is in the press release.

And last question -- of course I will save some of the questions off line. But definitely you have been putting a lot of investments into your (indiscernible) practice which includes some initiatives around RFID. I was wondering if you view that any (indiscernible) in which you are participating and still there are some concern about standards not being in place regarding RFID. What is your sense -- what is marketplace telling you on that? And thanks again for answering all of these questions.

I think the question was on RFID and our experience with that. Our view on RFID is that while most of the laypeople generally understand that as what happened in the store but we think that in-store RFID is going to be some years from now. And at the present time the only serious things being considered are RFID in the warehouse and in the rest of the supply chain, and that is where there is a genuine business case.

In the U.S. and in Europe, the announcements that Wal-Mart and Metro have made about when their (indiscernible) should be complied by, it is going to drive a lot of momentum behind RFID in the entire supply chain. And since supply chains tend to be global, that means it's going to be a global phenomenon. So we expect that the spend on RFID and related investments will pick up. So far all the work we have done on RFID has been largely related to workshops and studies and pilots but there has not been a whole lot of big investment dollars going into RFID just yet.

Thank you very much.

Joseph Vafi from Jefferies.

Good evening and another great quarter. The question has to do again back to the package implementation line of business. If you could maybe provide some color for us on Infosys' competitive positioning there. Specifically say we looked back a year ago or maybe even 6 months ago at the package implementation business, the percentage of opportunities you saw there where you were actually going head-to-head with some traditional players, North American players, Accenture, BearingPoint, IBM, and what you're seeing today. The question really has to do with try to moving up the food chain in the package app implementation line of business versus traditional players. Thanks.

Hi, this is Steve Pratt from Infosys Consulting. So one of the key initiatives that we have is to really attack the market when it comes to package enabled transformation. So if you look at big projects that our clients involve at their core SAP, Oracle, Siebel; that is a very big push for us right now. We've also had very good success in recruiting. We have hired some very, very senior people from our competitors in that area and I think have a very credible offering in that area. In fact there was just recently an analysis done by Forrester I believe, that talked about that the Indian players were a very credible competitor in that area. In fact they singled out Infosys as the leader in realizing business value from putting in enterprise systems.

So I think our story in the market and our experience with the clients in the market are we combine very, very experienced business transformation consultants with the Global Delivery Model is really resonating out there. There are 2 things that make it better than the competition. One is that -- I guess 3 things. First is that the overall price of doing the project is a lot lower. It's not that the rates are lower but just the fundamental business model is doing more or using the delivery model drives down the cost. And second is that discipline that goes around that actually drives higher quality. And third is that when clients save the money on the technology implementation, they can actually reinvest that into change management and change their business and there have been a lot of sales in (technical difficulty) in ERP and CRM and one of the main reasons for that is the lack of focus of helping the business change.

In our model the people that we're hiring from the top consulting firms can really help a client make sure that they get the impact from the occasion (ph). So we think we are a great choice when it comes to enterprise systems implementation and that is one of our key areas attacking the market.

Would it be fair to say, Steve, that you think you can grab more share there moving forward as you kind of look to expand your service offerings? And then I guess again, if you looked at your competitive deals in that area over the last 6 months, have you seen more head-to-head against some of the North American players as you try to move up the chain?

Actually that is very true. We have what Steve talked about is the fact that we have added a lot of skills and people within the space. Now the next thing is that we handle it in multiple ways; one is that even at the number level that means the positive revenue which we make, on an LTM (ph) level we have gone up from 13.8 (ph) to 15.4. So in essence, it is one of our largest services at this point. We are competing with global side more and more. I don't want to name examples but we are competing with them more and more and we are winning. Definitely (indiscernible) as well as the times we come across the global, they have gone up in the last 6 months.

That's helpful and then just 1 more quick one on outperformance in the quarter and upping guidance a bit. Any change to hiring plans moving forward and any issues with H1-B? Thank you.

