Infosys Ltd (INFY) 2006 Q1 法說會逐字稿

Good morning. My name is Cynthia and I will be your conference operator today. At this time, I would like to welcome everyone to the Infosys Technologies first-quarter and financial year 2007 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

I would now turn today's call over to Infosys Technologies management. Please go ahead.

Good morning and thank you all for joining us today to discuss the financial results for the quarter ended June 30, 2006. I am Sandeep from the Investor Relations team in the U.S. Joining us today on this conference call is CEO, President and MD Mr. Nandan Nilekani, COO and deputy MD, Mr. Kris Gopalakrishnan, and CFO, Mr. B. Balakrishnan, along with other members of the senior management.

we'll start with a brief statement on the performance of the Company for the recently concluded quarter, followed by the outlook for the September -- for the quarter ended September 30, 2006 and the year ending March 31, 2007. After that, we will open up the discussion for Q&A.

Before I pass it onto Mr. Nilekani, I would like to remind you that anything that we say which refers to our outlook for the future is a forward-looking statement and must (indiscernible) that the Company faces. A full statement explanation of these risks is available with our filings with the SEC, which can be found on www.SEC.gov.

I would now like to pass onto Mr. Nilekani.

Thank you, Sandeep, and I am indeed very glad to invite all of you to this analyst call, and I do hope that we are able to answer all of your questions in the next one hour.

I think this has been a good quarter for Infosys. Even as we speak, global spending and momentum growing for our business model. We are finding that our robust organic growth is being fueled by the fact that, in the last few years, we've done a lot of brand-building of Infosys, so Infosys is a well-known brand among our global clients. Therefore, our client base has gone up (indiscernible) clients giving us more than $1 million of business, we have 11 clients giving us more than $50 million of business; we have 2 clients giving us more than $100 million of business. So we're able to create the market share and the mind share in the minds of the clients. And complementing that has been the fact that on the delivery side (indiscernible) scale, execution capabilities and end-to-end service offerings to take full advantage of the market opportunity.

Thanks to this, we've been able to have volume growth of 11.3% sequentially quarter-to-quarter, and also further (indiscernible) depreciation of the rupee to the dollar we've been able to have a 15% growth in (indiscernible). (indiscernible) the overperformance and depreciation, we have realized a guidance under U.S. GAAP to something like 35.4 to 35.9, now close to 36%, and in the rupee terms we're realizing (indiscernible) 40%.

So I think this essentially -- later on, my colleague Kris will talk about some of the reasons and all that, but fundamentally, I think this is one more revalidation of the fact that our business model is really very, very clearly superior one; it's a model of IP services that delivers faster, better and cheaper services to customers. As all of you know, in any industry, if you create a business model and value proposition which delivers faster but then cheaper services to clients, then they will switch from the old to the new. Therefore, (indiscernible) is really a (indiscernible) behavior where people are switching from the legacy firms to the new firms; the people are switching from the old to the new from yesterday to tomorrow. We think that this is just one sort of (indiscernible) are in the marketplace. As I explained, Infosys I think is particularly well-placed because of its strong market position.

Also, I think (indiscernible) for a long time now, the structure and benefits of our business model can only be achieved if we build our business model organically. This cannot be done through (indiscernible) from the legacy model to the new model. We believe that has huge consequences in terms of rebalancing the workforce, organizing structure, (indiscernible) issues, control issues, (indiscernible) issues between locations (indiscernible). So these kind of business model changes cannot be done on the fly. (indiscernible) build them organically. I think (indiscernible) the Infosys business model has been a strong (indiscernible) to organic growth where step-by-step (indiscernible) both on capabilities on the scale -- from the scale on one side, and on the brand/client acquisition account management on the other. So I think (indiscernible) these results of this quarter is nothing but a very strong validation of what we have been saying now for several years. And I believe that all investors and all of our analysts need to look at very clearly the dynamics of this industry and the long-term consequences of what we're doing to the entire info system of the industry, as they make their future investment decisions.

With that, I request my colleague -- incidentally, while I'm waiting for an announcement I want to make, is that we had a couple of senior management changes that I thought I would share with you. We have Mr. [Narayana] (indiscernible), our Chairman, who has held that distinction for the last 25 years. He is turning 60 on August 28, 2006 and as to the service rules, he will retire from service on that day. And the Board as a result has appointed him as an additional director, and he will become the non-executive Chairman of the Board from August 31, 2006. Also, given the similar role that he has played in the creation of this company and its history so far, we have requested him to continue as a Chief Mentor which, we believe is a (indiscernible) that will enable him to (indiscernible) the leadership and advise and (indiscernible) for our upcoming leaders of the Next Generation.

At the same time, we are also happy and proud to announce that Mr. Gopalakrishnan, who is currently the Chief Operating Officer and Deputy Director, is being promoted and redesignated as the President, Chief Operating Officer and (indiscernible) Director. This will also come into effect from August 21, 2006. We believe this is a very welcome and very desired development, and Kris will play a very, very important role in the future of this company in this new, expanded role.

With this, I will hand over to Kris to speak on some of the operational highlights.

Thank you, Nandan, and good afternoon, good evening, good morning to each one of you.

