Infosys Ltd (INFY) 2009 Q3 法說會逐字稿

Good day everyone. And welcome to the Infosys third quarter earnings for fiscal 2009 conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Sandeep Mahindroo. Please go ahead, sir.

Thanks, Jennifer. Good morning everyone. And welcome to this call to discuss Infosys' financial results for the quarter ending December 31, 2008. I'm Sandeep from the Investor Relations team in New York.

Joining us today on this call is the CEO, namely Mr. Gopalakrishnan, COO, Mr. Shibulal, and CFO, Mr. V. Balakrishnan, along with other members of the senior management.

We will start the proceedings with a brief statement on the performance of the Company for the recently completed quarter, followed by the outlook for the quarter and year ended March 31, 2009. Subsequently we will open up the discussion for Q&A.

Before I pass it on to the management, I would like to remind you that anything that we say which refers to our outlook for the future is a forward-looking statement and must be read in conjunction with the risks that the Company faces. A full statement and explanation of these risks is available 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, good evening to everyone, wherever you are. Thank you very much for participating in this call.

Despite the challenging environment, including drastic movement in cross-currencies, we have delivered a reasonable performance. It's an all-round performance. Our revenues in constant currency grew 1% sequentially in dollar terms. The reported revenues, of course, dropped sequentially by 3.7%, but in constant currency terms the revenue grew 1%. Volume growth was 2%.

We had a blended pricing decline of 1.8% in constant currency terms. But operating margins increased by 2.3% sequentially during the quarter. We added almost 6,000 gross employees. We met our guidance and the revenue was in the range in which we had talked about.

Our repeat business continues to be high, at 97%. We added 30 new clients during this quarter. We closed four large deals of $50m plus. Our attrition has come down to 11.8%. Utilization has gone up from 7.1% to -- 74.1% to 74.8%.

So all around, a good performance. We're looking to add another 3,700 gross employees. Most of these are at entry level, honoring the commitments we have made in the campuses. And given the challenging environment, we feel we have delivered a good performance.

We've kept our guidance the same, except for two impacts -- two things were taken into consideration. One is the currency movement. Second is the blended pricing decline. Other than that we have kept guidance for Q4 the same.

The environment continues to be challenging. We feel that our model has again proved to be resilient. We've proved that we are able to sustain margins in these difficult times. And as things improve, when the cycle ends and recovery starts, we should be in a strong position to take advantage of this. We have $1.98b of cash on hand, and overall a good performance.

Now I'll pass it on to my colleague, Shibulal, to give you more details on the business performance.

This is Shibu. As Kris said, this has been a very good quarter for us. In spite of multiple issues, we have delivered on the guidance.

Billing rates have come under pressure. Our prices have come down by 1.8% on constant currency. We believe it is manageable at this point. There are multiple price negotiations. Our strategy is to convert the price negotiations into more of value conversations. We can convert deals to fixed price, to transaction-based pricing, link volume to price, etc., etc. We also believe that if the situation gets worse, the pricing could come under pressure again.

We have not seen any material cancellation of projects as of right now. They seem to run their course. At the same time the velocity of decisions has come down. Decision-making is slow. Scrutiny is now higher. And that is impacting our -- that has impacted our growth.

Budgets are not finalized. We are looking to February, March to finalizing budgets. We have won four large deals of $50m to $100m this quarter and there are multiple deals in the pipeline.

Utilization has gone up, 74.8% compared with 74.1%. We are comfortable with 76% to 80%. Three subsidiaries, in terms of China, in terms of Consulting and in terms of Mexico, are still in the investment phase. But we need to look at these more from our [MI] reporting rather than from the statutory reporting.

We have added 30 new clients this quarter. Our top 10 clients grew 3.2% in constant currency, and non-top 10 grew 0.1% sequentially in constant currency. The contribution from the largest -- the top clients came down as percentage terms. But in actual numbers, in constant currency, it has only moved down by a couple of million dollars, not anything material.

We will add 27,000 people this year. We applied for 9,000 visas. And out of that the government has taken up 4,800. Our visa utilization is 49%, which is very healthy.

With that, let me now hand over to Bala to discuss the financials.

Good morning, everybody. This quarter was good. Our revenues were $1.171b. It is a decline of 3.7% on a reported number basis. But if you look at the constant currency, it grew by 1%. And it grew by around 14.6% on a year-on-year basis.

I think if you look at the guidance we gave in the beginning of the quarter, we said the revenues will be somewhere between $1.175b to $1.220b. If we restate it for the currency, the range would be $1.137b to $1.181b. The actual is $1.171b. So we met the guidance.

Even if you look at the EPS, we gave a guidance of $0.57. The actual is around $0.58 if we (inaudible) $0.02 because of the tax reversal pertaining to the earlier years to $0.56 is mainly because of the cross currency impact. Even though we had a benefit of $0.07 in the EPS, because of the rupee depreciation against the dollar, we had an impact of $0.08 because of the cross-currency movements.

