Infosys Ltd (INFY) 2009 Q1 法說會逐字稿

Good morning. My name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter fiscal 2009 results for Infosys Technologies conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Sandeep Mahindroo from the investor relations team for Infosys Technologies. Please go ahead sir.

Good morning everyone and welcome to this call to discuss Infosys financial results for the quarter ending June 30, 2008. I am Sandeep from the investor relations team in New York. Joining us today on this call the CEO and Managing Director, Mr. Kris Gopalakrishnan; COO, Mr. S.D. Shibulal; and CFO, Mr. V. Balakrishnan along with our other members of the senior management. We will start the proceedings with a brief statement on the performance of the Company for the recently concluded quarter followed by (inaudible) for the quarter ending September 30, 2008 and the year ending March 31, 2009. Subsequently we'll open up the discussion for Q&A.

Before I pass it on to 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 of the Company (inaudible). A first 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. Gopalakrishnan.

Thanks, Sandeep. Good morning, good afternoon and good evening to everyone of you wherever you are. Thanks for joining us for this call at the end of quarter one. Our quarter one revenues of $1155 million is a growth of about 24.5% from last year and this is compared to the guidance we gave of 1142 to 1145. So we have exceeded the guidance and given the -- come to 1155.

The operating margins are slightly down as we said at the beginning of the quarter because it gets impacted by the the salary increases as well as [visa] costs and things like that. We have actually given a guidance of 5.2 to 6.1% growth for Q2 and this is because of an all around good performance. We have added 49 new clients.

If you look at the various industry verticals -- banking, financial services, manufacturing, retail -- all have sequentially grown. Even banking and financial services grew by 4%. US grew by 4.3%. (inaudible) client in the top 10. If we exclude that, top 10 grew by 3.8% the non-top 10 grew by 3.9%.

We added 7182 employees at the gross level compared to 6000 which we gave as guidance. And we're planning to add another 10,000 employees this quarter. So overall good performance.

We had been of course positively impacted by the depreciation of Rupee and that helped offset some of the additional expenses this quarter from salary increases and [visa] costs. And we are optimistic about the future and we believe that our guidance for the year of 19 to 21% stands at this point. We have not looked at revising it because of the challenging environment in which we are. But overall it is an optimistic environment to be in. I'm now going to ask my colleague, Shibulal, to give you some other information on the various segments and things like that.

So as Kris said, it has been a good quarter for us. We have added 49 new clients, very strong client additions. The number of $1 million clients have gone up from 325 from 310. Out of the new clients we added, three of them are Fortune 500. Today we have 114 Fortune 500 clients. Other growth has been all around.

If you look at the vertical segmentation, banking and financial services grew by (inaudible). Manufacturing also very strong growth, 13.3%. Retail has grown 3.7% quarter on quarter. We have seen growth in multiple verticals and again (inaudible) 5.1%.

The segmentation is based on survey (inaudible) business process management grew [jumped] (inaudible) to 6.3% from last quarter to this quarter. Infrastructure management has reached 7.5% of our revenue and that is almost 0.9 -- actually 1.1% up from last quarter. Last quarter it was 4.6%.

We're also seeing strong pickup in consulting services and package implementation. Our revenue from consulting services and package implementation (inaudible) was $275 million. We are also seeing [good] range. We have three transformation wins this quarter. (inaudible) area for us and it is -- these wins are based on our strength in consulting, package implementation and system integration.

The revenue from now, let me look at the geographical spread. The revenue from North America was 62.6%. Europe was marginally down to 27.3% and the rest of the world 8.8%, in India 1.3%. The revenue from our product line, Finacle, was 3.9%. Revenue (inaudible) remains stable quarter on quarter. There is a marginal increase. We believe that the pricing will remain stable for the rest of the year.

That is it from my side. Let me now request V. Balakrishnan to give you financial details. Thank you.

Good evening (inaudible). We just concluded a quarter. It was a great quarter. We have seen the revenues from Europe growing sequentially by 4%. Even BFSA which (inaudible) worried about, the segment (inaudible) insurance has grown by 4% sequentially. We have seen growth good in retail, manufacturing did exceedingly well. We are above guidance. We gave $1,142 million to $1,145 million in revenues. We did $1155 million (inaudible) sequentially grew by 1.1% (inaudible) what we thought in the beginning of the year.

In terms of margins, the gross margin was 39.7%. Operating margin is 26.7%. It is down 2% from last quarter. Remember in the beginning of April we guided a 4% drop in margin. We ended up with 2% drop in margins. Currency to some extent has helped us this quarter.

