Infosys Ltd (INFY) 2009 Q2 法說會逐字稿

Good morning, my name's Jessica and I'll be your conference operator today. At this time, I would like to welcome everyone to the Infosys second quarter fiscal 2009 earnings release conference call. After [the Company's] remarks there will be a Q&A session. (OPERATOR INSTRUCTUIONS). Thank you, Mr. Sandeep, you may begin your conference.

Thanks, Jessica. Good morning, everyone, and welcome to this call to discuss Infosys's financial results for the quarter ending September 30, 2008. I'm Sandeep from the investor relations team in New York. Joining us today on this call is CEO and MD, Mr. Gopalakrishnan, COO, Mr. Shibulal and CFO, Mr. 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 ending December 31, 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 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. Gopalakrishnan.

Thanks, Sandeep, and good morning, good afternoon, or good evening to everyone wherever you are. We had a very good second quarter. Our revenue grew sequentially by 5.3% in dollar terms in constant currency. It grew by 7.1%. In rupee, of course, it grew 11.6%. Volume growth was strong at 6.5%.

40 new clients were added. DSO, days of sales outstanding, was at 60 days compared to 64 days. Operating margin improved by 3%. Our utilization improved, attrition came down so, overall, in all parameters we had a very good quarter.

When you look at the guidance, there are two parts to the guidance. One is the impact of currencies. Most of the currencies have moved significantly, depreciated significantly, against the dollar. And the impact of this is about 3% on our original guidance given at the beginning of the financial year. So at the beginning we gave 19% to 21%.

Right now, when you look at the impact of currencies, it comes down to 16% to 18%. Given that the environment continues to be challenging, this uncertainty, we felt that we needed to be cautious, so we've given a guidance of 13.1% to 15.2%. The EPS growth will be 13%. If you consider that last year we had a reversal of tax, so if you take that out then the growth in the EPS will be 13%, in line with the growth of revenue.

And even though we are not seeing any impact, we have managed the business pretty well. For Q2 we felt that in this environment it is better to be cautious. We have not seen any significant impact to the business until now. Even in the financial services sector we have not seen significant impact, and the revision is based on our cautious approach to the environment at this point.

I'll pass it on to my colleague, Shibulal, to give you more detail of the revenue and margin.

This is Shibulal. As Kris said, we are coming out of a great quarter. All the numbers are looking very good; sequential growth, 7.1% in constant currency, volume growth, 6.5%. In spite of the -- in spite of drastic currency movements, we have been able to meet the guidance. If we actually look at it in the constant currency, we would have exceeded the guidance from the top end of the guidance by about $10m. So it has been a very good quarter for us all around.

Now regarding the revenue, let me give you some color. The US revenue, the revenue from the North American market, has gone down to 61.5%, and Europe has gone up to 28%. You will clearly see that in all the points I am making they are as per our strategy. For example, our strategy is to invest in Europe and grow, and Europe over the last many quarters has gone up consistently and this quarter it has crossed 28% in revenue.

The next one is revenue from Consulting and Package Implementation. It has crossed 25%. Again, our [number one] strategy is to become transformational partner for our clients. And you can see that very well we have very successfully executed on this strategy. Revenue from Consulting and Package Implementation today is 25.3%, compared with 23.7% in last quarter. We had great wins in the transformational space.

In Q2 we had five major wins; three of them in Finacle and two of them outside. Each one of these wins are [between] transformation oriented. They are sponsored by the business side and they are clearly accepted by the client that these are transformational programs. So other strategy which we are achieving very well, from a vertical perspective manufacturing is doing pretty well. [Our leverage] in manufacturing has crossed the 20%. Last quarter it was 18.4%. Annual vertical which is doing fairly well is energy and utilities. The revenue from energy and utilities is 5.5%.

Even in these tough times, the revenue from banking and capital markets, while it's come down in percentage terms, it has gone up in absolute terms. So this quarter the revenue from the BFSI segment is $405m, compared with the $398m last quarter.

Onsite/offshore ratio has remained stable. Revenue productivity has remained stable. Revenue productivity onsite has gone up by 0.6% and offshore has gone up by 0.1%. But the branded have come down by 0.3% due to a change in onsite/offshore mix.

