Infosys Ltd (INFY) 2008 Q3 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen, and welcome to the Q3 2007/2008 Infosys Technologies Limited conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

(OPERATOR INSTRUCTIONS). Just to remind you all, this call is being recorded. I'd now like to hand over to today's chairperson, Mr. Sandeep Mahindroo. Please begin your meeting and I'll be standing by.

Thanks, [Azine]. Good morning, everyone, and welcome to this call to discuss Infosys financial results for the quarter ending December 31, 2007. I am Sandeep from the Investor Relations team in New York. Joining us today on this conference call is CEO and MD, Mr. Kris Gopalakrishnan, COO, Mr. S.D. Shibulal and CFO, Mr. V. Balakrishnan, along with other members of the senior management.

We'll start the proceedings with a brief statement on the performance of the Company for the recently concluded quarter, followed by the outlook for the quarter and year ending March 31, 2008. Subsequently, we'll open up for the discussion for Q&A.

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

I'll now pass it on to Mr. S. Gopalakrishnan.

Thanks, Sandeep, and good morning, good afternoon, good evening to everyone, wherever you are. Let me also wish you a happy New Year.

This quarter, we saw our revenues cross $3b for the nine period -- nine-month period until December 31, so we have completed the full -- last year's full-year revenue in nine months. We also saw that our net income over the last four quarters has crossed $1b so, last 12-months basis, net income is over $1b. And Europe also has crossed $1b on a last 12-month basis.

We saw significant customer additions. We saw significant wins, about nine large multi-year, multi-service projects. And then, if you look at the various industry verticals, we saw growth in BCM, banking and capital markets, telecom, manufacturing.

All our parameters regarding customers saw growth in terms of $1m customers, $10m, $50m, $100m. And overall, we've not seen any cancellations or project slowdown. We have seen [rate] increases, seven quarters of consistent improvement in revenue per employee of about, on an average, a percentage point. This quarter it was 0.8%.

So all in all, the environment seems to be positive. We have also polled our clients. They have been telling us that offshore will continue to increase. They will invest in moving projects to offshore and things like that, so that trend seems to continue.

The only concern, or maybe area where we're watching is how do the budgets for next year look like. Most of the budgets would have been typically completed by now, but we're seeing some customers, at least, delaying it to the end of the month or the early part of February, when they'll share it with us. So that's only data point which there are -- which we will await for -- which we are waiting for.

Even where the budgets have been closed or completed, on an average, we are seeing 6% increase in IT budgets for calendar year 2008 and offshore continuing to get a higher proportion of this growth, so that trend continues.

So all in all, a good quarter, improvement in operating margin, growth in customers, growth in the various industry verticals, growth in various geographies and a quarter which was as expected. Q3 and Q4 are slow quarters and so we have expected this and we've done slightly better than what we expected.

Now, I'm going to pass it on to my colleague Shibulal to talk more about the industry verticals and things like that.

Good morning, this is Shibulal. As Kris said, we have seen strong growth all around. Our top five customers have grown by 19%, top 10 by 16% and top 25 by 9.3% sequentially. More importantly, the BFSI segment has grown ahead of the Company average. Also, the telecom segment has grown ahead of the Company average.

As far as the demand environment is concerned, we are not seeing any change at this point in the IT spending environment as of right now. Most of the clients whom we talk to continue to be bullish about increasing their offshore IT spend within their overall IT budget.

This quarter, we have signed [multiple], multi-million dollar, multi-year contracts. If I am right, I believe we have signed nine such contracts this quarter, most of them between $50m to $100m range.

The pricing environment continues to be stable within a forward bias. Our new clients are coming at around [3m to 4m] above Company average. Pricing in existing client contracts when renegotiated, for most part, are coming around 2% to 3% above Company average.

This is (inaudible) constant increase in the revenue productivity. As Kris said, the revenue [for this period] has gone up, quarter on quarter for the last seven quarters, almost an average of 1%. This quarter, it has gone up by [0.8%]. Europe is growing ahead of the Company average. This quarter, it is 28.6% of our revenue.

Even in the BFSI segment, we have seen pricing increases with a couple of our clients when we renegotiated. We have a good pipeline for large deals and, at this point in time, we track about 12 to 18 deals and these deals are long-term, long-incubation deals. They take anywhere between three to four quarters to close and we have a good pipeline.

As Kris said, we are seeing delays in the closing of the client budgets in some of our clients and we expect them to close in Feb. We will get a clearer picture when all the budgets are closed.

