Infosys Ltd (INFY) 2006 Q3 法說會逐字稿

Good morning. My name is Angela and I will be your conference operator today. At this time I would like to welcome everyone to the Infosys Technologies Q3 '07 financial 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]. Thank you. Mr. Mahindroo, you may begin your conference.

Thanks Angela. Good morning and welcome to this conference call to discuss Infosys' financial results for the quarter ended December 31, 2006. I'm Sandeep from the investor relations team in New York. Let me start by wishing you all a very happy and prosperous 2007. Joining us today on this conference call is CEO and MD Mr. Nandan Nilekani, President, CEO and joint MD Mr. Kris Gopalakrishnan and CFO Mr. V. Balakrishnan along with other members of the senior management.

We will start with a brief statement on the performance of the Company for the recently concluded quarter followed by the outlook for the quarter and the year ending March 2007. After that we will open up the discussion for the 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 rest of the Company [basis]. 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.

Thank you Shekar and I would like to welcome all of you to this call, this evening Indian time and morning in the U.S. and happy new year to all of you. And let me give you a brief overview of the business and then Kris will continue and then Bala will talk from the finance side.

I think we have had another good quarter. We have had sequential growth, as you have seen, of 10.1%. This happens to be the third consecutive quarter where we have delivered double-digit revenue growth in dollar terms. So we believe that this is an endorsement and validation of our strategy of building the brand, building our transformation capability and our investments in enriching and synergizing our portfolio of services so that we can create compelling value propositions for the clients.

While we have grown 10.1% this quarter, we have also given our guidance for the next quarter where we expect revenues to grow between 4.6 to 4.9%. And for the year we expect revenues in dollar terms to grow at 43.6% in this fiscal year. The revenue for this quarter was at $821m and our earnings per ADS has gone up to $0.39 from $0.26 in the previous quarter, with an additional 43 new clients.

While we have grown at double digits in dollar terms, in rupee terms our growth has been more modest, it's been at 5.9%, essentially because the rupee appreciated at around 3.8% for the year and therefore we lost about INR145 of revenue due to rupee appreciation.

But even here, I think, given the fact that typically 1% appreciation of the rupee costs us 0.5% of operating margin, if nothing else had changed this rupee appreciation would have cost us about 2 percentage points of operating margin reduction. But thanks to an improvement in [revenue] productivity, thanks to an improvement in license revenue in Finacle, thanks to scale benefits on SG&A we have been able to offset the impact on our -- negative impact of operating margin on currency by a positive impact to essentially productivity, efficiency and value realization. And therefore the net impact, in fact, of all this was positive and the operating margin overall has gone up by 20 basis points in spite of the rupee appreciation. So we think that is a strong signal for the robustness of the business model.

We also believe that the story continues. We think that the outlook is strong. We think offshoring continues to be a strong secular trend. While we believe that IT spending will go up by a few percentage points in this year, we believe that the trend of our clients to increase the proportion of their spend on offshore and global sourcing is going to go up, which will play in our favor.

We also believe that the risk perception of our clients about offshoring has reduced even further. And now they are quite comfortable with having several thousand employees of theirs working in India through various partnerships or with their own units. So I think the risk perception in the mind of the global CEO has come down and we think that's a positive sign for the future of this industry.

With this I'll pass it on to my colleague Kris Gopalakrishnan, President, to delve into some more aspects of our business performance.

Thank you Nandan, and let me also wish you all a happy new year. In nine months of this fiscal we have had a revenue of $2.23b, which crossed the revenue for the full fiscal last year. Last year full fiscal, the revenue was [$2.15b] and nine months revenue this time is $2.23b. Also in the BFSI space we have crossed $1b in revenue. BFSI is today 38.6% of our revenues, up from 37.4% revenues in our last quarter and we have crossed $1b in BFSI space.

In BPO also in the first nine months of this fiscal we have crossed $100m.

So there are several parts to the business, several segments of the business which have contributed to this growth. Just to highlight this, Nandan talked about Products doing well, Products have gone to 4.3%. Europe has gone to 26.8% of revenues from 25.8. Package Implementation has gone to 17.9 from 17.0. In the BFSI space itself, Insurance has gone from 6.7% to 7.6%, Retail has gone to 10.5% from 9%, Services [companies] have gone from 7.7 to 8.3.

The top 25 clients have grown 12.6% compared to a Company growth of 10.1%. And if we include the holidays for this quarter, actually the growth would have been closer to about 13%. So good all round performance and good growth. And in spite of the rupee appreciation, as Nandan said, we've been able to maintain the margins.