The revenue from clients -- we have added 40 new clients this quarter. Revenue -- million-dollar clients, 325. There are 20 clients given as more than $50m a year in LTM basis. The largest client is 27.6% which is a very good number to have. We are comfortable with the single-digit percentage for the largest client, and this is a very good 7.6%. Top five clients are giving us 18.6% and top 10 clients are giving us 28%.

Our repeat business for this quarter is 99% plus, which shows that we are able to mine our existing accounts but, at the same time, it shows that we are not able to ramp up our new clients, and that is something which we need to focus on. That is something which we need to focus on.

Our client base today is 500 plus and, out of the 500 clients, 99 of them are Fortune 500 clients. We added one new Fortune 500 client this quarter. DSO days have done extremely well. Our DSO is 60 days compared with 64 days last quarter. So, even in that count, we have done very well.

Subsidiaries of China, Mexico [and] Consulting continue to be in the investment phase. We expect in foreign Consulting to break even this year. The number of employees in China has gone up to 1,000. The number of employees in Consulting, in full Consulting, is 161, but that is the subsidiary alone. Across the organization we have close to 2,500 consultants as of today. With that, let me hand over to Bala for giving more details of the financial performance.

Good evening, everybody. Great talking to you again. This quarter the revenues were $1.216b. The gross margin was 43.3%. Last quarter it was 39.7%, so it went up by close to 3%. Operating margin of 29.5%, last quarter was 26.7%. We had the rupee depreciating by close to 6% and cross currencies moving against us during this quarter, so net impact is positive on the margins by around 2.5%. We had compensation increases in the first quarter and also the resale costs, which was close to 2.4% together. So, overall, we had a positive impact of 5% on the margin.

We (inaudible) part of that in the business. Our cost of revenues and the SG&A costs went up by close to 2%. So, net net, we had a favorable impact of 2.8% on the margins. The tax is close to 4.6% of the revenue. The effective tax rate went up during this quarter. Last quarter, excluding the tax, there was about $7m. The effective tax rate was 11%. This quarter it went to 15%. Last full year it was around 14%, 14.5%. We believe for the full year, even this fiscal, it could be close to 14%, 14.5%.

Our EPS guidance was [50]. We are down [56 cents]. In July we gave a guidance of 19% to 21% growth in dollar terms, and the cross currencies have moved against us drastically during the quarter. If you take, for example, our Chilean dollar, it depreciated by close to 16% against US dollar on a quarterly basis between September end and June end. And if you take euro and GBP, both of them have depreciated by somewhere between 12% to 14%. It had a big impact on our reported dollar numbers. If you take the constant currency growth it went up by around 7.1%. The revenues went up by 7.1% during this quarter. In reported dollar terms, it went up by 5.3%.

Our volume growth was good. So, I think if you -- after account for this currency and restate the guidance what we gave in June, our guidance would have come down to 16% to 18%. In the last four weeks a lot of things happened in the environment. We are cautious. We want to be cautious. That's why we reduce our dollar guidance to 13% to 15%.

We are not seeing any impact now with any of our customers. They are still seeing good growth. Volume growth is strong. Pricing is still stable. We have seen growth in BFSI. We have seen growth in Europe. We have seen growth in some [of the] services. But looking at what is happening in the environment where things are changing so drastically. We want to be cautious. That's why we reduced the guidance for the full year.

And our DSO days are very good. It's 60 days. Last quarter it was 64 days. We are focused on receivables. Our quality of receivables is extremely good; 82% of the receivables [was within] 30 days. And we have a hedging position of $932m. Last quarter it was $811m. We saw a slightly increase of our hedging position, but we'll continue to take a short-term view and try to hedge over [exclusive] for next two quarters. We don't want to take a long-term view because the currency markets are very volatile.

However, we'll look at increasing our hedging for the non-rupee currencies, that is, all the major currencies whether it's US dollar, or GBP or euro, because those currencies are becoming much more volatile and that could impact our revenues and profits. So we are trying to increase our hedging for that.

We also made one more announcement today, that we are not going to increase our offer price for Axon. As you all remember, we gave our offer of GBP6 per share including the interim dividend which they declared. We had done a fair amount of due diligence and homework before we [reveal] that price. We feel that was a fair price and, looking at the environment, looking at the diligence we have done, we felt there was no need to increase the price which we communicated to the Axon Board.