From an expansion perspective, from a geographical expansion perspective, we are going -- we are investing in Australia and Japan. Interestingly, in Japan this quarter we signed a deal, an infrastructure management deal, multi-million, multi-year deal. Australia is -- I think, is a good market for us.

Then, from a vertical perspective, we are investing into -- we are investing more into verticals like life sciences, pharma, services, which are yielding results.

From a client perspective, we have added 47 new clients this quarter. Four of them are Fortune 500. The number of $1m clients has gone up from 295 to 305. Our repeat business is 96%, so there is enough potential in our client base to mine the existing relationships.

From a service perspective, we have added a couple of services in the last few months. The first one is our [Australia] service. We have a platform for social computing which we are taking to market. There is a pipeline and we have closed one deal.

The second one is learning service, which is just out in the market and we have a pipeline, but no deals have been closed.

So overall, we have seen strong growth in our existing clients. The demand continues to be robust and the pricing at this point is stable within a forward bias. Thank you very much, and let me now hand you over to Bala.

Good morning. It's great talking to you again. We had a great quarter. Our revenues were $1.084b. They increased by 6.1% sequentially. Gross margin was at 42%. Operating margin slightly increased. It was 27.5% last quarter. This quarter it went up to 28.7%.

We had three one-off events during this quarter. The first one was the settlement we made in California. We did a one-time voluntary settlement with the statutory authorities there for around $26m. That impacted the margin by around 2.4%. This is relating to past three years and the wages could be paid to the employees in due course.

The second one was the reversal of the insurance cost. I have been providing our books on a gross liability basis. When we reconciled for the last three years, we found some excess provision of around $18m, which we reversed during the quarter. That positively impacted the margin by around 1.7%.

Then we had tax reversals, which relates to earlier years where the adjustments [got over] or the statutory limitation period [got over]. That was around $13m.

On the operating margin side, there is the California settlement which impacted 2.4%, and there was the reversal of insurance of around $18m, which positively impacted 1.7%. There was the impact due to rupee of around 0.8%, because the rupee appreciated by 1.9% during this quarter. And we had the benefit of the increase in per capita revenue, which offset the impact due to rupee.

We had scale benefit coming on the SG&A side. Last quarter, we had an ear-out payment for the partners in Infosys Consulting of around $11m, $12m that was not there this quarter, so the SG&A costs came down. It positively impacted the margin by around 1.4% which flowed to operating margin of around 1.2%.

We gave a guidance of $0.51; we ended up at $0.54. The $0.02 came because of tax reversal and [we have seen a further] $0.01 because of growth in revenues. Our effective tax rate is almost at 15.4%. It was 15.1% last quarter. If we exclude the tax reversal during the quarter, it is at 15.6% net net.

We have given our -- we have increased our guidance slightly for the whole year. For the full year, our revenues are expected to grow somewhere between 35% and 35.2% and our EPS is expected to grow by 34%.

For the full year, we expect the margins to remain -- stay at the same level as (technical difficulty) next three months, we are assuming the currency to be at [39.4], which is the closing rate for December. And we assume that we'll add 31,000 employees on a gross basis for the full year.

Last quarter, we said 30,000. We increased the guidance by 1,000 more people. And we assume the pricing to remain flat at the same level as it was in December for the next three months.

So assuming all this, we believe that the margins could be stable for the full year as compared to last year. With this, I conclude my presentation. We can take the Q&A now.

Thank you very much. (OPERATOR INSTRUCTIONS). Our first question comes from Joseph Foresi. Please announce your company name and location and go ahead.

Hello, Joseph Foresi from Boston. I know you guys talked about the budget process taking a little longer. I wonder if you could give us some color on why, any specific reasons that you're hearing from clients, for the delay of committing to the budget.

This is Kris here. Obviously, the concerns about the economy, the macroeconomic conditions are the reasons for the delay. There is another reason also. We are also seeing that this time around there is a lot more involvement from the leadership of the company in deciding on the budgets and the plans for the year and things like that. Maybe that's some of the reason why there is some delay.

Where the budgets have been closed, where we have visibility etc., we are seeing that the proportion of allocation, budget allocation, to offshore continues to be robust. And that's the strategy companies are [on], even in this period, when they look at optimizing their expenditure.

Okay, thanks. And I was wondering if you could give us some rough idea of what -- maybe what percentage of those budgets -- the budget processes are still open and you're waiting to close. How much visibility do you think you have heading into next year?

No, I don't have a percentage, because we only look at some of our customers. We don't look at all our customers when we look at being part of the budgets, especially the larger customers. So it's difficult for me to give you a percentage and things like that at this point.

