Infosys Ltd (INFY) 2005 Q4 法說會逐字稿

Good morning. My name is Angela and I will be your conference operator today. At this time I would like to welcome everyone to the Infosys fourth quarter and FY ’06 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will a question-and-answer session. [OPERATOR INSTRUCTIONS].

Thank you. Mr. Mahindroo, you may begin your conference.

Good morning and thank you all for joining us today to discuss the financial results for the quarter and year ending March 31, 2006.

I’m Sandeep from the Investor Relations team in Bangalore. Joining us today in this conference room is CEO and President, Mr. Nandan Nilekani, COO, Mr. Kris Gopalakrishnan, and CFO, Mr. Mohandas Pai, along with other members of the senior management.

We’ll start with a brief statement of the performance of the Company for the recently concluded quarter, and outlook for the quarter ending June 30, 2006 and the year ending March 31, 2007. After that we’ll open up the discussion for Q&A.

Before I pass on to Mr. Nilekani, I would like to remind you that anything that we say with respect to our outlook for the future is a forward-looking statement and must be read in conjunction with the rest of the Company’s [papers]. A full statement and explanation of these risks is available with our filings to the SEC, which can be found on www.sec.gov.

I’d now like to pass on to Mr. Nilekani, President and CEO of Infosys.

Thank you Sandeep. And I’d like to welcome each and every one of you to this call. I’m sorry that we’re having this call on a Friday morning for a lot you, and it’s a long weekend, so our apologies for that.

I think this has been a good year for us. Our revenues for the full year have come in at $2.15b with the year-to-year growth of 35%. And our fourth quarter revenues have come in at $593m, which is up 30% from the previous quarter of the corresponding last fiscal.

The earnings per ADS have increased to $0.56 from $0.47 in the corresponding quarter last fiscal. This year is also the greatest year of the formation of Infosys. So, we have taken a number of investor-oriented decisions. One is we will have a stock dividend to shareholders including ADS shareholders in the ratio of two for one. That means one additional ADS for every ADS held, subject to the approval of shareholders.

Similarly, we have announced a Silver Jubilee special dividend of INR30 per ADS, which is equivalent to $0.67 per ADS at the prevailing rate of INR44.48. And also, a final dividend of $0.19 per ADS which are both again subject to the approval of the shareholders. And these dividends are payable at the prevailing rate on that -- on the payment date on prevailing exchange rate.

We also would like to share our outlook for the quarter June 30 and the year ending March ’07. We expect revenues between $628 and $633m for the quarter ending June 30 and between $2.76 to $2.80b for the fiscal year ending March 31, ’07. This translates into a quarter year-to-year growth of 31.9 to 33% and a year-to-year growth on an annual basis of 28 to 30%.

We also expect consolidated earnings per ADS to be between $0.56 and $0.57 for the quarter ended June 30, which is a year-to-year growth of 24 to 26% and between $2.57 and $2.61 for the fiscal year ending March ’07, which is between 26 to 28%.

I think this has been a very good year for us. We have grown. It took us 23 years to reach our first billion and it’s taken us 23 months to reach our second billion. And we believe that the global IT services industry is showing signs of stronger growth. We are seeing an uptake in discretionary spending. And it’s very clear to us that all our customers are fundamentally going to use a global model for all future delivery of IT services. And, therefore, this puts us in a very strong position to take advantage of this opportunity that’s in the market place.

I think at this point, I’ll request my colleague Kris to speak about some of the other dimensions of our performance this quarter and the future.

Thank you Nandan. And good morning and good afternoon and good evening to every one of you.

Let me give you some highlights on the client data. We added 38 new clients this quarter taking the total number of active clients to 460. More importantly, we have 221 million-dollar clients, nine $15m clients, one client contributing revenue of more than $90m. Our accounts receivable is a good 62 days -- accounts receivable days to 62 days.

From an industry perspective, Banking and Financial Services, Telecom have grown faster than the other groupings. So, Banking and Financial Services 29.2% of our revenues and Telecom is 16.3% of revenues. From a services perspective we continue to see healthy momentum in our enterprise solutions or package implementation service. This is a service which is closer to consulting and typically delivered at higher price points. And it is 17.1% of our revenues.

Our products are still doing well, so it’s about 3.2% of our revenues. From a utilization perspective, utilization has come down to 77%. We have added more than 5,100 employees gross this quarter, of which 1,620 employees were at the experience level. So, because of that our utilization has come down slightly to 77%. Our utilization including trainees is 69.7%. It is in the range which we want it to be, high 70s, low 80s. For the year -- fiscal year 2007 we plan to add 25,000 gross number of employees. And in the first quarter we plan to add 8,000 gross employees.

With this I’m going to hand it over to Mohan to talk about the numbers in detail.