Infosys today has 488 active clients. We added 43 clients this quarter compared to 45 last quarter. So the client addition continues to be robust. We have 256 $1m relationships, 67 $10m relationships, 11 $50m relationships and two $100m relationships.

We added 6,092 [sic - see presentation] employees this quarter at a gross level, of which 1,676 employees were with prior experience and came in the lateral -- came laterally. So we continue to add experienced employees to the workforce.

Attrition is slightly up at 13.5% compared to 12.9% last quarter. Attrition, if I exclude involuntary separation, especially at the entry level, it comes down to 12.2%. The corresponding number last quarter is 12%.

The top client contributed 6.9% to the revenues. Repeat business continues to be very strong at 94.7%. Accounts receivable 63 days. So, again, the story is the all round performance, good performance. And now let me pass it on to Bala, the CFO, to continue the discussion.

Thank you Kris. Good morning everybody. We have seen strong growth in revenues this quarter. Sequentially, the revenues grew by 10.1% to $821m for the quarter. We have seen the margins improving. The gross margin this quarter was 43% as compared to 43.3 last quarter. We got some benefit on the SG&A side. SG&A is 14.5% of our revenues as compared to 15% last quarter. The profit before tax, [30.1%]. It was [30.2] last quarter. The effective tax rate continued to remain at 11.7%. And we had a net margin of 26.5%.

This quarter the currency behaved more erratically. The rupee appreciated by 3.8%. The average rupee dollar rate last quarter was INR46.29. This quarter it was INR44.53 resulting in an appreciation of 3.8%. It impacted the operating margin by 2 percentage points.

We had some offsetting factors. The Product revenues grew sequentially by 27.5% from $28m in Q2 to $35m in Q3. It impacted positively the margins by 80 basis points. We had the blended per capita revenue going up by 1.4%; 1.9% on site, 1.7% offshore. That gave a positive impact of 80 basis points to the margin. And we had the scale benefit on the SG&A of 50 basis points.

Net net we had 2 percentage point impact on the margins because of the currency, which was offset by 80 basis points due to billing rate increase, 80 basis points due to Product revenues going up and 50 basis points due to SG&A scale benefit. So we are able to maintain the margins in spite of the substantial appreciation in rupee for the quarter.

For the next quarter we have given a guidance of increasing revenues of somewhere between 4.6 to 4.9%, with an EPS growth of 2.3 to 2.6%. We are assuming the rupee dollar rate to be at INR44.11 for the next quarter. We take the Federal Reserve Bank rate, noon buying rate for our currency purposes. It was INR44.11 as of December end. We are considering the same thing for next quarter guidance.

For next quarter guidance the EPS growth has been slower than revenue growth mainly because of currency, otherwise, the margins are almost similar to what we have seen in the third quarter.

Coming to subsidiaries, we have four subsidiaries. Progeon had a revenue of $40m with a net profit of 22.4%. Last quarter they had a net profit margin of 21.3%. Infosys Australia, $24m revenue with a 14% net income margin. Last quarter they had a revenue of [$25m].

Infosys Consulting $12m of revenue with $6.5m of losses. Last quarter they had a loss of $3.2m. They are still in the investment phase. They are growing. They are -- they may break even in the next few quarters but right now they are in the investment phase. Infosys China, $5m with a loss of $1m. Last quarter the loss was, well similar, $1m.

So net net we have absorbed the impact of currency. We were able to maintain the margins. We were able to grow faster. For the third consecutive quarter, we had double-digit growth in revenues. I think it's very significant. With this, I conclude my opening remarks. Now we can open the floor for questions.

[OPERATOR INSTRUCTIONS]. We will pause for just a moment to compile the Q&A roster. Your first question comes from Bryan Keane of Prudential.

Hi guys. A very solid quarter. Could you just talk a little bit about pricing, the pricing environment? We hear a lot of different things. I guess [and] you can break it up between new deals and then what you're seeing on renewals.

Pricing continues to remain stable with an upward bias. For the new customers, we are getting about 3 to 4% above our average. For the existing customers, when we renegotiate, we are getting probably close to that only, maybe 2 to 4% above our average. And our revenue productivity blended has gone up by 1.4% this quarter. The on-site revenue productivity has gone up by 1.9%, the offshore revenue productivity has gone up by 1.7%. That is on a quarter-to-quarter basis.

On the year-to-year basis, that is if you look at last year versus this year, the on site has gone up by 3.7%, offshore has gone up by 2.1% and the blended has gone up by 4.3%. So the rate increase is actually showing up in our revenue productivity over a period of time. And it is also showing in our margins.