As Nandan already mentioned, we have seen all-around growth this quarter. From a geographical perspective, the U.S., Europe has shown growth, especially Europe, compared to other geographies. From an industry perspective, telecom, financial services, manufacturing are all (indiscernible) growth and these being the strong verticals, industry verticals for Infosys, have of course helped us grow. Similarly, from a services perspective, package implementation testing, (indiscernible) process outsourcing application development, all have shown growth. We have two plans (indiscernible) have grown to $100 million spend rate, and we have about 11 clients who give us $50 million or more. So clearly, from a client perspective, from our ability to mine existing relationships from an industry perspective, geography perspective, services perspective, we have seen growth.

Currently, as Nandan said, we have $221 million clients. We added 38 new clients this quarter. The top five clients grew 90% quarter-on-quarter in this quarter. We have 8097 employees this quarter; that's a gross addition of (indiscernible) 11.9%. We've added [50] more people in sales. In fact, our sales of marketing expense (indiscernible) quarter because of this additional people. We have (indiscernible) in India. We have (indiscernible) in India. This has had an impact of 3.3% on our revenues, and 3.3% on our margin and you know, this is offset by depreciation of the rupee and a reduction in the depreciation (indiscernible) Bala will explain.

All in all, we have seen all-around growth, as I said, and in a good quarter.

Now I will turn on to B. Balakrishnan, CFO, to talk about the numbers.

So, good evening everybody. Good morning for some of you on the other part of the planet.

This quarter, we've seen the revenues grow by 11.3% sequentially. It [compresses] of the 8.5% growth because of (indiscernible) around 1.8% growth because of the (indiscernible) capital revenues. On-site revenues grew -- on-site capital revenue grew by 1.1% (indiscernible) by 0.2%. On a blended basis. it grew by 1.8%.

This quarter, we absorbed the impact due to rate increase. We increased the (indiscernible) in India effective April 1 of 14 to 15%, and (indiscernible) salaries by 3%. (indiscernible) of 3.3% on operating margin.

During the quarter, the (indiscernible) investment in research. We spent around $11 million in investing in research. We've made applications for close to 3500 [visas]. Because we've heard that (indiscernible) incremental basis, we need to reinvest in the business and that's what we did. And the (indiscernible) impact of stock acquisition costs of around $1 million had an impact of [0.2]%. So while we observed an impact of 4.8%, we had a positive (indiscernible) because of the rupee. The rupee depreciated by 3.6% during the quarter. (indiscernible) ratio will be what 45/65 this quarter as compared to 44/22 last quarter. So it carried a positive impact of 2.2% on the operating margin. Depreciation came down by 2%. Last quarter, we had a one-off impact because we had (indiscernible) in the UK that is not there this quarter and the depreciation normalized. So overall, we had a 4.8% impact and a 4.2% benefit because of the rupee depreciation, and the operating margin came down slightly from 26.3% last quarter to 25.8% this quarter. So, we were able to maintain the margin in spite of rate increase and incremental investment in research.

Going forward, we increased our guidance for the full year. Initially in the beginning of April, we gave a our guidance of 28 to 30% for revenues; we increased it to 35.4% to 35.9% in revenue terms. And in terms of the EPS, it will grow from 32.4% to 33.8%.

If you look at the cash flow, we had (indiscernible) the minority interest in Progeon. We paid around $[16] million. The (indiscernible) the minority stake in Progeon because (indiscernible) in goodwill and also intangible assets on the balance sheet. (indiscernible) $91 million in goodwill and 90 million in (indiscernible) because of the acquisition of minority stake in Progeon.

So overall, it's a good quarter. We had absorbed all the costs and we have maintained the margins, and going forward in the guidance, we assume the revenue (indiscernible) capital revenue to be flat. We have not assumed any increases (indiscernible) capital revenue. Currently, we believe the environment is stable with some of the new customers coming at higher price points. We have not assumed any big deals. Most of the growth is organic growth. We are not looking at any inorganic growth in the guidance. So overall, it's a good quarter.

Now, we will open up for questions.

(OPERATOR INSTRUCTIONS). Alan Hellawell, Lehman Brothers.

Yes, thank you very much. Two questions -- you've stated that you're quite optimistic of higher clients than in FY '07, and top five client spending has increased. Can you actually give the figures of absolute numbers about -- on top five clients' spending, year-on-year?

As I said -- this is Kris. As I said, in this quarter, the top client is 5.8% of revenues. The top five clients constitute 19.5% of revenues. The top ten clients constitute 31.7%. And the top 20 clients constitute 47.3% of revenues. Top five clients have grown by 19.1%. The top 10 clients -- (technical difficulty) -- 13.8%, and top 20 clients by 9.8% in this quarter.

Okay, great. The other question I have is you are obviously investing a large amount of resources and you've profiled it at the learning and development center and in Mysore. Can you give us a sense as to whether you think that's going to have an appreciable impact on attrition rates and staffing of projects? I mean, specifically from which quarter would you -- if there is a material impact -- would you see tangible results from this investment program?

So out of the 8097 people, we have recruited about 2000; about 1900 people are people with prior experience. So the remaining, excluding the additions, is Progeon. Progeon has added about 1000 people. So about 4500 people are part of the Infosys training program now, and these people will undergo training typically from -- you know, most of them will undergo training for about 16 weeks, and some (indiscernible) background (indiscernible) training for about six weeks. They will be absorbed into the project as and when they come off the training. The utilization, including trainees, is about 71% and excluding trainees is 77%.

