Infosys Ltd (INFY) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Infosys fourth quarter and fiscal 2009 earnings release 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, Lisa. Good morning, everyone, and welcome to this call to discuss Infosys financial results for the quarter and year ending March 31, 2009. I am Sandeep from the Investor Relations team in New York. Joining us today on this call is CEO and MD, Mr. S. Gopalakrishnan, COO, Mr. S.D. Shibulal and CFO, Mr. V. Balakrishnan, along with other members of the senior management.

We'll start the proceedings with a brief statement on the performance of the Company for the recently concluded quarter and the year, followed by outlook for the quarter ending June 30, 2009 and year ending March 31, 2010. 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 will now pass it on to Mr. Gopalakrishnan.

Thanks, Sandeep, and good morning, good afternoon, good evening to everyone, wherever you are. Thanks for participating in this call.

In spite of a challenging environment, we have met the lower end of our guidance in constant currency terms. Our revenues for the quarter was about -- was $1.121b. In constant currency terms the guidance would have been $1.118b to $1.159b, so we are just slightly above the lower end of the guidance.

We faced multiple challenges; growth was a challenge, pricing was a challenge and the currency volatility challenge. In spite of that, we have been able to sustain the operating margin for the year. For the quarter, the operating margin declined by 2.3%.

We have been able to continue to invest in the business. In this quarter we added about 5,000 employees. Our attrition has come down. Utilization has slightly come down; it's 74.3%. But compared to last quarter it's about 0.5% drop.

We've given a guidance of 3.7% to 5.4% decline next year. In constant currency terms it will be a decline of about 0% to minus 3%, so about flat to minus 3% decline. And in the operating margin, we are looking at a decline of about 3% for next year.

But when you look at the three challenges I talked about, growth, pricing and currency, we have sustained the margins in spite of the challenging environment. Going forward also it's still within a narrow band. Given the challenging environment, the guidance factors in a wider range, because of the challenging environment.

And we believe that the Company has managed the challenging environment reasonably well, and is poised to take advantage of the growth that we anticipate when recovery happens. And for the fiscal year 2010 we will continue to add employees. At the gross level it's about 18,000, at the net level probably about 8,000, because attrition is expected to be about 10%. So at the net level it will be about 8,000 people.

And this, again, is something which we believe we can manage. All these are factored into our guidance and our margins, and things like that. We believe that our investment into the future, our investment into solutions, IP, our investment into increased sales, we are adding another 1,000 -- hire another 100 people in sales next year. So all these will help us get growth back when recovery happens. Of course, we are sustaining the margin and we are managing this currency fluctuation very well.

At the beginning of the year rupee was at INR39. At the end of the year rupee is around INR50 per dollar. And still we have been able to sustain the margins. Most other currencies also have depreciated against the dollar and, in spite of that, we have been able to sustain the margin.

So the model is pretty robust, it's resilient and, yes, we have been impacted on the growth side, and that's because the impact is growing from the impact on our clients. Most of our clients are telling us that, of course, their budgets are lower and their spending on their supplies is lower. And that's what is causing the volume decline. Sequentially, volume declined by 1.4% and our guidance now factors in a decline because of that for the fiscal year 2010.

Now, I will hand it over to Shibulal to give you more details by the various segments, and give you more details about what is happening in each of those segments.

Let me -- this is Shibulal. Let me start with giving you some color on the demand situation. We recently conducted a survey of our 135 top clients. They account for 83% of our revenue in LTM basis. We are seeing a high level of uncertainty in the IT budgets for these clients. But we conducted the survey about three to four weeks back. At that time, only 61% had finalized their budgets.

Now, the majority of these people, the majority of the 135 we surveyed, 89% indicated decreased spending in FY '10. So that means the budgets are down for 89%. 69% said that their budgets are down in low double digits in FY '10.