We closed the year -- closed the quarter with $1.9b of cash. We believe that we have enough liquidity and our balance sheet is very strong. So I think overall we had a very good performance. We are cautious about the future because of what is happening in the environment, and our guidance reflects that. Going forward for the full year, we believe our operating margin will be stable at the 2008 fiscal level, between a narrow band of 40/50 basis points. So, in spite of all this, we'll be in a position to maintain our margins within a narrow band.

With this, I conclude. If you have any questions, we'll take them. Thank you.

Jessica, we can start the Q&A.

(OPERATOR INSTRUCTIONS).

Your first question comes from Trip Chowdhry.

Hello, this is Trip Chowdhry from Global Equities Research. I was wondering first, of course, that the environment is very challenging, but I was wondering if you can imagine the scenario and give us your thoughts. Suppose today is July 2009 and, for the first time in your history, you have registered a negative year-over-year growth, and you are at the crossroads to decide among two things. Number one, reduce your staff salaries to 2003 levels or to cut your work force. What are the pros and cons to the Board strategies? And if that situation really comes, how will Infosys react to that operationally, strategically?

And the second question I have is why don't you just walk away from Axon? I don't think the time is right, the price is right and the way you are paying for the company is right. In a tough credit situation you don't buy companies on cash. You should have bought it on -- by stock and maybe put a collar next to it.

Any thoughts on both questions? And again, all the best. It's a very difficult climate and you're doing very good.

Let me answer the first one. One minute. Okay, let me answer the whole question. I'll moan here.

First of all, let us make one thing clear. We have created a Company with a cost model which is very flexible. 30% of the offshore costs are variable. If the work onsite comes down, people can always ship them back to India because, of the maybe 20,000 people who are abroad, 4,500 people are formally stationed there. Less than 1,000 people were hired for the positions. So 5,500 people are there actually can come back if required.

So, even if the revenues come down, we have a tremendous amount of flexibility in the model. And 30% of those total offshore salaries, which are maybe 15% of revenues, are variable. So there is no need to ask people to go in case the revenues come down, unless it becomes so catastrophic that the world comes to an end. So that's one point I want to make.

And the second point I want to make is that we have a process whereby we rate people on performance and people at the bottom end of the table not normally go out of the system. And there's enough inbuilt attrition in the system to take care of non-performers so that the people in the system are very good people. So there's no need at this point of time, sitting where we do, seeing what we do, to do anything else.

And another thing, you asked about acquisition. Please remember, in an acquisition there are two parties to a contract. There's somebody who has to make an offer, somebody who has to accept an offer. If you want to acquire a company you have to make an offer and somebody else has to accept it. If you put a collar, if you do everything you do, whatever you say, nobody will accept that offer.

And this was made at a point in time when the economic conditions were very, very different. So you must be seen in that particular context. We could make a collar, we could give some stall, we could do -- we could put in some 100 conditions, but then it is not worth it for somebody to sell themselves. Nobody is desperate to sell. Nobody is desperate to buy. It was done in a particular context. So I think you need to understand in that context.

Yes. I was just wondering, just as a follow up, the situation has got much worse when you put the offer and where the stock is today. In truth, the stock is almost down 30%, 40%, and I don't see the initial pieces that was put in place that you want to expand in Europe because Europe is a growth area. I think Europe is no better off than US and I really think you need to take the offer off the table. You will get a break up for your $4.5m; not a bad thing. And probably [a] year out Axon is worth much more (multiple speakers).

I think you have a good viewpoint, and we'll let it rest at that.

Thanks.

Next question.

Your next question comes from Arvind Ramnani.

Hi, this is Arvind Ramnani at Banc of America. A couple of questions. What is the road map of your top account?

So we continue to work with the top account. We continue to be committed to every client we have. It is seeing some steady, let's say -- it's steady at this point, and so we'll continue to work with the client.

Great. My next question is can you actually expand on your new hedging strategy?

No, there is no new hedging strategy. We are following the same strategy. What we said earlier was we don't want to take a long-term view because the markets are very volatile. We're taking a short-term view. We are continuing to do that. What we are doing now is the cross currencies. The cross currencies have moved drastically in the last few months and we need to have hedging strategies to address that. That's what we are doing now. But on rupee/dollar, there is no new strategy.