We have no issues with H1-B at this point in time because we have (indiscernible) during the last visa cycle, and (indiscernible) for applications we have applied adequate numbers and got (indiscernible). So our utilization at this point is probably 50 to 55 percent. That means the number of visas we have and the utilization of that is about 50, 55 percent. The second question was hiring plans. We did hire 2000 plus people this quarter. Next quarter we are planning to hire 2000 people. Although the number in Q2, we had an intake of 5000 plus people because that is the campus season for us. That is when the people from the campus (indiscernible). And lastly, our utilization including training at this point is only 71 percent. That means when those trainees come into the mainstream, we will people -- in that number of people joining our workforce, (indiscernible) workforce.

Thank you.

David Grossman from Thomas Weisel Partners.

Thank you. Just a couple of follow-up questions. First on the pricing side, maybe you could help us understand from the customer perspective how the pricing negotiations go, particularly with your existing customers where clearly there is evidence that your costs, at least in India, are going up at a rate on the wage side 17, 18, 19 percent on an annualized basis. How do these discussions go? What is their justification for resisting these price increases? Maybe you could just help us better understand that dynamic and how that dynamic unfolds if we continue to experience the kind of rate of wage inflation that we have experienced over the last 18 months.

David, this is Kris. Yes, we will put before them all the reasons we can think of, including salary increases. As you know, it is very competitive out there, given the global system integrators sometimes are actually outbidding us in some cases. So as long as the client has choice, we have to be flexible, and that is the reason why we are seeing only slight upward trend in the pricing now, but the positive thing is that there is a climate now which will accept some price increase.

So is the change in price dynamic primarily a competitive issue where you're seeing the competitive offers from some of the larger integrators abating a bit, and that's what's creating the environment for some price increases?

As the offshore phenomenon becomes mainstream, the clients are also more knowledgeable. The offshore in software services industry is being tracked by all the major analysts today, technology analysts, so they have a view on pricing and things like that. Third, in many of the larger deals today you have deal consultants, and they of course would advise the clients on the right price and things for that. So it is much more complex than before, and in that environment we are able to get some pricing.

Okay. And actually, Kris, while you're on the phone here perhaps you could help us understand maybe the dynamic. It looks like the number of trainees went down fairly substantially and sequentially and I'm sure that part of that is seasonal and is impacted by various other timing issues but it is both down fairly substantially sequentially and year-over-year. I'm wondering if you could just clarify why that number went down so much sequentially and year-over-year and whether we should expect that number to go up fairly substantially over the next couple of quarters?

The number of people recruited this quarter was about 2000 plus. It did go down compared to the previous quarter where we did 5000 plus by people in Q2 and the reason for that Q2 is the time in which we have campus recruits joining us. These are people who we recruited in 2003 and we went to the campus and gave offers. They will generally come into join us somewhere between Q2 and Q3. We have approximately 3000 people in training at this point. Most of those people are in training. That is why the utilization including trainees is only about 71 percent.

Now next quarter we have already said that we will recruit 2000 people. Again just like what we did in 2003 we have gone ahead and done campus recruitment in 2004. Those people will join us in 2005 in Q2 and Q3 and that number stands at 6000 growth. That means -- that doesn't mean 6000 will join us based on various factors and the majority of it will join us in 2005. That is Q2, Q3 of '05, '06.

Okay. Did you say you have 3000 trainees right now?

Yes, right now we will have 3000 people in training.

Okay that compares to about 1400 at the end of the quarter. I'm just looking at -- it looks like what you are (multiple speakers) Perhaps I have this number wrong. I have that you had about 1400. So it has more than doubled since the end of the quarter then?

Yes, we have people joining.

And then actually Mohandas, on the margins, it looks like you've got secure fairly substantial operating leverage this quarter particularly on the sales and marketing line. Could you perhaps help us better understand what the underlying dynamic was there? Is there some structural changes in the way the sales force is being compensated or are there other some other dynamics that play there?