Thank you Kris. Folks, if we look at the fourth quarter figures, our gross profit is 40.3% as against 43% the previous quarter. SG&A is up at 14% as against 13.6%. Operating income has come down to 26.3% as against 29.4%. I want to explain the reasons for this.

In this quarter, the fourth quarter, the rupee/dollar exchange rate went the other way. The rupee appreciated and the average rupee/dollar rate was INR44.22 as against INR45.30 in the third quarter. This had an impact on the operating margin by 1.3%. So, the 26.3% on a normalized basis would have been 27.6%.

Depreciation and amortization, which is part of the cost of revenues, went up to 5.5% this quarter, primarily because the last quarter before the end of the year from 4.6%, so they increased on a comparative basis 0.9%. And also, since we reduced the utilization as planned, but we hired slightly more people than what we had planned compared to the guidance, we incurred an extra cost of 0.7%. If you add all three you come to a more normalized margin for this quarter at operating income level of around 29%.

The impact of the rupee appreciating was felt in a lower ForEx loss in the other income column, which also went up because of higher interest receipts. And we had a lower ForEx loss of about $3.5m on account of translation, on account of ForEx differences. In the previous quarter you’ll recall that we had a $10m upswing in the operating income, because the rupee depreciated. At the same time we had a $12.5m negative in the non-operating part of the income statement, because the ForEx differences on account of translation. If we strip out the rupee movement in the previous quarter and this quarter, the operating margins are almost similar.

So, we met our guidance INR0.06. We added on more people than we had anticipated, because we want to build the momentum for the future. And I think we have done well.

The top 10 customers are in good shape. The top 10 customers grew by 10.2% sequentially compared to the growth rate in the third quarter, higher than the revenue growth of about 6.1%. And we are seeing that the top 10 customers have come back. We will find another interesting trend. In the BFSI sector, we find a positive growth this quarter. The same quarter last year we saw a decline in the BFSI compared to the previous quarter, and again good news.

Like Kris said, we have nine customers who give us more than a million dollars of customers. People keep asking us questions as to the big deals. Big deals do not mean big customers. We have got nine customers who give us more than $15m of business and we have grown that organically. The largest customer gives us more than $90m of business. And if you anticipate even if they remain the same for the next five years that’s $450m of business at a pretty good value to us and to the customer.

So, overall we’ve built up a high-quality client portfolio where million-dollar customers make up about 96.9% of the total revenues that we have and about 327 customers who are $9m make up 3.1% of the total revenue. That means even by increasing the revenue from the existing customers we have an ability to grow in the next financial year.

We’ve also seen that the subsidiaries have done as per budget. Progeon has had a revenue of $85.55m and 24.7% net. Infosys Australia has $72.71m and has done well for the full year in terms of profitability. Infosys Consulting has done $32.35m on a standalone basis. They were expected to be profitable in the fourth quarter. Well, the fourth quarter, they did make a loss, because of accelerated hiring. In Infosys China we had a loss again in the fourth quarter as, again, anticipated profit -- because some of the global business that we anticipated did not come up, and they’re putting in redoubled efforts.

I will now hand over to Bala to give you some update on the guidance for fiscal year ’08. Bala please?

Hello, we are guiding a revenue growth of 28 to 30% in fiscal ’07 and an EPS growth between 26 and 28%. When we are giving the guidance for next year we are assuming the billing rates to be stable. We are not factoring any price increases for the next full year.

We also factored in the increase in salaries between 14 to 15% offshore in India and 3% outside India. We are factoring in a stable margin environment for the next full year. If we look at fiscal ’06 we have operating margin of 27.8%. Going forward in the next year for the whole year we are factoring in a stable margin.

Tax rates, we had assumed to be the same, because our effective tax rate today is between 11.5 to 12%. It will continue to be the same.

The difference between the top line and the EPS growth is mainly due to some dilution due to ESOP exercise and also due to the increased costs, which comes into effect because of the stock compensation. As you know, we are entering into a new environment for FASB 123R relating to a charge to be taken for the issue of stock option. So next year we have to take a charge of something around $4m, which is already factored in the guidance.

So, if you take out this I think the top line growth is in line with the bottom line growth. We are assuming investment -- I mean CapEx of around $350 to $400m for next year. The depreciation factors that. So overall, next year we are talking about stable margins and a growth of 28 to 30%.

Now we can take questions from you.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Joseph Vafi of Jefferies & Company.

Good evening gentlemen and congratulations on a very good quarter here. I was wondering if we could talk a little about some of the largest clients and their outlook for the new fiscal year. If we look through the metrics we see that the largest client actually became a larger percentage of revenue as did the top five and the top 10 on a sequential basis. And I was wondering if we could get some color as to how you see them performing in the new fiscal year. And is that one of the reasons we are seeing some strong guidance out of the Company for fiscal ’07?