Looking at the operating margin for the quarter, it's around 43.6%, almost the same as last quarter. Operating margins have gone up. It is 31.8% as compared to 29.5%. It's basically because the rupee impact, we got a benefit of 4.7% in the margin because of rupee, because it depreciated by close to 11%. And we had a negative impact because of cross-currency on the operating margin of 1%, and the utilization coming down from 70.7% last quarter to 68.5% this quarter impacted the margin by around 1.3%. There are offsetting factors like reduction in SG&A and the reduction in overall per capita revenue.

For net debt -- or the net margin level, our net margins are at 28.3%. Last quarter was 26.2%. If you remove the tax reversal, it's 27.3%, compared to 26.2% last quarter.

As you all know, in the beginning of the year, we gave a guidance of 19% to 21% for growth in revenues. We reduced it to 13% to 15% in the beginning of the quarter, mainly to factor in the currency impact and also the general economic environment. Now we are revising it to 12% to 13%. If you look at the difference between 19% to 21% in the beginning and the 12% to 13% what we give today, the differences are mainly because of the currency. Currency is around 4% to 5%. So on a constant currency basis, the way to look at 12% to 13% is to look at constant currency. It will be around 16% to 18%.

Our guidance for next quarter factors in the reduced per capita revenue because we have seen the per capita revenue reducing by 1.8% on constant currency terms in the third quarter. We are taking the same per capita revenue for the fourth quarter. And we are maintaining the guidance, just adjusting it for currency.

If you look at the non-operating income, non-operating income, we have a loss because of translation and hedging. Last quarter we had a loss of $28m because of the currency. This quarter we have a loss of $44m. We had a benefit in the operating income because the rupee depreciated. Operating income went up by $41m because of the rupee depreciation, but we had an impact on non-operating of around $44m. I think net/net, at the net income level, the impact is minimized.

Subsidiaries have done well. If we look at IBPO, they added $67m of revenue. Their net margin is 16%. Australia did $26m in revenue. Their revenue has come down there mainly because of currency. At net income, they had 6.2% as net margins. Consulting made a loss of $2.6m, China $2m, Mexico $0.5m. All the subsidiaries are still in the investment phase and that is the reason why they're making losses.

This quarter, the currency model has been quite volatile. The economic environment has been challenging. Even in this environment, with all this volatility, we were able to maintain the growth. We were able to maintain the margins. We were able to have better DSOs. The DSO days are 56 days for the quarter. And in the quarter that had a lot of holidays, that the environment is challenging, we were able to collect most of our receivables and make sure the DSO days are reduced.

We are ending the quarter with $1.98b of cash. We believe that's very important in an environment like this. It gives to a lot of comfort to not only us, but also to the customers and other stakeholders who want to deal with us.

With this, I conclude. Now we can open up the floor for Q&A. Thank you.

Jennifer, we can start the Q&A.

(Operator Instructions). We'll go ahead and take our first question from Bhavan Suri with William Blair.

Hey, guys. Good quarter. Couple of quick questions regarding the pricing issues. The first, could you elaborate a little more on the discussions you've had with customers around pricing? And then where are you experiencing these conversations? Are they in any specific vertical or any specific geo, or is it across the board?

So we are having pricing discussions with a few customers across verticals and across geos. If you look at the past 10 quarters or so you can clearly see that our prices have gone up, our revenue productivity has gone up quarter on quarter. We have been able to convince our customers of the value which we provide and they are willing to pay us higher value, higher rates toward that theory. Today the customers are undergoing trouble and they are under pressure. So that is where some of the discussions are happening.

Also we are seeing, at least in some locations, competitors cutting price, current competitors cutting price globally and in offshore. So our direction is usually to try and convert the discussion into a wider discussion on the value which we deliver and on the total cost of ownership. So we can look at linking those discussions to additional volume. We can look at converting the deal into fixed price. We can look at converting the deal into other pricing models. We can look at productivity improvements. So we explore all these possibilities. And usually we end up in a combination of some of these possibilities.

Thanks, Shibu. Just --?

Yes, go ahead.

I was going to say -- and then, could you give me some idea of -- you said a handful of customers or a few customers, the magnitude of that? And is there a risk that other customers see you doing this and then bring their rate card and say we want lower rates. Could you quantify the magnitude of it and the risk for the rest of the base to do that?

That is why we don't work with the rate card level. We try to work with the clients to fix price the projects so that we can get something out of it by improving productivity, etc. We can meet the customer expectations on their budgets, etc.