Right. And also the margins look like they were benefited by the amount of effort that moved -- continued to move towards the mix, towards offshore. Can that mix continue to go, I don't know, to 75 to 80%, and that seemed to have a lot of leverage on the margin, even though utilization fell it looked like the effort moving more towards offshore was a key.

Our target for on-site versus offshore is to keep on-site between 30 to 35%. So right now it's around 32%, actually 32.7% to be precise. And last quarter it was 33.0 --- 33%. So that is the range at which we will keep this. As we add new services, we look at services which have significant offshore content like Infrastructure Management, Testing, etc. On the other side, Consulting, Package Implementation, they are more on-site centric. But when we combine all these things, the ratios still maintain -- again are kind of retaining our operating margin.

Okay. And then just finally on the guidance. As you guys stated, you've grown double digits sequentially for three consecutive quarters, but for the fourth quarter it looks like it's more the mid-point of the range sequentially. It's like 4.7%, 4.6, somewhere in there. What's the reason for the drop off? Is it some seasonality, or what can explain that, to go to mid-single digits from the double digits you guys have been putting up sequentially?

You see, for our clients, this quarter is the quarter in which their budgets are finalized and frozen, etc. So though we have grown sequentially and we have said that for the year we would grow at about 43.5%, last quarter of course 10.1% we said. Given the visibility we have right now and the budgets are being frozen, we have given a guidance of about 4.9% growth this quarter. And if you look back for the past three, four years, our guidance for Q4 typically has been lower. And given that our utilization today is about 77.7%, we have the ability if really the opportunity comes our way to grow faster.

Okay, great. Thanks a lot.

Your next question comes from the line of Moshe Katri of Cowen and Company.

Thanks and congratulations on a solid quarter. Can you talk a bit about the deceleration in sequential revenue growth rates from your top five and top 10 clients?

And then, in the same context, also by vertical, we've seen a deceleration in Manufacturing and Telecom verticals. Thanks.

The top 25 clients grew by 12.6% sequentially. The growth in -- I'm just getting the right thing. The top five clients grew by 18.9% -- sorry, 10.4%. The top 25 clients grew by 12.6%. That's on the clients' side.

From a industry verticals perspective, of course, we have seen growth in BFSI, Banking, Financial Services, Insurance, Retail Services, etc. And there is a slowdown in especially the Transportation sector for us. But you see what happens is some clients stagnate for some time before they again continue to grow, or sometimes they drop off. So I think the only sector I can see where that has impacted is really in the Transportation and Logistics sector.

Your next question comes from James Friedman of Susquehanna.

Thanks. It's Jamie Friedman of Susquehanna. I know some of this was covered on the prior call, but a couple of housekeeping details for Bala. Bala, did you say what the -- I know you said what the net margin, but did you say what the operating margin was at Progeon Infosys BPO?

Yes. Progeon, the net margin is 22.4%. Operating margin is 21.1%. Last quarter the net margin was 21.3 and the operating was 19.5.

Thank you. And then when you were describing earlier about the 80 basis points from billing, the 80 basis points from Products and the 50 basis points decline in G&A. I just wanted to ask about the Products. When you say Products, what was the -- if you could give us some color on Finacle and how that may have impacted the Product related improvement, because it seemed like Finacle had quite a strong quarter.

Finacle is a total Bank Automation Product. We sell it in India and some of the Asian countries. Now we are getting into the Western markets also. This quarter the Finacle revenue was $35m as compared to $28m last quarter. Product revenues always [it's a lumpy] business, some quarters it will be higher, some quarters it will be lower. And it's more of a license revenue. So we have seen the Finacle revenues going up sequentially by 27.5%, an increase of $7m. And that had impacted positively the margin by 80 basis points, because in the license revenues most of the revenues flow into the margins.

Got it. And then the last thing, with regard to the billable headcount, if my calculation is right, that increased as a percentage of the total professionals. The billable headcount increased pretty significantly sequentially. Out here I'm just doing the numbers, but it was up -- it looks like it was up about 7 or 8% sequentially. How should we think about the seasonality related to that and what should we anticipate as billable as a percentage of total professionals going forward? Thank you.

I think the revenue grew by 10.1%. The volume growth was 7.4% this quarter. There was a pricing growth of 1.4%. What we believe is, the pricing environment is stable, so most of the growth could come because of volumes going forward.

But due to change in business mix, and if some of the new customers who join us at a higher price point, if they grow faster, both could possibly impact the bill rate increase. So I think the volume growth continues to be strong. It was 7.4% this quarter. Last quarter it was 11.2%. That continues to be strong. But the revenue growth will depend on both the volume and price growth.