David, the biggest leverage we had on sales and marketing was in about two items and those items are basically in what we call brand building. We had major event last quarter and we did not have the major event. We spent a lot of money on that event. And the second thing that we had as a benefit this quarter has essentially been some communication costs and some rental costs came down because we vacated some offices. If you look at that item, we got the leverage from these 2 items and as an ancillary, the maintenance costs came down.

So we had a benefit of about 0.8 percent and this is -- at the same time if you look at our subsidiaries, Progeon, Infosys preconsulting, Infosys China and Infosys Australia, you will find that Progeon did very well. (indiscernible) came down because it was flat and the revenues went up in consolidation if we are floating to the parent Company and Infosys Consulting started building revenues and since started building revenues, their SG&A costs came down as a percentage. And so also for Infosys China. So the benefit of Infosys China, Progeon and from Infosys Consulting was about 0.4 percent. The balance came from Infosys.

Okay, and Mohandas, looking at the guidance that you provided for the March quarter, I assume -- is that a basic earnings per share number, the 44 cents?

Yes, we are comparing with 42 cents and 42 cents is the basic earnings per share and 44 will be the basic again, yes.

Should I assume that the dilution on a comparable basis -- your guidance on a fully diluted basis would be comparable to about 42 cents?

Yes. It is comparable because we don't foresee any dilution this quarter compared to the previous quarter.

Okay and just one last question. Can you give me an idea of how much square footage on a percentage basis you added or you expect to add in '05 and any kind of thoughts you may have on '06?

David, we have about 6.2 million square foot of space and we have about 3.5 million square foot under construction. And quite possibly out of that 3.5 million we could be adding between 1.5 to 2 million to capitalize.

So that would be in 2006?

Well the balance would be in 2006 and it is quite possible that we start something in this quarter too.

Very good. Thank you and congratulations.

Ashish Thadhani from Guilford Securities.

Good evening. Of the 140 or more than 140 clients with trailing revenue of 5 million plus, roughly speaking in how many situations is Infosys one of two or more vendors? What I'm trying to do here is determine client overlap and market penetration. So any flavor would be very helpful.

We have 65 relationships with 5 million plus. 156 relationships with $1 million plus. For the rest of the things I will ask Basab to answer about where we have only one or two.

So this is Basab. I think generally speaking below $5 million you generally do not have an overlap. You don't have a competitive situation unless it is a potentially large account with a large IT spend and we're in the first year and therefore, it is sort of ramping up and it is below $5 million. So $5 million is like the steady-state of offshore outsourcing, the Company knows better than to have 2 competing vendors for such a small pie.

So that takes care of 156 minus 65, almost 90 clients where in general we would be their sole or this would very quickly become more than a $5 million account. And the rest, I would say roughly speaking, I'd have to check the numbers, it would probably be 50-50 where between where -- we are in some accounts we are 90 percent plus and I would call that sole. Everybody likes to keep somebody on the margins to keep us honest. And in another 50 percent, the other 50 percent of accounts, there would be competition and another major player.

That is very helpful and a quick follow up is well. Revenue in calendar 2004 just ended, rose more than 45 percent year-on-year despite an unfavorable political backdrop at the beginning of the year. Is there any reason to believe that there will be a significant change in this kind of rate in the foreseeable future?

If you look at the results of all the major software services companies from India over the last 2 or 3 quarters, all of them have done actually very well. So in spite of all the debate about offshore outsourcing and things like that the business was actually good and companies are doing well. Because of that, we are not seeing any change in terms of business pick up and things like that after the election and things like that. There is definitely an uncertainty has been removed in terms of which party, who is going to win etc., and a discussion on outsourcing also has come down. But that is an opportunity on the (indiscernible) level on the business and nothing has really changed.

Thank you very much. Nice quarter.

This is Sandeep here. If you guys would stick to only one question, that would let more people in. Thank you.

Julie Santoriello from Morgan Stanley.