Currency depreciated by around [5.5]% which means we got a benefit of (inaudible) on the operating margins. Composition increase impacted the margin by 2.2%. [Visa] costs impacted the margin by 0.7%. Utilization went down during the quarter. It impacted the margin by 1.5% and net net the operating margin was impacted by 2.1%. We had kept the guidance for the full year in dollar terms at the same level as what we had predicted in April.

I think the environment has not changed. The year is panning out as we had thought of in the beginning of April. We have not assumed any price increases in the guidance. We assume the pricing to be at the same level as we have seen in the first quarter. Pricing this quarter has been stable. We're not seeing any big pressure on pricing. There could be some one or two sporadic instances that the price would have declined but it's not something new. In any environment good or bad, those things happen.

At the portfolio level, we're seeing the pricing to be stable and we believe it will continue to be stable for the full year. Our guidance assumes that our operating margin should be stable between the narrow band of 40 to 50 basis points for the full year. If currency remains at the same level, it's quite possible we could get some benefit on the margins but we will try to reinvest in the business because at the end of the day, we are to build a Company for the long-term and we will put the money back into the business.

It does increase our spending on consulting or (inaudible) spending on hiring more domain experts (inaudible) put money more into Finacle products, put more money into creating IP assets in the Company which could give us some (inaudible) in growth going forward. (inaudible) is under control. The DSO days are 64 days. Last quarter it was 72 days.

I just (inaudible) in the beginning of April it was 67 days. 79% of the receivables are less than 30 days. The quality of receivables is extremely good. We have seen (inaudible) growth the top 10 clients including the top clients grew by 3.8% sequentially this quarter. Non-top 10 grew at 3.9%. So overall it has been very good quarter.

We're seeing the year spanning out as we planned in the beginning of the year. We have seen some stability in April/May but the environment is still challenging. There are still some challenging news coming from the environment but we're very confident about (inaudible) our guidance. We're very comfortable about our full-year guidance.

We want to be cautious. That's why we kept the full-year guidance at the same level. We are to wait and see how the second quarter pans out for us to take a view on full-year guidance. Because I conclude, now the floor is open for questions.

(OPERATOR INSTRUCTIONS) Trip Chowdhry, Global Equity Research.

Thank you and good execution in a very difficult environment. A few questions. First regarding the deal activity. Can you give us a sense like what kind of deals and what kind of verticals get, say, closed faster versus which deals and which verticals take a bit longer time? Thank you.

The time taken is dependent on the size of the deal rather than in which vertical they fall in. Typically we're finding that [larger the deal] takes a slightly longer time. More actually in terms of whether there is a deal consultant or not, what is the process they're following, the client is following. $100 million plus deals where deal consultants are typically involved, we have seen that it probably takes six months to nine months to close.

But if it is a deal [straight] run by the client people themselves probably takes maybe three months less than that. So, the process is what delays the decision-making rather than industry by industry. It is the decision-making is dependent on the process.

Moshe Katri, Cowen and Company.

Thank you. I wanted to focus a bit more on guidance and obviously there are a lot of questions on the reason why the guidance remains conservative. Have we seen any project cancellations during the quarter? Did things get worse progressively towards the end of the quarter in terms of project ramp? And it just seems as though there's a change in tone from about a month ago. Can you kind of elaborate on that?

No, we're not seeing project cancellations towards the end or anything like that. In fact, you know (inaudible) says the year is sort of panning out as we saw in the beginning of the quarter. We had said that we will grow 19 to 21% and we're saying still 19 to 21%. We have given a guidance of 5.2 to 6.1% in Q2.

So if you look back in April, we had assumed that approximately 6% of the growth rate required for the three quarters. If you combine Q1 and Q2, the total percentage of revenue in the first half will be about 46 to 47%. Again, it's in line with what we have seen in the last year. And you know if you just look at the segments we talked about BCM, retail, manufacturing, the geography US; we're seeing growth higher than the Company. So it's kind of panning out as we had thought it would be, significant client additions which should give us growth down the line. It's just panning out as we thought it would be actually.

And it seems that you have that a pretty sudden decline sequentially in revenue contributions from your largest customer. I know you don't like to name it. You don't really name who your largest customer is but -- and I think you have also indicated that numbers will be coming down from that customer base. But it is a pretty sudden decline sequentially. Maybe you can -- I think it will be helpful if you kind of talk about what's happening there because again it is your largest client.