Well, as Mohan already said, the top 10 clients grew faster this quarter at 10.2% compared to Company growth of 6. -- or percentage. And for the entire year, last 12 months, the top 10 clients grew at 41.5%. Typically we have churn within the top 10 accounts, because somebody may slow down, somebody may reach a plateau and get replaced by new set of names.

And that has happened in the last one year also. We have a new set of -- not every one of them, but some churn in the top 10 clients. But clearly each one of them is growing now and that’s why we are seeing this growth. And we expect that these will form the basis for significant growth. In most of these clients we are delivering multiple services from consulting to package implementation to application development, maintenance to infrastructure management, and in some cases business process outsourcing also.

Just to illustrate this, for example, for one of the -– an oil major we’ve just got the first part of an order for a multi-year process fitness project, which if we get the complete project could turn into several million dollars, in fact several -- more than $100m actually. So, that’s the type of project we are getting from these clients.

We have -- because of the long term and large relationship we have, we have visibility into their budgets as usual. And this is what is giving us the confidence to say that the environment today is positive towards outsourcing, towards offshore outsourcing and the fitness which the services and process has to their requirement.

Okay. And then one follow-up question on the new guidance and the implied stable margins with the assumptions on certain amount of salary increases. Are you assuming the same amount of 2 to 3% increases to bill rates in fiscal ’07 as part of the offset here? And what are maybe some of the other offsets to get back to a stable margin here for fiscal ’07, as we know that everyone in the offshore IT industry is staffing up a little bit faster and heavier than they have maybe in previous fiscal years? Thanks.

Well, Bala here. Right now we are seeing the outsourcing environment to be stable. So, going forward into next year our guidance that taxes and pricing to be stable, we are not assuming any increase in the prices. The offset for the wage increase will come in terms of scale benefits we get on the G&A side. So, we are not factoring in any increase in the prices for telephonic systems. We are assuming the pricing environment to be stable.

Thank you.

Your next question comes from Rod Bourgeois of Bernstein.

Hello guys, yes, Rod Bourgeois here. You had originally guided to flat fiscal ’06 operating margins. And it appears fiscal ’06 ended with margins down about 80 basis points. And I just -- the question here is, what’s the main reason the margin was a little weaker than what you had originally planned for in fiscal 2006?

The main reason lies in the fact that when you look at the rupee/dollar rate going forward you normally take a flat rupee/dollar rate and you try to hedge during the course of the year. And we have guided to a flat rupee/dollar rate. But if you look at the experience of the previous year in terms of the rupee we have found that the rupee has -- the impact of the rupee/dollar rate for the entire fiscal has been about 1.75 -- 1.95% of revenues, of which, 0.85% is a non-operating income level. And the balance is of 1.10% is an operating income level.

So it is basically the rupee which has been the key factor in shifting. And we also say that at any point of time, the operating income would differ between a range of 50 to 150 basis points. And that is the range that we are comfortable with, for a year, but not of the long-term cumulatively, because cumulatively we wanted to be in the narrow band. But this year it has been the rupee, and average rupee/dollar rate has gone up, the rupee has appreciated and this has hurt somewhat.

Alright let me just make sure I understand that, because I went back to the notes. It looked like the assumption, at the beginning of the fiscal year, for the rupee was 43.62. Can you tell me what the actual was for the full year?

Well I think, at the beginning of the year, the rupee was 43.68, yes you said that. And for the entire year -- for the entire year it was 44.21 on an average. And this has had is impact.

Okay. Alright. And another thought on this here is -- in the earlier call for the Indian investors, it appeared you talked about not needing to win large deals in order to hit the guidance that you provided for fiscal ’07. And the question I have is can you actually win large deals without sacrificing margins? Because I think you indicated that you would not win large deals if they would come in at below corporate average margins. So can you actually win these larger deals that are put out to bid, without sacrificing margins? Is that something that you can account for in your operating model?

On the first question, I think, still there is not sufficient predictability on these large wins, it’s almost zero or one, you win or you don’t win. And so when we give guidance we do not want to factor something which is quite uncertain at this point when we give guidance. So that’s why we said we do not factor in any large deals in the future. Of course, the ABN deal is already won is already factored in our current numbers.

Now to the second question about can we win without sacrificing margins? So we will be selective in what we go after. We will look at what is the impact of taking this project, or taking this deal on our overall portfolio of income, in our income is at a portfolio level based on services, based on customers, based on a big bit of execution. We are [looking] to that in order -- when the customer came in, at what rate etc. So based on that portfolio, based on what capacity we have, we will decide at that point whether we need to be selective or aggressive. And right now we feel that we need to be selective.

We have won large deals in the past. And as Mohan was mentioning, if you look at the nine $50m-plus relationships we have, and these are multi-year relationships, even though contractually they are not multi-year, but we have had a history of holding on to clients for long term. It can translate to $450m, sorry $250m, five times $50m each actually, that’s kind of a large deal you can think of it as a large deal also. I hope that answers your question.