Now, all the salary costs of these people are already factored into our model. We have given 14 to 15% salary increase in India and 3% salary increase outside India. That also factored in. We already announced that, for the next fiscal year, that is starting April 1, 2007, we plan to increase the salary to 2.4 to 2.7 (indiscernible), which is about 270,000 rupees, from 240,000 rupees, which is an increase of approximately 11, 12%. What normally happens is, when these people come in, that's when we give the salary increase, because every year we've been getting a salary increase. This year, we preannounced it so that we have a better opportunity to recruit the best and the brightest from the campuses. In fact, we have seen that business had a positive impact in our ability to recruit. We have already gone to a few engineering colleges; we plan to go to about 240 engineering colleges. You know, this (indiscernible) 25% people of which 8000 joined in the first quarter. So second quarter, we are looking at 7000 and second half, we're looking at 10,000. So considering all this, we said that we must announce the increase right away, and we are seeing it has positive impact. Does that answer your question?

Yes, I guess one very small add-on question -- so, as a result of all these innovations and development, I mean do you have -- can you talk about what you think, where you think it might take attrition and things like that? Because the profiling of your investment in training is -- at least you've better profiled it of recent, but can you help us think about what -- how that investment might translate into attrition rates and what not?

So, currently, our attrition is 11.9%. It has gone up from 11.3%, so a slight increase. We believe that all these will help us maintain attrition. The competition for resources is severe, but our objective is to maintain our best and brightest people; our objective is to give competitive salaries; our objective is to make sure that we have a very good learning and working environment for the employees. Hopefully, this will keep our attrition one of the lowest in the industry, which is what it is currently and what we're trying to sell now. Our objective clearly is to keep the attrition low.

Thank you very much and congratulations on the very strong growth.

Moshe Katri, Cowen and Company.

Let me also add my congratulations. The question is for Bala. Bala, can you give us an update on the ABN Amro contract, specifically where we are in terms of ramp up and in terms of the impact from ABN Amro on earnings so far?

The ABN Amro contract is still in the (indiscernible) space, (indiscernible) space (indiscernible). The impact of that on the margins is very much limited, because our business (indiscernible) and as we said earlier, (indiscernible) the margins will be similar to what we earned in that sort of business. So, the ABN AMRO deal margins does not impact significantly on the numbers what we have today.

Okay, then the various investment initiatives, North America consulting, China, Austria -- is there anyway also to quantify these investments in terms of their impact on EBIT margins and also get an update on when are we going to get or are we getting to a breakeven level on each one of these three investments?

Sure. China and certainly in Australia (indiscernible) we felt that we had a lot of 2.2 million (indiscernible) China and 4 million in Infosys consulting total in the (indiscernible) space. Consulting may breakeven in the next three to four quarters. China will take some more time because we're just starting up. It will take some time for it to come to steady-state.

Progeon Australia particularly (indiscernible) so overall net-net, if you look at the numbers, the numbers (indiscernible) impact of $6 million of investment, both in China and Consulting, and going forward for the full year, we would be observing something around 15 to $16 million due the (indiscernible) China and consulting.

Okay. Then just finally, just a general big picture question -- any comment on IBM's plans to invest about $6 billion in India? Have you seen IBM in the market? Have you seen them recruiting aggressively? Because we are scratching our heads here trying to understand exactly what you can do with $6 billion in India in three years.

Well, it's very inexplicable for us also. But I think -- you know, we welcome it in the sense that I think IBM is coming to India and we will see (indiscernible) a big (indiscernible) in India and we welcome that. So we have absolutely no issue in terms of competitive pressure and so forth. So, we can't really say we have heard anything on the -- we aren't really seeing any impact on the attrition side because of that specific factor.

As we have said for a long time, the fundamental thing which is happening in this industry is that we have a deceptive model. Now, whenever you have a deceptive model in any industry, there's unpredictable behavior of the incumbent. First, the incumbent ignores this assumption. Then, because we've just (indiscernible) [left field], then over time the incumbents tend to (indiscernible) this -- the deception and then grudgingly acknowledge. Then finally, as (indiscernible) and we embrace the deceptive model, so in a sense, you are seeing that kind of evolution happening in the marketplace.

Also, I think, frankly, my view is, if any company really wants to grow this business and really transform to our model, they will have to make investments in training. I think you know it cannot be a model where you establish operations and then just take a lot of people from other companies (indiscernible) a scalable model. I think what distinguishes Infosys is a huge, huge investment in training; we are investing $100 million this year in training. I think (indiscernible) that we are building Mysore into the world's largest, and I think the fact that we can take close to 1.5 million applications a year, identify 25,000 people, bring them to Mysore and train them, that's a serious and strategic competitive position that we have. I don't think that's applicable by anybody in a jiffy. So I think we welcome our competition; we've been taking competition for the last 25 years to -- in many senses, this is nothing but a validation and confirmation that our business model is the model of the future. It has had absolutely no impact on either our recruitment or on our attrition.

Thanks a lot.

Rod Bourgeois, Bernstein.

Our thoughts and prayers go out to all of those that were affected by the Mumbai bombings, and I guess I should ask quickly if these bombings seem prone to have any impact on the business.