Thank you very much.

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

Hi guys, and nice job this quarter. I was wondering if you could talk a little bit about the demand environment and areas of growth looking into fiscal '08. Is there any particular areas that you see accelerating? And are you seeing any trends in the size and the number of the deals?

The demand continues to be robust. We have been talking to our customers and doing some [specific] surveys with our customers. And the feedback we get is that the budgets are going to remain stable or slightly up, maybe 2 to 3%. But, at the same time, there is a definite indication that their spend on outsourcing as well as offshoring is definitely on the rise. So we expect the -- we are not seeing any slowdown at this point from our customer base.

Now on the deal size, what has happened is that the size of the deals have constantly gone up. Just to give you a flavor of the deals which we had last quarter, we have signed a deal with one of the largest hi-tech manufacturers and started work on a $100m deal, multi year. We have signed a deal of about $75m with a software provider in the U.S. With a food manufacturer we have signed a deal of $73m, all three of them multi year. So today we are winning deals, multiple deals of $50m and above in a quarter. We are also being called to almost all the large deals in the market. So we are being called to deals at any size, even close to $1b today in the market.

Great. And sort of a second question here. I was wondering if you could talk about hiring this quarter. It usually tracks well with revenue, but it appeared to be a little bit later on the net basis sequentially. How should we look at the hiring this quarter, especially in reference to future revenue growth? Is this an effect of having ramped up in the September quarter?

So, we hired 6,036 [sic - see presentation] people at the gross level and net hires is about 3,000 -- 6,092 [sic - see presentation] and net hires is 3,282. Our attrition, as I said, is 13.5% on a last 12 month basis for this quarter. We expect to hire another 5,000 people in the next quarter, that is, quarter four for us, gross which will make the total number of people recruited this year to about 13,000.

Currently our headcount across the complete Group is 69,432 people. So that's where we are right now. And we are growing headcount at -- so, for example, this quarter the headcount grew by about 5, 6%.

Now last quarter saw a significant jump in hiring because there is a seasonality to hiring. We had hired about 10,795 people last quarter. And this is because the people joining us from college, straight out of college, joined typically in July, August, September timeframe. That's the time when the campus hires join the Company.

Okay. Thank you. And just two more quick ones. On the attrition side. Can you guys give us any color on where you see that really going and any maybe overall views on the labor market and the supply right now?

The attrition is happening mainly in the one to five year band, highest in the one to three, and second highest in the three to five year band. 46% of the people who leave us go to join other companies. 20% for higher studies. 10% drop out of the workforce and this 46% has been constant for the last many quarters.

What is happening is that people leave for various reasons, not necessarily because of other companies coming to India and setting up shop. If you look at the attrition data we have 1.3% involuntary attrition out of the 13.5, primarily driven by people who did not pass our training course at the end of 14 or 15 weeks of training, because we have toughened the entry norms to get into the delivery organization. And if you normalize that, the attrition is 12.2% as against 12% the previous quarter.

In terms of overall people who left us, the number of people is the same this quarter and also the last quarter, despite having a higher number of people this quarter. So overall I would say that attrition is a function of the market having more opportunities. We do not see any definite trend. There is a marginal increase in the attrition, net of involuntary attrition. And we are fairly comfortable at this point.

Sure. And just one last question here on the BPO side. Maybe you can give us an overview of the market. Is your focus -- is it primarily on non-voice work? And if so should we see margins improve and maybe attrition decrease? And thanks guys.

On the BPO side as far as the market is concerned we continue to see extremely good traction. Our pipeline looks strong. We have grown -- our quarter-on-quarter growth has been in double digits through the last three quarters. And this quarter we grew by 20 plus percent.

We have seen a margin expansion this quarter as Bala pointed out. And if you take off some of the one-off items we have, we are tracking 24% plus [plus on] margin which we expect to continue to maintain as we move forward.

Our attrition number, quarter-on-quarter, has moved positively. We were 38.2% attrition last quarter. This quarter we have 26% attrition. So we have made significant progress on the attrition side, at least on a quarter-to-quarter basis. But this is only a one quarter decrease. We need to sustain it. We believe it is very important for our business to sustain attrition at these kind of numbers, or even lower. And we're working very hard towards moving in that direction.

Great. Thank you.

Your next question comes from Rod Bourgeois of Bernstein.