Offshore continues to be of interest. 22% said that they will increase their offshore spend in FY '10. 5% said that they will increase their offshore by more than 10% in FY '10. On the same token, you have 69% saying that there will be decreased offshore spending in FY '10.

Recovery is expected to be protracted. 57% of the people who we surveyed on the accounts where we collected the information, said that the recovery will be beyond March 2010, which means that the recovery is about 12 to 18 months away. Overall, on the growth outlook for the clients we surveyed, it was down by 2%.

Where they are spending money, we are seeing that they are spending money on application maintenance, which is lights-on work. They are outsourcing and offshoring application maintenance to generate better value.

They are spending money on enterprise solutions. I tend to believe that these are programs which are multi-year, which have kicked in already, or these are programs which they are kicking in today so that they can emerge stronger in -- when the downturn is over.

The verticals where we are seeing trouble, we are seeing pressures in banking and capital markets. We are seeing pressure in manufacturing as well as in retail. Energy and utilities segment seems to be doing better. We are also expecting that there will be better spend in healthcare because of all the money going into healthcare.

Our utilization levels have come down. Our utilization this quarter is 74.3% (sic -- see press release) excluding trainees, down from 74.8% (sic -- see press release) last quarter. And this is a reflection of the demand situation. The utilization in a way is linked to demand, and this shows that the demand is down.

That is it from my side. I will hand it over to Bala to give you the financial highlights.

Good morning, everybody. We had a great quarter. Our revenues were closer to the lower end of the guidance we gave. In constant currency, we ended the quarter with $1.12b of revenue. The gross margin was 41.9%. It was 43.6% last quarter.

In this fiscal year we got benefit of the currency in the third quarter, that is, quarter ending December. We allowed the benefit to flow into the margins because we had little time to invest. This quarter, we invest.

If you look at the operating income, operating margin came down to 29.4% from 31.8%. At the net income level the margin went to 28.5% from 28.3% because, on the non-operating side, we had lesser impact because of the currency. We had only $3m of impact coming because of currency. It was higher in the last quarter.

So, overall, we met the EPS guidance. We gave a guidance of $0.55. We have done $0.56. At the end of the quarter we had $2.2b of cash and our accounts receivable days are 57 days. It was 56 days in the third quarter. Slightly gone up, no concerns. More than 60% of receivable is less than 30 days. So we had a great quarter.

Last year was an extremely challenging year, because almost all the currencies moved by something between 25% to 30% against the dollar, and rupee moved something around 26% against the dollar. So we had an extreme volatile currency environment last year. In spite of that, we are able to maintain the margins or improve on the margins. If you look at year on year, between fiscal '08 and fiscal '09, our margin went up by around 200 basis points because we are able to manage the environment much better.

We have given a guidance for next year. Our guidance assumes the revenues could decline by something between 3% to 7% in dollar terms for the full year. And in Q1 it could decline somewhere between 4% to 5%. We assume the pricing level to remain at the same level like what we saw in the fourth quarter for the rest of the -- full year next year. That means the pricing could decline by something around 6% on a year-on-year basis for next year.

We are adding 18,000 people because we are -- given certain commitments in the campus last year, we want to honor all those commitments and, plus, we'll add some laterals. And we are also investing more money in the sales and marketing, because we want to hire at least 100 people on the sales and marketing side to strengthen our sales team to make sure that future growth is not impacted.

So we assume that operating margin could come down by around 300 basis points for full year of next year because, one, the pricing impact will be there. Even if we take the average of fourth quarter to remain the same as for the full year, the pricing could come down by around 5.7% and that could impact the margin.

Of course, we will have the benefit of the rupee. At the same time, the utilization could come down. Because we are observing a decline in the revenue growth and we are adding people, that could have an impact on the margins. So, net net, the operating margins could come down by around 300 basis points for full year of next year. And the net margins could come down by around 200 basis points.