We can also leverage our bench offshore, so we can offer some free resources, again to meet their requirements and things to that temporarily. So we are doing many things such that we meet their requirements and we keep our pricing impact as much as possible. Of course, overall they are falling back, and that's what we are seeing. But by and large, we are trying to keep it as minimal as possible. In some cases we are tying up the increase with volume increases so they're actually seen as volume discounts.

Okay. If I can squeeze one last question in here. Bala, if you look at the lowered guidance for the full year, what's the impact of that lower pricing rate on that, say, 2% decline in guidance? Is there a portion of that that's due to the pricing versus the currency?

Well, if you look at the numbers, at the beginning of the year we said 19% to 21%. In the beginning of this quarter we said 13% to 15%. Now we are saying 12% to 13%. The reduction is mainly because of currency. The impact of pricing is hardly some 0.5%. But the balance is mainly currency. So from 19%, if you look at 12%, there is a decline of 7% -- 7% to 8%. Of that, 4% to 5% is currency, the balance was due to the economic environment. The pricing adjustment of fourth quarter is only 0.5%.

Okay. Thanks.

Okay. We'll move forward to our next question which will come from Moshe Katri with Cowen & Company.

Great. Thanks. Can you give us the revenue growth of the various verticals by constant currency? Hello?

Yes. I'll give it to you now. The revenue growth, in constant currency, BFSI 4.1% in constant currency. Manufacturing declined 3.7% in constant currency. Retail grew by 2.9% in constant currency. Telecom declined 3.4% in constant currency. The remaining segment, others grew 4.3% in constant currency.

Okay. And then, Bala, can you talk about the different moving parts that drove margins? You had a pretty strong growth in operating margin performance during the quarter.

Well, the operating margin has increased by around 2%. It was 21.9% this quarter, last quarter was 29.9%, mainly because of the rupee/dollar because the rupee depreciated by around 11% against the dollar. That gave a favorable impact of 4.7% on the margin, but it was offset by the cross-currency move of around 1%, and also a declining utilization of 1.3%.

There were some offsetting factors like reduction in the SG&A which was more than compensated by the decrease in per capita revenue. So net/net the operating margin went up by around 2%.

Okay. And then Kris, you spoke very briefly about clients' budgets. Can you -- what are your preliminary thoughts based on what clients are telling you, looking at '09, looking at overall budget, looking at the allocation for offshore?

We believe that budgets will get finalized mid-February. That's the indication we are getting. We also believe that budgets will be flat or may be down -- down maybe by maybe up to 4%, maybe 5%. The percentage of clients, they have given us an indication that offshore allocation would increase. We don't have a percentage at this point. They're just saying that please don't reduce your recruitment plans, etc., because we believe that offshore would increase and you need to be prepared for that.

So it's -- that's the stage at which we are at this point. We'll get a better picture of this probably mid-February.

Now they're also telling us that on the caution side, if things continue to be bad or worsen, even if the budgets are there, they may hesitate to spend or they may not be allowed to spend. So that caution is also definitely there.

Okay. And then finally, BFSI held up really well during the quarter. Can you talk about what you're seeing there in general, and then maybe talk about some of the recent wins? I think you've added about 30 customers. Maybe you can talk about which part came from BFSI. Thanks.

So let me ask Ashok, he's here with me, to talk about BFSI.

Yes. Thanks, Kris. So the BFSI segment, actually from a client addition perspective, of the 30 nine clients are from BFSI and this is across both the US as well as Europe. We are also beginning to see increased interest from our clients and prospects in other parts of the world, whether it is in Asia as well as in Latin America, etc.

We've seen both volume growth and, of course, pricing does continue to be a challenge. But at this point of time we are getting a premium for value-added services. And we are seeing pricing either being maintained where it was, and this is negotiation time for us, contractual negotiation time for us, so we're seeing pricing essentially being tied at a very flat level.

We are also seeing, from a -- the kind of services that we have built out and the capabilities that we have built out and the investments that we have made are finding traction and increasing traction in the marketplace, especially in the areas of corporate governance, regulatory -- risk management, compliance, etc.

Also from our product perspective, that continues to gain traction, both in Asia, as well as increasingly in Western Europe and with clients in the US.

From a budget perspective, we do expect, as Kris mentioned, that the budgets will come in around the mid-February time. And the good news there is that even though we will not be seeing increased allocations or increased dollars, the percentage of offshore companies is actually increasing. And we're very confident on the commentary that we're hearing in the market that, unlike last year, there will not be too much variation in budget closure and too much variability, but the fact that the budgets will be definitely closed, albeit the numbers may be lesser.

Thanks. Good execution.

Of the client additions, nine are in the BFSI space, as Ashok said. Six are in manufacturing, four in retail. The rest are all over. Out of this, 11 customers are in North America, eight in Europe, and balance in rest of the world. So 11 rest of the world.

Thanks Kris.