Yes. It's Rod Bourgeois here. I wanted to ask about the CapEx budget for the year. Has there been any change from your previous estimate of $360 to $400m that you spoke about in the September quarter as being your full year CapEx plan? I just would like some color on whether that CapEx plan has been lowered?

I think the CapEx plan for the full year continues to be the same. We said $360 -- $360m to 400m and there's no change in that.

Okay. Are you on plan or is the CapEx [simply] going to be more back-end loaded than you originally planned?

The CapEx plan includes some provision for purchasing land for the next campuses, particularly in Bangalore and [Hysabad]. So the purchase particularly of land may get delayed. It won't impact our overall construction schedule. But if you remove that, the rest of the construction what [we already decide] is on schedule.

Okay, got it. And you noted the increase in your involuntary attrition and I'm wondering if that could possibly be an indication that the quality of the incoming pool of labor might not be what it was in previous years.

I think it's not the quality just that our standards have been toughened very -- in a dramatic manner. The quality remains the same because we pick among the top 20% of college grads, it's just that the entry criteria has been stiffened up. For instance, we have a minimum requirement of four [CDPA] out of five which we did not have and, two, we have given them only one opportunity after they finish their initial assessment to complete. If they don't complete then they don't go through.

Other years we had a more relaxed criteria. If they do not complete we put them through a training program for another 30, 45 days and that could take more time. Now we give them one more opportunity to complete in 15 days and that is it. So we have toughened up the criteria to ensure that people take this much more seriously than other years and if they don't they do not continue and that's the only thing. We're not seeing any fall in standards of people coming in.

Yes. But can you specify what's driving your increased criteria? Is there a reason why you've taken your criteria up?

We've taken the criteria up to make sure that as we stretch our intake across many more colleges, people do not take our training program in an easy manner. What we've found in the previous year was that people are not stretching themselves to learn as much as they could, they were just coasting through in the secure knowledge that it's okay to coast through. And there were no stripping [out year] that don't do very well because of lack of effort. So we put in a stripping out year to say that you need to have a minimum criteria to get through. If you don't you will not continue. And that's the only reason to ensure that the training becomes really effective and people take it very, very seriously.

Okay, great, that makes perfect sense. And if I assume the license revenue spike that you received in the quarter, which also helped margins 80 basis points, if I assume that was a, quote unquote, lumpy event and is not going to be a recurring event, then you need other levers moving into next quarter particularly if you have a surprise like the rupee moving against you again. So, can you give us some specificity on what positive margin leverage you have remaining for the March quarter if you need to pull those levers more aggressively for an unexpected event?

I think we spoke about several levers in the past, one is the on-site/off-shore mix, the second the utilization rate, the third is the [SG&A] skill benefit and fourth is the increase in lender per capita revenues. So we are -- if we have to use one of the levers or some of these levers at some point in time to make sure the margins are maintained, with our guidance factors in a stable margin [exits] for the rupee for next quarter because we assume the currency rate of INR44.11 on next quarter, whereas, in the December quarter the RA rate was INR44.53. So we had to use some of these levers to make sure the impact was minimal.

Okay, but I guess the question I would have on that is off-site mix and per capita revenues are levers if you have an unexpected surprise. Can you really affect off-site mix? Is that a controllable lever that you can decide to pull in a given quarter, or is that something that is really just a function of the demand that happens to be available and it's harder to control that? And I would assume off-site mix and per capita revenues are levers that are hard to control at your discretion, is that accurate or not?

I think it concerns the service mix. For example, the [single faster] most of it is offshore. BPO grows faster, most of it is offshore. So to some extent it's [an] even better business mix. So if we are able to grow some of the high offshore revenue segments like [sifting] or BPO, offshore could increase.

Right, but I guess as an example, if the rupee is surprisingly appreciated in a material way tomorrow do you have the ability to decide to increase your revenue content in segments that better leverage off-site? Can you make that decision inter-quarter and act on it?

I think, if the rupee behaves irrationally in the last week of the quarter, we can't do it. If it happens in the beginning of the quarter, probably we could focus more on segments where we want to grow and try to change [the volume] mix. But it's not totally in our hands. This also depends on the market demand environment. But I think we also have the levers, as I told you, we have the [SG&A] benefit, we have the utilization rates, so we can use some of the levers to offset that impact.

Okay. And one final question, this has been very helpful. Within G&A what are the specific things you could do inter-quarter on G&A. I guess cutting variable comp is a lever. Are there others besides that that are pretty big buckets of room for cutting if needed?

