Infosys Ltd (INFY) 2006 Q2 法說會逐字稿

Good morning. My name is Wes and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter results for fiscal 2007 for Infosys Technologies Ltd 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]. 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 ended September 30, 2006. I am Sandeep from the Investor Relations team in the U.S. Joining us today on this conference call is CEO and MD, Mr. Nandan Nilekani, COO, President and joint MD, Mr. S. Gopalakrishnan, and CFO, Mr. V. 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 completed quarter, followed by the outlook for the quarter ended December 31, 2006 and the year ending March 31, 2007. After which we'll open up the discussion for Q&A.

Before I pass it on to 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 be read in conjunction with the risks that the Company faces. A full statement and 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 it on to Mr. Nilekani.

Thanks, Sandeep, and I'd like to welcome all of you to this call. Let me give you some highlights. As you have noticed, that the revenue for the quarter grew 13% in dollar terms. And, thanks to the strong performance, we have been able to revise our guidance for the year. We have revised it to exceed $3b and basically that should be within 40.6 to 41.1% growth.

So I think I'll -- let me just give you -- I think what you're seeing here is really a transformation of many trends that we have been talking about for the last several years. As you know, we have been postulating for some time that what you see here is not really just our business, but a fundamentally new business model, a fundamentally [constructive] business model, a business model which delivers faster, better, cheaper and more innovative solutions to our customers.

And I think that is reflected in the kind of growth that Infosys has been able to demonstrate in the last six years. As you're aware, we went public in the NASDAQ first in March of 1999. We had revenues of $121m. And now, with our latest guidance for the year ending March of '07, we anticipate revenues to grow in excess of $3b. In other words, this Company will have grown from $121m in 1999 to over $3b by March of '07.

I think the fact is -- another way of looking at it is that it took us 23 years to do the first $1b; it took us 23 months to do the second $1b. And in effect, we have gone from $2b to $3b in the one year. So I think you can see the kind of growth that's happening. And I think this clearly demonstrates that it's really -- that with a fundamentally new business model here, which is taking away market share from the legacy players in this industry, which is creating a whole new compelling value proposition. And I believe this is a model that's here to stay.

And this model is not just about what we do as a company, but what is the impact and consequences of this model on existing legacy players. What does it mean for their revenue streams? What does it mean for their prices? What does it mean for their global rearrangement of the workforce? These are all large structural challenges that will be faced and we think that we are essentially driving the agenda in this space. And other people simply are following the agenda that we have worked out.

I think the other important thing we're increasingly seeing is that we are increasingly convinced that the world is being buffeted by some major mega trends. We have identified emerging economies as one mega trend, economies like India and China, which used to be [inaudible] global GDP and went down to 7% in 1970. Slowly inching back to take a larger and larger part of global GDP, which is a very important impact on markets.

We're also seeing the impact of demographics with the rise of a young workforce in the Asian countries as opposed to an ageing workforce in Europe, which has its implications on healthcare, on dependency ratios, on pension benefits and the need to get a high return on capital in emerging markets. We also see a huge impact of regulation, whether it is financial regulation, health regulations, privacy regulations. All kinds of regulations which have a huge impact on companies.

And finally, we find a huge impact on technology and businesses and in a sense Infosys is a child of technology through change. Because we are able to have thousands of people sitting across the world, using one network to deliver value.

So clearly these four mega change -- four mega trends - emerging markets, demographics, regulation and technology - we think is flattening the world and I think it's affecting each and every company. Because every company that is in the business of selling to customers is finding that whom they sell to is changing, what they sell to is changing, how they sell it is changing, where they produce it is changing, where they [source it] from is changing, where are the employees to provide the value is changing.

In other words, everything is really up for grabs. And we think that this transformation is going to affect every industry, whether it's banking or retailing or telecommunications or insurance or what have you. And we think that Infosys is uniquely placed to be of service in this change because we ourselves are, A, a preacher of these changes and, B, we -- ourselves being what we call a flag company, we are in the best position to tell our customers or advise our customers on what they should be doing because we have gone through these changes ourselves or we have been constructed on the basis of these fundamental changes happening in the global world.

So we find that this message is resonating extremely well with our customers. Our customers believe that the world is flattening. Our customers believe that they have to go through transformation. Our customers believe that Infosys is the right partner for this transformation and this is contributing to a huge impact in terms of mind share, in terms of global awareness of the Infosys brand, in terms of what we can do for them.

And I think this is -- all these things which you would think are subliminal or not really directly relevant, I see play a huge role in the strategic positioning of Infosys. And it's that strategic positioning which provides essentially the wind power, in a sense, that drives this whole thing.