And I just -- also -- we also look at other data points, like industry analysts, etc. Most of them list their, at least in whatever reports I have seen, predict that IT spending will be about 4% to 6%, or maybe even 7%. Last year, it was estimated to be 8%. So it's still not too much lower than last year, and that is also a positive data point.

Okay. And just lastly here, in the budgets that have closed, have you seen a push to increase outsourcing as a cost-saving method, or is there any impetus for the push? And thanks, guys.

Yes, as I said, offshore is getting a higher allocation in the budgets that are closed. The budgets that are closed, approximately 6% is the increase in IT spending and offshore gets higher proportion.

Okay. Thank you.

Our next question comes from Moshe Katri. Please announce your company name and location and go ahead.

Thanks, Cowen in New York, New York. Again, not to beat a dead horse here, since we are talking about delays in the budgeting and the budget cycle, can you talk to us a bit more about how -- why are you so comfortable with your expectations for the March quarter? I think that would be helpful.

And then also, can you provide an update on what some of the -- your banking and investment -- investment banking clients are actually doing in this environment?

So we look at data points, which we have. We have seen an increase in banking capital markets business. That business has grown by 8.6%. Overall, BFSI space has grown by 7%; a Company growth of 6.1%. So it's growing faster than Company average.

We had new customer additions and new project wins in the BCM space. We had rate increases in the BCM space. We did not see any cancellations in the BCM space. So these are the data points which give us comfort in saying that we will be able to meet the Q4 numbers.

Now, of course, Q4 is only just one more quarter. And overall for the year, when you look at fiscal 2008, this is the last quarter. And we had -- in the beginning (inaudible) we had predicted certain revenue for Q4 and it's gone up slightly, but by and large it's almost flash -- flat. And the reason why we were cautious is about -- is because of the budget cycle and things like that. So we have factored all the data points we have when giving the guidance at this point.

Okay. That's fair enough. And then, can you -- Bala, can you comment on volume growth, the growth there in the quarter, which seemed a bit weak?

And then, EBIT margin during the quarter was exceptionally strong. That was pretty impressive. Can you again go through the list of the pluses and minuses impacting the margin?

Well, the volume growth was 4.5%. There was a price increase of 0.8%, resulting in 6.1% growth in revenues. The volume growth has been exceptionally good. When we gave the guidance in the beginning -- in October, we factored in the holidays during the quarter.

Normally, the third and fourth quarter, for us, are tough quarters, because there are a number of holidays and etc., clients' budget period. In December they conclude the earlier budget and in January to March they have to come up with the new budget. So normally they're tough quarters. Considering that background, the volume growth has been extremely good during the current quarter.

The operating margin improvement mainly came about because of the scale benefits we got on SG&A. As I said earlier, last quarter, we had an earn-out payment for Infosys Consulting that has increased the sales and marketing cost. That has come down this quarter, because that was a one-off event last quarter. So the scale benefit has flown to the operating margin. We got a scale benefit of 1.4%. The improvement on the operating margin was 1.2%.

We had a currency impact of 0.8%, which was offset by the rupee increase of 0.8% we saw during the quarter. We had an impact of 2.4% because of the California settlement, which got offset by the reversal we made on insurance of 1.7% of the renewals. So net net, the improvement in operating margin has -- is mainly a result of the benefit we saw on the SG&A due to the scale.

Okay. And then finally, can you give us an update on where we are in the profitability of some of the subsidiaries that we spoke about in the past, whether it's China, Australia or North America Consulting? Are we close -- maybe you can talk about who's close to breakeven and who's still losing money.

Well, all the subsidiaries are doing well. Some outfits like consulting and China are still in the investment phase. Consulting, the losses have been more or less negligible during the quarter. They are still in the investment phase. They could be making a couple of million dollars of losses in the next two, three quarters. After that, they could breakeven.

China is still in the investment phase. It will take some more time because we have some [690] employees in China. Our revenues there are around $5m a quarter. It will take some more time for it to breakeven.

But other subsidiaries are doing well. Australia has done well. They were up 14% net. IBPO has done well. They are growing fast. So Consulting and China will take some more time. They are still in the investment phase.

Thank you.

Our next question comes from Trip Chowdhry. Please announce your company name and location and go ahead.

Definitely. Trip Chowdhry, Global Equities Research. A question for Shibu. You did mention that the customers you spoke to had a budget increase of 6%. Could you provide some color on it, like what specific areas are you seeing the budget increase and the budget increase it's more on the ADM side or new projects? And what is driving that?