Moshe, we said that telecom as a segment is still very important and we're optimistic and we're seeing growth there. Now one vertical customer we just cannot talk about or give guidance how it is going to pan out. All I would say is that it's not an indication of any trend in that industry. And something which we --I'm just trying to look at the right words to use here. It's very difficult to comment on a particular client. It's not something which we worry too much, that I can tell you.

On that client (multiple speakers)

I think (inaudible) we have a portfolio approach. At some point of time some clients will grow faster, some clients may stabilize at some point of time. Some other customers may not grow. But at the end of the day if you take the portfolio, we're seeing good growth. So look at top 10 clients including the top clients we still grew 3.8% sequentially. Non-top 10 clients grew 3.9% sequentially. So we have to take a portfolio approach. We're not looking at client-specific growth.

Will that client remain at that level throughout the next few quarters or do you -- should we expect more drops coming out from there?

Moshe, all of our clients are very, very important for us. We want to make sure that we work very hard to win their confidence and grow every one of them. Just one quarter, so let's see.

Joseph Foresi, Janney Montgomery Scott.

I was curious how would you characterize your confidence in full-year guidance? Has it improved or would you say that your visibility towards the full year number has improved?

When we give our guidance we're confident of meeting it. Otherwise we wouldn't be putting it out as a guidance. (inaudible) of course not an indication of future performance but (inaudible) is there. We try our level best to meet our guidance and it is based on facts we have and we have the confidence at this point of meeting it.

How would you characterize that level of confidence? Has it changed since the beginning of the year?

In fact you know we said you know it's panning out as (multiple speakers) it is panning out as we had indicated at the beginning of the year. We have to grow around 6% in the three quarters and that's what we're seeing. See any quarter when we begin the quarter typically we have visibility of about 80, [85]% of the revenue for that quarter and for future quarters 70, 75%. And none of that has changed our deep relationship with our clients. If you just look at the repeat business this quarter, quite high. So a deep relationship with our clients gives us confidence.

Just looking at the model, how should we think about the revenue driver going forward? It seems like headcount is probably stable and pricing is flat. Is it fair to say that utilization is going to be one of the key metrics going forward?

You have to look at utilization differently. In our business it's not like (inaudible). You can't just hire people and start billing them. We have a leadtime of four to six months before they become billable. So at any point of time we have to keep the model ready for us to take any growth opportunity.

The worst thing to happen for us is we have business and we don't have people. So at any point of time we try to escape some slack in the system to make sure we don't miss on the growth. So look at our guidance for next quarter. We're going to grow at 6%. That is our guidance.

So some of the people who have just come out of training, they could get absorbed next quarter but they are hiring 10,000 people more next quarter; all of this to create a base for next year. So I think we need to [clear] some flexibility. Another way to look at this, we have a cost base that's already absorbed all of this cost and (inaudible) opportunity that could be positive for us. Today, we have the ability to absorb the cost and still grow and create a model ready for future growth. So you have to look at utilization differently.

Just lastly real quickly, it seems like the demand for labor has sort of maybe softened a little bit. Is it still fair to say that there's a direct link between your hiring guidance and your revenue growth? And thank you.

Yes, in the beginning of the year we gave a guidance of 25,000 (inaudible) for the full year. We've not changed revenue guidance and we've not changed our (inaudible) guidance. Both remain the same. Tomorrow the opportunity exists -- quite possible we can hire more people.

We always said we're comfortable with utilization somewhere between [76 to 80]. At some point of time it could be less than that. But we are keeping the slack to make sure we don't miss on growth opportunities. (inaudible) longer period of time we're trying to create some kind of a nonlinear retained revenue by improving revenue productivity. If we're able to do it on a larger scale quite possible that the manpower growth and the revenue growth could get [billings]. But that is over a longer period of time.

George Price, Stifel Nicolaus.

Thanks very much. I guess I wanted to follow up on an earlier line of questioning and kind of hold you guys a little bit closer to the fire on some things. In early June you were quite bullish on the prospects in BFSI relative to the more subdued outlook earlier in the year.

I understand -- we can see what's been going on in the market since that time. But it's relatively short. I mean we're talking about a couple weeks, relatively short period of time. Can you help me reconcile a little bit more detail how -- what changed and led to your more cautious tone in such a short period of time?

So, BFSI, if you look at banking and financial services we have grown 4%. We have said that this is going to be an important industry vertical for us. We expect BFSI to be the largest industry vertical for Infosys (inaudible) for obvious reasons -- largest spender in technology. One, the sector which has accepted this model faster than anybody else. So it will continue to be actually a very important and large industry vertical for us. The caution is just the environment is challenging, that's all. There's nothing else.