I think with that context you'll notice that we have had tremendous growth. Another important facet of this growth is that, unlike maybe even a couple of years back where growth was due to three or four large customers, what you'll find is that this time the growth is coming due to a whole constellation of large customers who span industries, who span geographies. And I think this broadening of large customers and creating multiple engines of account growth, I think is one of the reasons for the robust growth that you have seen.

Now, there are many other -- many, many other aspects to this. I think the other important thing which we have been emphasizing for quite some time is that our growth is fundamentally based on robust, organic growth. And I think we are growing at 40% this year entirely on an organic basis. And the reason that again is happening is because we are focused on building client value. We are focused on building a broad range of facilities to the user clients. We're focused on expanding our relationships. We're focused on delivering value. They are old-fashioned concepts but that's how to get growth. And I think we have demonstrated that the business model is very important for this growth. An organic model that is customer focused is very important for this growth.

So I think, when we look at the results, we should -- of course, at one level we should look at it in terms of quarterly performance. But I think it's equally important to understand how strategically it fits into the global scheme of things, and how major changes that are happening in the industry and how Infosys is leading that charge.

With that, I'll request my colleague, Kris, to continue with the discussions.

Thanks, Nandan, and good morning, good evening, to all of you. Let me give you some more details. If you look at the geographical distribution of revenues, almost all the major geographies have contributed to this growth. The U.S.A. grew by 12.6% quarter-on-quarter. The U.K. grew by about 14.2%, France 27.4%. So these are major countries [inaudible]. Japan grew by 12.7%, Australia grew by 28.7%. So it is all-round growth from a geographical perspective.

If we look at business, we had again growth in all the services, some of course better than others. Like package implementation, consulting, testing, business process management, etc., grew faster than the Company average. Products also, that has been across the Group.

From an industry perspective, the industry segments which were strong were banking and capital markets, telecom, energy and utilities. So, again, we had all-round growth from an industry perspective.

Our revenue per employee on a blended basis grew 1.2%, 1.4% onsite and 1.1% offshore. And for the past three quarters we have seen that the revenue per employee has been growing. We have seen a 3 to 4% increase in rates for new clients, and about 1 to 2% increase in some of the contract renewals. And now it's starting to get reflected on the revenue productivity.

We had 271 $1m clients, this quarter 272. We have 61 $10m clients and 12 $50m clients and two $100m clients. The largest client is 6.6% of revenue. So, again, we saw faster growth in our top 10, top 20 clients.

And from a scalability perspective this quarter, we have added the largest number of employees, 10,795 employees, of which 2,560 are experienced hires. Attrition has inched up to 12.9% but we are also much more rigorous in looking at performance and encouraging people to leave in -- out of this 12.9% about 2.9% is involuntary attrition, or attrition which is encouraged.

Utilization, excluding trainees, for the services business is 80.3%, last quarter was 77.3%. It's partly because of the faster growth experienced this quarter. Including trainees it's 68.7%, which is [represent] of the huge addition at entry level. Most of those people are undergoing training.

We have absorbed salary increases. This quarter we have also announced a long-term bonus for some of the senior people within the Company. And during August we were able to maintain the margins. We continue to invest in infrastructure building. 7m square feet of space is under construction, which will give us capacity for an additional 13,400 employees.

With this, let me hand it over to Bala to give you more details on the financials.

Good morning, everybody. This quarter the revenues were $746m, which is a sequential growth of 13%. Of that, 11.2% is volume growth, 1.2% is price growth. Onsite per capita revenue went up by 1.4%; offshore went up by 1.1%. On a blended basis it went up by 1.2%. Gross profit, 43.3%.

We had the benefit of less visa costs during the quarter. It impacted the margin positively by 1.1%. We also have the currency in our favor. The rupee depreciated by something around 1.4% during the quarter. It impacted the operating margin positively by 90 basis points. Sales and marketing costs were 6.4%; it was 6.8% last quarter. G&D is 8.4%, similar to what it was last quarter. Overall we got a benefit of [50] basis points, and we achieved it because of the scale.

Non-operating income was less during this quarter because we don't have the benefit of large exchange gains which was there in the first quarter. Income tax is 3.5%. The effective tax rate is 11.7%, similar to last quarter's. Overall net profit was 26.6% this quarter as compared to 26.4% last quarter.

So, overall, we have the benefit of visa costs, currency and leverage what we saw on the agenda because of scale, which has improved our operating margin by something around 2.5%.