Okay. We'll move to our next question which will come from Joseph Foresi with Janney Montgomery.

Hello, gentlemen. My first question here is just the decision to take up the hiring guidance. Obviously we know that it's a tough environment out there, and it sounds like you're doing this because a lot of your potential customers have said that you might need excess capacity and not stop hiring. I wonder if you could just give us some insight as to why you wouldn't, at this point, try to do more with less.

Let me explain this. At the beginning of the year we said we'll hire 25,000 people as a target for the year. It had two components. The first component was the people who are freshers, for whom we have made 18,000 offers last year. The second component was the laterals, and the third component was the BPO. Now, as of this quarter, we already hired about nearly 24,000 people.

Part of the increase compared to the pro rata figures that we had are due to the fact that the higher percentage of people than estimated from the freshers batch joined the Company. We make a certain estimate. A higher percentage joined. Now we sat down and made a full evaluation to see what is going to be the gross numbers for the entire year. And we found it's going to be closer to 27, based upon offers made the previous year and percentage joins, based upon the lateral hires that we are doing currently, very, very small numbers for specialized skills, and the joins in the BPO.

So we are not having an additional hiring target. We are not hiring more people than required for this year. We are just coming out with a statement as to what the estimated final count of hiring will be at a gross level. That's for this year.

For the next year, our hiring is based upon the offers we made some time the previous year in the calendar year 2008 because the fresher batch is higher, nearly one to one and a quarter years ahead of our needs because we always hire in advance. So we have made 20,000 offers already before the first quarter -- closed the first quarter itself. So we had already made those offers because the college hiring starts from January, February of the calendar year, and possibly ends by about June, July.

Out of 20,000, we estimate maybe 75% out of the people may join. 15,000 people may join next year. The date of joining is going to be decided and intimated to them in a close band or otherwise, and we're going to tell them. Most of them will join at a particular point and they will not be available for billing in the next financial year because the period of training is 16 weeks. After 16 weeks they have to take a test and pass with a four out of five CGPA. If they don't get that, they go out of the Company. And right now, there are [wide] people going into the bench and not having worked, we are giving them additional training of eight more weeks.

So for the next year, if things do not improve or things do not change in a big manner, we could have an extended training session. So most of the people who join, they join at different quarters. And they may still be training. They may not add to the billable resources next year. This is what we want to explain about the hiring.

You will also realize that this quarter, including trainees, utilization is 69%. We are able to sustain or improve the margin. So our model includes the cost of training. The cost is not that very high. So we believe that we are looking at this from a long term perspective. By honoring our commitments, we're creating goodwill in the campuses. By creating this trained pool of resources, we are preparing ourselves for the future and will be able to respond faster if we see opportunities in the market. So we see this as a standard model and a competitive advantage in some sense.

Okay. Just traditionally you have linked, or at least I believe the analyst communities believe that you've linked headcount to revenue growth. So as hiring numbers have gone up here, can we expect that same link? Or is there now not a link between the two?

Traditionally, we would have planned for a utilization of 78% to 80%. The utilization is lower because growth has slowed down. So you'll have to use that factor. Utilization will continue to be lower than our optimum level for the next few quarters unless, of course, growth picks up and we are able to use these people.

Attrition also is coming down. So that will also reduce utilization. We are looking at how we can leverage this, how we can maybe take advantage of this. But right now it looks like utilization will be lower. But the costs are not too high. And we hope to sustain the margins in spite of all this.

And just one last question on the labor front. As far as -- let's assume that the outlook for next year is potentially worse than maybe some of the data points that you're getting right now, and there's not as much work for your projected hiring schedule. What is management's view as far as how to handle that? Would you be pushing out offers or, assuming things get very bad, would you look at potential layoffs?

No. Let me explain that again. Out of 15,000 people whom have joined, next year we will have an opening balance of maybe 105,000 people, 104,000 people, assuming an attrition rate of 10%, because the 10% attrition will be a normal attrition even in the worst period. Even in the most difficult period that we had in 2001, we had an attrition of something like 6.7% to 6.9%.

So if you have a 10% attrition rate, you will normally have about 10,000 people leaving over a period of time, for higher studies or whatever. Let's not forget that 20% of people who leave, leave for higher studies. And about 10% of people who leave, leave because they drop out of the workforce on account of marriage or family reasons or something else.

So a 10% attrition rate means we will have 10,000 people. That means there will be a net increase of 5,000 people. And those 5,000 people will not be billable by the end of the next financial year as per our current training schedule. So they will not be sitting idle there. So they will be in training. So I think we have found a nice balance in the target that we have set for the next year.

Okay. And just one last quick question, just maybe on the Satyam front, if management can give any of its views on customer relationships, I know you have some overlapping customers, and its view on taking business or additional business on from the potential fallout, and also employees. If you guys could just present your views. Thanks.