Okay, well I still think there's a distinct difference in tone and I'm not sure I understand exactly why that is. But do you still expect BFSI to grow in line or possibly head of overall Company growth for the year?

If we look at the first quarter, the BFSI excluding insurance still grew 4% sequentially and (inaudible) the two largest verticals for us are financial services and telecom. If they do grow, the whole Company won't grow. So by the end of the year it's quite possible that the BFSI could be growing in line with the Company growth rate.

You mean on sort of an exiting basis?

Pardon?

As opposed to BFSI growing in line for the full year, you mean by the end of the year?

By the end of the year, the (inaudible) has grown faster than -- you can't say quarter to quarter. Full year, quite possible that it could grow in line with the Company growth rate.

Within BFSI, maybe get a little bit more granular. What particular areas are you must cautious on? Is it capital markets for the obvious reasons? Is it commercial banking given increasing concerns on loan quality? Is it insurance? What do you see in your client base that makes you must cautious within that segment?

Rather than sector-wise the -- subsector-wise it's really individual companies really. And even with (inaudible) companies depending on the your track record, your relationship etc. you're able to grow. That is what we are seeing and we are proving that also. You cannot talk about -- in the banking and financial services you cannot talk about any particular subsector at this point. It is company success rate.

Last question, I think on the last call you talked about pricing up modestly on-site, down modestly offshore in the quarter. Can you just give a little bit more detail as to what is driving that. What is the outlook for the year for pricing offshore in particular?

So, (inaudible) on the pricing for the year is stable. We believe the pricing will remain stable for the year.

Offshore as well as on-site?

Both, yes. At the portfolio level, that means at the Company level.

Anthony Miller, Arete Research.

A couple of questions. Firstly, sorry to keep pressing the point on the top client but I do think it is an important issue. Can you at least say whether the drop in revenues was what you might call because of normal project completion or was it because projects which were currently underway had for some reason been curtailed or because projects which were scheduled were subsequently deferred?

You know I cannot talk about a specific client unfortunately and give you more color because it's not right. We have confidentiality agreements with all our clients and things like that. It is not something unusual, let me just say that. It's not something unusual because between quarters there may be slight some slight up-and-down. We still work closely with them. They are a very, very important client for us and we are growing. You know in some other areas (inaudible).

Moving onto my final question and it's about decision-making and your ability to accelerate putting customer work offshore in these troubled times. You said in the earlier call as you have said indeed before that decision-making is taking longer. Things that used to take one month take two or three months.

On the other hand you also said that you're looking and customers are looking to put more work offshore to reduce cost. But there is a sort of a side sort of conflict there isn't there? Can you give us an idea -- I mean you have got your guys on-site in the clients looking for new work to put offshore. If they see an opportunity, how long would it actually take you to move that work offshore and start billing for it given the extended decision-making process? Is it too late even now to do that to generate revenues this year?

No, it is not too late to generate revenues for this year. Clearly, that has been -- if we look at the growth in the industries in which we operate and our manufacturing has [given] 13.3% growth quarter upon quarter. So it's clearly not too late. Typically when the larger the project is or the program is, there is delay. But smaller programs typically get developed faster.

Sometimes they go for external consultants to guide them through the contract process. That puts additional delay; not new to this environment in which we are. It's the process itself. And you know typically a large deal will take six months to nine months from start to finish. That is why we have a pipeline.

Typically we bid for maybe 12 to 15 large deals. These are deals $15 million plus and currently our pipeline is as strong as that. We have 12 to 15 deals we're pursuing at this point. (multiple speakers) stages of completion. Some could complete -- this month of course we have not (inaudible) competing for them but some will close this month, some next month, etc.

You have to find new deals, new smaller deals. Are they out there? Are you picking up work that you hadn't seen before that wasn't originally in the pipeline? And are you able to convert that opportunity into revenue this year?

Yes.

Okay; thanks very much.

David Grossman, Thomas Weisel Partners.

Thanks very much. You know, I may have missed this earlier, Kris. But when you back out your largest client in Europe, can you give us a sense for what the growth was in Europe?

David, you want to know what was the growth in Europe last year?

No, the growth in the June quarter when you back out the largest client.

Back out the largest client. David, just go ahead and ask the next question and I'll just look at that and come back to you.