Actually, I think this was a very, very terrible act and a really shameful act, and we also -- our hearts have gone out to all the people who were innocently killed and injured here. But you know, also for Infosys, we don't really have that many operations in [Bombay]. What we do have is people who support our various banking clients, and we're not having any impact of the bombing. We don't believe that this really has an overall impact on the business because today, we have seen terrorism in New York, we have seen tourism in London, we have seen tourism in Madrid. So I think there's no part of the world which is insulated from these kinds of dastardly acts. So I think people understand that, and I think the India story, the India outsourcing story is as strong as ever. I think the impact that the people of Bombay have gone back to work and gone back to business today, shows their courage and their resilience.

Okay, great. Two other quick topics -- what caused the mix shift towards on-site revenues, and to what extent will this mix shift towards on-site potentially continue in upcoming periods?

So, on-site percentage has gone up to 33% [late], and this is due to an acceleration of this growth, and the growth accelerates. Clearly, we've more projects starts and this is a reflection of that. Our target on-site percentage is somewhere between 32, 33, 34% and it's well within that range. We believe that Infosys manages its percentage very well, (indiscernible) as we have in order to manage our margins, and we've managed this very well.

Okay, so is that -- is the on-site revenue percentage likely to attenuate in upcoming quarters, or to the mix shift towards on-site continue?

It will be in a narrow band. The reason why I'm saying this is if growth continues (indiscernible) on-site will be slightly on the higher side of this band, and as it reaches a steady-state(indiscernible) then it comes back to -- I don't know, 31, 32%.

Okay, all right. Then you know, turnover was up and you're clearly increasing wages for [freshers]. You know, the competition for talent is definitely severe, as you characterized it. The question is whether you are seeing more pressure from wage inflation and supply challenges than what you expected earlier this year. In other words, you know, when you entered the year, you were seeing a set of trends. The question is are those trends intensifying versus where you started the year, or is this about what you expected?

I think -- (indiscernible) here. I think, in this year, we set back to (indiscernible) strategy after we spoke to you in May, and we said, one, we ought to get the best people young minds in the business to walk inside the door and stay here; and two, we also had to make sure that we retained people who will spend a year or year and a half with us, as we have the highest attrition, the one to three year (indiscernible). We look at our competition structure over the last four to five years. Well, the last four years, the compensation has been restructured for people who are in the higher levels, people with six to seven years experience, and it's reflected with lesser attrition whereas people in the one to three years have not seen such a big increase in compensation, and that is at least part. These are people who are required to fill in project positions and [leave them in] larger numbers. We have been (indiscernible) adequate (indiscernible) of senior people where we need people at the bottom and people who come up fresh. So, recently we do three things. First, we made sure that we restructured compensation for pressures so that we get the best, we get the largest number that we want, and we're not forced to hire from the marketplace. (indiscernible) used to get about 40 to 50% of the people at entry-level from the colleges, and the balance to the marketplace during the course of the year. We said that the strategy is good, but what we get in the course of the year is not the same quality as in the colleges, and you also (indiscernible) [increase] in the colleges. The [increase] from the colleges is that we will (indiscernible) slightly more.

Two, if you went out to the marketplace and the colleges and told them that we wanted the top (indiscernible) people from colleges, because everybody is a narrow band and normally what we used to offer was a salary for (indiscernible) joining this year, or next year, then to join next year they're going to hire. So we said, we will take next year's [height] and make the offer right now for next year, and when they join, not hike it further. (indiscernible) offered more we got about 8000 people who are signed up for fiscal '08.

Third, we said, in the one to three-year band, you also research your compensation, so in the first (indiscernible), in the month of April (indiscernible) 3% height from the 1 of July for this (indiscernible) further 8% (indiscernible) $2.5 million a quarter, which is not really significant. And we see we have a very competitive wage structure, there's a great demand for work, a demand from our customers, and we also have all the people possible to meet it. We (indiscernible) hiring in the first quarter 8000 people, so importantly, in quarter four, we will have an adequate number of people to meet demand. Last year, you will notice that we had a great growth in quarter two, so our people strategy has been reoriented. We don't think all of this will lead to any wage increases, because we are essentially (indiscernible) getting salary in the one to four-year band and paying more in the beginning and less [jump] as they go higher up.

Okay, that's very clear. Thanks for that explanation. Would you guys expect wage inflation and turnover issues for your peer group -- for the other Indian IT services firms? Would you expect wage inflation and turnover trends to continue to worsen as the year progresses, or do you see anything happening in the market that would cause the aggregate of the Indian employers to see less pressure from those factors as the year progresses?

Well, obviously, at the entry-level (indiscernible) slightly higher wages go up, you know, the best people who walk into the door at Infosys and hopefully it will result in a better pricing period. So wage increase for us is both strategic and tactical, strategic because the (indiscernible) business in the marketplace goes up, and the people have to have a very (indiscernible) behavior, hopefully. And two, tactical (indiscernible) the requirement for times like now to make sure we meet the needs of tomorrow. I think for other companies, they have to look deeply and reorient what we do.

Okay, so they are playing catch-up to sort of replicate the model that you have.

Well, yes. They are playing catch-up but we (indiscernible) structure which allows wage inflation to ease itself out as it goes out the pyramid, so the average wage (inaudible) increase for the full year will be maybe 40% of the increase in the beginning of the year.

Got it. Thanks, guys, very much.