Going forward, we've given a guidance of 5.9% to 6.6% growth in revenues for next quarter, revenue being $790m to $795m. EPS to be $0.37 for next quarter, which is 3% growth, because we are assuming the currency to appreciate next quarter. Our guidance is based on a rupee/dollar rate of 45.6 for next quarter and for the next full year.

For the full year we have given a guidance of 40.6% to 41.1% growth in revenues, with an EPS of $1.44, which is 41.2% growth. Our balance sheet size today is $2.2b. We have around $948m in cash. Accounts receivable is around 65 days.

So I think overall it's a good quarter. We have seen a margin improvement. For the full year we are assuming the operating margin to be stable, similar to what it was last year. Last full year the operating margin was 27.8%. We believe it should be similar to that during this year, within a narrow band of [40 to 50] basis points.

I think with this I'll conclude the financial presentation. Now the floor is open for questions and answers. Thank you.

We are ready for questions. Please go ahead.

[OPERATOR INSTRUCTIONS]. Your first question comes from Moshe Katri of Cowen and Company.

Yes, thanks, and congratulations on a very, very strong quarter. On the pricing front, what in your view has been contributing for the recent pricing strength, especially on the base of existing clients?

Moshe, it's V. For the past three quarters we have been saying that we are able to get slightly better prices. It's primarily driven from the clients appreciating, understanding that the costs in India are going up and that at some point it will have to get reflected. It is a small increase but it is happening now. And, in Infosys' case, we are also quite clear that below a certain price we will not take up work. So that is also helping us with new contracts to try and push up our price points.

Okay. And then, on the attrition rate side, you've indicated that if you looked at voluntary turnover, it was probably about 10% for the quarter. For comparison purposes can you just give us a feel, what was the voluntary turnover number -- turnover levels during the past two quarters? Was it flat? Was it high? Was it lower?

Moshe, the voluntary turnover last quarter was approximately 9.2%, and the quarter before that was about maybe 9%. So there are three kinds of issues here.

First, our [getting] for training has increased in the sense that you have to get a certain minimum level of accomplishment to get through training. So there we are seeing people not getting close, so they don't get in. Two, very importantly, this quarter we had largely about 450 people or so leaving for higher studies, because it's the quarter that happens. So this quarter it will not happen. And three is, of course, the people at the bottom level of performance who left. And these are the three things that [pry up] the largest on the attrition.

In the voluntary part we are not seeing any appreciable increase. There is a marginal increase and that's caused through the fact that the markets are buoyant. And the U.S. markets too are buoyant and that is the main reason.

Brilliant. And then, finally, after we've seen decelerating revenue growth last year, it seems that we're headed towards accelerating growth. Can you comment on this trend, do you think? Is there anything unusual here? Because obviously this is a pretty positive trend for the industry.

Yes. Nandan was saying, Moshe, it shows that this margin is better for the clients. They are able to get better quality deliverables at very good price points. So clearly that this is a better model and clearly that's the reason. As companies become larger, clients are more and more comfortable working with us on larger projects. Clients are willing to increase their revenues or increase their services with us.

So today we have two $100m relationships and all the parameters from a customer perspective are growing. We have a very diversified portfolio of services. If you include BPO, the footprint is very large. So it's a combination of all these things, all the things we have been doing in the past five years starting new services, starting consulting, starting BPO, creating the brand equity, enabling our Company to scale up, creating the capacity to recruit, train.

All these things are paying off at this point and the market conditions are right, and so we're able to take advantage of that.

Thanks.

Your next question comes from Bryan Keane of Prudential.

Hi, good morning. Just when you look at your guidance for the first quarter and then the second quarter, you guys have obviously blown through those numbers, especially on the top line. I guess can you pinpoint what surprised you? Why the out-performance?

Clearly, the environment is conducive. We got the benefit of better market conditions. Our services were appropriate for the market. We executed well, so customers were able to give us more business. And the surprise was the volume, and of course we were able to take advantage of that in terms of capturing that business. So volumes were the surprise and we took advantage of that.

And then you mentioned in your opening comments about taking some share from legacy players. Has that been a change over the last couple of quarters that you're seeing now, where work used to go to the multinationals, now that Infosys is taking some of that work?

Yes. And we believe that, as companies become larger, this will enable our clients to actually work with us on larger relationships and larger projects. And that also has been a cycle, at least, that's going up here. If you look at some of the fastest growing services, like package implementation, consulting, etc., the total number of people who are able to deliver consulting type of service is almost 3,000 today. And that is helping us, those transformation projects, consulting assignments, end-to-end solutions, BPO driven, business transformation. So it is what is, I think, driving the replacement which is happening from the legacy players to companies which are more global delivery oriented, I think.