Just looking for a general update on the competitive environment. And perhaps if we could look at it in terms of the different types of competitors, the other local India players; perhaps other offshore companies and other geographies, and then the multinationals? Thank you.

This is Basab. I will treat this in 2 parts. One is with the offshore players and the other is with the incumbent system integrators who are generally market based, U.S. or Europe. So with the former, with the offshore players, the competition tends to be fairly aggressive on offshore outsourcing opportunities. So where a company is to say they want to do all outsourcing, they want to do it offshore, they call the usual suspects and that is where the competition -- that is the arena of the competition. We like our chances in that kind of a competition, particularly in certain industries like financial services, retail, and especially in our communication service providers an industry we think we hold our own comparing even easily.

And on the other -- we have -- we win some, we lose some, but on the whole the numbers say more than I can say. With the incumbent system integrators, our battle with them is on consulting, systems integration. We have had very good success in the early (indiscernible) that we have made against competition where we are combining Infosys Consulting and Infosys Technologies and going together to the market. We have a fairly good win rate and something that any consulting company out there would be proud of. Obviously we're not very large yet in Infosys Consulting but whatever size we have we're doing well with that. The integration with Infosys Consulting and the Infosys sales force is going very well and I would also invite Steve Pratt to say a few words on this.

So things are going really well. I think our model is working. We think that our competitors who are basically from -- have their roots in the accounting firms a long time ago have some vulnerabilities in their business where I think that they were designed probably for a different era and that for solving today's business problems you need to actually combine better business consulting that is done with firms from the likes of Gallon and Hamilton (ph) and ECG and Thane (ph) to combine skills for business analysis like those firms with very, very good technology. In that way you can really have a much tighter linkage between the business value that's created for the client and technology. So we are out there hiring aggressively those types of skills and developing those types of skills in our people. And so when we go in and talk to the client not only do they get better business consulting and a better understanding of how it creates value for their company, but they also get better technology and the overall business model makes the whole thing less expensive.

And I think that is probably why our win rate is so high right now. And so I just think it is better for clients. So it is a good model and we are confident that the business model will allow us to scale quickly to get the new win.

Thanks and just a quick follow up. Are you seeing the multinationals getting more or less aggressive on price and more or less aggressive on wages?

I think the multinationals when they compete in the offshore outsourcing space, which they would love to be able to do, they don't yet have a uniform way of competing there. First of all it tends to be very defensive. They are throwing their hat in the ring on an offshore outsourcing, it tends to be only in response to a threat of a loss of business at an account. And where they do this, they tend to really lowball numbers because they're defending their territory. And frankly they are not competing head-to-head with us into many deals. So I don't see a trend there to speak of.

(technical difficulty)

I'm sorry, can you repeat that number?

15 to 17 percent of salary increases in India.

Thank you.

Sandra Notardonato from Adams Harkness.

I was wondering if we could talk a little bit more about the consulting business. I was wondering if you can give us the number of people you have in that segment, a little bit around the bill rates and who your relationships are with at the client company when you're selling this service.

Sure, I will just maybe give some highlights. It was a very good quarter for us. We added quite a few clients. One of the big -- we continued to recruit. We had our first MBA campus recruiting this quarter so we went out and recruited on campus at Wharton, Stanford, Harvard, Haas (ph), Sloan (ph), and UT. So that was very successful. Right now our average realized rate for our consulting projects is $205 an hour and -- the relationship, our focus is and the services that we are designing are for the Chief Operating Officer. So we are not trying to -- we're not a corporate strategy firm. What we're trying to do is develop operational or expertise in operational change in company in making operational changes. And so that is the main target.

You mentioned MBA campus recruiting. Did you actually hire some folks or is this a new program that you are launching and we will see some employees added over the course of the next couple of quarters?

Right, so we made offers and are in the process of closing those offers. So we have a lot of accepts already so they will start -- be able to start later this year.