So we are seeing some requests from our clients. We are treating these as new requests. And we would put through a proposal, give it to the customer, the customer accepts the proposal, then we will take this forward as we would do any other business that comes our way. We are not proactively canvassing for Satyam business, for obvious reasons. It's not the right thing to do. And if a request comes, we'll take it up.

Over and above this, of course, there is some increased due diligence from our customers. Infosys is very well prepared. Whatever questions the clients have, we're able to answer. In fact, whatever the questions investors have also we are able to answer. We have increased our level of disclosure. We want to make sure that we give comfort to customers, prospects, investors, etc., about the corporate governance practices at Infosys. We have increased the disclosures, as I said.

I don't think this will increase the time taken to close deals, etc. Already the velocity of business had been impacted because of the economic slowdown. We don't see this having an impact, especially in the medium to long term.

Okay. Thank you.

We will go ahead and move forward to our next question from George Price with Stifel Nicolaus.

Hi. Thanks very much. Just couple of topics. First, wanted to understand why telecom, even on a constant currency basis, was down 3.4% if it's beyond -- if that's even beyond British Telecom, it doesn't sound like BT really moved a whole lot.

And if you could, related to that, comment on -- there have been press indications about over 1,000 employees working at BT possibly being benched in March, and the fact that you're still hiring even if that occurs. Thank you.

Hi. This is Subhash Dhar, representing the Communications business. On a constant currency basis, yes, the telecom vertical did decline. I think there's a couple of reasons for that. One is, of course, that our -- the telecom industry has very few clients which are large accounts for us. And therefore any position freezing -- that happens takes with it a bunch of revenues. There is some lumpiness in that industry, both in terms of business coming and getting frozen at times. That's one.

Second, we did have some vacation enforced in December, and in actually some of our biggest clients, which was a first. It was something we have encountered in the past but has never been enforced in the past years. But it was enforced in the year which went by. So that gave us a couple of weeks of impact on some of our biggest clients.

Okay. And if you could just comment on the press article talking about potentially benching, I think, it was like 1,200 employees at BT possibly by March, and maybe how that factors into how you're thinking about quarter over quarter growth into the June quarter.

Well, we don't know where that article came from. As it is, we don't have a policy on commenting on specific customers, but we still don't understand where that article came from.

Okay. So that's something that you don't -- I guess just ask the June quarter question, do you think you could see another quarter over quarter decline in June?

No, we expect it to be flat on a constant currency basis.

And that's an overall question for the business not just telecom.

Yes, for the business.

Okay, thank you.

All right.

We'll move to a question from Rod Bourgeois with Bernstein.

Yes, Rod Bourgeois here. We talked about pricing on the earlier call, but I wanted to clarify what you are assuming precisely in your guidance for the March quarter, and if you've got any assumptions on that and how it may play out over the next year. Are you assuming flat pricing in dollar terms or are you assuming a similar decline in pricing as what occurred in the December quarter?

So right now we are assuming flat pricing in dollar terms for Q4. The same pricing as the end of Q3.

Okay, great. And is there something happening in the market that would cause you to believe that the pricing decline will attenuate now. Is there a mix factor or some other dynamic happening where the pricing concession requests are subsiding at this point?

No, by and large we have been able to manage the pricing by giving various options and choices to our clients, so that their requirements are met, their budgets are met. And our requirement to hold onto the pricing is met, fixed pricing, by moving work offshore, by looking at the -- we have a bench anyway.

So, by giving for the short period maybe some additional resources to clients, etc. So we are able to meet their expectations and manage our requirements also. So that's what we are doing.

In some cases we are linking pricing decreases with volume growth. So volume discount is again something we do always, and so it's part of that. So we try to manage this as best as we can.

Now if the situation just continues like this, we believe we will be able to handle it better. But if the environment worsens then it could become challenging. So we have to wait and see we don't know what is going to happen there.

But from what you're seeing right now with your value approaches to deal structuring, do you think pricing can definitely be flat in the March quarter, but it's definitely a factor that you are monitoring closely? Is that the way to look at it?

Yes. We feel that we can handle the margin. We are saying the margin will be flat. We are assuming that pricing will be the same level as Q3. And then we are monitoring the situation very, very carefully.

Every pricing discussion gets escalated up to the Chief Operating Officer and the CFO. So we are fully aware of this impact. We have a portfolio approach.

So based on our ability to absorb that we take the decision. So we have a portfolio approach, we look at it company-wide, we look at impact. So it is centralized at this point. And we tightly control this.

Okay. And I think you've indicated on this topic, but I just wanted to follow up. We've seen in the last several months' kind of an elongation of decision making cycles, because of all the macro issues that are out there.

And in the last three months we've had the Satyam fiasco as well as the Mumbai terrorist attacks. Are you expecting any further elongation in decision making cycles, or do you feel like the worst is behind us on that front?