Okay. And then just finally, on the metrics, I just noticed that repeat business was down to 95%; usually that number's usually 97% or so. Just any downtick? Did some clients move away? What explains that downtick?

The way we compute this is it is reset every finance year, so Q1 is slightly -- Q1 is higher, Q2 is lower. At the end of the fiscal year it will come done to 90%. So, on an average it's 90%. It gives us better visibility into the pipeline. It allows us to build a deeper relationship with our clients, increases the predictability. And new customers are also ramping up at this point faster.

Right, okay, great. Thanks a lot, and congratulations on a great quarter.

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

Hi, gentlemen, congratulations on some good results here. I just had a couple of quick questions for you. The first one is that it appears here that the offshore movement continues to evolve, with the Indian vendors moving into different geographies, verticals and offerings. Can you comment on any specific areas of growth that you feel you guys are focusing on? Anything new on that front? Obviously the movement towards package implementation is there, but anything new on that front?

So, from a geography perspective, proactively we are investing in Europe. Europe has gone from 9% of revenues some years back to 25% of our revenues. From a services perspective, it's more business solution driven rather than technology solution, combining our consulting package implementation, BPO. Today we are able to offer clients transformation projects, transformation solutions.

We have also come out with our point of view on what is the landscape today from a business perspective and what companies need to do in today's world. Nandan, in his opening remarks, talked about the four major shifts which we see, and we are able to help our clients with how they need to respond, how they need to compete in today's world.

Thanks. Actually, a second question here. Obviously it looks like demand is pulling the market and putting pressure on the labor supply. Just if you can give us some idea where maybe you expect attrition to be in the future?

And also, on the wage front, could you give us a lateral fresher mix for recruits this quarter? I think you gave it in an earlier call.

Attrition for the rest of the year should be in the same range sitting where we are, seeing what we're doing. Salary increases for the next year should be in the range of 12 to 15%, sitting where we are today. The reason is we don't see any perceptible shift there. The key challenge you face when you grow up is getting enough middle level people in to meet our growth requirements. Otherwise the base pressure is there but there is no perceptible shift change. We're also seeing that for the big [inaudible] who came into India, who used to raise wages and pay much more than what we pay for people who joined them. They're becoming more cautious and more discriminating. And the indiscriminating increase in salaries has come down and they're benchmarking against large Indian companies.

So I think there is some stabilization going on there, because people are very conscious that continued pressure on wages is not going to help anybody. So on both fronts I think, there is some stability. But it all depends on the growth rate. The growth rate go up, obviously our costings open up and attrition will be slightly higher. I think that attrition is not a great cause of risk or worry for us at this point of time. We want to bring down the attrition, of course, but it's not something that is giving us very sleepless nights.

And just staying with the labor question, as far as middle managers, any rough idea what the attrition rate is at that level? And could you give us a ballpark number of what the salaries are at that level?

The middle level is something from three to seven years of experience. And attrition at the middle management level is around 12.5%, if you take the entire basket of people. The wages at the middle management level I would estimate is something around $20,000 to $25,000.

Good, thank you. And just --

Per year, per year, not month.

Per year, of course. And just one last question here on the BPO front. Any growth drivers in that business? And if you could just give me the attrition rate this quarter, that would be great.

Well, the growth drivers in the BPO business is the F&A business. F&A is growing; more customers are coming in. We have about 1,500 engaged in F&A. And we got a lot more enquiries in that particular area. In the knowledge processing area, the research area is opening up and is seeing much more enquiries. But these are two large areas which are growing pretty fast, along with the rest of the business.

The attrition in the BPO business is about 28% for the quarter and it's come down about 2 percentage points. And if you reconcile the attrition, 28% -- 25% of the attrition is in the zero to three month category. That is very strange in this industry, because when people join they have to go to [inaudible], some of them don't adjust and some of them leave. And about 40% attrition is in the one year to -- one year to one and half year's category, because of the one year people get trained and the demand for them is much greater than the people below one year. And these are the two categories. And in the category one and a half years plus, the attrition comes down. So there are two lumps that happen in the attrition. And that's for a very particular reason. But we are trying to push it down and I think, in the future, the attrition rate for BPO will come own.

Great, thanks, guys. And, again, congratulations on some good numbers.

Your next question comes from Chip Chowdry of Global Equity Research.

Thank you. And, again, congratulations on a phenomenal execution. First question is for Bala. You did mention that the research costs have gone down. I believe that the H1 research cap had reached, I think, in the month of April. Is that one of the reasons or there is something else you are seeing there?

No, you are right, because we accelerated the research investment in the first quarter, because we knew that window is going to get closed. We spent close to $11.5m in the first quarter. That's -- the impact is not there in the second quarter. That is one of the reasons why the margin went up.