Sure. The second thing was that obviously you're concerned just like everyone else about the macro environment but at least based on your comments from an earlier question it sounds like your visibility is comparable not only three months out but six to nine months out to what you've seen in previous years. Am I understanding that correctly?

Yes, in fact (inaudible) reiterating that if you look at April and June, what is happening today is exactly what we said in some sense in April. So we had factored all this in. We had said in our revenue will be between 1142 to 1145. We did 1165. We were expected to do about 6% in Q2, Q3, Q4. So we have given a guidance of 5.2 to 6.1 and while I just quickly compute it, so without the largest client Europe would have grown about 4% this quarter.

Just getting back to the last question I just answered, I mean it feels like there is a little confusion about kind of what you guys have typically always very cautious about macro fundamentals and rightfully so but it sounds like with that said, your visibility on your business is no different than what has been in prior years. Is that accurate?

It's no different. You know probably what we have not done this quarter is after the first quarter we have not revised for the entire year and as you rightly said, it makes sense to be cautious at this point.

I see. And just one last question. I know there were moving pieces in the tax rate. What is the tax rate assumptions that you're making for the balance of the year in terms of percentages?

In the first quarter, the effective tax rate is 11% if you back out the (inaudible) we did. For the full year it could be somewhere between 14 to 14.5 because first quarter we had close to $19 million of (inaudible) loss in the nonoperating income and also the rate increases and the [visa] costs kicking in. One of those normalized and the nonoperating loss gets away. Quite possible the effective tax rate for the full year could be somewhere between 14 to 14.5.

Okay, great. Thanks very much.

Karl Keirstead, Kaufman Brothers.

Hi, thanks for taking my call. If I could just piggyback on that last question that David asked. Actually, my calculation shows that if the largest client had of been flat whereas your overall revenue growth in the June quarter might have been 4% in Europe it would have been about 2% had the largest client been flat. That's a little lower than I think most analysts expected given that Europe is viewed as a source of growth. So I'm wondering if you might just add some color on the health of Europe outside of that largest single client. Thank you.

The large client contributed around 10.3% of revenue in Q4 of last year. This quarter they were 7.9% of revenue. So there was a sequential decline of close to 22%. So back out that (inaudible) could have grown somewhere close to 4%. That is the number I gave. On Europe (inaudible).

Arvind Ramnani, Banc of America Securities.

Brandy, we're not yet done with the previous question. We need to complete that.

This is (inaudible). I just want to again reiterate the question which came up on Europe. On Europe apart from the opportunity in the financial services, we're looking at growth happening in (inaudible) retail and manufacturing. These three sectors we're seeing increased traction both in terms of pipeline as well as current business growth.

At the same time, (inaudible) service line which typically it's not so much (inaudible) which is our (inaudible) services. This is something which we are seeing in the last six months gaining traction. There is on the product design and product reengineering both in the automotive, aerospace and (inaudible) manufacturing. This service line is picking up growth in Europe. We opened four new client accounts on the engineering services.

Overall, the tone in Europe apart from our growth in the UK we're seeing traction in Switzerland, Germany, the Benelux region and the [Nordics]. What is also happening in Europe is the fact that the clients in the mainland Europe have started to increase their (inaudible) in terms of [network] consolidation. They're looking at alternate means of reducing their dependency on individual subcontractors.

We see increased (inaudible) in terms of discussions both at the (inaudible) as the last (inaudible) partners like us. That [engagement has started]. While in the near-term we could see some challenges in terms of (inaudible) increase ramp-up in Europe but we (inaudible) long-term we will see this scaling back.

Arvind, you can go ahead with your question.

Congrats on a great quarter. Based on second quarter guidance it seems that this is no longer a back half loaded year. So why did we not increase our guidance for the year?

(technical difficulty) look we clearly said on the environment front nothing else changed. It's the same environment. We had a planned growth for this full year when we started in the beginning of the year. So we are continuing with that. If the environment changes probably we're going to have a re-look at the early number.

In the beginning of the year we said we will be flat in the first quarter because (inaudible) 6, 6.5% growth for the next three quarters and now we've grown 1.1% in the first quarter. We've given a guidance of (inaudible) for the second quarter. So the rest of the quarter will be growing at close to 6% to meet the guidance. So nothing in the environment has changed for us to have a re-look at the guidance.

What growth are you factoring from Europe over the next couple of quarters?

It will be in line with what you're seeing in the first quarter. So first quarter we're seeing the Europe excluding the topline growing close to 4%. So that could continue. Europe, there's a lot of opportunities. Of course (inaudible) has not grown as we expected but I think (inaudible) for the year it could be in similar (inaudible).