I think on the G&A side one of the variable sell rates and some of the costs are discretionary that we can cut down. And also we keep strict vigil on the kind of SG&A expense we want to spend. So even though the absolute numbers may increase slightly, it may not increase in proportion to revenues, that's very clear with scale benefit. So some of the discretionary costs may be around 30/40 basis points. We can see them in the G&A side.

Got it, very clear. Alright, thanks guys very much.

Our next question comes from Julio Quinteros of Goldman Sachs.

Morning guys. Just wanted to check on a couple of quick things. First of all, the kind of visibility that you guys have on the Product side, can you talk a little bit about it? It sounds like this is going to be a much more lumpy business if it stays at this percentage of your business given the software nature of the sales. Is that correct?

Product, yes, it is lumpy. Bala had indicated that it would be lumpy, but it's a small part of our business, about 4% of our business comes from Product revenue. And the lead times for closure are longer and you have a smaller base to work on. So, this quarter we have had a positive benefit from that. But it is lumpy.

Got it. And I saw some comments overnight regarding appetite for acquisitions in Europe, can you talk a little bit about what that was intended to reference.

To be -- we have always said that we are open for acquisitions. We will look at acquisitions to fill a gap in our services mix, to grow faster in a market where organic growth will be challenging. For example, in a non-English speaking market like Germany, France, Japan, etc., and from that context Europe. In Europe we can look at an acquisition. We'll also look at acquisitions to look at the faster growth in a particular industry, vertical or an entirely new vertical.

Given that integration is the biggest challenge, making it work is the biggest challenge, and the industry data shows that only maybe 15 to 20 personal acquisitions give the value, or the benefit, which is intended to be given or you will derive benefit from that. We are careful in selecting the companies. We are careful in what we are willing to pay, and we're careful about the ability to integrate. We need to have clear plans for integration, roles and responsibilities especially if the overlap is significant.

We need to figure out who stays, who does what and where they will get sent because our model requires a lot of people to be stationed in locations like India and offshore locations etc. So there are some challenges and that's the reason why we have been very careful about acquisitions. We've done one in Australia. We've done smaller ones for our Product Group where they needed certain modules for filling the portfolio, for the product, and we did some acquisitions there. But we are open at any point of time and we are in discussions with some companies, some investment banks etc. Only if, you know, an attractive price we can, of course, talk about it or so that we have done one more.

Okay, great. Finally for me on the wage increases, as we begin to look to fiscal year 2008, what are the preliminary plans or viewpoints for affecting another wage increase as we had in fiscal -- the next fiscal year?

In the last several years, if you look at what has happened in India, wage increases have been in the range of 13 to 15%. At this point we believe that is the range we're looking at for next year also. And that's something which we have factored into our model. About 70% of the recruitment happens at the entry level at the bottom of the pyramid, for the way we look at the distribution of people. And as the year goes, this 13 to 15% actually reduces to maybe about 5, 6% because the pyramid starts broadening at the bottom as the year progresses. And so the total impact is actually much lower than the 13 to 15%.

Okay, good. And is this a modest change because I felt last quarter you guys were talking about possibly even going as high as 20% on the offshore wage increases? Are you looking at a slightly reduced number now or maybe I'm mistaking you guys with somebody else.

The 13 to 15% is the average across the Company. Now what we do is we do targeted increase where the attrition [as I] talked about the attrition being higher at the two to five years experience level. But we can do targeted increase at certain levels. And, as I said, at the entry level it's much lower and that's how the pyramid effect comes in.

Okay, great. Thank you guys.

Your next question comes from David Grossman of Thomas Weissal Partners.

Thanks. I am wondering if, perhaps Bal you can or Kris, break out the improvement realization between pricing and mix?

[If] the volume growth had been 7.4%, 6.1% on-site, 8% offshore. So on a blended basis volumes grew by 7.4%. The per capita revenue went up by 1.4%; 1.9% on-site, 1.7% offshore. Overall revenue growth was 10.1%.

Right. I guess I was thinking more in terms of the per capita revenue. If you could -- it looks like you grew, like you said, about 1.5 sequentially and 4 or 5% year-over-year. And I'm wondering is there any way to isolate how much of that is pricing versus mix?

It's a bit difficult. It's a mix of everything. We have some new customers coming at higher price points, the business mix is changing. Some of the highly billed rate services like Package Implementation and Consulting, they are growing faster. So it's blend of everything. It's difficult to break it up.

Is there anyway to say --

It's quite complex actually because you have to look at the year in which the customer was added and then you have to look at the different services. You have to look at on-site, offshore. It's fairly complicated because of that.

Okay, and I guess getting back to the unit growth number, I think Bala there were a couple of fewer work days. Was it two in the quarter versus the prior quarter?