On the tax rate, I think the effective tax rate for full year of fiscal '09 was around 14.7%. It was 16.5% in the fourth quarter. We are assuming that the effective tax rate will be closer to 16.5% for next year full year because, one, we had a higher yield on our cash and cash equivalents in fiscal '09. It was 9.6%. Next year it could come down to maybe around 7% [to an extent] the tax payout could be less.

And also in our guidance we assume the currency rate as at the March end to be constant for the full year. So the rupee impact could be there, but it could be more or less neutralized by the pricing decline and also the utilization decline.

So overall we have done well. We have maintained our margins or improved on the margin in an extremely volatile economic situation and also a currency situation. And we have done well. We are ending the year with $2.2b of cash. And we continue to generate a high degree of cash, even in this environment.

I think, with this, I'll conclude my opening remarks, and now we can open up the floor for Q&A.

Lisa, we can take questions now.

Thank you, sir. (Operator Instructions). And we have a question from Bhavan Suri with William Blair and Company.

Morning, guys, or, good evening, your time. I guess a couple of quick questions. The first is what are you seeing on customers coming back and renegotiating existing deals? What's been the ramp-down of existing work?

We are not seeing existing work being ramped down. What we are seeing is that, when projects end, we are not able to replenish the work because of delays in decision making and lack of demand.

And if you look at some of -- I think you signed 37 new customers this quarter. Were average deal sizes less than what you've seen? How is that looking?

And then if you could talk a little bit about the pipe and what you are seeing on kind of the deal size and the duration of those deals?

Deal sizes are low -- smaller now. Actually, what happens is the pipeline continues to be pretty good, the deals start off as large deals, 250,000 -- and 250m, 300m etc. Then during the discussion, negotiation etc., what happens is either the scope gets reduced because the client does not want to commit everything at this point.

Second, it is possible that then suddenly they decide to make this a multi-vendor deal. And they also put these high numbers upfront so that they can get better terms and conditions and things like that. But the deal size, when it completes, when it closes, typically, is much, much lower than the starting point.

The second thing is the time taken for these deals to close. Typically, the deal will take six months. Now it will take probably nine to 10 months, so about 30%, 40% increase in closure time.

The third thing is the velocity of closure which I talked about, so that does have an impact on growth at this point.

And so, I guess, if I look at your guidance for fiscal 2010, what provides the confidence that -- is your visibility -- you've typically got it where you've had 70% visibility into your guidance. Is that still the case? And what do you think about visibility going into this year now?

So our model is still the same. We do about a bottom-up of building up the forecast. Then we -- as you said, we need visibility of 65% for four quarters out and about 80%, 85% for the next quarter. And that is the model we still use. That has not changed.

The reason why we are confident of any of the guidance we would give etc. are because the model has not changed, and -- yes, growth has come down, so that reflects the market conditions, but model is still the same.

Second, we are confident about margins etc. is because the Company has shown time and again that we are able to manage margins in a challenging pricing environment, in a challenging currency environment. And so we are confident about margins.

We still have many levers which we can use in order to manage our portfolio such that the margins are sustained. The Company is run very efficiently. It has strong customer relationships.

As Shibulal said, we are not seeing cancellations, we are not losing clients etc. It's just that they have ramped down their projects, they've cut their budgets and, hence, the volume has come down, and that's reflected in our guidance.

Great, thanks.

Our next question comes from Mark Marostica with Piper Jaffray.

Good evening. I was hoping you could provide just maybe a little better clarity on the operating margin guidance that you put out, the 300 bps. Can you talk about what gets you there as it relates to utilization, volume etc.? I am just trying to maybe get a little better clarity, maybe if you can break that out a little bit better.

We had assumed that the pricing for the fourth quarter could remain constant for the next full year, because that is what we do every year. We factor in only the known, not the unknown. So if you do that, pricing on a year-on-year basis could come down by around 6%. That could have an impact on operating margin of around 3%.