Just a (inaudible) really quick data points. In terms of tax rates for next year, what should we really factor in?

I think next year the tax rate could still be somewhere between 14 to 16%. We're getting (inaudible) tax holidays only in 2011. Probably at that time we're able to push more work into (inaudible) our effective tax rate could be somewhere between (inaudible).

Great, if I could squeeze one last question in. What should we expect for utilization for the second quarter and for the year?

No, no; we don't give utilization guidance for each quarter. Overall we are saying that utilization, we're comfortable when it is somewhere between 76 through 80. At some point of time it could be less than that. But we want to create the flexibility in the model. We don't want to be suppressed by growth.

One of the worst things to happen for us is we have opportunities but we don't have people. We don't want to get caught in that situation. So quite possible when you see larger opportunities, we're willing to take the cost and keep the flexibility because we don't want to [miss the growth].

Julio Quinteros, Goldman Sachs.

Just real quickly, can we go just on a service line level, trying to get a sense for relative strength of service lines and in particular is there any one area in particular that stands out where demand remains robust, where pricing trends remain favorable just to kind of distinguish maybe on a service line level if possible?

Sure, if we look at the various service lines, business process management continues to be very strong for us. We're seeing significant opportunities there. Infrastructure management, significant growth from 4.6 to 5.7% of revenues, so about 24% growth. Our enterprise solutions and -- consulting and enterprise solutions though this quarter is flat. And generally we are seeing significant opportunities there. We won three transformation deals this quarter all in the consulting and enterprise solutions space. These are deals worth $13 million plus actually.

And testing again continues to be very strong. Finacle is doing very well from the product side. Finacle on a year on year basis is growen by 50% almost. So these are some of the strongest industries -- strongest service lines for us.

Go it, great. And then in terms of offsets to your larger client, it almost feels like in order for you guys to actually get the acceleration that your second guidance suggests, it feels like there has to be some bigger stuff in the pipe that will obviously begin to contribute. Can you just give us a sense on how quickly that comes online and is it enough to -- obviously it's enough because you guys are going to grow into the next quarter sequentially. But just what verticals is that coming out of and how much does that help you sort of mitigate the potential drag from your largest client?

All industry verticals are growing including telecom if you take out this one client. That is just (inaudible) this client as I said, it's a very important relationship for us and we will make sure that we meet their expectations for growth and things like that. But generally all segments are seeing growth for us actually.

Okay, got it. Finally, one of the sort of general sort of views has been that as companies continue to struggle with costs and continue to struggle with a weak environment overall etc. that they would be inclined to do more work offshore and to do more outsourcing at some point. At this point based on your conversations, do you think that your clients are already sort of over that initial kind of wave of shock and dealing with everything they have to deal with and finally have gotten to the point where they say okay, we really do need to do this with more frequency and with a higher velocity because the environment is not going to change?

Are we at that point or are clients still kind of at the point where maybe they're more like a deer in the headlights kind of caught by what is happening and the current sort of environment is to continue to sort of hold off on things with somewhere down the road maybe seeing the opportunity for offshore? Any way to characterize how that environment is probably trending along for you guys? Because it almost feels like we're not quite at the point where those decisions are coming but it feels like it is kind of building up in the system, if you will.

So if you look at client valuations, we're one of the best quarters -- 49 new clients, three Fortune 500 clients being added this quarter. So the way I see it and the way we look at it is when will the accelerations happen from spending perspective. So I think clearly they see that this is the direction in which they need to go. They're also signing up, even existing clients are saying that we need to spend more with this model.

When will the acceleration happen? From first quarter to second quarter we're saying yes, the growth rate is going to be better. To some extent the acceleration is happening. And depending on how companies are comfortable with the economy, I think that acceleration will take place going forward.

It's about the -- how fast the decisions are made etc., the pace of the decisions. (inaudible) model I'm positive in saying it's clearly being made at this point.

Got it. And just lastly just to take one last sort of pulse, as you guys came out of the month of June, was there a change in the way that you guys were feeling, say, between April and May to the June quarter? Just to sort of kind of get that one and put it to rest I guess one last time if you could just kind of help us get a sense for what went on between the month of June and, say, April/May?

Nothing really happened other than probably it's still as uncertain as in April when the situation will improve. I don't know (inaudible) we could say then or we could say it now. If we look at our guidance in April and guidance now, it stays the same. In that sense it is panning out as we thought. Only difference I would say -- could we say it has improved now? Probably not. That's all.