And I guess I have two questions in that context. Is that essentially the change in sequential unit growth from the past couple of quarters to the December quarter?

And then, secondly, can you give us an idea do we face that same dynamic in the March quarter or are you going to be -- are you flattish in terms of the number of work days March versus December?

I think the number of working days in December quarter was two days less. That is one of the reasons why the growth has been slower. In March quarter the working days is slightly higher, but March quarter is always the tough quarter because the customers finalize the budgets and it takes time for them to spend. So that is the reason we're giving a guidance of 4.9% growth in March. Other than that I don't foresee any other reason.

Okay. And then talking a little bit just about the pipeline and I don't know if that was [Shibu] earlier on the call that was making some comments. But if you look at the pipeline, is the larger deals are these characterized more by stand-alone, deals or are these typically components of larger outsourcing deals which are segregating out components which can be done offshore?

The deals that I talked about, the ones that I mentioned in my remarks, they were all stand-alone deals. They were not segregations. We also pursue deals of size ranging from $100 to $1b and some of them we do end up getting part of the deal and we probably have about five to six of those deals in progress. But they are long integration deals that take anywhere from nine months to a year for closure. But at the same time the deals I mentioned are happening every quarter. Many of them are stand-alone deals.

Okay. And just one last question --

And for the guidance we are not touching what we consider as a [inaudible] deal of $100m and above.

And how many are -- fit that category?

At this point probably about five to six in that category but the point is these are long integration deals that take anywhere from nine months to 12 months.

Okay. And then just getting back to the BPO business for a while. That business has been growing in mid single to low double-digit growth rates sequentially for several quarters and it spiked up this year. Is there something fundamentally going on in the BPO business, on a secular basis, or are you just -- recognition in the marketplace that this can be done or more focused by emphasis? Any color you can give us to the acceleration of sequential growth over the last two quarters.

I'm sorry. No, I don't think -- you know the BPO market has been, in terms of overall demand, has been quite good so it is not [fundamentally] a big change in the BPO market which has led to this [kind of new] growth. They have been growing quite rapidly since we were set up five years back. But what you definitely seeing is there are a number of clients -- there has been an increased number of clients and as you see growth in each of those clients you can track a much higher growth than before.

So [anyway] we need to sign more clients and each of those clients have [contributed] to add to the growth rate you'll see that the double-digit growth rates is coming back. Our clients are seeing value in working with us. We are able to demonstrate to them how we are adding value on a year-to-year basis and that's why we've seen continued growth in each of our BPO clients we're working with. And as we sign more clients, normally if we sign a client this year, we see that the real impact of the growth from that client coming only after 12 to 18 months.

Okay, very good. Thank you.

Your next question comes from the line of George Price at Stifel Nicholas.

Hi, can you hear me? Hello, can you hear me okay?

Yes sir, your line is open.

Okay, apologies, a little phone issue there. A lot of my questions have been answered but I still do have a couple more.

Just going back to the prior question on talking about the large deals, has there been any change to your view of what you will and won't be willing to pursue? I know Infosys historically seems to be a little more hesitant in pursuing larger deals that may involve higher risk, particularly to the margin side, taking over a large amount of people, certainly taking over any meaningful assets. Can you just tell us where your views stand right now? What are the characteristics of the larger deals that you're looking at now?

Not much change in our philosophy here. We want to take these deals at reasonable prices and reasonable margins. We want to make sure that we are able to execute value, which means that under the global delivery model typically [inaudible] of the purchases are delivered offshore. So if we take over a significant number of employees, then, we will be challenged to figure out what to do with them. So that's why we're electing to take over a significant number of employees. 20, 30 personal employees we can take over, beyond that, we need to figure out what to do.

It would be better if the client can do the restructuring, given that they want to get the benefit of the global delivery model, and then we can work with them to take over the work etc. So that's the philosophy that the Company and continues to be the philosophy.

To what extent are you willing to enter into longer term deals that are going to be margin dilutive and over what timeframe? If you get hit for a couple of quarters and to the extent you can elaborate on what magnitude might be tolerable versus -- how far will you go in that regard and what would you not take on?

So, what we do is when a large deal comes in our financial [investor] modeling exercise which is about what will be the impact on our margin, short term, long term etc. And if we are able to absorb that, and sometimes we are able to absorb that because there are some other business is coming at a higher margin etc., then we proceed. So that's something we do on a deal by a deal basis and take decisions based on what is the current situation at that point.