No, whatever has happened in Mumbai and with Satyam we are not seeing at this point any increase in the decision making time, etc. All the velocity of business has slowed down past September. That's when the collapse of the various banks happened, etc. That's when the pendulum swung to the other side in terms of what everybody expected the economy to do.

Until then there is hope that it may not happen. But after that, everybody decided the worst is going to happen, so the pendulum swung to the other extreme. So, velocity came down after September. We are not seeing anything different now it continues to be challenging and slow.

Thank you, guys, very much.

We'll go ahead, and move forward to a question from Trip Chowdhry with Global Equities.

Thank you and very good execution. I was just wondering regarding the H1 visas, which start to be opened again in the month of April, how do you see your needs would be regarding H1 visas? And do you see it will be same as last year, up, down? And how about the pricing on visas, and has your guidance incorporated the fee structures and the expenses related to visa? Thank you.

It considers that there is a seasonality to visa, and typically in Q1 we will have higher visa expenses, etc. that we normally factor in. Now what the visa policy would be, what the regime is, etc. we don't know at this point. All data, what we have is what you also have. And our assumptions are all based on that -- it continues to be what it is today. There is no new information we have about that.

Thanks.

Okay. Our next question comes from Ed Caso with Wachovia.

Morning. Congratulations on managing in a tough environment. A couple of quick questions here. Was there a break-up fee for the Axon deal and how much was it in dollars?

Well, we got around GBP4m which is at a break inducement fee for the Axon deal. There was an expense of around GBP1.8m. And the net GBP2.2m is shown in the non-operating income.

And the -- any license fees out of the ordinary this quarter? I thought I heard that the product business was doing well.

There is nothing extraordinary except in the tax line item. We had a reversal of $13m pertaining to earlier years. Other than that I don't think there are any exceptional items.

Anything different on your accrual for variable comp, or could you give us some thoughts on where wages stand going forward?

Well, the variable component for this quarter is similar or slightly higher for the last two quarters. There is no change there. Going forward the variable payout depends on the revenue growth and the operating margin, so that is a function of those two. At least for third quarter there is no reduction in the variable pay. It's almost similar to first two quarters or slightly higher than that.

I was curious about -- I know we are coming up on the annual wage cycle here in April, so any thoughts at this point? I assume wages have been -- the increases have been dropping. Is it looking like they are going to be flat year-over-year coming up for FY'10?

We believe that salary increases will be muted if any this year. The environment has considerably softened at this point. So it may be very much muted this year.

A final question. On the BPO business I think it was down, if I saw the numbers right. How much of that is the timing of contracts and how much of that is just sort of volumes, lower volumes that you might be doing?

I have Amitabh with me, so he will talk about BPO. Amitabh?

I am not very clear whether it was a revenue question, but if it was then, yes, the basic decline in revenues because of currency. 58% of our revenues come in pounds and euros. And if you take a look on a constant currency basis we actually grew 4% plus quarter-on-quarter from a BPO perspective.

So it's mainly because of the currency that we have got hit in a big way this quarter because of the pound and the euro depreciation against the dollar.

Thank you.

All right, we'll move to a question from Julio Quinteros with Goldman Sachs.

Hey, guys. I've just got a quick question. I realize that the constant currency growth rate, relative to the beginning of the year hasn't moved all that much but when you look at the rate of deceleration from the beginning of the year to what's projected into the fourth quarter it looks like we are finishing the fourth quarter out at roughly 5% to 9% year-over-year growth in constant currency.

And if you sort of project that growth rate out into fiscal 2010, what drivers or what are you seeing right now in the business that would actually lead to any acceleration into fiscal year 2010?

Julio, seen in constant currency terms the growth rate would probably be around 15% to 18%.

That's for the full year but for the fourth quarter it's finishing at 5% to 9%, right?

Okay, fourth quarter, okay. Now, going forward, yes, it is going to be a challenging environment. We are looking at all drivers for growth looking at what we can do.

The feeling is that if there is some stability, recovery doesn't have to really happen, but if there is some stability then customers will feel confident in kicking off some projects, and that should give us some increase in growth. So that's what we see now.

We are waiting for the budgets to be finalized. We will know by probably mid-February. That will also give us some indication about allocation to offshore. In our discussions with clients they are telling us that please don't significantly reduce your recruitment and things like that. So we'll have to wait and see.

Okay, got it. And then just a couple of quick questions on looking at the balance sheet. Can -- Bala, can you just talk to the other comprehensive losses that we are seeing? I think the other -- accumulated other comprehensive income is now negative $413m in the detail of the balance sheet for the buildup of the stockholder book -- of shareholders equity.

Can you talk about what's dragging that down, because it started -- the balance started with a positive $39m it's now down to a negative $413m. What are the drivers on that?