Ashish Thadhani, Gilford Securities Incorporated.

I was wondering if you could talk about your US on-site presence a little bit; specifically, where it stands relative to your own objectives as well as client servicing requirements and whether this is an issue that maybe may constrain growth.

No, it is not going to constrain growth. We have a particular model. We said that our on-site/offshore mix is typically 30-70 and the business currently is around the same percentage. We have increasing local hires both from campuses as well as lateral. This is helping us with the relationship management consulting (inaudible) growing locally. So it's sort of in line with what the model requires at this point.

Okay, very quickly your BPO net margin is now 10%. Could you provide -- could you shed some light as to what one can expect in the future and what explains the current level?

We're looking at a net margin -- an operating margin for BPO of 15% and this is actually including the work which we do to other parts of Infosys. We expect to maintain these margins going forward in the coming quarters.

Rod Bourgeois, Bernstein.

Guys, I wanted to try to better define this term 'environment' because I think it is creating some confusion. I think we have had everything this morning from the environment is weaker to the environment is the same. I think the key is to define what the environment needs. So let me ask the question this way. Let me present two scenarios and you tell me which one is more accurately reflecting what is happening here.

Scenario one is that the environment as defined by the business environment of your clients, that environment has weakened particularly in the financial services vertical. But in terms of its effect on your business, you're not seeing any major disruption to existing deals and what's happening in your pipeline. That is scenario one.

Scenario two is the environment is weak and your clients are having struggles in their business and it's also disrupting the deal flow that you're facing in your business. In my view, scenario two was definitely in place earlier this year but can you characterize right now whether you are in a scenario one situation or a scenario two situation?

Scenario one and I am assuming that you're saying scenario one was there in April and it (inaudible) in June so it's scenario once.

So you're seeing issues with your clients' businesses are increasingly struggling but you're not seeing that having a sort of deleterious effect on your actual deal flow in your business?

We saw this in April and we gave a guidance and the same (technical difficulty)

Hello?

Brandy, I think we have lost Bangalore.

I think we're back on.

Brandy, is that connection still established with Bangalore?

Yes, sir, their line is still established.

Okay great, so I think we're back on. So, guys, this is Rod Bourgeois back. Are you able to hear?

Brandy, can you recheck please?

You may resume.

Am I back on the conference?

Yes you are.

We were talking about the situation in option one and option one -- what I'm just saying is the year is panning out as we thought it would be in April and the situation is no different today than in April. The clients' environment is challenging. And our work with our clients has a certain assumption and those assumptions are the same today compared to April.

Okay, great. Guys, on a different topic, can you talk about your general plans on the M&A front? It is clear that you guys have been looking at doing some acquisitions but can you talk about timing your geographic focus and your service line focus when you look at acquisitions as a priority?

So I will talk about focus first. Clearly we want to look at gaps in our service lines. We want to look at acquisitions in a strategic manner rather than as a growth engine. We want to look at the gaps from a geographical perspective also.

So for example, it makes sense for us to look at let's say (inaudible) in Europe where we need to increase our local presence for language reasons. We have been saying that we would look at smaller (inaudible) acquisitions rather than larger acquisitions. The probability of a smaller acquisition is higher. The price is typically 10% of our revenues maybe 300 to $500 million. These are all (inaudible) rather than (inaudible) rules which cannot be violated (inaudible).

The timing will depend on us finding the right company at the right value where we feel comfortable that the strategic fit is there, where we feel that we can retain the employees because if you're buying something for capability than we should be able to retain those employees so that we can leverage that. So that is our focus. We have a dedicated team which looks at acquisition candidates, etc. And as you know, we look at many but only when everything fits and there is an agreement, we can talk about it publicly.

One final question guys. Given the move in the rupee you've got more room in your margin structure. As you guys start doing planning for fiscal '09, if the rupee stays where it is and you're able to reinvest some of that extra margin upside from the rupee into the business, does that help your growth outlook as you move into fiscal 2010? In other words, I am asking if you're able to reinvest significant margin upside back in the business from the rupee, does that help your growth outlook moving into the next year versus where you would have been earlier?

Typically, we invest it back in the business. We look at building out solutions. We look at hiring domain and industry experts in investing and consulting. We look at investing in Finacle, our product (inaudible) and these would have medium to long-term impact on our growth.

Kanchana Vydianathan, Pacific Crest Securities Inc.