See, what is driving is offshore. And depending on the client, the services are different. We're still seeing up-pick on infrastructure management. We are seeing up-pick on the traditional application development and maintenance, especially on the maintenance side. And we are seeing up-pick on package implementation, maintenance of the package. So it is actually broad.

Even we are seeing discretionary spends and development projects. There are some data center consolidations which are going on, virtualization and things like that. There's a very broad set of offerings and services and it's really dependent on specific clients. So it's very broad.

And looking at your segments, it seems like Banking and Financial and Telecom did well, while the Services was a little weak. Can you provide some color among these various segments?

Yes. Banking and Capital Markets, Telecom, Manufacturing, all the top industry verticals grew faster than the Company average. And we got some big deals also in these industries, so that is helping us. If you look at, actually, Shibu talked about it, top 25 clients grew 9.3% this quarter, so that's helping us in some of these sectors.

And other sectors, for example, Retail -- in fact, Retail probably is one sector where, before Thanksgiving maybe there was some concern and slowdown were seen, but now it's disappeared. But the -- if you look at the performance this quarter, it is muted. But overall, I'm glad to say that the top three sectors for us are growing -- showing growth.

Thank you.

Next question comes from Karl Keirstead. Please announce your company name and location and go ahead, please.

Good morning, Karl Keirstead with Kaufman Brothers in New York. A question about the revenues you generated from your largest client in the December quarter. It went up significantly and was a big contributor to your revenue growth.

Perhaps you can't name the client, but can you give us a little bit of color in terms of the industry or the type of project and let us know whether there were any one-time revenue boosts from that client that we may not see in the next few quarters? Thanks.

See, I cannot give you too much detail, because this will be specific to a particular customer. We are doing many, many projects for that customer, all the way from consulting to infrastructure management, BPO. Probably that's one customer which is using all the services Infosys provides. And we are also doing some very large projects for this customer, transformation projects and things like that.

Now when some of those transformation projects come to an end, you may see a decrease in revenue, but it picks up, because this customer is really focused on increasing offshore. They do work with multiple Indian service providers, not just Infosys, and they have a fairly large program focused on India. This customer has been growing for many quarters, not just in the last quarter. And that's all I can, at this point, give you in terms of details for this customer.

Okay, thanks. And secondly, this Release, you didn't give any color on the wage increase environment in India. Could you add a few comments there? Thank you.

We believe that the wage increase will remain at 12% to 15% for next year at this point of time, but we're seeing some very interesting phenomena in India. We're seeing a mega trend of [right skilling]. That is companies working out the skill requirement for a particular job and matching skills with the capability needed for the job.

For instance, for the last three years we have hired 3,000 people who are undergrads and not engineers, using them for testing, using them for infrastructure management services and product production support. And we're going to [isolate the] timing. They will have a separate career path. So the pool of talent will expand and that will have a moderating influence on wage growth as we go along.

And because of right skilling, companies, I believe, in the next two years, will hire people depending upon the kind of talent they need. And therefore, that will help them to moderate wages and also pull people into the talent pool. People like us want to hire top-quality talent in the top 20% always, so we will pay a higher price. And we do believe that we get a premium pricing for the client and the right strategy for us.

But overall, the wage -- the supply situation is very much more -- much better now, compared to earlier. Right skilling will moderate wages as we go along and each company decides its wage policy based upon the segment [in which] they'll hire. So we think that this is what is going to drive the wage increases in the next couple of years.

Perfect. Thank you.

Our next question comes from Julie Santoriello. Please announce your company name and location and go ahead.

Thank you, Morgan Stanley in New York. I just want to make sure I understand the potential ramifications of customers pushing out their budgets into February. How do you see customer behavior in that regard? If you have a certain proportion of customers who are not pushing through their budgets just yet, do you have certain projects that are on hold right now?

No. We did not see any cancellations or projects put on hold. That's why we have grown as expected, right? So we're not seeing anything at this point.

Okay. And the employee utilization, there was a down-tick there by about 150 bps. Can you address that? Was it just seasonality, or was there more going on, either planned or unplanned?

Can you just repeat that, please? Which line item?

The utilization, employee utilization.

So, the employee utilization came down from 79.5% to 77.4%. The Q2 is the quarter in which we bring in the largest number of employees. There's a seasonality to the employees joining the Company and typically, Q3 and sometimes maybe Q4, the utilization comes down slightly. We are very comfortable with the utilization somewhere between 77% and 80%, 81%, and that's fine.