No, I think it's important to understand that what is happening here is that systematic values of (indiscernible) are timing up on different facets of our business. First of all, I think the size, band and scale is building one barrier of entry. Second, the $100 million a year investment in training is creating another barrier for entry. Third, the compensation package is creating a barrier of entry. Fourth, the growth rate is creating a barrier of entry, because what happens when you have high growth rate is that you're able to essentially spread the cost of compensation over all the pyramids. When a company's growth rate slows down, then it ends up becoming top-heavy and it loses its per capita employee cost. So you have to have high growth rate to pay for all these things. So I think, essentially, we're trying to create a virtuous cycle, which we believe will lead to further consolidation from the pack.

Joseph Foresi, Janney Montgomery Scott.

Good quarter. I would like to concur with the sentiments that our thoughts are with you, given the tragedy in Mumbai. My first question is around the other income line. Can you guys give us a breakup of how much of that is foreign currency gain and sort of how that breaks out?

Well, if we look at the revenue growth, it grew by 11.3% sequentially. 8.5% came because of volume.

No, I was actually looking at the other income line itself.

Other income, okay.

Yes, other income -- I wanted to know the breakout of the foreign exchange gain.

Sure, sure. On the other income side, we had a benefit because of the rupee depreciation, and also the impact of hedging impact came in. Because of the cancellation of the foreign currency assets we have in the balance sheet, we had a benefit of $17.4 million. Hedging, we had close to $300 million of forward contracts and option contracts outstanding as of the end of last quarter, which gave a negative impact of 5.8 million. So net/net, we have seen a positive impact of close to $25 million, because of the rupee on the nonoperating income. But that gave around $0.03, because initially we focused around $0.57, we ended up with $0.63. $0.03 is because of the nonoperating benefit we saw because of the rupee/dollar rate.

Okay, thank you. That's helpful. Just two more quick questions -- given your change sort of in the recruiting and what you've been saying sort of about wage inflation, do you expect wage inflation to rise as sort of a percentage of revenue, or can we expect that to sort of stay stable?

I think it hasn't really (indiscernible) impact. In the initial few quarters, we see the impact. (indiscernible) the whole year, it gets normalized. So in the last few years, we've given 13 to 15% increase. But it's nothing new; it is a manageable issue as of now.

Okay. My last question is sort of around margins. Given what you guys said about the on-site revenue ticking up, just sort of looking at the other levers that you guys have in place, utilization and SG&A spending, where do you see those sort of headed throughout the back half of the year? Do you plan on sort of maybe ticking up utilization or using SG&A to offset any work or impact from an increase in on-site work?

Well, we always said we're comfortable with the utilization rate between 76 to 80. We really want to keep it at the lower end of the range. This quarter, it was 77.3. So we have some levers left there. On the (indiscernible) side in the first quarter, we had seen the sales and marketing costs slightly going up because (indiscernible) investment adding (indiscernible) more. So on the SG&A, we may get some benefit in the next few quarters. As I say, we are comfortable in saying that on a year-on-year basis, the operating margins will be similar to what it was last year. So we have some (indiscernible) there (indiscernible) particularly used in the next few quarters.

Great. Thank you, gentlemen.

Bryan Keane, Prudential.

Just a question on the development revenue -- sequentially, that looked like that popped almost 18%, and it hasn't done that in quite awhile. Anything happen there? Any color on what happened to development?

As you can see (indiscernible) this quarter we have seen serious growth in our revenue, and some of that has come from the discretionary spending from our customers. Discretionary spending is mostly (indiscernible). So that is where you are seeing a growth the development revenue.

Do you expect that to be strong because of discretionary spending looks higher for you guys going forward, or is that -- to me, that's a little bit of a surprise. Is that a surprise number to you guys or did you expect that kind of strength?

If you look at the growth, it (indiscernible) surprise (indiscernible) price but the dollar (indiscernible) together is because the discretionary spending, the application development, increase in the on-site, all these work together. So in that sense, we're not --I'm not surprised.

I don't expect it to go materially high over the next couple of quarters. It will fluctuate within the percentage range of [February 1 '02].

Just a question on the number of clients -- I saw that specifically the $5 million clients ramped pretty nicely to 94; it looks like it's up 13 sequentially. Is that just that you are just gaining market share and wallet share inside of customers that only are 1 million, or is that just a size thing that they just happen to tick over to 5 million? But that looks like a good sign that you are gaining on the wallet share.

Over the last few quarters, we have been investing in our clients, facing people investing in our comanagement, investing in mining these accounts. We've increased our services footprint to make sure that we have the right and relevant services for our clients. So it is a percent of a program we had launched in terms of growing our existing accounts, and that is reflected this quarter. Now all the (indiscernible) consulting, starting our strategic global sourcing group, which looks at larger relationships and larger deals, (indiscernible) management, business process outsourcing (indiscernible) because they become very, very important service in today's world where every business exposes (indiscernible) system on the Internet, and to make sure that each of those systems is (indiscernible) affected and is an important service offered to our clients (indiscernible) I think as a percent of things which we've been doing for the past several quarters.

Okay. Then just finally, on the other income line, obviously that spiked up due to some of the gains on the depreciating rupee. What are you guys expecting or how should we model the other income line going forward in the next couple of quarters?