Yes. No, that --

Mohan also has something to comment on.

I want to clarify what I said earlier. The clarification is that the distinction between what I gave on the rupee was based upon the actuals for the previous year and the actuals for the current year. And the rupee has impacted that.

But if you look at the guidance for the year, at the beginning of ’06, and the actuals for this year, the decline in margin has been primarily because of the increase in depreciation by about 0.5%. The depreciation charge has been higher than what we had given in the guidance by 0.5%. And I think that explains the majority of the difference in the margin between the guidance and what you see here.

You are just saying that the actual for last year was different than the rupee guidance you were assuming when you guided to fiscal ’06 originally?

What I am saying is the rupee difference that we just spoke about, the 1.1% is based upon the actuals for ’05 compared to the actuals for ’06. In the guidance for ’06 we had taken a particular rupee figure and the difference is not very material. But within the guidance for ’06 and the actuals for ’06 you will see a decline in the margin. It’s because of -- the main reason is because of the increase in amortization depreciation charge by 0.5%, 50 basis points on the operating line.

And also if you go back to the data, you will find that we have increased the number of people that we have hired this year, compared to the figures that we gave in the original guidance. We have done that -- we have done that primarily to make sure that we have enough people at the end of the year to ensure sufficient growth in fiscal ’07. We have said in the guidance that we will hire about 12,600 people gross. We ended up with hiring about 22,800 people gross.

So the difference is also because of the fact that we hired more people. And we could grow faster than what we said earlier in the guidance for ’06. And that also led to a higher employee cost, not on a per-capita basis, but on a total employment basis. And that enables us to have a deeper bench to take care of revenues in the first quarter.

Got it, yes. You clearly beat on revenues and that probably added some costs. That makes perfect sense.

But it also meant that end of the year we had more people on the bench than what we anticipated in the beginning. So we don’t -- that’s why we don’t see any particular decline in margin.

Okay. Great. A question on the wage inflation. This is more from a market perspective. The wage inflation you are targeting for fiscal ’07 is in line with the prior year, so it’s at a normal level. Do you think your competitors in the Indian market, the Indian IT services firms, will be able to keep their wage inflation to a normal level? Or do you think wage inflation for some of the other players in the industry might creep up this year?

I don’t want to comment on other people because we are confident. But all I can say is, we pay wages in India and we pay wages outside. If you look at offshore players, for the wages we pay outside we probably are higher than where they are on an average. And some of them have disclosed that they are trying to play catch-up. And that could impact the total wage cost. And for the next year or two we have taken an average which we think will place it -- place us right at the top.

As for the offshore salaries are concerned, I think for a great majority of the people who are competing for those offshore position, excluding MLPs, we are right at the top. And with the wage increases in the month of April, the difference between us and the rest of the crowd would increase. And if they had to play catch-up they could seen an increase in their -- in the wage cost.

Perfect. That makes perfect sense. Thank you guys.

Your next question comes from the line of Trip Chowdhry with Global Equity Research.

Thank you. And a good execution in a very difficult situation. Two questions here, first on your assumptions for rupee/dollar exchange rate. What are you assuming for fiscal year ’07?

Well, it’s Bala here. We normally give the guidance in dollars and translate it to rupees using the exchange rate at the end of the year. We assumed the rupee rate at 44.48 for the guidance.

I think, don’t you think that is very conservative? And the reason I am saying that I am running some models on my own, and talking to a few economists. The cost of oil continues to rise. And India is totally insufficient when it comes to oil. And some people are saying it may reach INR48 equals $1.

If that is the case where does your fully diluted EPS estimate come in? Because, by the way, the $0.56 you mentioned was on basic share count. On the fully diluted basis it was $0.54, and I believe your guidance is based on diluted, not basic share count.

Oh no, our guidance is based on basic number of shares, not on diluted number of shares. And on the rupee/dollar rate, the market is very volatile, there are various factors which play in. It’s not only the oil price, the Indian economy is growing strong, it’s attracting a lot of capital. So the inflows also make a difference. So, sorry we don’t’ try to be God and try to predict the rupee/dollar rate for the whole year. We take what is the reality as of March end and use it for guidance.

That is good. Also a few data points we collected, IBM Global Services becoming very, very aggressive. And a few of our contacts told that you missed a couple of deals to IBM Global Services. I was wondering from execution and tactical point of view, what are you doing that such a thing doesn’t happen in future?

We compete very well with the multi-national companies. We have won deals against some. There have been projects where the client brought us in to take over in some cases. I don’t want to be specific about who were the competitors in those cases. And we do compete very well with these companies.

We are seeing that when the deal gets split between infrastructure and application, we have an upper hand on the application side. And more and more on the -- infrastructure side also we are seeing that there is traction, when the client starts splitting further. Definitely we have a very good chance.