In any quarter we don't want to optimize all the levers we have in terms of margin. This quarter, for example, the offshore increased, whereas, the utilization came down.

And this is the cushion we have when it comes to a new quarter and we need to pull some levers to increase margins and things like that. That gives us the flexibility to manage our business better. We have multiple levers which we can use to optimize the business in any quarter and things like that. All levers are not optimized in a quarter and this is an example of a lever which is not optimized this quarter.

Okay. Thank you very much.

Next question comes from Ed Caso. Please announce your company name and location and go ahead.

Hello, Ed Caso, Wachovia, United States. My question is around the BPO business. Can you give us a sense for size, growth, what the clients are asking for? Is there a change in mix and so forth?

Ed, good to hear from you. I am going to ask my colleague [Amitabh Chaudhry] of BPO to answer that question.

Hello, everyone. BPO saw a growth of 23% quarter on quarter, partly helped by the Philips acquisition, the acquisition of the Philips captive centers in [Lodz] Chennai and Bangkok. Philips acquisition gave us a revenue of $8.7b this quarter. If you exclude that, the BPO business grew by close to 10% quarter on quarter. So this quarter we have done $68.6m of revenue. Our standalone business continues to maintain the margins at 22%.

The Philips part of the transaction -- the revenues were obviously at a loss because in this quarter we had charge off expenses related to the acquisition, some retention money which was part of the planned expense. We have also had some [credited] depreciation and there has also been a charge off on our write off of customer contract value.

But the overall loss in Philips, about $2.5m, is less than what we had purchased it for, so from that perspective it is going well. The integration of the 1,400 people is complete. All the entire senior management has joined us. The attrition levels have remained low and the execution on the Philips contract is going well.

If you look at the mix of the business, mixture has remained the same. Our Voice business continues to account for about 20% of overall revenues. The largest verticals are Telecom, High Tech [DSL] factoring and BCM and in that order. Our pipeline remains quite strong we are quite excited about some of the positives we are looking at.

After the Philips acquisition we had more than 5,000 employees in finance and accounting space, which makes us one of the top five players globally. And we are already seeing the impact of that in the kind of deals we are getting invited to, the kind of conversations we are having. And obviously this is giving us confidence about the future.

With this kind of [delivery] profile, we are pretty much caught up with all the BPO players in India who are four or five years ahead of us. And obviously our margins remain much, much better than them. So overall the traction is good, pipeline is looking strong and the Philips acquisition to date has gone very, very well. Thanks.

Thank you. A last question, any concern from clients? And this is an industry-wide question about quality, particularly as you move towards right skilling, and maybe there is a little less overstaffing from a quality perspective. Are you getting any concerns from any of your clients about quality?

Are you -- this question is for BPO or this question is for --?

No, I am sorry, more -- just generally.

Ed, there is no concern from the clients because we done a very good mapping. For example, in the testing area the work is very repetitive and the quality is of extremely high order. In [Consulting] and Management Services, the work is repetitive and the quality is very high with (inaudible). In product production support, we find that the same situation is coming. So we are not seeing any challenges.

But at the moment the numbers are small. Out of 31,000 people that we are going to hire this year, about 9,000 are for the BPO and 22,000 is for the services. Out of 22,000, we probably will hire about 2,000 people from this profile. So the numbers are small and the numbers are very specific. So there are no quality issues.

Thank you.

Our next question comes from Julio Quinteros. Please announce your company and location and go ahead.

Goldman Sachs, San Francisco California. Real quickly, Bala, can you just walk us through a slowdown scenario, I guess? If you were to look back at the dot com day meltdown and look at the potential for a recession in the United States going forward, what levers would you have left if revenue growth materially decelerated from here?

And maybe in order of priority, what would be the top two or three things that you would be able to do to preserve margins in a slowing scenario?

Well, if you look at what happened in 2001, 2001 when there was a sharp slowdown, it impacted both our billing rates and our volume growth. At that time the billing rates were at an unrealistic level because we had a dot com boom between 2001 and 2002; the prices went up by something around 25%. Those unrealistic prices got corrected when the economy entered a downturn.

I think we are today at a much more reasonable pricing level. Only in the last five or six quarters we are seeing the [prior] billing rates going up. So the pricing levels are at a much more reasonable level today. So the sharp deceleration we saw after 2001 is slightly unrealistic now.

Number two, the volume growth could come down, but in 2001 offshore was not a mega trend. Most of the customers were not looking at offshore as a top priority. But today our offshore is a mega trend. It is the only trend in the whole industry. The top [players] are very clear about the benefit that offshore brings them.