Okay and can you give me the profile of some of these people? Are they American and will be working in the U.S. or are they people from India that want to move back to India? I just want to get a little clarity on that.

The vast majority of our people we have are from the U.S. I think the percentages are right now 85 percent. (multiple speakers) 85 percent. That is people who are either U.S. citizens or green cards. But most are U.S. citizens.

Okay, and did you have the number of people that you have in that business?

Yes, the number of people that we have right now is 39 and we have 30 more people who have accepted offers.

Okay, and do you have a sense of how many consulting engagements you're currently working on?

We have 15 right now.

Okay.

If you have any more questions, I can take that off line. I just want to get 1 last question on the call.

I actually just had one more question on that. If you could just tell me what your thoughts are on growing this business segment in terms of organically versus acquisition over the course of the next 12 to 18 months?

Sure, I think that the strategy of building a foundation of the business organically is absolutely the right strategy. We are -- that is proving to work very, very well. We have very good integration with Infosys' technologies and are working day-to-day in the field. As we scale up we're going to look at all options for increasing and scaling for accelerating. So, yes we will look at both options.

We need to understand something very well and need to have some leadership in play before we look at acquisitions (ph).

One last question.

Sameer Nadkarni from WR Hambrecht.

Great, thank you. Congratulations. Great quarter. I am curious in terms of as you are adding new accounts, could you provide any color on the typical company size and how this compares to a year ago? I am basically just trying to understand, are you still the Fortune 1000 type of large companies or are you also seeing relationships starting up with the expanded set ala Fortune 2000 or midsize accounts?

This is Basab. I actually think that the accounts we are adding are going the other way, because there was a time at least 2 years -- 2, 3 years back when we still had a large stable of mid-sized and even startup companies in the good old days. And we no longer have many of them as clients and since then we are once bitten twice shy and we stay away from the startup market of course. And our focus is in fact shifting to the large size accounts, the large IT spenders because we believe the top 20 percent companies in an industry actually honor 70 to 80 percent of the IT spending in the industry. So that is where we want to focus and that is where we are getting most of our clients.

Great and I guess related to that if you could just comment on the global strategic sourcing group and the contribution in terms of influencing revenues and in terms of adding new customers, that would be great. Thank you.

There are two aspects to what we're doing in strategic global sourcing. One is we are investing in putting together the tools, frameworks, methodologies which will set us apart from our competitors on how offshore outsourcing is done. We will be leaders in the pack. We can be the lowest risk provider of offshore outsourcing services. We believe that can be done and we are busy doing that. So that is an investment we're making which impacts all kinds of offshore outsourcing that we do in the Company.

The other part is a small unit that focuses on winning and running large all at once rebadge (ph) deals. These are outsourcing deals that are generally done by the incumbent outsourcers. In the offshore model it does not work quite the same way. Rebadge in offshore outsourced deal is just like oil and water. So we were trying to make both ends meet because there is a client requirement to do it faster and that is what the other part of SGS is working on which is how to craft and guide our clients to a successful rebadge outsource deal and win those deals.

This is Steve. I just wanted to make one clarification on the previous question is that the number of -- I answered the question with the number of people within just the legal entity of Infosys Consulting, which is -- we have very, very senior people but in the broader Infosys, the number of consultants that we're working with and going against the market is 1300.

Thank you, everybody. Mohandas, I had one question from e-mail, a quick one. The decline in cash flow; if you have any comments on that, that would be on our revenue line.

The decline is because AR has gone up slightly. And two, our CapEx has gone up in the quarter. And three, we paid a huge amount of dividend for the 9-month period. But we're still generating large free cash flows. Our total cash and liquid assets have gone up to $633 million on the balance sheet from much less at the beginning of the year. We are cash flow positive.

Thank you, everybody for joining. I would request that if you stick to just one question that would give everybody a chance behind you to get in the call. But thanks for joining and we will talk to you again in the second week of April for the fiscal year ending quarter. Thanks again. Goodbye.

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