And will you be hedging on top line or bottom line?

Well, I think you can't hedge the top line. You have to hedge to make sure they impact on the margins and EPS is minimized. That's what we are doing.

Sure, thank you.

Your next question comes from Mark [Marostica].

Good evening, it's actually Mark Sketelovic for Mark Marostica. I just have two questions. First up, in light of the current environment, I'm just trying to understand what your motivations are for adding an additional 8,000 employees in the second half, despite having a similar number on your bench right now.

And, just a follow up to that, what that implies for utilization rates in the second half -- utilization rates ex trainees?

Well, in the current environment, Mark, what we are doing essentially is we are [filtering] the offers that we made last year. We have said several times that a part of the employee for the next year you have to make offer one year in advance in the colleges. We had 18,000 offers outstanding last year. Already 11,700 offers have been fulfilled. The balance 6,300 offers are to be fulfilled, and we estimate about 75% of people to whom the offers have been made will join. And that is what the number that you see coming in this year, apart from some old outstanding offers, a very small number of outstanding offers we have made maybe about 60 days ago.

Okay, so should that imply, then, a continued downward trend on the utilization rate that we've seen in the last few quarters?

Yes, they are the bottom of the pyramid. They don't cost so much in comparison to our thing, and you know, we will train them up, we will train them.

Could you provide --

The utilization this quarter has gone up from last quarter and there is a seasonality to our hiring. The campus recruits join typically in our second and third quarter, and they go through a training for about four months. So when they come into the system there will be a temporary dip. We are comfortable with a utilization of about 76%, 77%, up to even 80%. That's the range we want to keep. Right now, the utilization is 74.3%, so -- which is a comfortable -- 74.1%, which is okay. And margins will support a utilization at this level.

Okay. And can you just provide some insight into next year in terms of how you're looking at conditions next year?

We give guidance in April for the next year. Having said that, it is actually difficult to talk about next year because of the challenging environment in which we are. I strongly believe that once the stability comes there will be significant work for companies like Infosys even now, because of the mergers and things like that, because of the need to cut costs, because of the need for regulatory changes. And I strongly believe there will be further regulatory changes and things like that. There will be work for companies like Infosys.

Medium to long term, the need to globalize the business, take advantage of India and China, that's the drivers we have been talking about for some time. All these will require investment in technology. And the model in which we operate, the global delivery model, is no longer seen as a challenger. It's really the mainstream model, that's the model which is strong. The proof is that this industry continues to grow. The number of companies coming into India continues to increase and so this model will continue to grow is what we see.

Okay. And then my last question has to do with visibility and your top five clients. Having declined about -- looks like about 10% in the last two quarters combined, what should we expect here in the second half?

We have given you our guidance -- overall guidance for the next two quarters. We don't like to talk about a particular segment within that. Anyway, it's like what is the growth rate in Europe for next quarter, etc. We have quarter to quarter changes happening. Sometimes the top 10 grows. Sometimes the next, let's say, 20 accounts grow. This is a quarter where the accounts below the top 10 grew substantially more than the top 10 itself. So that keeps changing quarter to quarter. There is nothing unusual happening.

We have in the past also slowed down in some accounts, growth in certain accounts. There is a churn in the top 10 that -- there could be churn in the top 10. These are all things which have happened in the past and can't be attributed to what is happening in the environment today. So that's why we don't give you by top 10 or [the growth rates] and things like that.

Well, can you comment on just your visibility today versus what it looked like a quarter ago on those revenues, just among your top five? Is it the same, is it better, is it the same? Just maybe some color there.

Yes, visibility is the same. But what we have done is, even though visibility is there, we said let us be cautious because this is a very unusual set of circumstances. This is probably a once-in-a-lifetime event. At least that's what everybody believes or thinks, and in that environment you need to be cautious and that is exactly what we have done.

Great, thank you.

Jessica, can we have the next question?

The next question comes from Moshe Katri.

Yes, thanks, Moshe Katri of Cowen. Guys, when you look at the quarter in terms of the progression on a monthly basis, is there -- can you comment on the month of September versus July and August in terms of ramp up of new projects, maybe project delays, and then new wins? Have we seen -- I'm assuming we've seen some pretty big changes as we got towards the end of the quarter?

