Infosys Ltd (INFY) 2008 Q2 法說會逐字稿

Good morning. My name is Cynthia and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter results conference call for fiscal 2008 for Infosys Technologies.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS).

I would now like to turn today's call over to Sandeep Mahindroo from Infosys. Please go ahead, sir.

Thanks, Cynthia. Good morning and welcome everyone to this call to discuss Infosys' financial results for the quarter ending September 30, 2007. I am Sandeep from the Investor Relations team in New York. Joining us today on this conference call is CEO and MD, Mr. S. Gopalakrishnan; COO, Mr. S. D. Shibulal and CFO, Mr. V. Balakrishnan, along with other members of the senior management.

We will start the proceedings with a brief statement on the performance of the Company for the recently completed quarter. Following that, our outlook for the quarter ending September 30, 2007 and year ending March 31, 2008. After that we'll open up the discussion for Q&A.

Before I pass on, then, to the management, 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 pass on to Infosys' management.

Thank you, Sandeep, and thank you all for participating in this call. Good afternoon, good evening, good morning to each one of you wherever you are. This is the first quarter we have achieved $1b in revenue; in that sense it's a significant milestone for Infosys. The growth has been 37% if you look at the corresponding [costs] last fiscal.

We have seen growth across the various industries in which we are operating; Banking and Capital Markets, Insurance, Retail, Manufacturing, Energy, Utilities so the growth has been very broad. We have seen growth across all the top 25 customers. When you look at it from a 12-month perspective, quarter-upon-quarter there are some variations, so this quarter we saw the non-top 10 clients growing faster, much faster than the top 10. But if you look at the last 12-month period, we have seen good growth from all our top clients.

We have added 48 new clients this quarter, so our ability to attract new clients to come to us is also very good. We have added about 8,500 employees gross this quarter, though we said that we'll add 11,500. What happened was we had to postpone the joining dates for about 2,500 to October because our facility was not yet ready. We had some issues with the contractor for completion date; they could not prepare cement for completion etc. But we will be adding those employees in October and, in fact, we're looking at a gross addition of 30,000 employees for the full year.

We have improved our margins to 27 -- operating margins to 27.5%; 2.8% increase from last quarter. So we have actually recovered from what happened in the first quarter because of the rupee appreciation within a very short period of less than a quarter. And that shows the resilience of the model. That shows that we are able to leverage what levers we have in our business in order to sustain margins. And we see margins in a narrow band of 50 to 100 basis points for the remainder of the fiscal.

And our philosophy of having one of the highest margins in this industry continues to be a goal for Infosys. We have revised our guidance for the rest of the year. When we started the year we started with 29% to 30%, then we increased it to 30% to 31% and now we're seeing a growth of 34.5% to 35% for the full year. That's almost a 4% to 5% increase in our guidance for the full fiscal year.

So with this, let me hand it over to Shibulal to give you more information on how the revenue is segmented [and things to that].

This is Shibulal. Thank you for joining the call. As Kris said, we have grossed $1b in revenue in a single quarter. It's a major milestone for Infosys. Our sequential growth was 10.1%. Out of that, the volume growth contributed 7.7% and the revenue productivity growth contributed 1.9%. Now we have seen overall growth in almost all segments. The BFSI segment, which is our largest segment, has grown 11.4%. Manufacturing grew 13.2%. All this is quarter-on-quarter. Retail grew 27.3% quarter-on-quarter. Energy and Utilities segment grew 19.5% quarter-on-quarter.

If you look at Services, Package Implementation Consulting has grown. Consulting is now 5% of what we call (inaudible) Consulting is 5% in the Package Implementation which includes container -- which is also Consulting-oriented, is 18.7%. It has [grown] -- last quarter it was 18.4%. So our total Consulting revenue if you look at it in the industry standard rate today is 24%. $241m of revenue we derived from Consulting this quarter.

Our independent validation service has grown 13.6% quarter-on-quarter. Again, giving some color on the [revenue], our fixed price has gone up by a couple of hundred basis points to reach 31.5%. Our own status remains stable, margins decreased from last quarter and it is 31.7% in Q2.

Our revenue productivity has gone up 1.9% blended, 2.9% on-site revenue productivity increase, 2.6% offshore revenue productivity increase which has led to a 1.9% blended revenue productivity increase.

It is very interesting. This is the sixth quarter in which we have revenue productivity increase. The last six quarters we have had continued revenue productivity increase. Last year we had gained 5% -- 4.7% or so year-on-year revenue productivity increase.

The billing rates continue to be stable with an upward bias. New clients, new contracts are coming at around 3% to 4% higher than our average. The contract renegotiations are also coming at 2% to 3% above average.