Can you repeat that, we were not able to completely follow the question. Can you just -- it's about the balance sheet.

On the balance sheet in the buildup for stockholders equity, the accumulated other comprehensive income entry is negative $413m.

Yes, that is a translation loss or gain because when the rupee depreciates or appreciates in a big way in any quarter that number comes so bigger, because rupee depreciated by 11% this quarter. So that is a translation of the balance sheet items at a particular date.

Got it. And then on the decline in the DSOs for the quarter, can you walk back through why your DSOs went down so much? Are you actively going after your accounts to try and collect some cash? And by the same token it doesn't appear like you are taking up any reserves for doubtful accounts. Can you just give us a balance in terms of the faster collections but no real improvement in the doubtful accounts reserves?

In an environment like this we are focused on collecting the money as quickly as diligently as possible. So there has been tremendous focus from everyone on collection and our people have done a good job. It's just that they've done a good job, that's all.

And then what about on the doubtful accounts, why wouldn't you also be taking up the doubtful account reserves?

Again, can you just repeat that, Julio?

Why would the doubtful accounts balance not be going up at the same time? It doesn't look like it actually went up for the quarter.

Are yoy saying that we are writing off more receivables?

No, no. the doubtful accounts balance. I can follow up offline, it's no problem. That's fine.

No, no, look, Julio. we provide for all receivables more than 180 days. Even for receivables less than 180 days that concerns we do provide for it. We don't have any large uncollectable receivables at any point of time.

This quarter, the DSO days basically went down because in an environment like this we said we have to go behind all customers and make sure we collect money on time, because this is an environment where people have a lot of challenges on the liquidity front.

So the DSOs actually came down because we are aggressive in collecting the money. In spite of more holidays in this quarter, our sales force went out and collected most of the dues from the clients. That's why the DSO days came down.

And Bala, real quickly, on the last quarter the implied operating margin, it looks like it was down from the third quarter just based on the comments for flat margins for the year. The level that it would come down to, just back of the envelope calculation, is something like 23% down from 31%. What are you guys factoring into that fourth quarter operating margin for it to decline so much?

Julio, for the fourth quarter we are assuming the rupee/dollar rate to be at 48.71. Remember 49.42 is the average rate for the third quarter, that is one.

Number two, in the third quarter we had the substantial benefit of the rupee depreciation. There was an impact of close to 3.7% on the operating margin because of that currency. And we had the equal amount of impact on the non-operating line item because of translation hedging loss.

So on the net level, if you look at the fourth quarter guidance, the net margins are similar to what we have seen in the third quarter. There was an operating gain in the third quarter, there was a non-operating loss, both were not assumed in the fourth quarter.

Thank you.

Okay. Our next question will come from James Friedman with Susquehanna.

Hi, thanks for taking my question. And I know it's a bit of an indelicate one, but with regard to Satyam would you see the developments at Satyam as being a net benefit or net positive to Infosys, and why?

We -- if we take an industry view, it is sad, it's disappointing, it's dismaying. Now if we take a company view, there are positives and negatives again. We have to provide additional information to our clients, they are increasing their due diligence and things like that. And if we are able to convince probably it will give you more business and more opportunities, so there is some positives also.

Okay. Mohan, with regard to your expectations on wages, is there any chance to potentially reduce wages in 2010, fiscal 2010?

I don't think there is potential to reduce wages which people get because it doesn't work that way. You must remember that 30% of what we pay as salaries offshore is variable. The offshore cost is about 15% to 16% of revenues, but 30% of that is variable. That means we have about maybe 4% to 5% of revenues as variable in the compensation. And it's not possible to reduce anybody's salary.

The second thing is that industry-wide, like Kris said, the salary increases for next year will be very, very muted. I am not sure how many companies are even going to give salary increases. Some companies are talking about not giving any increases. So anyway, in any case it will be very muted because our proceeds are very much less.

Mohan, I think many of the people on this call can confirm that it is in fact it is possible to reduce salaries. But that's an aside. Balakrishnan, this is my last question, the --

No, I think, well, there are two or three things, it depends what you define as salary. For example, if you have a salary of $100, $50 is variable and $50 is fixed. You get $50 and that $50 is variable they may not get it, so that's a large part.

But if you say the entire $100 can be reduced, we are told that it requires a contract to be changed because it's an employment contract that has to be changed, people have to be called. And I don't think we are at the stage where we need to do anything like that.

Okay. And then with regard to the use of funds, you have quite a cash hoard here it appears. Balakrishnan, I know you've spoken in the past about the relative merits of a dividend versus a repurchase, but could you refresh your thinking about that?

Well, the thinking is the same, we don't need to refresh.

By refresh I am thinking about your thinking.