Moshe, in our case, actually it's the other way. Actually, September was a good month for us, but we don't want to take that forward. These are unusual circumstances and it could be client specific, company specific. But in our case, actually, September was a good month for us.

It was a good month in terms of project ramp as well, new projects coming on board?

Yes.

Okay. And then are you prepared to make any comments, Kris, on the '09 budgets? I know it's still early. In your view, what's the likelihood that we'll go through the same push packs we went through early calendar '08 in terms of setting the budget?

Moshe, the early indication we got and this is -- we do -- it's the way every quarter. The early indication we got was that there would not be a delay this time. But I wouldn't now take it that we are going to go back to our clients and talk to them again.

Okay. And then, finally, obviously given the drastic restructuring and reshaping in the financial services arena, recent M&A activity, the bankruptcies, is there anyway you can quantify the impact on the revenue base in financial services? Do you think that that impacts 10% of your revenue base in financial services? Do you think that's going to take it out of the overall revenue base down the road? Have you done such an analysis, given that financial or BFSI is such a big part of your revenue base?

No. BFSI, which includes insurance, is still the largest industry vertical for Infosys. About 35% of our revenues is -- actually 33.3% of our revenues is from the whole BFSI space. Our Swiss banking [in] financial services is actually the largest. 26.5 is banking and capital services -- financial services.

So we don't expect a drastic change, Moshe. And the reason for this is even -- one -- first ting is, fortunately, at least until now, some of the companies which got severely impacted, or ceased to exist, they were not our clients.

And where there is some acquisition, we have actually benefited from that acquisition. And we expect some integration work to come our way.

And then, given that our percentage share of the total IT spend in this sector is still very small, even at 26%, we are talking about total revenue from this sector of close to $1b or more. And that is not even 1% of the total spend. I don't know, maybe even 0.1% of the total spend in this sector actually when you look at all the companies. And so it's not -- I wouldn't say that it's going to change that much.

We also did some other kind of analysis. We said that of all the possible companies we can work with, how many are we working with. And that percentage is also very small. So there are more companies we don't work with than we work with, actually.

And the last data point is, of the 40 clients we added in Q2, majority were actually in the BFSI segment. So when I look at all this data, will it change dramatically? Probably not. Between quarters there will be some small variations here and there. That's all.

Thanks. Thanks for the clarifications.

Your next question comes from George Price.

Hi, thanks very much. Just a couple of questions. First, with the top five and top 10 client contributions weakening a little bit, can you give a little bit more color on what's going on with the shifting around in the top five and the top 10 is being driven by in terms of delayed work or work stoppages or shifting of clients within those lists?

There is all of the above in some sense. We are seeing some delays. We are seeing -- in ramp up delays we are seeing some shifting. That is sometimes growing slower or just staying put, and some other client growing faster so they move down in the list, so all of these are happening.

Okay. Is -- are the top five and the top 10 the same this quarter as the prior quarter, September versus June?

Yes.

Okay. And what can -- what's implied in your fiscal '09 -- the revision to the fiscal '09 revenue guidance, beyond currency? I guess, specifically, does this imply zero new business, or the current levels of ramp up that you are seeing now, which is obviously slower, do you assume that it kind of gets incrementally worse? Do you assume it gets any better? Any kind of color around that about what the underlying assumptions are would be helpful.

George, typically when you enter a quarter, we have 95% visibility. Now in this environment we said we cannot apply our normal standards, and we said that we have to be cautious. And that is why we shifted the model a little bit even though we have good visibility. We said that the revenues that we expect to come within the quarter, which is approximately 5% more, even from same client there may be delays. There may be delays in ramp ups because we have had good significant wins. And, hence, we put a factor and said that let's be cautious.

Okay. Last question is when -- given that you are involved with several clients on the M&A side, and I guess I would say, I think, primarily in BFSI that there may be others that we are not aware of, but I guess more particularly to BFSI, when do you think the integration related work begins to flow? What's your sense of the timing on when that could start to -- assuming that your involved in that work, you win some of that work, when would you think that that could actually start to flow through your results?