But I think, to [that] extent, the ability of customers to improve the offshore spending within the overall IT spending is very high and it could happen very quickly than what it has -- what's happened in 2001. That's why we keep saying that even if there is a downturn in the U.S., the offshore IT spending could go up within the overall IT spending.

On the cost side, they have built a much more flexible cost structure today. We are getting the scalabilities. We are leveraging offshore for all of our support work. We are sitting tight on the cost.

We have several levers on the cost side, like the utilization rate, the on-site/offshore mix. And we are moving up the value chain by -- today, more than 50% of our revenue comes from new services which has started in the recent past. And we also have the utilization rate. And our rate is also -- we made it more variable; 13% of offshore (inaudible) is variable linked to the Company's performance in terms of top line and bottom line.

So over the years we have made our costs to a much more variable and that will help us to reduce the impact on the margin even if there is a downturn. Of course, there are issues like currency which is external to us, which we can't do much. As long as most gradually we can manage some of it. But if there is a sharp movement it will hit us. Excluding currency, we had [taken] a flexible cost structure which will allow us to reduce the impact on margins even if there is a downturn.

Got it. That's very helpful. And just on the one point, I know that there was the one-time hit to the SG&A last quarter with the payout for the ICI for the Consulting part. But even if you only look at the numbers in aggregate, the level on a percentage of revenue basis for SG&A is at really, really low levels.

Is that just the variable component kicking in because the revenue growth, or the magnitude of the upside for revenue growth just didn't materialize this quarter? Is that the way to think about why that dropped so much, other than the one time payment not being there?

No, if you look at our cost, our SG&A is normally around the 8% and S&M is somewhere between 6% and 7%. And that trend is there for some time. And this quarter, one because even though it was not there, which was there last quarter. And number two, we got a credit for the insurance, which I spoke earlier. That is allocation between cash costs and SG&A cost. That also played a role. But on a steady state basis, G&A could be somewhere around the 8%. We could get some scale benefits there and S&M] could be somewhere between 6% to 7%.

Okay, got it. And then just finally, when we look at the pace of growth in North America from the beginning of the year to the end of the year, obviously, the deceleration from about 38% growth to 30% growth on a year-over-year basis. Can you talk a little bit about what factors are driving that? Is that just the -- a shift in emphasis from North America to Europe? Or are you seeing something else that is weighing the performance of North American growth?

So, Europe has grown and if you look at year to date Europe has grown 43%, whereas, North America has grown 33.8%. So obviously, the growth is being -- we are shifting the growth away from North America to other geographies. The rest of the world grew 37.5%, Europe 43%.

This is a proactive strategy. For some time we have been trying to grow non-U.S. revenues. We are investing in newer geographies as part of this re-org, also India, China. We will be setting up sales and marketing for South and Latin America, Middle East. We want to grow Australia. So definitely you will see it as a percentage. In absolute terms, all these geographies are growing. As a percentage, North America coming down.

Okay, great, thank you.

Next question comes from Andrew Steinerman. Please announce your company name and location and go ahead.

Hello, it's Andrew Steinerman Bear Stearns. In the Press Release you use the line in the midst of your comments, "we've concluded several multi-million dollar deals", meaning programs work for clients during the quarter. Was this expected program ends? Would you say that it was a natural number of program ends of multi-million dollar projects?

And do you expect -- and how do you expect the balance for the fourth quarter between multi-million dollar project starts versus multi-million dollar project ends?

I don't have the data or number of projects -- large programs which ended in Q3, so I can't immediately answer that. But if you look at our pipeline today, for large deals we had about 15/16 deals we are still pursuing. And that's the number we look at.

There are programs which are, in our case, $50m to $100m or above. So that's the kind of programs we are going after. And that pipeline has been growing slowly and we track that.

The nine deals which we talk about are in the range of about $30m plus multi-year, multi-services deals. And these are ones which are from existing clients as well as new clients, and are not just new clients; existing and new clients. And these are some of the things which we have been pursuing for maybe sometimes three months, six months etc.

And this trend we just highlighted so that people can see that we have had wins in Q3 also in spite of the concern of slowdown and things like that.

Great. So I think that addresses half the question well. The fact that you highlighted concluded several multi-million dollar programs in the quarter, did you know three months ago that those would conclude in December quarter? And is there an unusual number of program ends in the March quarter to be expected?