Our growth is all around. The top 10 customers grew by 2.7% quarter-on-quarter. That is if you look at it on a year-to-year basis. You will see strong growth in the top 10 customers. Non-top 10 grew 13.7% sequentially. As Kris said, we added 48 new customers this quarter. The total number of clients is 520.

The number of $1m clients has also gone up. Last quarter it was 285. This quarter it is 295. 295 clients have given us more than $1m per year. 16 clients contributed more than $50m of revenue on the LTM basis, five more than $90m and three more than $100m. Fortune 500 clients; we have 113. This quarter out of the 48 clients which we added, three of them were Fortune 500.

Our DSO has remained stable. Actually, it has come down to 65 days compared with 67 days last quarter. Out of the DSO, 80.9% of our DSOs have been less than 30 days.

Utilization has gone up from last quarter to this quarter. It has reached 79.5%. Last quarter it was 75.1%. But the other number to notice is utilization including trainees, which is at a very healthy rate of 71.2%. This means that we have enough capacity in training, which will take care of our growth requirements for the coming quarters. As Kris said, we will be recruiting 30,000 people this year, including the Philips [lift out] of 1,400 people.

We have given salary increases of 12% to 15% offshore and 5% to 6% on site, effective April 1. The salary increase has been utilized using the number of levers we have and our margins have gone up by 280 basis points in dollar terms.

Our [visa] utilization is at a healthy rate of 67%. Our subsidiaries are doing well. [I feel] subsidiaries are doing well. China and Consulting continued to be [in] investment [mode]. China has (650) employees, in total, Consulting has 236 and we have a new subsidiary in Mexico. We have opened a center in Mexico and that has 27 employees as of this quarter.

We have 3,400 plus employees doing Consulting and Package Implementation, which is contributing 24% of the revenue.

With that, let me hand over to [Bala] to give you color to the financial statements.

Hello. This quarter we have seen revenues growing by around 10.1% sequentially. We grossed $1b in revenues. Our gross margin went up to 42.2% from 38.7% last quarter. The operating income has gone up to 27.5 from 24.7% last quarter.

We have seen an improvement in operating margin of 2.8%. It basically came in because the visa cost, which was around $16m in the first quarter, has come down to $3.5m because there was a window of opportunity to (inaudible) [for returned visas] in the first quarter. That contributed positively to the margin by around 1.2%.

The G&A costs came down by around 90 basis points. Because of the bill rate increase of 1.9% on blended basis, we got a positive impact on margin of 1.1%. The rupee impacted the margin by around 50 basis points because [it appreciated] by 1.2% during the quarter.

So net-net, the operating margin went up by around 2.8%. The effective tax rate slightly went up this quarter. Last quarter we had a tax reversal of $13m. The normal is that the effective tax rate last quarter was 13.9%. This quarter it went to 15.1%, basically, because we had seen some improvement in the [profits] on site. In all the countries we operate we do pay taxes and the tax rate has gone up because of that.

We had given a guidance of $0.46 as the EPS; we [have done] $0.48. We have seen good growth all around and, in terms of guidance, we are increasing our guidance for the full year. We are saying the revenues could grow somewhere between 34.5% to 35% for the whole year but our earnings per share could grow somewhere between 29.4% to 30.1%.

If you exclude the tax reversals which were done last year and what we have done in the first quarter of this year, the effective tax [and] the EPS could grow somewhere between 32% to 33%. We are assuming the bill rates to be similar to what we have seen in the second quarter for the rest of the year. We assume the currency to be at INR39.5 for the next six months. We have not assumed any large deals in the guidance. We have not assumed any price increase in the guidance from what we have seen in the second quarter.

We also assume that the utilization could be somewhere between 76% to 80%. We have seen the utilization slightly going up this quarter but, when we add more people in the next two quarters, it could come within the band of 76% to 80%; more closer to the lower end of the band.

So, overall, we have seen strong growth in all areas. We have improved the margins in spite of the currency going against us. We have increased the guidance for the whole year. The momentum for revenue growth continues. I think, with this, I'll conclude my presentation. We'll open up the floor for Q&A. Thank you.

(OPERATOR INSTRUCTIONS). Your first question from Joseph Foresi with Janney Montgomery Scott.

Hello, gentlemen, and nice quarter, nice execution this quarter. I know you talked a little bit about this in the Indian conference call, but I wonder if you could just talk about what you're seeing as far as budgeting and spending on IT services heading into next year?

Hello, this is Kris here. Currently we are seeing that for this year people continue -- (inaudible) continue to spend on IT. In fact, some analysts are even saying that this year's spend is higher than last year by 8% or so. And some of the reasons we see are because companies want to expand into newer markets, especially developing markets, etc. they are spending in Technology. They are spending in acquisitions, mergers, etc. and that is one of the reasons why the spend is going up.