Well, in (indiscernible) we have not factored in any impact of rupee/dollar rate for the next three quarters (indiscernible) which way the rupee will move. The biggest factor for something like India is the oil price, and in the current term, we believe that rupee will be under pressure in the long-term as economic growth of 8 to 10% (indiscernible) a lot of capital that will put some pressure on the rupee to appreciate.

(indiscernible) model, we have taken a hedging of $[381] million. Our policy is to hedge for the next three to six months, not to predict on the long-term. So we have to manage that (indiscernible) model and guidance we've not factored in any impact of rupee/dollar on the nonoperating income (indiscernible) next three quarters.

Right. I guess, last year, that number was about, well, I guess 9 million, but I guess mostly we just think about that number being just a pure interest income on the cash?

Yes, the interest income on cash has slightly come down because (indiscernible) sales of (indiscernible) million dollars (indiscernible) one-time (indiscernible) -- otherwise, more or less interest income will be stable for the next three quarters.

All right, great. Thanks, and congratulations on the quarter.

James [Friedman], [SIG].

Congratulations on the quarter. I just had a quick question about the customer metrics. It looks like you did 97% repeat business, yet you added nine new active customers; I think that's the highest level since September of '04. Could you comment on the type of work being done at those new customers and how that work should ramp?

Some of them (indiscernible) open (indiscernible) consulting factors. Some are open through other applications development (indiscernible). So we're doing (indiscernible) in the new customers which we're opening. There is nothing special this quarter (indiscernible) that demographic.

Great, thank you.

[Ra Ramaral], [RR] Capital Management.

Good morning, gentlemen. I have one comment and two questions. Number one, in your conference call, mostly analysts participate, and we are an investor. Investors go through the same kind of risk/reward as management and employees go through. So if you can keep some [slot] for the investors, we will appreciate that.

Now my question -- your operating margins are slowly decreasing. Any concern that you have that you will be able to maintain this margin on a going-forward basis in the future?

Okay, so the operating margin normally comes down in the first one or two quarters, because we have to absorb the impact of a business (indiscernible) just normalized when we start adding pressures for the year. That's why we are confidently saying that we will be able to maintain the operating margins on a year-on-year basis even though we have seen a slight decrease in the first quarter because of the investments they make. So we do have any significant concern there. We have several levers on the cost side we (indiscernible) use to hedge against even the rate increase. So our guidance assumes that the model will be stable for the full year.

Okay. Number two question, there is some anticipation that the consumer in the U.S. will slow down and the U.S. economy may slow down. What strategy are you adopting to maintain the percent growth rate in case the U.S. slows down? Will it have a material impact on a going-forward basis on your future growth pattern?

I think, to answer that question, you'll understand the dynamics of this industry. You know, we agree with you that we (indiscernible) a lot of economists that all cover global imbalances and all of that, and we believe there will be a slow down. But what is happening in the industry is that while IT spending is not going up significantly, the proportion of IT spending that a customer is reserving for the global approach is going up. In other words, the offshoring is going up and the global delivery model is becoming more and more acceptable and more mainstream. Large corporations are now willing to make major investments and major commitments to really have thousands of people in a global (indiscernible), say in India. So to that extent, the customer has (indiscernible) bought into the business model for the simple reason that the value proposition that we give is faster, better and cheaper for our customers.

Now, what's going to happen in a slow down is that we believe that, in a slow down, different criteria then start coming into play. Customers want to continue to get more value for money, they want a better value proposition, so we believe that, even when the economy slows down, the pressure on customers to deliver, get more value for their money goes up. To that extent, we think we are in a different situation where we build significant business even when the market is slowing down. In some cases, it could even accelerate the movement towards offshore. To that extent, I think there's a natural hedge in our business where when times are good, we can take advantage of the investments of our clients; when times are bad, we can play to the cost-cutting initiatives.

Now, if the U.S. slows down, can you improve your penetration in the market share in Europe and Japan to maintain the present growth rate?

So, proactively, we are investing in certain marketing in Europe; we've invested in Australia. So we are slowly trying to shift our revenues from North American (indiscernible). I said that I also need to say that North America continues to be the largest market, and also, I think the world (indiscernible) different value that one part of the world will slow down and others won't, so it probably will be a global phenomenon.

I think we can go onto the next question.

Julio Quinteros, Goldman Sachs.

Good evening, guys. I guess I wanted to sort of stay on a similar point with regards to the environment. Part of this is because everything seemed to have worked in your favor this quarter. Obviously, the demand environment was there, the rupee helped, and based on their last conversations, Bala, when we were down there, we talked a lot about how growth essentially trumps a lot of the issues that you would have to sort of face in the normal course of business in the interim. Having said that, if you did everything sort of going right to date then you sort of assume going out that things actually do slow down and things actually, say, decelerate, how are you positioned to deal with that in an environment where clearly your expectations right now are for relatively flat pricing, wages are going up, attrition is staying at levels? So I guess I'm trying to sort of play Devil's advocate more than anything else and understand what you would do in an environment where essentially the pace of growth would decelerating. Can you just sort of walk us through the mechanics of how you guys would think of the world in that sort of event?

So clearly, you are operating at (indiscernible). You know, first of all, as Nandan said, there is an element there which plays to our advantage, which is clients are trying to cut costs and they will be looking at offshoring because of that.

Second, you know wages have been going up for several years now. You know, if you looked at the last few years, we have been increasing salaries by 13 to 15% at least in a year. And our objective is to be the last man standing. Nandan do you want to add something?