Beautiful. Now, other question I had is the consulting team that is led by [Steve Black]. That seems to be doing very well. I was wondering what -- when will you feel comfortable of telling us how many engagements was the consulting -- how many customers did they engage in? And among these various customers we have in $1m, $5m, $10m or $100m kind of segment, among them, where do you see Infosys Consulting having the maximum traction?

Infosys Consulting will have the best value right now for the large transformation projects. It is helping clients figure out what they need to do to compete in today's world and what they need to do in order to transform themselves to compete in this [flat world]. So we are doing client workshops regarding what it means, what are the drivers. We do assessments and come up with a program for them to look at the transformation itself [inaudible]. [Base] of the work, of course, involves changing the technology platform, again, because of the large enterprise solutions practice we have. And, in many cases, the transformation is led by implementing it safely or [inaudible] or something like that. Again, we are able to help our clients make this transformation.

So, today the focus is really in how clients transform themselves to compete in this world. We have framework, we have methodologies, we have toolsets to help our clients do this.

The last question is on insurance, banking and financial vertical. It seems like all the companies I follow, including the software vendors, they seem to be really doing very, very well in this vertical. I was wondering is there something really endemic to this vertical which is giving a lot of business to almost the whole software industry? Thank you again and congratulations on a phenomenal execution.

This industry always, especially the banking and capital markets, not so much the insurance side, has been a high spender. They love technology. It's driven by innovation and use of the latest technology and things like that. And, as a percentage of revenue, typically these companies spend higher than other sectors, for example manufacturing, which typically spends 1 to 2% on technology. Whereas a financial services company would typically spend, maybe, close to 5 and sometimes up to 10%. And some [services from them] are completely technology driven, actually. So that's the reason why this sector is a very good sector for software companies, IT services companies, hardware companies, etc.

Your next question comes from James Friedman of SIG.

Hi, thank you. It's Jamie Friedman at Susquehanna. My first question is regarding Progeon. Did you disclose the operating margin at Progeon, or what's now called Infosys BPO?

Yes. Let me give you the operating margin for Progeon. As per U.S. GAAP, the operating profit is about 20%.

Okay, thank you.

20% operating profit. Net income is 21.3% because of non-operating income.

Thank you. Next questions regard to headcount. I believe that your prior fiscal year '07 headcount guidance was 25,000. Did you update that number?

Yes, increase is 28,300.

28,300. Okay, and then last question --

It is gross of attrition.

I am sorry, say that again?

This is a gross number, not a net number. It is gross of attrition.

Yes. Thank you. And then the final question is regarding the ADR issuance. Could you help us walk through the prospective calendar? It sounds like you are going to meet in November to tentatively approve an offering. But can you remind us, based on the prior schedules, how we should think about the mechanics of the offering again? Thank you.

Well, the Board has just approved the offering. We are working on the timeframe. We have not finalized that. The Board approved that we'll issue up to [30m] shares through a sponsored [secondary ADR] program, which will include part of [certain] public offer [without listing] in Japan. We can't share any more details on this offering, because we are constrained by the regulations of SEC.

Very good. Thank you very much.

Your next question comes from Alan Hellawell of Lehman Brothers.

Hi, gentlemen. I guess I was just hoping to get a little more clarity on your U.S. market strategy. I know that you've invested significantly in large account chase teams. Can you talk about any capabilities that you've developed to entertain larger contracts and whether that is going to be a thrust that we'll see in your contract size in the United States?

There are two ways you can have large relationships - one through large contracts, another through a master services agreement under which you execute multiple projects. Our traditional model, which is very different from the legacy players, has been to have a master services agreement under which you execute multiple projects. It gives the client flexibility. It gives them the option to work with a company for the long term, so that you can take advantage of knowledge retention. You can take advantage of best practices sharing and things like that. But still keep the partner on their toes, because there is always the threat that if you don't deliver the last project, well, I can shift or I can switch. So that is the bulk of our contracts. It is helpful for us also, because of the long-term nature that master services agreements will [give] to the budget. They are part of the budget process, etc.

Added to that, we are now bidding for larger and larger transformation projects, outsourcing projects. You may have read about the ABN Amro bill in Europe, where we got a share of the application outsourcing from them. And we are seeing more of those opportunities. What is happening is that these large outsourcing deals are getting split between two or three vendors. And in almost all cases we make the short list, and some of them we win. It's not all going to one company; it's going to two or three companies.

Great. Well, thank you very much.

Your next question comes from Julio Quinteros of Goldman Sachs.