Now, for next year it will all depend on how the budgets are set in the first quarter. In the past we have seen that the offshore benefit disproportionately because companies transition work to offshore continuously and offshore has become mainstream today. So, overall, the environment seems to be positive with no signs of slowdown; maybe a slightly up-tick and then definitely trend towards offshore.

Have you seen anything on the discretionary spending side of things?

In fact, if you look at our Consulting, Package Implementation, Consulting, etc., these services are growing. So we are not really seeing any slowdown on the discretionary spend also. Most of the investments into newer geographies, newer areas, innovation, there is a lot of interest in things like RFID, grid computing, software [as a] service, so there is investment happening in innovation, [discretion], etc.

Okay. And just one last final question here, have you guys taken a look at any implications from the expiration to tax holiday and anything that we could -- what that would do to your tax rate heading into '09 and any indication of what would happen politically as far as that tax holiday going away? Thanks, guys.

As it stands today we have the special economic zones in some of the centers already operational. And in other centers we are in the process of getting all the approvals and setting it up, so we will have most of our incremental growth coming up in [SEZs]. As the [ACP] scheme comes to an end in 2009, you will see an increase in our effective tax rate. Right now, around 14%; it may go up to 20%, 21% as is today -- [see] today. But if we are able to accelerate the growth in SEZs, it may be even lower than that and then it will continue to dip.

And from a political side, of course, the industry is looking at support from the government to continue the tax holiday. We will have to wait and see what the response from the government will be. I will let Bala add, if he has anything to add.

As of note, the last time the tax holiday could [go off] in 2010 but we have to wait and see because there could be a new government in place in 2010. And we have to see what they are going to do. But as of now, the law is the tax holiday could [go off]. Our effective tax rate today is somewhere between 13.5% to 14.5%. If the tax holiday goes [off], it could go up to maybe around 20%, 22%.

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

Thank you and, again, congratulations on very, very good execution here. Two questions. First is, we are getting some [data points] that Avionics industries, the vertical, is having some increased traction with Indian IT services companies. I was wondering what kind of services can Infosys be providing to the Avionics sector.

And the second question I have is regarding setting up more [firm] businesses, like these Infosys offices in rural India. I was wondering do you have any specific locations where you are looking into setting up new offices. Thanks and, again, congratulations on very good execution.

So, we have actually a broad range of services for the aircraft industry, traditional application development, maintenance, consulting. We do engineering services. We do embedded systems work, product development work.

As you know, we are working with the two major aircraft manufacturing companies. There is also an opportunity for companies in India through the [Offset] program. Infosys is one of the companies who is approved for participating in the Offset program and that could also be an opportunity for us. So we have a good set of services, good opportunities in the aircraft industry.

Now, to the second question, Infosys is today in four tier one -- what we call, tier one cities; Bangalore, Chennai, Hyderabad and Pune and actually six tier two cities; Jaipur, Chandigarh, Bhubaneshwar, Mysore, Mangalore, Thiruvananthapuram, etc. So we are looking at tier two cities as we expand.

We do like to look at tier two and tier three cities. We don't want to speculate on any other new locations because then that would create problems for us and it could actually create speculation. So we will just leave it. We would look at tier two cities as we go.

Thank you.

Your next question comes from Julio Quinteros from Goldman Sachs.

Great. Thanks, guys. As we look forward and think about where utilization is currently trending right now, what do you think is the opportunity for utilization as we think about the sequential trend in utilization? Especially as we think about two factors; one, utilization as it relates as a revenue driver and, two, utilization as a potential offset to continued rupee appreciation.

Well, utilization is at a very healthy rate right now; 79.5%. We are quite comfortable with 76% to 80%. We have seen more than 80% in the past [locationally]; 81%, 82%. If you take it beyond a healthy level that will impact our ability to grow because we need the supply chain to grow, as well as to take advantage of any opportunities which will come around.

So I believe, and as Bala said, now we have a large number of people in training. If you look at our utilization including trainees it is [only] 71.2%, so until trainees get released into the system the utilization will remain within that band of 76% to 80% for the next couple of quarters. And Bala will add to that.

The utilization we always said we are comfortable with [about] a band of 76% to 80%. It has gone up slightly this quarter. But when we begin the year we always want [the end of this] utilization, which is somewhere closer to the lower end of the band. Because we want to have enough flexibility in the model to make sure the growth is there when we see market opportunities. To some extent, our utilization is a function of the market demand we see and is a function of the demand environment.

Got it. And then, Bala, one thing I wanted to ask was I noted the sequential up-tick in fixed price work relative to [time materials] work. Just in terms of the way that the work is accounted for, I know that the unit contribution for those two is about the same, but when should we expect to see margin benefits from increased exposure to fixed price, or are we already starting to see it?