Now we compete using a specific strategy, we look at what is the total value delivered by Infosys. It’s just not rate. The client should look at -- they should look at the quality of the deliverables, the maintenance cost. They should look at how fast the project is completed or cycle time. They should look at the implementation support required, the implementation cost etc. The total cost of ownership and the value delivered by executing that project. And there we are very, very competitive. And we believe, that we provide one of the lowest risk options to our clients, with the high degree predictability we have in delivering on time and within budget. We compete very well with these multi-national corporations.

That is good. Also internally, last time Mohan mentioned that there was some skills mismatch between what they have on bench and what the customers are wanting. Two questions, has that been fixed? And another data point we’re collecting is that the project management layer internally within Infosys is the big spot in terms of execution. Are we doing anything to strengthen that earlier within the corporation? Thanks and all the best.

The mismatch was essentially between the kind of work that was happening and what was inside. I think most of it has been fixed. You will have seen an accelerated degree of hiring for people in the second quarter, third quarter and the fourth quarter. If you look at the figures you find that for the fourth quarter we have broader utilization. We have more people available to meet customer demand.

And as far as the project management layer is concerned we do have adequate people. One analyst put out a report and we give a clarification on the use of data for that. We are a role-based organization where we have mapped competencies for each role. And that competencies ensures that the person who fits the role meets the capabilities required of that particular role. And we have an algorithm in terms of the number of people required at the senior level, the middle level and the development level. And we are well within that.

The challenges for companies as they grow is that when business becomes extremely complex you have a number of verticals and horizontals. And you keep getting projects from time to time, finding the right skill base to meet the right kind of requirement. And typically, as Shibu said in our conference call in the afternoon, we have a success rate of 98, 99% in finding these matches. And we normally do about 4,500 to 5,000 projects a year, about six to seven projects could go wrong in a year, which is a very, very insignificant percentage compared to the industry overall. This issue sometimes gets too overblown when people talk about. We don’t see this as a genuine issue.

Very good. All the best. Thank you.

Your next question comes from Mitali Ghosh with Merrill Lynch.

Hello. I actually wanted to dwell on two aspects, one is on the pricing environment. We have had some discussion even in the call in the morning. But just wanted to understand, how will you compare the pricing environment today versus about a year back?

And also in terms of -- on a like-to-like basis, and also in terms of the kind of increases that you might be seeing from your existing customers when they come up for renegotiation?

This is Shibulal. Our pricing environment continues to be as stable as the network buyers. What we said in the previous quarter holds good. The new contracts which we are signing now are coming up at about 3 to 5% [inaudible] in total average. Also on the renegotiations we are doing for the current MSAs we are getting 2 to 3% higher rate in most cases. This quarter we have seen an up-tick in the revenue productivity 0.7% than that basis. So the pricing continues to be stable with an upward bias.

But should we -- if you were to look at it about a year back would you say that the environment is actually a little stronger, in terms of pricing power? Or would you say it is just similar?

A little stronger. I would say that it is a little stronger.

Right. And this is only if you are trying to pass on a wage hike, or even from a demand perspective the bar is actually improving?

I don’t think this is something to do with a wage hike. I think it has something to do with the demand and also the cost of living going up and things like that. The demand also is a little bit.

Okay. That’s very helpful. And the second thing I just wanted to understand was on the client mining whether Infosys has shown very superior client mining in the industry. And two things there, one is the top 10, the growth that you mentioned Mohan, is that something -- has the top 10 changed between Q3 and Q4? That’s one question.

Actually if you look at our top five customers it has gone up in percentage from 17.6 to 18.6 from Q3 to Q4. And top 10 clients, it has gone up from 29.9 to 31% in Q4. Which means that, and our repeat business was a strong 92% in Q4. Which means that we have been able to mine our existing customers and that the large customers which we have, the top five and the top 10 customers are increasing our investment base slightly but that is growing strongly. I’ve got the names of these customers, who are the top five and the top 10 keeps changing quarter to quarter.

Okay. So even between quarter 3 and quarter 4 it has changed, you are saying?

Yes.

Okay. Do you track the statistic which will say what your top 10 customers were in Q3? How that set has grown in Q4?

They have grown in Q4.

Above Company average?

They have grown probably because the number of changes in these customer base top 10 cannot be more than two or three. So in that sense they have grown above the Company average.

Okay and one final --?

In the top 10 only -- in the top 10 only one client has declined sequentially. So I think there is much more stability in the top 10. We have said earlier that changes in the top 10 are a normal feature of life. Every quarter, in the top 10, some clients could decline sequentially, most clients would grow. And that gives us a good growth rate.