This is Ashok. So some of this stuff we are already having conversations with our clients and we are putting some -- our cost base costs together as well as certain project plans etc., together for that, so some are in the initial conversation stages.

We also have in certain cases already started work on one or two of these post-merger integration work. We have also actually been invited by two of our clients to do a decision -- to help them in the decisioning of whether an entity -- an acquire a target company would make sense, given the fact that we know their systems very well. And we know the target systems as well. We've not actually been told what it is, but we've been given at that presentation of what the target systems would be.

So the short answer is that in certain cases we have already started conversations, some -- at advanced stage, and in two cases we have actually started work with them.

Where do you think that this -- it sounds like all this stuff is still pretty early stage, based on what I am hearing in general in your comments. Is that -- do you think that's accurate, and when do you think you -- when do you think it peaks out or hits a run rate?

So this is not a large part of the revenue for us and, clearly, we do expect some of this to happen when the dust settles in terms of the acquiree and the acquired company basically sit down and make a determination as to what we need to do. We also think that the budget cycle will be an important inflection point in determining what kind of dollars will be allocated to this activity, what will be done immediately, what will be done in the medium term and what will be left.

It's also a function of how people are going to structure these companies. A lot of them may leave certain portions of the business of the acquired company intact and, therefore, they may not want to actually do anything and [sunset] all the stuff that's already there.

So when there is post-merger integration work, when there is sunsetting that's happening, in all these areas there is play for us. But, as I said earlier, this is not such a significantly large portion of our revenue.

Okay, fair enough. Thank you.

Your next question comes from Kanchana Vydianathan.

I am from Pacific Crest Securities. My first question is I just want to clarify I want to make sure I understand this right. So looking at your revenue guidance for the December and the March quarter, you are basically assuming no new deal signings, and you are also assuming possible push outs in some of your existing deals. Is that a fair assumption?

We are assuming no large deals at this point. We assume some deals will be signed. We will not -- normally we would assume some more revenues to come from new deals, but we are not assuming that many. It's kind of a cautious approach at this point, that's the difference, slightly more cautious than normal.

Okay. I guess my second question is on the pricing. Can you help us understand looking at pricing on new deals and existing deals. In the BFSI segment and in the non-BFSI segment, mainly looking at like-for-like deals, what are you seeing in terms of pricing? And also are you seeing any sporadic negotiations in terms of pricing, as you'd indicated in the June quarter, where you had an odd case or so? Can you help us understand that?

So I just want to talk about Q2 before I go there, because in Q2 if you look our pricing has been very stable. In fact, the onsite revenue [for s2] has gone up by 0.5% and the offshore has gone up by 0.1%. Lender has come down because the ratio between onsite and offshore has changed. We are not seeing sporadic pricing negotiations at this point in time. And I am not seeing a material difference between what is in BFSI and what is outside as well as these conversations are concerned. Ashok, do you want to add anything?

Yes. I think, Shibulal, you summarized that well in the sense that we are not seeing any sporadic requests for price negotiations. Negotiations that are happening are as for the annual plan. We've seen a fairly stable pricing environment for us in this past quarter.

We don't expect to be able to get any price increases radically, given the environment. But wherever we have expanded our service footprint or have done value-added services, we've clearly got a premium where it's been possible to explain the reasons for that premium, and our clients have bought that. But in the commodity part of the business, as I call it, commodity part of the business, we have seen steady rates.

Okay. And I guess my next question is looking at retail and manufacturing, I guess the bigger concern now there is in the coming quarters are you going to begin to see slowdown in retail manufacturing? You had a good quarter in September, especially in manufacturing. So can you help us understand, looking at -- based on your visibility, what is your expectation for retail and manufacturing in the next couple of quarters?

Well, at this point in time, if you look at our, again due to experience, manufacturing has done very well. It has gone up as a percentage of revenue from 18% to 20% in Q2. We do see the probability that this could go into retail compared to manufacturing. We have watching the situation very, very closely. But other clients at this point in manufacturing are not showing any fatigue.

And also manufacturing for us is a unique segment, because the kind of services we provide in manufacturing, which traditionally have been very, very wide, if you look at manufacturing we provided ATM services, we provide [service] implementation, [audit] implementation services. That is common for many other -- you can say that it is coming from many other verticals.