Actually, the fixed price [has] gone up this quarter. It is our our strategic direction to increase our fixed price. If you can agree to a fixed price and execute them at a higher productivity level, the result of that will be value [accrual] towards Infosys. So we are focused on the fixed price.

We have [come a bit] -- we have a separate tool and [the use] group now for the last 12 months. They are very much active and focused on increasing productivity. So by increasing fixed price and if we increase productivity in the fixed price projects we will have the value extraction towards Infosys. And our fixed price today is higher than our average margin by 3% to 4%.

Great, thank you.

Your next question comes from Moshe Katri with Cowen and Company.

Yes, thanks. There seems to be a disconnect between what you're saying, Kris, about demand trends versus your December quarterly guidance, especially in terms of sequential revenue growth. And I'm just curious; obviously your stock has been down pretty aggressively in India. It's probably going to open down again today. It seems to be mostly on concerns over your guidance.

In your guidance do you want us to -- do you feel that the takeaway from this call should be that Infosys is cautious about the spending outlook for December, or Infosys is being conservative? What do you think we should conclude from this because, clearly, the market is taking a stand here in terms of what they're understanding from the numbers? Thanks.

So, we have clearly said that we are not seeing any slowdown. Of course, January is when the budgets are reset, so next year we'll have to wait and see. But we are not seeing any slowdown. We have seen broad growth across [with] the various industries.

We give guidance based on what we see. We have a method to how we do guidance, etc. and we base it on that. We also make sure that we have slack in the system so that if we see opportunities in the market we are able to take a full advantage of that and grow faster than that. And so, basically, the guidance is based on what we see in the market today and what [we see]. We have revised our guidance for the entire year to 34.5% to 35% and Q3, typically, is slightly slow, so that's also reflected.

But Kris --

No, I'll answer the question. The difference between the two market [phase], the Indian market looks at the Indian rupee guidance and the rupee has appreciated. The volumes are higher than the growth in the EPS in rupees in India, whereas, I guess you folks look at the U.S. dollar guidance even though you look at the markets in India.

And if you look at comparable to the U.S., 35% growth in the top line and [near] that an EPS growth for the year among comparables in the United States is something that the people compare with to see how we are growing, whereas, in India they look at 20% because the rupee has appreciated and they said that it's not the same like last year. So I think the currencies [ride] back within the two markets and that's how people see differently.

I'm talking more about the fact that, sequentially, your growth this quarter was about 10% or so, and you're guiding for a deceleration in sequential growth to 5% to 6% in the December quarter. And this is without even factoring some sort of a price or bill rate increase. And this quarter it was about 1.9%.

So, assuming you'll get another 1% for the December quarter, then we're really talking about 4% to 5% sequential growth and then we're really talking about a deceleration. So I think we're looking at the pure sequential revenue growth numbers and I don't think it really has to do anything with the Indian rupee and that's what my question was about.

No, no, it's not really so. If you look at the last few years, you're always seeing the third and fourth quarter to be soft quarters because third quarter has a lot of holidays, fourth quarter -- first quarter when the clients finalize their budget and start spending. You are talking about a larger [base] also, right? So if you look at even Q3 of '06, or even Q3 of '05, the growth has been slower in the third and fourth quarter as compared to first and second quarters. What the Indian market's focused on is the rupee growth, not the dollar growth.

We are seeing great momentum in the business; 35% growth in revenues is a great achievement in this kind of environment. It is [base of] $3b. This year we'll be ending at $4b. I don't think [--] the markets are looking at two different numbers and coming to different conclusions. But if you look at the momentum in the [business], if you look at the growth, I think 10% growth in a quarter and the 35% growth in the year is a [great growth].

Okay. That's fair. So you're talking about seasonality. And then just briefly, the question is for Mohandas. The hiring for the quarter was a bit light. Maybe you can talk a bit in details about what's going on in Mysore and talk about your hiring targets for fiscal '08? Thanks.

In the guidance given at the end of the first quarter, we have said that we'll have 11,000-odd people joining us this quarter. 8,500 have joined. We had challenges in Mysore because of the infrastructure for training did not come up to speed. They were delayed by three months because the contractors defaulted in completion and there is a cement shortage in India. It sounds funny for me to say this, but it's true.

So the people are supposed to join the second and third part of September are now going to join in the first and second week of October. So we've got about -- [the offers] are there. They're all from the colleges and they're joining now. Some of them have already joined, so I think we're okay.

Will it impact our business for this year? No, because we have 5,200 people in training. A large number of them are coming off training and joining delivery in this month. So the people who were supposed to join us in the last two weeks of September were the people who will come off training some time in January. And we have enough people to work and to make sure that we have enough slack in the system by the time we end this financial year.