Okay. Wage inflation -- and just one more thing on the larger deals. You mentioned five to six deals that you're looking at right now that are fairly sizeable. Can you talk about a timeframe that there may be decisioned? I'm assuming those would be likely fiscal '08 deals, but let us know if not. And maybe where within the year, earlier or later?

We have not included these in our guidance precisely because it's a one or a zero [timeframe till launch]. And we don't want to give you a calendar of these other deals, when these are going to be potentially signed etc., we don't know. We've no control over this and that's why we've not included in our guidance also.

Okay. Going back also to some of the questions on wage inflation, noting that you leveraged the pyramid to the wage inflation that you experience on a blended basis. We did see, or have started to see some wage inflation at the entry level, I guess actually though starting in fiscal '08. Do you think that you might need to do this again? Can you just talk about maybe the entry level environment from that perspective? Are there -- beyond even this industry are there other industries or other players within the industry that might be influencing demand for people at the entry level that might cause you to have to up the entry level wages materially?

I think the entry level wages in the country are being influenced by only two industries; the IT industry and the financial services industry. The financial services industry this year will hire maybe about 75,000 to 100,000 people. The IT industry over 380,000 people. These two are driving up the demand for entry level people and the IT industry is hiring the largest number of people. They get the best of the crop. Obviously the competition is for the best of the best. I fear the financial services could offer a slightly higher wage to grab them. And second, the [glamour] quotient of the financial service industry is getting higher, [developing] investment banking and [upsetting incomes but they are].

As far as entry wages go we raised them from INR240,000 a year to INR270,000 a year for the next year, and this could go up by maybe 10% a year after that. And this 10% is factored into that 13 to 15% compensation that we talk about for the entire [scan]. So if we pay a 10% increase at entry level, the middle level we could possible afford to pay slightly more but typically we have to make sure that we become more attractive.

But definitely going forward for the rest of industry in this country it is going to become very, very challenging to get more and more people in. Right now the retail industry is hiring. They're not able to get people. The construction industry is not able to get people because all the [young men] want to join IT and the manufacturing industry is going to find it more difficult.

What will happen in India in the next three or four years is what we call [right filling]. The Indian industry has traditionally been a place where we have taken over qualified people to do more mundane work. I think in the next two or three years most companies will start, I think hiring people at the right time and not getting over qualified people to do work. And that I think will help to stem this balance in a particular way.

For instance, we have about 1,700 graduates who've been in forces, [the services] business who do part of the work in one or two verticals and that number is becoming slightly larger over the years. So in this way right filling will be the solution for the whole industry and as far as we are concerned we're sure we will be the top of the heap.

Okay. So the 10% that you discussed, remind me, last year you made, was it, a 20% bump for those entering fiscal '08?

No, I'm not saying that. What I'm saying is --

No, no, so, I'm sorry, you gave that, the INR240,000, INR270,000 I apologize. The 10% bump that you just referenced that could come after that, that would be for those coming in in fiscal '09?

Yes.

Okay. And last question on -- just going back to Finacle. I've seen some articles and some comments that you've made and you discussed a little bit here that you're looking to expand your client base for the Finacle product outside of India with larger financial -- global financial institutions.

Can you talk a little bit more about where that stands in terms of opportunity pipeline and your plans in fiscal '08? Just maybe some more around the goals of what you might like this segment, small as it is, obviously it does have -- it can have a meaningful impact, what your goals for the segment might be looking into fiscal '08? Upper single digit as a percent of revenue or how many clients maybe would you think would be a reasonable assumption by the end of fiscal '08? Anything along those lines.

We would like Finacle to grow faster than the rest of the business on a [liquid] basis. That would be a very nice goal. And as far as the pipeline is concerned, we said earlier today that the pipeline is stronger in the last quarter, the December quarter, than the previous quarter. We've seen openings in Europe. We've seen openings to Eastern Europe and in South East Asia.

South East Asia has opened up large banks and now seen the need for change of core banking. We already got a very large bank headquarter in Singapore. And we are seeing an increase in Russia and Eastern Europe and some traction in Western Europe. So we are seeing the first stirrings of the need for the Western banks in Europe to open up and look at change. As far as U.S. is concerned the functionality that we have needs to be improved upon to meet the requirement of the U.S. that is not right there at this point in time.

Okay, I think with this I think we have come to the end of our call and I'd like to thank each and every one of you for coming on this call and asking us questions. We're always there to answer any questions and if you have any further questions we'd be happy to have email from you to [inaudible] and [V. Bala] is here, of course, who will be happy to answer any questions. And thank you everyone and see you same time next quarter. Thank you.

Good night, good morning, thank you.

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