There are two other services which are very, very prevalent in manufacturing, one is product development, the produce development which we do, which we have been doing for many, many years through a lot of high-tech corporations. And the product life cycle management work which we do for -- predominantly for aerospace and automotive and things like that.

So the kind of services which we provide in manufacturing is very wide and varied. So that possibly -- that is a plus point for us in manufacturing.

Okay. And my final question, I was looking at your operating margin. You did get the benefit of the rupee this quarter and you were able to improve it by 2%. My question is do you believe at this point that, looking at your reinvestments into the business, that your -- if you look at the reinvestment rate that it is high enough, that you will be able to sustain above industry average growth rates for the next few years?

Yes, we are financial very strong. Even when you look at our investments, we have multiple initiatives going on simultaneously. We have not reduced our investment in education and training of our employees. We have not reduced recruitment. So we are actually well poised as opportunities come to accelerate growth.

Okay. Thank you very much.

Your next question comes from Karl Keirstead.

Hi, good afternoon, Karl Keirstead with Kaufman. I am just wondering if, given the credit crunch, you are seeing any change in the typical contract structures where competitors, or perhaps you following suit, might be guaranteeing cost savings or absorbing some of the up-front costs on projects. Any contract structure change, beyond the pricing points, over the life of the deal? Thank you.

In the BSFI sector we have not had any contract changes with respect to either pricing or any of -- any terms and conditions, whether they are service level increments or any other parameters.

Obviously, when there is consolidation you have to look at the contracts for both parties. And then you have -- we'll have to come to the part of the contract of the party that has acquired the target. Sometimes the terms and conditions could be different, and those have been looked at both by the company and us. And we have in most cases gone with the terms and conditions which are there -- of that of the target -- of the acquired company, sorry. But we have not had any material conversations around any changes in the contracts.

Okay, thanks. And maybe just a quick follow up. In terms of your assumptions underlying the guidance, it sounds as if you are assuming some continued delays in deal awards and project ramps. But just to be clear, is it the case that you are not assuming any project cancellations that are currently live? Is that correct?

Yes, we've not seen cancellations, so we will not assume the cancellations other than -- in even normal circumstances sometimes the projects get cancelled. So that's part of our normal routine. We get -- those get replaced with some other work and we go on. Every quarter there will be something happening and something -- some cancellation. Nothing -- there is no -- nothing from the environment that is creating those things. It's not different this time.

We have assumed that the velocity for business is slow, has slowed down, and that is the reason why we have said growth will be lower at this point.

Okay, good. Congrats on the good September numbers.

Thank you.

Your next question comes from David Grossman.

Thanks. Just a quick follow up to the assumptions, the underlying guidance, I think you've been talking about flat pricing. So is it fair to say that the volume growth that you are assuming pretty much parallels the constant currency growth?

Yes, we -- currently, we are looking at volume growth, David. And see -- the reason why we are able to sustain our prices, flat pricing etc., David, is that ultimately pricing is determined by the market, but you have some influence. You have the choice to decide to take up or not to take up, right?

And we have a disciplined approach to sales. We have strict controls put on how and who can give discounts and things like that. And that is why we are able to hold onto our pricing. We are not aggressive. We want the right business for (inaudible) philosophy of the Company always, and that we have sustained.

So then, the volume growth should parallel constant currency growth, at least in terms of your guidance for the second half of the year?

David, if you look at the third quarter in constant currency at the upper end, the growth could be around 2.3%. If you look at Q4 or Q3, because you assume the same currency rate, it could be flat.

Okay. And then, secondly, I don't think you've ever been in, not only an environment like this, but as you enter next year if you stick with the current trend and that extends into next year, can you just help us understand the puts and takes on the margins?

If we end up in a low-single, mid-single digit growth environment in fiscal '10, you've done a great job historically of managing the margin when you've had headwinds. But if you could just give us some insight into, given where we sit today, how that kind of growth environment would affect the margins and some of the decisions you'll have to make going into next year.

David, we are actually very confident of margins. And, of course, if everything crumbles, because anything could happen in this environment, then it's not -- you can't make that statement.

But with reasonable certainty we are more confident on the margins than on growth. And the reason for saying this is the number of levers we have, including, David, a significant part of compensation is variable for our employees.