We have increased the guidance for number of hires from 26,000 to 30,000; 26,000 at the end of the first quarter to 30,000 now. Of the increase of 4,000, 1,500 are acquired through the Philips deal and the balance, 2,500, organically we would like to hire from the marketplace, so we got a recruitment team in place. This year we'll be hiring 30,000 people as against 31,000-odd we did last year, so actually increasing the hiring.

Great, thanks. Thanks for the clarification. Finally, just a brief comment, Mohan, maybe you can talk a bit about your outlook for wage hikes on an ongoing basis. We spoke about this very briefly in July and then, since then, we continue to see all kind of different media outlets out of India talking about a potential moderation in wage hikes down the road. Is this something that Infosys sees and what's your view on that? Thanks.

Well, we do believe at this point of time that the wage hikes for next year will be in the range of 12% to 15%, same as this year and the year before that. We do not see any signs of moderation, for many reasons.

One, the offers for freshers for the next year is already out. We already made 18,000 offers. Other companies have made their offers and there's only a hike in the freshers' compensation by about 8% to 10%. And right now, when you look at hiring in the lateral level, in the middle level, you see the wages going up.

So next year, definitely, it will be 12% to 15% as we see it at this point of time, and we do not see any moderation. Remember, it is not only the IT industry that is hiring in India. There is a whole Indian industry hiring in India. Unless growth rate in India comes down significantly, there'll be no let up in hiring.

Do we see it going up more than this? At this point of time, no. We are comfortable with this range. And for us, a 12% to 15% hike in salaries, in April or March, would mean a 7% to 8% increase in per capita salary cost for the whole year compared to the previous year, because of the (inaudible) structure that we have built. So we're quite comfortable with what we're doing and I [think that] we're okay.

Thank you.

Your next question comes from Mark Marostica with Piper Jaffray.

Thank you. Nice job on the quarter. Obviously, your offshore mix has been increasing over a number of quarters; this quarter jumped up over 68%. I'm curious as to, number one, what you see as potentially a practical limit to your offshore mix and, secondly, if you could comment on the relative margin differential onsite versus offshore effort. Thanks.

So, we are comfortable with about 30% onshore and 70% offshore, but it is actually not the same across all the service lines we offer. So for example, enterprise solutions, which started off as mostly onshore, almost all onshore, today has only 40% onshore and 60% offshore, so we try to actually bring more efficiencies.

It's a win-win scenario for both Infosys and the client, in the sense that the client sees lower cost and we see higher margins. So for the second part of your question on the margin improvement, typically, the margins are almost double when we deliver the work from offshore.

Great. And then I wanted to ask a question on the retail segment. You had a real solid result this quarter. Is that being driven by retailers who are seeing some sluggishness pushing more work offshore? And maybe if you can comment prospectively, are you sensing any hesitancy among your retail clients as you look at their budgets coming up for this year?

So retail, for us, is a global business and we saw good growth of retail in Europe. We've acquired new clients in retail in Europe, so that's partly the reason, so some of the new clients who have come in are in retail segment.

So, client to client -- no, sorry. For the same client, the growth, as you said, may not be as much but, across the world and across the total business, we are seeing good growth in retail. What is happening is retail companies are now looking at offshore more aggressively and trying to leverage this model, as they see the environment becoming more global and the environment requiring more efficiency from them.

And then last question, I'll turn it over. Attrition ticked up this quarter. Can you give us a sense for some of the drivers that impacted this quarter?

This quarter, on an LTM basis, we had 14.2% as against 13.7%. We made analysis of this 0.5% increase. Of the 0.5%, 0.37% is due to the increase in the people who left us for higher education. We had 1,300 people, LTM, leaving us for higher education as against 970 same time previous year.

And if you look at this quarter versus the last quarter, there's an up-tick in the number of people who left us for higher education, because it's the season for MBA courses and the MTech courses. And the number of people who left us in the months of August and September is down from the number of people who left us in July. July, we had a spike and the spike was because of people leaving us. So I think we're quite comfortable.

If you remove the numbers about -- from involuntary attrition, we are at 12.8% out of 14.2%. And if you remove the number of people who leave for higher education, I think we're very comfortable at about 10.5% [or so]. [I believe that's] okay, because only about 43% of the total people who leave us in a year leave us to join other companies, and that ratio has been almost the same for the last three years.

Great. Thank you.

Your next question comes from Rod Bourgeois with Bernstein.

Hello, it's again Rod Bourgeois here. Mohan, I just wanted to follow up. We spoke on the earlier conference call some about the attrition. I wanted to follow up on that point a little bit. The quarterly attrition, if you annualize the quarterly rate, it looks like you jumped up to a little over 17%, which is a meaningful up-tick.