What is said was between buyback and dividend, dividend is better for shareholders because taxing [bands] of shareholders in India. Having said that we want to have sufficient cash on the balance sheet to make sure that our growth is not impacted, and gives us comfort in the business.

And we also clearly define what are the return expectations in the business. As long as the returns are not impacted, we are willing to have cash to give us comfort in the business and make sure the growth is not impacted.

And if at some point of time the returns are going to get hurt, and if we don't find alternative use of cash we are willing to return it to shareholders. We have done it already three times.

You are referring to special dividends or ordinary?

Well, we have given special dividends in the last three instances. So if there is actual cash available in the system where we don't find any strategic use we will look at that.

Last question, please.

We'll move to a question from Mark Marostica with Piper Jaffray.

Thank you, it's actually Mark Zgutowicz for Mark Marostica. Just a couple of clarifications on the hiring front. Where do you anticipate net hires to finish this year?

This year the net hires are about -- we are about 103,000 and we have said that this quarter we are going to hire about 3,500. And -- I just get the ([preview] just one minute. We will hire 3,500.

That's fine -- 3,500 net hires this quarter.

Yes, we said that we'll hire about -- no, we -- just hang on for a minute. Yes, we'll hire about 3,700 gross. That is 3,700 gross. Last quarter we hired a gross addition of 5,997 and a net addition of about 2,700, so we had an attrition of 3,200 people.

Out of 3,200 people we had an attrition of about 1,750 or odd in the services business, and the balance 1,500 -- 1,400 odd in the BPO business. So the BPO business is still running at an attrition of about 30%, 31%. So the BPO may not see any net addition, and we've got 1,000 people in the BPO, or there could be a slight decline.

Even if you assume that 1,400 attrition in the services business, and maybe 1,000 in the BPO business, that is 2,500, there could be a net increase of maybe 1,000 to 1,200.

Okay. So the net of that, you had roughly 19,000 net additions in '08, is that number going to be flat or down -- or up?

Yes. I think we will have something like about maybe 18,500 to 19,000 net hires this year. And that would be about 103,000 people to end with.

Okay, good. That's helpful. And then just a further clarification on negotiated salaries. Your fresher hires next year, just trying to get clarity here, the salaries that will be negotiated will be flat year-over-year or down some number, and what would that be?

Okay, let me clarify about the data here. We ended last year with 91,187 people. Quarter three we are at 103,078. Even if you add maybe 1,000 to 1,200 people we could end up this year with 104,500. That will be about a net addition this year, overall for the Group, of something like about 13,000 people. It's not 19,000, it's 13,000. I am sorry I got the data right.

13,000? So that 13,000 is down from the 19,000 net hires last year, is that the right comparable?

Yes, yes. That is fiscal '09, fiscal '09, '08/09 we'll go up from 91,000 to let's say 104,500. And previous year we had net hires of about 19,000.

As for the fresher salaries goal, the fresher's salary for the next year is what we offered when we made the offer last year.

Okay. It's our understanding that some of these fresher salaries maybe not at Infosys, but have been negotiated -- re-negotiated at lower levels, some 10% to 20%. Is that not the case at Infosys?

No. We have made an offer in a letter to all freshers in colleges last year because that's what we need to do. And we will stick to that offer. When they come and join us, we'll stick to that offer. And the offer is not very different from what was compensation for freshers in this fiscal year.

Okay, okay. And then just a bit of clarification on visibility. I think I heard you say that you expect telecom, the telecom business to be roughly flat. I am just trying to get a sense of what gives you confidence that it will be flat year-over-year in the current quarter.

And if that has something to do with your $50m plus deal pipeline, maybe you can talk a little bit about what sectors contributed to Q3 and what you expect to see contributing to Q4?

Well, I think overall at the constant currency level we expect it to be flat is what we are saying. Was there a specific question on that?

I am just trying to get a sense of your confidence level in it being flat constant currency. Is the pipeline, the $50m plus pipeline more concentrated on the telecom side? What gives you confidence that that telecom business should be flat year-over-year?

Telecom has a few large customers. In fact, if you look at the pipeline, we have 10 large deals in the pipeline. There are two out of that which are in the telecom area.

We've not actually factored in that we will win any of those large deals at this point, because they could take anywhere from three months to sometimes nine, 12 months to close. So we have not factored that in.

It's just that we have some large relationships and a few customers only in telecom. And we have some visibility into their spend pattern, etc. and that's what gives us the confidence.

Okay.

Unfortunately, we are completely out of time. I want to thank all of you for participating in the call. If you have further questions you can contact Sandeep or Shekar, the Investor Relationship Managers in the US and India. And we will reply to all your questions.

Thank you, and see you next quarter or in between in one of the investor meetings or something like that. Thank you very much.

Thank you sir. This does conclude today's teleconference. We thank you all for your participation. Have a great day.