And we also said that we can manage a churn in the top 10 in any quarter. But last year we had a top 10 churn. And also we had a decline in one vertical, in Financial Services North America, and that’s what made the first quarter of this year much less than the normal growth rate. You don’t see that happening now. This quarter we have seen only one sequential decline in the top 10. I think the top 10 is in good shape.

Okay. That’s good. And just one final question if I may. In terms of the training capacity, Mohan, if you would give us some update? What that kind of number is? How much are you investing in training etc?

Well, we are expanding the training facility in Mysore by adding another centre which can train up to about 9,000 people in a single sitting, in addition to the 4,500-people training centre we have, we are also building 7,750 rooms. Work on the training centre has started, and the rooms should start because we need to get some statutory approvals. And I think by the end of this fiscal ’07 both will be in place and we will have substantially added to our training capacity.

Okay. Thank you very much.

We will be spending about $150m on both of them.

Your next question comes from Ashish Thadhani of Gilford Securities.

Yes. Good evening. Could you break out the performance of your subsidiaries? I believe in the last quarter you disclosed a combined deficit of $2.4m on revenue of $28m. What might be the comparable number for this quarter?

The combined revenue of the subsidiaries this quarter, that is the fourth quarter, is about $54m. Last quarter was not $28m. I think it was much more than that, $54m. And we had a net income on that of approximately $3.6m. The $3.66m on $54m is about 6%, slightly more than 6%. So if you take 6% and the fact that we have a net income of close to 26% it meant that 20% of $54m is about $10m, is the profitability in the core business.

And in your fiscal --?

Profitability of the (multiple speakers) core business which has made up for the subsidiaries.

Right. And in your fiscal ’07 guidance, what assumptions might you have made implicitly for these subsidiaries?

Bala here. I think fiscal ’07 we are assuming that Progeon and Australia will continue to make profit. And China and Consulting are still in the investment and growth phase. So they may be incurring losses. So we assumed something around $8m lost on both of those subsidiaries.

For the last two subsidiaries. Okay. And what kind of headroom do you see in -- specifically in offshore revenue mix which was 51%? And utilization which is at 77% over the next year? What might be assumptions on those two specific metrics?

Well, on offshore we currently are running at 32% on site and 68% offshore from an applied basis. The -- this number would stay around the same, it may go up or down a little bit. But our target today, our goal today is to keep it around the same number.

Then the second part of the question was on utilization. We deliberately brought the utilization down to 77% by increasing hiring, so that we are prepared for fiscal ’07. We are in a better business environment today. And if, let’s say, the business picks up we should have sufficient number of people to take advantage of that situation. Clearly the business environment is better. And we decided that we will run at a slightly lower utilization, so that if need be we can accelerate growth.

Okay. Thank you.

Your next question comes from Joseph Foresi from Janney Montgomery Scott.

Hi gentlemen, good quarter. My first question is around human resources. What plan do you have in place or what do you have in place right now to bring the trainees in and get them trained effectively and get them on the job well? And do you see the pool as being very stable?

When a trainee joins they go through a 16-week training program. During the training in the first six, seven weeks they are taught the foundations of computer science, the fundamentals of computer science. And the remaining eight, nine weeks they are taught specific technologies and specific methodologies. For example, Microsoft .NET architecture and technology or Java J2EE technology and things like that. And during this training they further are tested and about 2 to 3% of people do not make it through the training right now, so it’s a very rigorous training program.

After the training they are then added to the available pool, and then they get absorbed into projects over time, even when they join the project they are mentored and they are supervised to make sure that they are indeed delivering to the expectations. Typically the first full year, that is the 18 week training plus the remaining 36 weeks, they are “in training” in some sense.

So we have a very rigorous program. And then on an ongoing basis we have training on technology, on project management, on industry vertical knowledge, as well as leadership training. So training in process, learning it in process is a lifelong journey.

My second question, as far as recruiting, can you give us a rough idea what the split is versus campus and middle management? Or where it may be going -- where it may be headed in ’07?

We recruit 70% of our requirement from campuses and 30% at experienced level.

Okay. And just one last question on the competitive environment. Do you see yourselves being continually asked to participate in larger deals? And do you have any strategic plan as far as mergers and acquisitions are concerned going forward? Do you have your eyes on anything in the U.S. or abroad?

We find ourselves making the first cut in almost all large deals, in several of them, making the final two, three. And -- especially if it is an application outsourcing situation we do make the final two, three. And then depending on how we are able to fit the requirement of the client, based on the terms and conditions etc, how the client’s expectations meet our expectations, then the deal gets decided. We win some, we lose some.

The second part of the question was on mergers and acquisitions. We are constantly on the look-out for companies to acquire. We look at acquisitions as a way to fill a strategic need of the Company, such as accelerating our growth in Continental Europe, which requires local language skill or filling out our portfolio in an industry vertical like insurance or life sciences or financial services or something like that. We can buy somebody who is doing a niche consulting in that industry, or who has got a solution for that industry. But we are also cautious in the sense that we have certain -- laid out certain parameters. And only if those parameters are met we will go through the acquisition.