And it would also suggest, mathematically, that your LTM, or your last 12 months' attrition rate over the next couple of quarters, could continue to rise. Is that the right way to look at it, or is something going to happen to stem the tide on that in the next couple of quarters?

Well, we had 2,700 people leave us in the services this quarter as against 2,100-odd people who left us in the previous year, out of which we had about, I think if I remember rightly, about 700 people leave us in August and about 750 or 800 leave us in September. So it's been constant for the last two months and the spike was in July and we had a spike in June. So June and July are the times when people leave us for higher education.

If you net that out and look at it LTM, and look at an annualized basis, and look in a quarterly basis, it has come down. So I think, net of the spike, I think we're quite comfortable. We're not seeing a spike in people leaving us for compensation or for joining other companies.

And I think -- but what is interesting is the number of people who leave us for higher education is increasing. I guess people have an aspiration that after working two, three years, they want to do an MBA [degree]. And people are always fascinated by an MBA. And that's the spike.

So apart from that, we don't see any other spike to the extent I think we are quite comfortable. I think it is under control.

But isn't that a trend that could continue? And if so, the math would suggest that your LTM attrition could go up in the next couple of quarters.

Well, it all depends on how we stabilize in October, November and December --

Yes.

-- because the trend has been down, in the sense there's a spike LTM. And if you take LTM up to July, it is up. Then it came down in August and September, if you take LTM. So if it remains the same pace in August and September for this month and the next two months, I think it will -- it has the chance to coming down, so we'll see some stability.

You don't view this as a new challenge to deal with from a wage inflation perspective, or just an ongoing ability to manage the supply part of the equation? Are you viewing this as a new challenge that's meaningful or it's a relatively minor issue as you manage the supply side?

Well, people leaving us is always a challenge. We prefer they [stayed back] with us and build up careers, because it's always good to have great people working for you. And it's always -- you spend more money and effort trying to recruit from outside to fill the breach caused by people leaving you. We prefer for people not to leave us.

But we have to accept the reality how it is, that there are -- there's opportunity here for -- in the local industries. India is growing at a very fast pace so, to an extent, people [would] leave us. The challenge is to keep within reasonable limits which you can afford and manage.

Is it hurting us in getting fresh talent from the marketplace? No, because our hiring of laterals has gone up and the lateral conversion rate has gone up compared to the previous year, so that's exciting. And even from the colleges, the supply is up.

The challenge at fresher level today in India is not the supply; it's an ability to hire and train people. They're all trainable people. You need to train. You need to invest in training, and that is a challenge. And we have built up the capacity. We could train 40,000 people a year in Mysore. Across the Company we have a system -- we have a capacity to train 50,000 people a year and we could house all of them for up to four months in our campuses all over.

So the cost of training is significantly less than any other Corporation in the world. So I think we have built competitive advantages and we have taken steps to utilize this.

Great. Thanks for that. And the margin performance under those circumstances has been, clearly, impressive. On the earlier conference call you guys indicated that discretionary spending could see some slowdown at certain clients that have a credit card business. And I was wondering if you could quantify what percentage of your client base might fall into that category of potentially having a slowdown because of credit-related issues.

If you're looking for the exposure that we have for companies that are in the mortgage business, it's about 0.5%, actually less than 0.5%.

But also on the credit card basis, we're actually not seeing any slowdown in our credit card clients, but we do -- we are seeing some amount of provisioning that they are doing. So we think that they may be anticipating some kind of a slowdown as a result of the perceived reduction in the wealth [effect], because housing price, etc., are falling down. But all our conversations with our clients, we have not seen any reduction in any spend/budget or any cancellation of projects.

Right, but it sounds like beyond the 0.5% that's exposed to mortgages, there's a slightly larger client base that might be provisioning for some slowing discretionary spending. Can you quantify how big that additional client base is beyond the mortgage clients?

Well, all our clients, you've seen the results that they have come out with, are providing for something, either because they are taking a charge off. Everybody has come clean, which is good, come clean in terms of what their MBS or ABS portfolios are.

In terms of being able to pinpoint the discretionary spend with these clients, it's all -- it varies from client to client. But, clearly, in our conversations with our clients, we have actually not seen them talk about any cancellation, delays or deferrals of any kind of a project, whether discretionary, semi-discretionary or pure [lights on], as of today.

All right. So would you be surprised if there was a meaningful slowdown in discretionary spending that affected your growth outlook over the next couple of quarters?

Hard to say, in terms of whether there really will be one. We are tracking and modeling all the macroeconomic indicators. We do not believe that there is any systemic risk out there. We do not believe there are any hidden surprises.