No, we do not know exactly when a program will close because that depends on the customer. It's very difficult for us to say precisely on which month it will close and things like that. We have some indication -- the client will give you an indication saying that we want to close on a particular month and start. But sometimes they slip and thing like that.

From the March quarter there isn't any unusual change or anything like that from a previous quarter in terms of number of project closures and things like that.

See, 96% of our business is repeat business, and even though our contracts are long-term projects such -- the work orders are for the project duration, these are ongoing things. We occasionally see a client coming down and then pick up later. There are some seasonality's and things like that. But by and large, this is 96% repeat business.

We have a comfortable track record in terms of growing accounts and handling long-term relationships and things like that. There is nothing special about our project closures in Q4 I can see at this point -- we can see at this point.

Thank you for spending so much time with my question.

Next question comes from David Grossman. Please announce your company name and location and go ahead.

Hello, Thomas Weisel Partners in San Francisco. Kris, on one hand I hear you saying you are pretty comfortable with the current environment and you are pretty comfortable with your business prospects. Yet, when I look at the volume growth over the fiscal year, it's been decelerating each quarter on a year-over-year basis.

So, can you help reconcile your point of view with what looks like, at least, decelerating volume growth on a year-over-year basis throughout the year?

So, David, good to hear from you. Normally, Q3 and Q4 are slower quarters for us; Q3 is slower because of reduced number of working days. Q4, typically, we are cautious because if the budget [can delay etc.] we may see some slow growth and things like that. So normally, we are cautious about Q3 and Q4.

It is not unexpected and we had expected this, and we had guided for 30% growth at the beginning of the year. We are ending with 35%. Our guidance is 35% to 35.2% for the year. So in that sense this is something which we had predicted and things like that; nothing different from what we had projected.

Right, so, I guess -- I am looking at the volume growth on a year-over-year and not on a sequential basis. And are there fewer work days in the second, third and fourth quarter this year than there were last year? Again, I am just looking at the volume growth year over year and it just appears that it's been decelerating throughout the year.

So, for -- when I look at -- I am just looking at Q3 in '06, Q3 in '07 and Q3 in '08. 6.7% [sequential] growth in '06, 10.1% last year and 6.1% this year, so it's mirroring '06, actually, this time.

Okay. We can perhaps pursue that offline.

Moving on to the subsidiaries in terms of the profitability, it looks like Consulting went positive or breakeven and I assume that had to do with this one-time payment last quarter. Was there anything else? Some of the other subs of bounced around a little bit. Is there anything other than typical a lot of small numbers, or just seasonality that impacted the profitability of the subs during the quarter?

Well, David, Bala here. I think those subsidiaries are doing well. [IBPO], the margin has been come down this quarter mainly because they had the Philips acquisition and they had to take the cost. Including Australia, its still doing well; the net margin is close to 14%, 15%.

Consulting in China has done very well this quarter. Consulting -- the impact on the overall profit is very [little]. They are not -- they may have made a profit, not a loss. China made a small loss of $400,000. So overall, Consulting in China has pulled up and they have done well. Both are in the investment phase.

Consulting could be making losses for a couple of quarters before they become breakeven. China will take some more time. They are still in the investment phase.

Mexico is still making a loss. They made a loss of $1m this quarter. That is the first quarter -- the second quarter of the operations and they'll will take some more time to breakeven. The other subsidiaries are doing well.

Okay. And then just looking at the verticals, it looks like the insurance vertical weakened at bit during the quarter again. Is that just time and place client-specific? Or is there something else specific to the insurance industry?

Yes, it's just a one-off, David. In fact, one of the big deals we won is in the insurance sector and that should pick up the growth going forward.

Okay. And just one last thing. Just looking at the -- if you think about where you are today versus prior years, is your visibility into next year, at this point in time, in your -- from your perspective any different now than it has been in prior years?

There is no change except for, typically, we would have got the visibility of the budget early Jan. Now we see that it will come completely by end of Jan, first week of February. Other than that, there is no change.

And having said that, from the discussions we are having with our clients [at this time] there is no change, and in fact they are saying offshore should continue to see this proportion in growth and things like that. So in that sense, there is no change.

I see. Great, thanks very much.

The next question comes from Mark Marostica. Please announce your company name and location and go ahead.

Hello, it's actually Mark Skitovich in Piper Jaffray, Minneapolis Minnesota. I was just curious, maybe one last budget question. Curious, what concentration of your client base has indicated flat to down '08 budgets? And how would that compare to those indicating the up 6% that you mention?