Hey, guys, good afternoon. I wanted to touch on, real quickly, the -- go back to the consulting practice real quick. Can you give us a little bit more color on how many folks you have in the consulting practice today, profitability and, if it's not profitable, when you actually expect it to go profitable?

So, the consulting subsidiary has 220 people. Consulting, as a service, spans multiple units within the Company. We have solution consulting in each of the business units. These are the people who look at industry, then proactively come up with solutions. We have some [IP] built into it, which has some, maybe, [calls] design systems [inaudible], and proactively taken to clients and to projects.

Then there is a whole area of package implementation, where we start with the package selection, business process re-engineering, helping customers create a template for their business, help them with change management, global rollouts and things like that. And today, we have about 2,000 odd people doing this type of work. Traditionally, you would have classified all these as consulting. So if we include all these people, we have approximately 2,600 people today doing consulting type of work.

Now, again, consulting subsidiary standalone is making a loss today, because we are still investing in that. We hope that in the next two or three quarters it will turn round and start making profit. Consulting, as a service, is very lucrative and, especially when it drives downstream, is giving us the required margins to justify us continuing to invest in that. In fact, the transformation type of project requires us to do program management, change management, business processing re-engineering, etc., which are really consulting type of services.

Understood. And a lot of the descriptions that you've just given on the consulting business, the lucrative nature of it, the kind of work that you are having to do there for your clients. And when I relate that back to the profile, the folks that you are currently hiring, 77% freshers, I guess I just struggle with understanding how the current mix, which is very weighted towards freshers, will allow you to truly move into some of this higher-end consulting work, given that those folks are probably not going to be the guys you are going to need for consulting engagements, I guess.

So if you are going to be looking at this business over the long term, why aren't you hiring more MBA types or more folks from outside of industry that can help you truly ramp up this business? Just to get a sense for where you want to take this business.

So, just to give you some numbers, we hired 600 MBAs this year. We are recruiting more MBAs as we speak. We are recruiting -- we have recruited 2,560 experienced folk this quarter, just one quarter, 2,560 experienced folk. We have recruited 600 CPAs in the last 12 months, especially for our BPO business. They are helping our clients with more of the analytics and more of the research kind of work and things like that, accounts reconciliation, closing of books and things like that.

So there are a lot of initiatives within the -- then, of course, we are recruiting in the market also. For example, in the U.S. universities we recruited 130 people who are undergoing training in India today. So there is a combination of multiple initiatives, where we believe that we are recruiting the right people for us to participate in these large transformation projects.

Now, you also need to realize that these large transformation projects require a few consultants at the front end. They require a strong technical team to do the architecture, the design and things like that. A very large number of people to do the programming, testing, the development type of work. And we have looked at the composition of large transformation projects and structured the Company, the pyramid for the Company, based on what we see as the requirement.

Now, we don't want to be a pure consulting firm. That is not our objective. We want to be a company which can help a client do end-to-end transformation, which includes, and in fact probably that is what is unique about it. We will help implement and run the business operations, which require -- which is required today to be competitive. So, we will help implement and operate. So that's the direction in which we are moving.

Okay, that's really good. And then, I guess related to the transformation engagement work that you are doing, what percentage of that work can actually be done offshore? So, if you take a standalone transformation engagement, how much of that can you actually do? So, if you break that up between onsite and offshore.

So, again, we'll have to take examples and illustrate this. When we started package implementation, 80% of the effort was being delivered onsite. Today, only 35% of the effort is being delivered onsite. So we have been able to change the [offshore systems and] methodologies to move a significant amount of work offshore. Even in consulting, which is considered primarily an onsite type of service, over time we are trying to do now second [inaudible], documentation preparation, analytics, etc., again from offshore. And in some cases we are able to deliver 20% of the effort from offshore.

So, overall, our hope is that [inaudible], if you look at it, the effort will be 30% onsite, 70% offshore on a blended basis, and that's what we are driving towards.

Okay, great. And maybe one quick question for Bala on the S -- sales and marketing percentage of expenses. We are down to a level now, I think you said roughly 6.4%, [I guess I'm] looking at the model now on a U.S. GAAP basis. How much more scale of benefits should we expect to see in sales and marketing as we go forward? So, as a percentage of revenue, what's the band that you think this number will bounce around at?

And then, also related to that, what was the depreciation impact in the quarter? How much did depreciation benefit the expense items? Thanks.

I think we will not get a major benefit from the sales and marketing side. Most of the leverage may come on the G&A side. Last quarter the sales and marketing costs went up by 1% because we hired more people. This quarter it got normalized, so we got some 30 basis points benefit there. Overall, I think on the SG&A side we can get another [42/3] basis points here and there.