Yes. I think to look at the wage issue, I think we have to look from the prism of Infosys and the prism of a global player. See, Indian salaries go up at 14 to 15% (indiscernible) 15% a year. Now, in an organically-based Indian company like Infosys, the contribution of Indian salaries to total revenues about 12%. But if you look at a whole thing, the impact of that is 1.8%. What that really means is that, in the Infosys business model, we need to combat a 01.8% impact on revenues because of wage increases in India.

Now, (indiscernible) global company, you will see the Indian operation is (indiscernible) and therefore you'll see the wage increase 15%. So (indiscernible) the wage -- the prism through which we look at the rate increase and the prism through which a global company looks at rate increases is fundamentally different and you must understand that (indiscernible) and then you'll understand what is the implication of that.

Then I guess just specifically to the bench that you're building, obviously you're bringing on a lot of folks and you're putting them into the training and facilities. How would you manage, in a slowing environment, sort of the bench that's being built? I mean, is it manageable in the sense that if you do see a slow down, those folks don't necessarily create a significant drag or how should we think about that?

Well, when you hire people, you naturally have great visibility for two quarters at least. This quarter, we have great visibility. It means that we hire people against potential declines one quarter down (indiscernible) and in case of a potential slowdown, we probably will hire less in quarter three, quarter four, where we will not make any commitments to hire and there is a pipeline and (indiscernible). It's a matter of two or three quarters.

I got it. Okay, perfect. Maybe if I can just switch gears to something that's a little bit innocuous and on the last page of your disclosures, as it relates to your upcoming stock split. I asked you guys this overnight and I want to just sort of reiterate this and make sure I understand. The one-for-one bonus issue that you guys are getting ready to enact, or tot effect here, will have, according to the notes here, an impact of essentially doubling your share count and having and cutting in half your EPS, based on the note on the last page of your disclosure for U.S. GAAP here. So essentially, when we look at the U.S. ADR stock price, the sense is that that would also be cut in half to reflect the new sort of capital structure. Is that correct? I guess if that is the case, how should we think about sort of a net impact to shareholders as it relates to that stock split? Because that would essentially mean there's no net change to the holdings of the shareholder.

Well, bonus issue in the ratio of one is to one, is similar to a stock dividend of 2-for-1. We are basically capitalizing the (indiscernible) and issuing additional equity. Particularly, what you're saying is right, except that (indiscernible) after the stock split is effective. (multiple speakers) -- number of shares increase -- (multiple speakers).

That makes sense. Then just finally for me, with the large client ramp-ups that we saw, can you just sort of characterize the type of work? Is it recurring? Was there anything that was sort of one-time in nature that would not recur in the next quarter?

No, this is a continuous thing. We have been systematically working to increase our client base as well as increase our interpenetration into existing accounts, relationship model, building long-term relationships is fundamental to our business, cross-selling, up selling, having the right services, which they would demand in the future. All these are part of our strategy. So, this is how we grow.

In any quarter that we look at, 90-plus% of our business is repeat business. So we have to build our existing accounts. That's why we have $221 million relationships and we have approximately -- we have about 127 1 million to $5 million clients. So it is something we proactively build.

Okay. I guess, just in the past, we had seen at least one of your largest clients had had a material ramp-up and then a material ramp-down. In hindsight, I guess a lot of that incremental growth was associated with some major M&A integration work you guys were working on for some specific platform. I'm just worried that, in this ramp-up, that we're seeing something similar, or is this more consistent with the sustainable, recurring revenue model that you guys have been citing all morning?

Yes (indiscernible) impact (indiscernible) broad-based (indiscernible) clients, and the largest client is only 5.8% of our revenues. We work hard to reduce -- keep on reducing that.

Okay, great. Thank you very much.

Joseph Vafi, Jefferies & Company.

Good evening and great revenue growth. I was wondering if we could focus a little bit on pricing. I know, in you're prepared comments, you talked a little bit about some incremental price increases for new work. I was wondering if you could make some commentary on pricing within your base business, change year-over-year or how you see pricing and existing business -- the dynamics there playing out over the remainder of the year.

This is Bala. The pricing is stable within (indiscernible) in our existing -- (technical difficulty) -- in the new business. The new Infosys, which we are signing are being signed at a 2 to 3% increase. On the old work, which we are renegotiating as and when the contracts come up for renegotiation, we are in negotiation. Many of them, we (indiscernible) 2 to 3% increase. So, given that fact, some of it is going back to the revenue productivity. On the other sense, because of the business is so high, it takes time for the -- (technical difficulty) -- to show up.

Also, as clients become larger and larger, some of the old (indiscernible) rates with which we have are kicking in, which is resulting in the price increase. So now, we have become more diligent in our discounting arrangement with customers.

Okay. That's helpful. If we look at the growth here in the quarter by customer size, clearly impressive in growing your largest customer share to 90 to $100 million annual run-rate level on I guess four customers now. If we look at the outlook for the rest of the fiscal year, clearly growth comes from all categories of size companies. But can these largest customers continue to grow from this level, or do you actually think there might be risk that the volume size where they are at now on a run-rate basis could actually decrease for these very large customers?

I (indiscernible) customers to grow but (indiscernible) portfolio, right, because that also implies that (indiscernible) customers it's a fact and it's possible that new customers will (indiscernible) and go forward. So, we believe there's enough headroom in our customer base for growth.