It's, I know, a broad comment rather than any particular sector. We only look at some of the larger customers closely and track their budgets and things like that. We have above $305m relationships. All those budgets we don't track. When it comes to $10m and above, towards the $50m we start tracking their budgets and getting visibility of their budgets and things like that. So this commentary is based on that. And that is across multi-(inaudible) industry verticals, not restricted to any particular industry vertical.

Okay. And just curious, can you give me a rough mix of your headcount within the testing and infrastructure management?

And then, what was your lateral hire mix overall in the quarter?

The lateral hires this quarter were about -- it was 2,200.

Now, the number of people in testing -- I don't have actually the data of number of people in testing. We can send you figures. If you please send us an email, we can send you the data of people in testing and things like that.

BPO is about 16,000 people. That is separate because it's a separate business line for us and things like that. But testing, I don't have the number with me at this point.

Okay, great. And just one final question. I think you mentioned your China headcount is still around 700. Is that correct?

Yes, it is correct.

Okay. And where do you see that a year from now?

And if also you could comment on your current headcount in Central and South America, what's that grown year over year? And what your expectations are there for next year as well?

China is growing. We plan to recruit. We are looking at about 200 more people to be added now. And then as the business picks up, we will keep adding. But right now the plans are to add another 200 people to China.

In Mexico, it just started. It's in fact the fourth month of operation and we have about 40 people -- 50 people in Mexico. Again, we will wait for business to pick up rather than recruit significantly ahead of business. Since the numbers are small, we are confident that we can recruit from the market, so we are not making large plans from campuses and things like this. It's not along the same lines as in India.

For example, in India 18,000 offers have been made at the campuses already and these people will be joining from July through October next year. But we don't have to make that kind of plan -- those kind of -- grand plans for Mexico or China yet at this point.

Okay. And in South America, would you just remind me of your headcount there and where you see that next year?

It's about 50 people and, as I said, as business picks up we will start hiring there. Right now, it's about 50 people.

There as well. Okay, great thank you.

The next question comes from Abbi Gami. Please go ahead with your question, announcing your company name and location.

Great, thank you. Banc of America, New York. In this environment it's reasonable to think that clients are going to come back looking for pricing concessions. Are you seeing an increased level of interest in discounting or more creative pricing? And in the situations, how are you handling those requests?

There are not many cases of any discount across the board or anything like that. Based on volumes, there are some discounts which are there in the contract, or sometimes when the contract comes up for renewal because they are promising higher volumes that some clients have asked for, for the discount. So the discount is separate from rates.

Rates, typically, we are able to get about 2% to 3% higher on contracts in the U.S. Sometimes additional clauses for discounts get added on account of higher volumes and things like that.

So, to -- just to be clear, you are not seeing clients come back looking for just straight rate card, or straight rate discounting?

Not across the board and things like that. There may be one or two instances, but it's not across all the customers and it's impact is limited.

Also going back over to the commentary regarding the budgets, what was the average IT budget increase this time last year based on your survey of your clients? And also how many clients have you already heard back from?

Last year it was about 8%. This year right now we are seeing 6% increase in IT budget from our survey and things like that. And we also do a survey to look at their attitude towards offshore, or where the offshore should go and we are seeing increased proportion of revenues coming from -- to offshore.

Now, I don't have a breakup of the percentage of customers with whom we have budget visibility and things like that, because we only look at the top few customers when it comes to budgets; $50m and above, sometimes maybe $30m and above and things like that. Below that, the numbers are so high that we don't go after them to give us a share of the budget.

And from that number, I don't have the percentage who has given us budgets and things like that. In fact, almost all customers share us at some point budgets and things like that. But I don't have the breakup right now.

Okay. I just wanted to get a sense of whether the data that you have received back so far from those large clients is good enough for you to be able to [get] visibility into your next 12 months. Or do you still require the remaining large customers to come back and give you that information before you can get comfortable internally with the forward trend?

Fortunately for me the full fiscal year guidance will only be -- we will only be giving it in April. So we can get this data and then be better prepared in April to give you full-year guidance. So we can wait for that data at this point.

Let me thank you all, we have run out of time. If -- I know that many of your questions have not been answered, or some of you did not get a chance to ask a question. If you can contact our Investor Relationship Managers, Sandeep Mahindroo or Shekar Narayanan, or send us an email, we will definitely respond to you. Or if you -- then we can set up a call to discuss this with you.

We thank you for taking time to participate in this call and looking forwarding to talking to you, or meeting you during the quarter or at the beginning of next fiscal. Thank you, again.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect your lines. Thank you.