But there will definitely be some amount of delaying for projects which could be done later on. So from that perspective, yes, we could see some discretionary spend getting deferred. But we again, to reiterate, we have not seen any of that; neither in our conversations with our clients have we heard them mentioning it.

But as -- in this particular space we are watching it very, very closely and we're in constant dialogue with our clients. And we are modeling what we see and hear in order to see the impact it will have on their business as well as, consequently, on their IT spend in our business.

Thanks for the help with the extra color, guys.

Your next question comes from Julie Santoriello with Morgan Stanley.

Thank you. Just a couple of questions to talk about the outlook for pricing, bill rates, for next year. It's been a nice positive -- nice challenge for you this year. Do you think that kind of increase in bill rates can continue for next year?

So, it is, perhaps, too early to talk about next year. We have two more quarters. We have seen six quarters of increase per capita income for the Company; this quarter, 1.9%. The trend is positive. We are seeing there's a 3% to 4% increase in new contracts and about 2% to 3% when contracts come up for renewal; not all of them, at least some of them.

So the trend is positive. Clients realize that costs are going up in India. Of course, they would benchmark it with inflation rates and things to that in the country in which they are operating, rather than India. But we are seeing consistently that 2%, 3%, 4% is possible.

And then, the way we have constructed the model -- Mohan talked about 12% to 15% increase in compensation in India. That is about 15%, 17% of our revenue -- overall revenue and effectively -- over the year, Mohan also told that it comes down to about 7%. So if you look at the effective impact of compensation increase, it comes down to about -- it comes down to approximately 1% or 1.5%.

And that is something which we can absorb because we are seeing that revenue per employee -- the per capita income per employee is going up. And that's why the model is resilient and model is able to sustain the margins we have.

Thanks. That's really helpful. If I could also ask you, if we do see a general slowdown in the global economy we could begin to become more concerned about budgets -- customer budgets for next year, which parts of your business would you be most concerned about? Do you think you would see it first in the ITO business or the BPO business?

The BPO business is much smaller, so we are not seeing any slowdown, but if there is, the rest of the Company can easily absorb. The BPO business dynamic is also very different. They are in several conversations already, several deals already. And I don't know whether those will get pulled back at this point, because most of the reasons for looking at offshore is, actually, improvement in efficiency, reduction in costs, etc. And if there is a slowdown, there will only be an acceleration of a move to offshore.

And when it comes to IT outsourcing, the primary driver is the move to offshore rather than IT spending. The primary driver for our growth is the move to offshore and that, I think, continues to be strong. This has become the mainstream model for even global system integrators. The number of employers is India is growing. So everybody sees that the opportunity for the future is really leveraging the GDM model and offshore should continue to increase.

We see this same from other analysts, that is, technology analysts. We see this in the NASSCOM-McKinsey Report, where they're predicting that the industry should continue to grow at 25% to 30%. And in that growth the larger companies are seeing a disproportionate share of that growth.

Makes sense. Just lastly, can you comment on your appetite for acquisitions right now and, particularly, if acquisitions will be necessary to expand geographically? Thank you.

Acquisitions can accelerate our entry into a market. Acquisitions can fill a gap in the services footprint we have. Acquisitions can help us become a larger player in the consulting business, etc., so acquisitions definitely is important for us.

Now having said that, you know the history of acquisitions is that 85% of acquisitions do not deliver the value they're supposed to deliver. So we're careful in selecting the companies. We have certain parameters which we look for in terms of strategic fit, overlap of business, overlap of clients, the ability to retain employees and the profitability of the business, valuation, the values, culture, ethics and how we can integrate both the organizations.

So we look at many of these parameters and if we find some company which fits these and, of course, they need -- they should want to be acquired. We are not looking at a hostile takeover or something like that, so they should want to be acquired. And then you will see Infosys doing an acquisition.

There is another kind of acquisition which is participating in outsourcing deals like the Philips deal, and you will see Infosys becoming active -- more active in that space also. So you will see two kinds of acquisitions from Infosys.

Your next question comes from Andrew Steinerman with Bear Stearns.

Hello. Thanks for taking my question. If you had met your hiring plans for the September quarter, do you think revenue growth would have been higher? In other words, the couple of weeks' shift out of people coming on board, do you think that constrained revenue growth in this September quarter in any way?

No. We had enough people in the system to possibly grow 3% to 4% more.

Okay. So when you look back at the September quarter, the 7.7% volume growth, is it fair to say the constraint to growth would be demand, not supply?

Absolutely, especially for us.

Okay. Thank you very much.

Your next question comes from David Grossman with Thomas Weisel Partners.

Hello, thanks. Actually, just to expand on Andrew's question, it looks like, on a year-over-year basis, your work is capacity constrained, but unit growth decelerated to about 20% -- 28% year-over-year and had been in the low to mid 30s. I was wondering if you could just help us understand, at least from your perspective, how we should view that.