Okay. Thank you.

Your next question comes from Julio Quinteros of Goldman Sachs.

Good morning. This question is either for Mohan or Bala. And I guess actually congratulations to both of you guys, Mohan for a job great -- well done and Bala for your future endeavors here.

I guess let me just get right into the first part of my question is -- related to margins and the decline in margins that is -- that we saw in the current March quarter. Can you decompose the components that drove the decline in margins? In your prepared statements I think you talked about the rupee having a 1.3% margin drag. Can you walk us through the other elements?

And then related to that, how should we think about the margin profile of the Company, as we go through the quarters in fiscal year 2007? It seems to me like you will still see some pressure out of June, with the assumption that we would get a lot of recovery as we go through the back half of fiscal year ’07. I just want to understand how that progression looks.

Yes, let me explain this change. The impact of the rupee has been 1.3% negative. Increase in depreciation is 0.9% because in the fourth quarter we had a higher depreciation charge compared to the third quarter. In the fourth quarter the depreciation charge – I’ll just read out the number to you. In the fourth quarter the depreciation charge was 5.5% of revenues. In the third quarter it was 4.6% of revenues. We have 1.3% and 0.9%.

And then we had an increase in personnel costs of 0.7%, not on a per-capita basis, but just because we hired more people earlier than what we had given in the guidance. And we built up the number of people to take care going forward. And that was 0.7% of cost. So if you add up all that you get about 3% of cost. And the 3% of cost makes up most of the decline in the margin of 3.1%.

Going forward for the next year, is it going to be made up in the first quarter? I will ask the new CFO, Bala, to answer that. Because he will have to answer you back after the first quarter.

Well done.

Bala here. In the first quarter we assumed operating margins to slightly come down maybe 100, 150 basis points due to the fact that we had the increased radius in India. And also outside India that allowed some impact on the margins. But over the years it gets normalized and on a year-on-year basis we assume that the margin should be stable.

And that scenario is a flat year-over-year operating margin for fiscal year ’07 versus fiscal year ’06?

Yes, you are right.

Okay. And can you talk about the levers that are available to improve margins as you go through the course of the year? Obviously I understand that growth is a big part of it. And as we -- how much more can you benefit on the SG&A side? Can that go down?

Is there opportunity to improve utilization, pricing? Talk about the dynamics that are still available to you to help you offset the wage increase in the June quarter, as you go through the next three quarters in fiscal ’07?

Well, there are multiple factors; one is the onsite / offshore mix. That’s -- in all the margin offshore is higher than in onsite. When any shift in that will give us some benefit.

Number two, even though we talk about the increase in wages in India between 14 to 15%, if you look at year-on-year since we are adding some 25,000 people that we took on for next year, which consists of around a 66% threshhold. So the average per capita cost is not going to grow at the same level. That gives you some benefit.

And second, on the G&A side the absolute value is not going to grow in tandem with the revenue. That gives you some benefit. And utilization rate, any improvement will give us some 30, 40 basis points of benefit on the margin. So we have a lot of levers. G&A is the biggest thing.

And the pricing we assume to be stable. And if the mix changes due to increase in value-added services like package implementation or consulting, that may give us some benefit. So we have several levers. And all these levers put together we assume that the margins to be stable for next year.

Okay great. And just for my last question is related to the tax rate. The assumption for the tax rate, it looks like it’s a little lower than what I had. What’s driving the change in the tax rate in fiscal ’07 versus fiscal ’06?

Well, in fiscal ’06 the effective tax rate is something around 11.4%. We had some tax write-back in the third quarter of fiscal ’06. If you discount that it will be around 11.5 to 11.9%. Going forward in fiscal ’07 we assumed it to be stable with the effective tax rate of something around 11.5%. Some of the units which are operating under the STP scheme may grow out of tax holiday at the end of fiscal ’07. That will have some impact on fiscal ’08. But it’s not a material impact. The majority of the units get out of that holiday in fiscal -- the end of fiscal ’09. So I think for next year we assume that effective tax rate to be in the region of 11.5 to 12%.

Okay. Great. And just finally, this is just more of a -- just a broader strategic question. Given that a majority of your people are still going to be coming from the campus levels, do you run a risk, and this is a longer term strategic question about the type of profile that you are hiring and the kind of work that you would like to get to, meaning that if you truly want to get to the higher end work, is the current base of employees that you are hiring the right base?

Well let me [detail] the model for you. At the very top of the pyramid we have Infosys Consulting which has 170 people and which is ramping up very rapidly. It’s the top of the line consulting who get paid $220 plus for consulting work. At the next level we have the enterprise solution group which did about $330m of revenue, who are into SAP and Oracle implementation work. And they have 2,500 MBAs in the 4,500. And they’re certainly growing at about 50%-plus or thereabouts on an average for the last many years. And they have superior margins and their rates are much higher. And they are going to grow very aggressively.