Okay. Then one final question on attrition, which did kind of spike up here a little bit, sequentially. Could you provide some commentary on attrition rates on-site and offshore, and if you are seeing any increase on the on-site employee pool relative to attrition levels?

There is no material change on-site (indiscernible) 11.9%. But at the same time, we have included the (indiscernible) number of (indiscernible) this quarter -- (multiple speakers) -- total (indiscernible) 117 (indiscernible) compared with 1500 last quarter. So, and we've also been able to hold on to [right] performance since we look at our attrition across performance (indiscernible) we would find that there is more and more attrition at the lowest performance (indiscernible) less attrition at the highest performance group.

Okay, thank you very much, gentlemen.

Anthony Miller, Arete Research.

Gentlemen, I've got a follow-on question on attrition and on pricing. On the attrition, yes, you've reported an increase from 11.2 to 11.9, but of course, that's on a parent company last 12 months basis. If you actually look at the quarterly annualized attrition for the whole company, by my calculation, that went up from 14.7% last quarter to 17.3% this quarter. If that's right, then it kind of indicates that attrition went up at Progeon out much higher than the rest of the Company. I wonder if you could comment on that, please, and also give us the Progeon headcount at the end of the period.

You're perfectly right. The (indiscernible) for Progeon for Infosys because both are different business models. Progeon has a business model based upon a much higher attrition level than Infosys, but the attrition for Progeon is high, is about 39% for the quarter. Progeon hired about 1700 people and added about slightly more than 1000 people net, and that [addition] Progeon arises because of two reasons. One, 22% of the attrition is the one, two, three months band where people come in and undergo training but they don't (indiscernible) night shifts and they leave, and about 44% is the 12 months-plus band for the Company's 12 months of training and work, and after that they expect to get a promotion because this is a [natural] industry. So these are the two (indiscernible) is less, but attrition has come down this quarter for Progeon, and the spike is essentially because Progeon. At the Infosys level, it has gone up from 11.7% to 11.9%, and like Shibu said, the attrition is different at different points. And at the experience level, attrition is highest at the one, two, three-year band. The one, two, three-year band is where people come out of training, they get into work, and some of them leave to do their MBA. 22% attrition in the band is because people leave to do MBAs. Only 45% is because they go to other companies or go elsewhere, and other the percentage is for the drop-out or do something else. So it's one, two, three years (indiscernible) and after that, it comes down to something like 7.5 to 8%, which is very, very reasonable.

Are you still therefore happy with this 25,000 hiring number for FY '07, even though the attrition is on the increase?

Well, when you do our budgeting and then you do our numbers for the year, we've built in a (indiscernible) factor. We are well within the (indiscernible) limits.

I'm sorry, can you just give that period-end headcount number for Progeon, as of the 30 of June?

Well, we ended this quarter with 8000 current employees against 7021 employees last quarter.

8012, okay. My second question is really following-on on the pricing. You say that you're able to get some pricing uplift on contract renewals, albeit it's 95 or 97% of your business. Can you tell us then what percentage of your contracts are actually up for renewal this year and whether you would therefore expect to get that 2 or 3% increase on those contracts?

This is Kris here. I think almost every contract has a clause to relook at pricing on an annual basis. You know, some -- only some of them are (indiscernible) will increase, serious increase. Typically, given the nature of the relationship and the relationship is continuing to grow, what happens is the impact will be (indiscernible) because the volumes are going up, and I would say that about 10 to 15% of these would flow into the system to show a real impact.

Now, this is complicated because there are different services sold at different price points, and that is why I'm not able to give you exactly and I don't have that analysis at this point -- (technical difficulty). I'm not -- (technical difficulty).

The line is breaking up a bit there. (multiple speakers).

This is Sandeep here.

(technical difficulty) -- Sorry. So, we, in our market, we review (indiscernible) look at particular service and [devaluation]. I'm looking at the customer level.

I guess related to that and just might last point to this question, can you give me an idea of what your average contract length is with your clients then? I understand this would vary by project, but is there a working average that we can use?

So, there are three types of contracts. We have market (indiscernible) look at a three to five year horizon, define the terms and conditions, define the rates, define the (indiscernible) for review of (indiscernible) rate and then define which services -- (technical difficulty) -- which services would be delivered under this master services agreement. So, each of the projects then becomes a work order under (indiscernible) agreement. Each of the projects will be maybe six months, nine months, etc.

The second type of contract is a maintenance contract for a fixed period with service levels defined, etc., so here, the terms could be three years, five years, sometimes seven years.

The third type of contract is the ones which are recently being won and negotiated (indiscernible) are almost like a fixed-price contract for five years or seven years, where the increase on an annual basis is predefined, predetermined in the contract and there are productivity improvements (indiscernible) are also part of the contract. And these are like the older outsourcing contracts but much smaller in size. You know, they are typically negotiated across multiple vendors and (indiscernible) this is the ABN AMRO type of deal, which we won recently. So those are the three types of contracts.

Thank you. Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I will turn it back over to management for closing remarks.

So, thank you very much for participating in this call and the excellent questions. I hope, as Nandan said, we have been able to answer your questions. If there are more questions, please write to us or contact us through our investment relationship managers, investor relationship managers and we will definitely try and answer those questions.

Thank you again for participating. See you all next quarter.

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