My first question is looking at your sales and marketing expenses, sales and marketing for this quarter was close to [5.3]% of total revenue. Now excluding fiscal 2008 during the prior years you typically maintained that somewhere in the range of 6.5%. Can help us understand going forward what would you like that number to be fiscal 2009 and also as a long-term goal?

We would look at our sales and marketing cost somewhere between 6 to 7% typically. But you know quarter on quarter (inaudible) up-and-down will come back (inaudible) typically we would look at around 6% maybe 7%.

My second question is looking at your consulting and enterprise and your package implementation business, it seems like the sequential growth was -- I mean it actually declined by about 4.5% this quarter. Just looking historically you have actually grown every quarter about the Company average growth rate. Can you help us understand [now] is this also related to the top client or were there more issues in this offering?

Actually, if you look at the package implementation and consulting space, that trend is not the [reversed] so the trend continues (inaudible) we see a good demand and customers are continuing to spend on the kind of work which we are doing -- transformation programs, package implementation, global rollout, (inaudible) consolidation, upgrades. All these are happening using offshore service providers like us.

So that change [has not] happened. To some extent, okay, there is an impact on the (inaudible). But if you look at the last quarter performance in terms of the transformation programs we have won, the large deals we have won and the (inaudible) that have gone live all are very healthy and indicate a good trend. So if you look at the dialogues we're having with the customers and the transformation programs we're winning and the way we're going against the global (inaudible) healthy (inaudible) real reason (inaudible). Quarter on quarter there could be slight up-and-down depending upon when the program starts, when the program ends (inaudible) the consulting and not package packet implementation business.

So is it fair to assume that in the September quarter and for the rest of fiscal '09 we would start to see growth that would be in line with the average growth of the Company?

Yes.

Ed Caso, Wachovia Securities.

Good evening. My question is on -- you have a rather broad spectrum of service offerings at this point in time. How much has that been a factor in your continuing to win business and continuing to penetrate your client base? And I guess I'm sort of leading towards are you starting to see some sort of bender consolidation where some of the Tier 2's are -- who don't have the breadth of offering that you have maybe suffering a little bit in the marketplace? Is that a right scenario?

Yes, we are seeing that the largest companies who have full-service capabilities are growing faster in this environment. There are cross-border acquisitions that happen, Indian companies acquiring consulting or front-end capabilities outside and global system integrators acquiring into India especially they have come into India late acquiring into India. So that kind of consolidation is happening.

And definitely what we are seeing I believe is there is a leadership pool which is a small set maybe five, ten companies and then there is a long tail. And this long tail will probably continue. This industry has never seen a consolidation and having only a few players. It's always had a leadership pool and a long tail.

And I think that will be the structure of this industry going forward and then you can -- at the leadership pool also there is probably maybe two sets. One is the companies which have all the way from hardware to services and then your independent service companies. So there's probably two sets in there, the leadership pool also. And, Ed, probably you know it deserves to be expected from you because you are the analyst. I'm just giving you my opinion.

My other question is on the business process outsourcing market in general. Can you differentiate what you're seeing in that space relative to what you are seeing in your IP space regarding sales cycles, client interests and so forth?

In the infrastructure outsourcing and that is the question, right, Ed?

Actually I was thinking more on the business F&A, HRO, that space.

Okay. You know the BPO side has a different characteristic because you work with business rather than IT. And if the business sponsor pushes it strongly, actually sometimes the decisions are made faster. The difference is the contracts are typically long-term.

Those are the traditional outsourcing contracts. The contracts are longer, the transition times are typically sometimes six months to a year long. So the characteristics are different and the workforce is different.

That whole business is actually slightly different. But there is synergy in the sense that at least some clients are saying that I would like to go to the same service provider for both BPO and IT.

Brian Kinstlinger, Sidoti & Co.

The first one was if I excluded your top customer what would the pricing trend look like?

Sorry, can you repeat that question please? We were not able to hear.

If I were to exclude the top customer of yours, is pricing still flat or is it modestly increasing?

Pricing is flat during the top (inaudible).

And then if I looked at BFSI in particular, are the pricing trends the same as the rest of the industry or is it a little bit weaker there? Are you seeing more client pushback?

We're not seeing any difference in the BFSI space. In fact, we have had some pricing increases also in the BFSI space. There are no differences.

Thank you everyone. I really appreciate the time you all have taken and for your patience to join this call. As usual we look forward to continuing this interaction throughout the quarter and our investor relationship people are in touch with you and please contact us if you need any informational details. Thank you very much.

This concludes today's first quarter fiscal 2009 results for Infosys Technologies conference call. You may now disconnect.