Coming to depreciation, it is similar to last quarter. We are not seeing any incremental benefit or impact because of depreciation.

Your next question comes from Rod Bourgeois of Bernstein.

Hi there, guys. Nice growth, particularly since it appears you haven't been as aggressive in winning large single contracts as some of your Indian competitors. So my initial question is, is it accurate that you haven't been as aggressive in winning large single contracts? And, if so, are you able to hit your growth targets going forward with below average reliance on these really large deals that are out there?

So, in our guidance for the balance of this fiscal, we have not considered any large deals to be won. And our philosophy, at this point, is that, in a market which is buoyant, we don't want to lock up our resources on deals which don't give us the required margins. So we are reluctant to compete on price on these large deals and lock up our resources.

So, we look at where the client is willing to structure the deal the way we would like it to be structured. We still believe that we are very competitive and we deliver good value to our clients, better than our competition. But the deal has to be structured such that it makes sense for both of us, for the client as well as for us, to take up. And that's the philosophy of the Company. So, we are not that aggressive; you are right. We have certain parameters by which we will evaluate each deal and go forward.

Great, that sounds good. Now, a couple of questions on the margin side. In terms of margins going forward, are you expecting operating margins to decline sequentially in the December quarter and then follow that by an increase in operating margin in the March quarter? Is that the outlook?

If we look last year, the full year, we had an operating margin of something around 27.8%. In the first half of this year our operating margin is close to that, around 27.2%. We believe that it will be stable at around 27, 27.5% in the next two quarters. That's why we said, on a year-on-year basis, the operating margin will be stable except for a narrow band of some [40 to 50] basis points here and there.

Okay, but are you expecting more strength in the March quarter on margins than in the December quarter? Or is it going to be pretty balanced?

Well, it's going to be pretty balanced, because in this current quarter the operating margin is 28.3%, which includes 90 basis points impact because of currency. Going forward we are assuming the currency to strengthen by around 1.4%. So it should be within a band - 27, 27.5%.

Okay, great. And then a couple on the margin driver front. Are you planning mid-year wage hikes this year? We watched the turnover rate moving up and some of the supply challenges in the market. Is it possible that you are -- you will employ some mid-year wage hikes beyond the wage hikes given in the June quarter?

Well, sitting where we are sitting, seeing what we are seeing, we don't believe that we will be increasing wages mid term this year.

Okay. And when you talk about wages, are you talking about bonuses and other related compensation on the stock front, etc.? Are you broadly defining wages?

I think the long-term bonus is different. That is more of a retention plan and the impact of that is not material. But wage hikes come only once a year in April. We don't believe that we will be increasing that [mid year some time].

Okay. So you may give some additional compensation in [inaudible] but they will not be in the wage category?

You see, our variable compensation depends upon the profitability and the revenues, and that is variable. But the base level of salaries will not be increased. Variable is a percentage of the base, and the variables may increase if we do much better or come down if we don't do well, but the base won't go up.

Okay, great.

What we did in this quarter, second quarter, is for one particular sector, we gave an interim hike. The reason is that we wanted to do that in the first quarter, we could not do it because of the fact that at the beginning of the quarter we felt there was not enough money in the kitty. So, since, you saw, things go much better. It was an unfulfilled agenda of the compensation structure was done in this quarter, but it's not going to happen in the next two quarters.

Okay, is that Mohan?

Yes.

Okay. Good to hear from you, Mohan. Thanks for the explanation on that. And then just one quick follow up on the pricing front. Can you define whether price on like-for-like deals is going up? Or is the increase in price that you are experiencing more due to business mix shift than pricing on like-for-like deals?

Both. We are playing around with the business mix so that we can optimize our margins and do the right thing. We are also seeing increase about 3 to 4% on new client deals and about 1 to 2% in some cases where we are able to renegotiate, so both are applicable. Those are two -- [inaudible] we have -- we also have the onsite, offshore mix lever where [inaudible] when the growth rate [inaudible] rate, we have more projects start, which is what happened in the last two quarters with an onsite vendor. But then proactively we bring down onsite, and that also helps us improve margin.

Okay, great. Thanks, guys.

Your next question comes from George Price of Stifel Nicolaus.

Hi, thanks very much for taking my questions. And, again, congratulations on very strong numbers. First question is I wanted to ask about the top account growth, really seemed to -- the year-over-year growth in your top accounts really seemed to accelerate materially. And I am wondering if there is any particular trend that we can take away from that.