At the next level we have a solution design group, and the solution design group is also helping [envisage] the verticals, and the horizontals so that we could add greater value to our customers. And they are a small group but they are driving the value-add part of the work.

It is true that we are adding a lot of people at the bottom of the food chain because that is what is available. At the middle level, when the industry grows at 30% a year for more than 12 years, consequently there are going to be some stresses. That is why we are focusing on hiring at the top and the near-top. And this will -- this will disproportionately add to our revenues because they are growing faster and they have higher per capita revenues.

And from the middle and the bottom we are driving the capabilities of people up by certification programs, by training programs, by a richer mix of experience and by job rotation etc. So we have developed a model which takes care of this issue and gives us enough room for growth as we go along.

Okay, thank you Mohan. Final question is related to attrition, attrition on a terms-open basis looks like it went up. Can you talk about where the people are going. Are they going to competitors, multi-nationals, captives or back to school?

Well, 45% of the people go to other companies and we track the number of companies, names of companies from what they tell us. We don’t see any large number. Maybe the largest number of people is 100 who go to any particular company. And we are not worried about that. We don’t see some other names you talk about at the top of the list.

Two, about 25% of the people go to -- go for higher education or go to profile education. And the balance drop out of the race or don’t tell us where they are going. So we don’t know about that. So that’s a residual amount. If you look at the attrition, it’s 11.2%, and the bottom 5% has got an attrition about 50%. So that is 2.5%. So for the balance we have an addition of 8.7%, which is very good. And we count attrition from the day a person joins either as a trainee or on probation until the person leaves, unlike companies we do not take the period of probation or the period of training for counting attrition.

Anyone in the training program, maybe 2% of the people who join, do not pass through the training program and they leave, and they add to that. If you look at the number of years experience and when people leave, people who have been with us more than six years leave us maybe 6.5%, at 6.5%. And people who have been with us between one to three years have about 14%. And people between one to three years typically have a higher attrition rate because they would have finished the training and some of them want to go for higher education. Some of them want to change location. A part may go elsewhere.

So overall it is a very comfortable scenario. We have a very tough metrics collection in the sense that our standards are very, very high. If you compare us with other companies you ought to make sure that the standards for all of the companies are high. We take it on a rolling average basis for the full year on an LTM basis. We don’t take the year-end figures or figures like that with the larger base to calculation the attrition.

And thank you for joining us today.

Okay. Great. Thank you very much.

Your next question comes from Abhishek Gami of Banc of America Securities.

Thank you. A little follow-up on the attrition question. The 6.5% rate for your more experienced people, how has that trended throughout fiscal ’06? And what are your expectations for overall attrition, especially at the higher end level for fiscal ’07?

I think our expectation for attrition at the higher levels would be that they would be less than the Company average, because that is the record. High levels have a lesser attrition than for the entire Company because most of the attrition is in the one to three year level. For example at the level of one to three years we have 14%, like I said earlier. And at the higher levels the attrition comes down. And we would expect the same level of attrition going forward.

In the quarter just gone by we hired about 1,200 lateral in the services business which is very -- which is a basic business, up from 740 the previous quarter. We have a large lateral training -- lateral attraction program which is working very well. The Indian has been turned on, the Indian is tracking well. And I think we are going to attract a lot more laterals. I think this is an issue which has been slightly overblown, because we discussed the issue three quarters back and we have passed any of these challenges.

Okay. Great. So what is baked into your guidance for fiscal ’07 for total attrition?

Well, I would expect maybe 9 to 11% is the range that we would expect, which is built into the model.

Okay. Great. Thank you very much.

Folks, we have to end this conference now. And I want to make a personal statement. I will be stepping down as CFO with effect from the end of business hours on April 30. My colleague, Bala, will be taking over from May 1.

I want to thank all of you for the wonderful time that I have spent talking to you, and discussing with you and answering all your questions and for taking your calls on all the quarterly shows that we had. It’s been a very enjoyable experience. I want to thank you for your kindness and for putting up with me, and spending time. I do hope I’ve answered all your questions to the best of my ability.

Thank you. Goodbye. And I do hope that we will continue the wonderful relationship that we have in terms of being able to answer the questions. And carry on with my colleague Bala who’ll succeed me on May 1. Thank you very much.

Let me also thank all of you for taking the trouble to come on the Easter weekend for this call. And we are indeed grateful. And we are sorry for any inconvenience caused to you. And you know we are -- we look forward to talking to you next quarter. And also if there are any other further questions please email them and we will be happy to get back to you. Thank you very much. And goodnight and good afternoon.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.