And then, secondly, if you could perhaps relate that -- I think you said also that your gross headcount adds would be up, maybe 1,000 people year-over-year, but essentially flat. So perhaps you could relate what you're seeing on the unit growth side also to what you're doing on the headcount side. Thanks.

David, we model the business for a particular growth rate based on how we see the business. And to a certain extent, that is also a limit to our growth. We provide for slack.

As you know, 77% to 81%, a 4% improvement in utilization for a quarter or so is possible. It's sustainable. And you saw a perfect example of that in this quarter where we had budgeted a certain growth rate, but we grew much faster. And, of course, we were helped with an increase in per capita income also.

So the way we look at our business is that we want steady, consistent performance and growth. Sometimes some clients grow faster. We do get surprised because of that. But the beauty is that we're able to take advantage of that and grow the business. That's what typically happens. Other than that, there is no slowdown or anything like that and the business is a planned growth business.

So you wouldn't view the 28% year-over-year growth as a deceleration, but just lumpiness in your model?

Yes.

I see. And looking at the margins, in terms of the dynamic between pricing, mix and utilization, could you give us some relative weights on how important those three items -- each of those three items were in terms of driving the realization rates up in the quarter?

We have to use some of the levers or all the levers at some point of time. Pricing is good because any 1% increase in pricing, it'll have an impact on margins by around 50 basis points. Utilization could give a benefit of 40 basis points. Scale benefit is there to see. It could be somewhere between 50 to 60 basis points.

So I think all the levers are very important, but we may choose to use some of them or all of them at some point of time.

So, I think you said that utilization would be coming down sequentially as you hire and bring in these incremental hires. So to hold the margins within your 50 basis point band, what are the levers that are going to allow you to do that, with utilization coming down in the second half of the year?

No, what we said was we always want the utilization to be within the band of 76% to 80%. Closer to the year, probably we will try to bring it down to the lower end of the band. If the utilization probably goes down, say by around 2%, probably it'll have an impact of around 80 basis points. We can get some lever out of the G&A costs and also the onsite/offshore mix, coupled with some increase in pricing.

I see. And one last question about the other income. It looked like it was down more than I would have anticipated, even with the more stable rupee. Was there any other dynamic, Bala, going on there, in terms of rates or anything else that would have impacted that number sequentially?

No, I think it's basically because of yield. Last quarter, the average yield was something around 11.5%, 12% on the money we deployed. This quarter it has come down to around 7.5%, 8% because there is enough liquidity in the banking system, so generally interest rates have come down. And last quarter we also had a ForEx benefit of around [$17m]. This quarter it's not there, because rupee again appreciated from the base. Other than that, I don't think there's any other [trend].

Okay. And just one last thing on the tax rate. So, if we look out in the second half of the year to hit the 13.5% to 14.5%, does that mean the tax rate comes down in the second half of the year from the 15% level?

Yes. It has gone up to 15% in the second quarter because the onsite profitability has gone up. Because last quarter we had a visa cost coming and this quarter we don't have that. It could get normalized in the next two quarters. Probably, it will be somewhere between the 13.5% to 14.5% range.

Is that for the second half of the year or for the year in its entirety?

Both for the second half of the year and the full year.

I see. Very good, thank you.

Your next question comes from Ashish Thadhani with Gilford Securities.

Yes, good evening. Nice quarter. Your operating margin was relatively unchanged from a year ago, at about 28%, despite the 13% rupee appreciation, which would be about 600 basis points impact. The question is where has the 600 basis points been made up and how much more cushion do you see?

No, it has been basically made up from the higher billing rates we are seeing. Last quarter we are seeing the billing rates -- the first quarter we are seeing the billing rate going up by around 1.1%. This quarter, again, it went up by 1.9%. The utilization in the beginning was around 73%, 74%. It has gone up to 78%. And we got some benefit on the G&A side because of the scale. So it's a combination of all the three which helped us to offset the impact of the rupee.

So it's basically these three items, right? These are the three major items that would offset the entire rupee appreciation year-on-year?

You are right. These were the three major items which helped us to offset the impact, yes.

And would you have a finer breakdown of how these three -- what they were in terms of relative impact?

Well, we can take it offline, because [last year] --

Sure.

-- also we have said what are the levers we use. Probably -- we can take it offline.

Sure, okay. Thank you.

So, thank you all very much. Really appreciate all of you taking time off to interact with us. I look forward to -- we look forward to talking to you all during the quarter, or at the end of next quarter. And have a good day. Thank you.

Ladies and gentlemen, this concludes today's second quarter results conference call for fiscal 2008 for Infosys Technologies. You may now disconnect.