Clearly we have worked very hard in creating a basket of services which are relevant. We've made sure that we service the client, made sure that the satisfaction is very high. And the size also helps, because as offshore becomes very strategic, clients would like to work with larger partners; again, size helps in that regard. So it's a combination of having the right services, executing very well, making sure that the clients are happy and satisfied, and taking advantage of the opportunities.

The trend we see is that companies are looking at increasing offshore. They are very confident about -- it [inaudible] mainstream. They are confident about the quality of the services and things like that.

And is there any change to the trend? Certainly at one point it seemed like there was a trend to, as companies, embrace offshore on a broader basis. They look to possibly add to their list of strategic offshore vendors to diversify that incremental business. Is there any change, do you see, to that trend? Or is it just the sheer volume of business, moving offshore is offsetting that?

Some of the companies [inaudible] two or three strategic partners; that trend continues. Some of the companies are looking at setting up their own captive unit; that trend also continues. But as it becomes mainstream, this will reflect what is there in, let's say, U.S. or Europe, etc., where companies will do some work in-house, they will have some work outsourced. In outsourcing they will look at two, three strategic partners to work with. Very rarely will a company look at giving their entire IT - hardware, software, infrastructure, people, applications, everything - to one vendor. A few, very few cases.

Today the trend is towards two, three strategic partners, maybe sometimes a captive, significant drive towards offshore. Even [visibility] from the Board on what is India's strategy, and especially combining IT and operations from the same vendor offshore. So all these we have anticipated and we have tried to create the relevant services, the relevant client relationship structure to manage these.

Okay. Just a couple of other questions, one on utilization, excluding trainees obviously up significantly quarter over quarter, the highest level we've seen in some time, I think since back in fiscal -- some time in fiscal '05. What -- obviously it looks like there was strong -- pretty strong demand in the quarter, even surprising you. Is that just simply the answer on that strong utilization or was there anything else driving it? And in terms of expectations going forward, do you think that that level of utilization you are running [hot], is that going to come down or is it sustainable?

The way we manage this is we shoot for about 77% [after] utilization, excluding trainees. This gives us the slack required if the demand is better than we expected, as it was in this quarter. The utilization can go up to 80%. We try to keep it between 77 and 80%. Beyond 80%, customer services are suffering. And so this quarter the utilization went up to 80.3. So this is actually part of our plan and strategy.

Okay. And last question on the comment that you made on being able to be selective on deals, based on your targeted pricing and margins, and being able to do that, given the strong demand. For the work that you don't take on because it doesn't meet your criteria, can you give us a sense maybe of who is then coming in to take on that work? Would it be tier two firms who are being a little bit more aggressive on price? Any color on that would be great. Thank you.

Well, it's typically tier one. It is a small set of companies today who are getting a higher share of the demand which is out there. It is seen from the first quarter result, second quarter result. We are the first [inaudible], so we have to wait and see from what happens in the other companies. But if you look at the results of the other companies in the first quarter, the larger companies have grown a bit faster than the mid sized and the smaller companies. So typically it is the larger, the tier one companies, who are benefiting from this.

Thank you very much.

Your next question comes from Rama Rao of RR Capital Management.

Good morning, guys. It's very impressive growth. You guys have almost like defined the gravity. The last large number says that, when you grow, when you become bigger you slow down, but you guys are -- keep on going. How do you see that you will be able to maintain that growth rate that you have at this time, or that a point will come when you begin to hit the ceiling?

Well, I think that's a good question, and that also we also think about that question often. I don't think we have a clear answer, because clearly there is a lot of scalability in our model. The market for the rebalancing of the global workforce in IT services is still not matured yet. And there is huge customer demand. So, I think it's difficult to say when this whole thing will reach an equilibrium stage. I wouldn't like to venture a guess.

Okay. My next --

The fact is that we have been able to demonstrate scalability in services and we have been able to ramp up our people from a few hundred to 60,000-odd. And in this business there are companies who, in terms of employees, have a much larger base. So, I think all these things are open questions. But we are trying to build as scaleable an engine as possible. And I think our investments in recruitment, in training, in systems and processes, have all contributed to the scalability.

So, I think that's our answer. I think we need to come to the end of this. I'd like to thank everyone for participating, for a very enthusiastic and very interesting set of questions. Please feel free to email us and ask us any more questions about the business performance, the direction.

Let me once again state that we believe that we are at a whole new structural point in this business. Our model is proving to be increasingly the sustainable model and it's having a huge impact on global players. So I would urge you to study this industry not just as what is happening in India, but what is the global impact on other firms and the consequences thereof. Thank you very much.

Ladies and gentlemen, that concludes the second quarter results for fiscal 2007 for Infosys Technologies Ltd conference call. We appreciate your time. You may now disconnect.