And if worse comes to worse, that is also. And if there is no growth etc., this variable compensation does not get paid out. So there are many levers and there is a lot more control over the margins. And then, if the growth is there, then you have both; growth and margins.

Okay. Thanks very much, Kris.

Your next question comes from Julio Quinteros.

Hey, guys.

Hi.

Hey, how are you, Sandeep? Hi. Real quickly, just on the ranges in terms of the guidance as you look at the third and fourth quarter, huge, huge ranges on the low end and the top end. Could you just walk us through what would be built into the low end of the guidance?

Are we talking of -- I know you guys are saying no cancellations, but does that scenario incorporate more delays, more deferrals? Is that just cement? I am just trying to understand what's on the low end of your guidance as far as implications in terms of push outs, delays, that kind of stuff?

Well, the velocity business has slowed down and there are projects which are ending etc. And so if, let's say, there is a delay in replacing that with some projects etc. So what we have done is -- even the visibility is similar. We have assumed that there may be slowdowns. And then when you put that into the model you get a different growth rate, and that's what we have done this time.

Okay, got it. And then, looking at the larger client accounts, there is all kinds of different puts and takes in terms of what's happening with the larger clients. But if you guys had to say what the key service offering is that you bring to the table today, what are they actually still buying from you more if you kind of spread it out across your services?

Is the core service offering today mostly maintenance and outsourcing type work, or is there something more specific that clients are coming to you and asking for, given all of the constraints that exist today?

We are seeing good traction in our Consulting and Package Implementation services. Consulting is seeing significant traction. In Q2 we won five transformation deals which are all above 30m plus. We won five large deals, outsourcing deals, which are again more than 50m each.

And so we are seeing traction across infrastructure management, system integration again saw growth, and we continue to see all our services are doing well in this environment, both the discretionary and on non-discretionary spending. Again, we are seeing good traction.

Okay, got it. And then, can you guys just remind us philosophy in terms of dividend payout versus buybacks? Given the amount of cash you guys have on your balance sheet, you are still generating a significant amount of free cash. How do we think about at what point you guys go back and figure out whether a buyback or anything along those lines would make more sense?

So, Julio, we will keep increasing our dividend payout. Now last year we decided that up to 30% of the profits can be paid out as dividends. So we changed the percentage from 20% to 30%. And dividends have been going up, with occasional one-time large payouts and things like that. And so that philosophy of dividend will continue.

Regarding buybacks per se, we never say never, but generally we don't want to look at buybacks. That's the current philosophy of the Company. So we are not looking at buybacks at this point.

Okay, great. And then just on the big contracts that you mentioned, what's the timing on the ramp up of those large contracts? Is there a way to map that out, or is it still difficult to say when really begin to contribute?

So that is where some of the delays are. Even when the contract is signed, it is not ramping up as we had originally anticipated. So that's part of the delay we are seeing.

Got it. And then, anything unusual on the balance sheet side that you guys can comment on, just relative to the decline in deferred revenues?

Well, I think you can't see a better balance sheet than ours in any part of the world. I think when you look at (inaudible) you have to see the net amount. They're nothing unusual.

[Of] balancing against, okay. Okay, all right, got it. Thanks guys, good luck.

Jessica, can we take one last question?

Your next question comes from Ed Caso.

Hi. Thank you for taking my question. Just I wanted to clarify, relative to the prior guidance, how much of the reduction reflects the currency and how much of it reflects a more cautious view of the environment?

Our original guidance in dollar terms was 19% to 21%. If you convert that into constant currency, it comes to 16% to 18%. The 3% drop is the cost of currency at the movements. So 3% is currency, 3% is because of our cautious outlook into the future. So from 19% to 21%, which we give six months back, we are saying 13.1% to 15.2% today. And out of the 6% drop, 3% is currency and 3% is based on the environment.

Thank you all very much for joining us today. We are always thankful to you for the interest you have and the time you've taken to participate in these calls. Looking forward to interacting with you during the quarter and, if not, we'll again meet on this teleconference at the end of next quarter. Sandeep.

This brings us to the end of this conference call. We thank you all for joining us, so have a good day. Thanks.

This concludes today's conference call. You may now disconnect.