The rupee could be beneficial because last year, that is fiscal 2009, the average rupee/dollar rate was around INR46.50 or so. Next year we are assuming INR50.70. That could give a benefit of around 4.5%.

Then the utilization could come down, because we are assuming a decline in revenues by around 3% to 7% for the full year. At the same time, we are adding around 18,000 people because we want to ensure all the commitments are fulfilled. So, net net, the utilization impact could be there. So, overall, the operating margin could come down by around 300 basis points because of all these factors.

So -- just so I understand that right, so you're assuming, in that 300 bps, there is roughly a 4.5% rupee benefit?

Yes.

Okay. And then, just shifting to geographies, I'm just -- you are obviously seeing Europe come down at a greater pace than the US. I am just curious can you -- when you talk about your visibility 65% out, how does that look in Europe relative to North America?

Hello, yes, this is B.G. Srinivas. Overall for the year in Europe -- again, if you look at Europe, UK as well as the Continent of Europe, the Continent we saw significant growth, year on year 26% growth, in reported currency terms. However, the decline in the UK specific to two, three sectors has offset the growth in the Continent. For the full year the last fiscal year we added $100m in the Continent incremental revenue. So that has been the overall number.

In terms of the global, the percentage of global revenues in constant currency terms that is 25% of revenues from Europe.

Specific to sectors, as we look forward for the coming fiscal, we still see headroom and opportunities in pharmaceuticals, in specific sectors within manufacturing, including resources and aerospace, in CPG clients in the Continent Europe.

Telcom has a mixed bag; some of our clients are doing well and they continue to invest into the future. And we will still see that translating into dollar revenue for Infosys. Apart from that, we also are seeing sustenance as well as growth coming from energy and utilities. This cuts across both the UK and the Continent.

Okay, great, thank you. And just one quick final question. In your top -- of your top-10 clients, are there any clients that are indicating budget cuts in excess of the 9% average that you are seeing among your client base?

Not in the top 10. If you look at our clients, we have 135 clients, about 89% of that have said decrease and about 69% have said that maybe 10% or more. But the top 10 it's not -- in the top 10, no, and we believe the top 10 will be actually around 3% to 5%, that's all.

Great, thank you very much.

Our next question comes from Joseph Foresi with Janney Montgomery.

Hi, guys. My first question here is just -- particularly historically there's been a link between the headcount and revenues. I was just curious. You are obviously going to add people, but the guidance is for lower revenues. Can you help us reconcile that?

The reason for continuing to add people are two-fold. One, last April, before anybody saw this downturn coming, we had gone to campuses and made 20,000 offers. Remember that our Q2 fiscal 2009 was one of the best quarters we had. We saw sequential growth of almost 6%. And so we had made those offers. And right now we feel that it is important that we gave a commitment, so we need to honor those commitments and we are asking those people to join.

They will join starting July/August, and we have extended the training so the training is now almost six months long. So they will come out actually starting Jan/Feb 2010. So let's say the recovery starts and we are in a better position, so that's what we have thought.

Second thing is, net of attrition, 18,000 gross number actually comes down to 8,000. And so the impact on utilization is not that much. And, lastly, an impact on margin, yes it is there, but still it is not significant.

So when we look at our brand, our commitment, our -- the goodwill we've built with these campus etc. and being prepared for the future, we believe that this is the right thing we should be doing. And that's why we've gone ahead and done this. So, yes, we understand, yes, revenue is slightly down, that's what we have predicted, but still we are adding people.

Yes. And, on the tax rate side, what was your expectations for tax rate for next year?

If you look at the effective tax rate it was around 16.5% in the Q4, if you remove the tax reversal. And for full year it was 14.7%. So for next full year it could be close to 16% to 16.5% because, one, the yield on the cash and cash equivalents could come down. We had effective yield of 9.6% in fiscal '09. It could come down to maybe around 7%. So, to that extent, the impact could be lessened.

At the same time some of the units which are operating under the STP scheme could come out of the scheme. So, net net, overall the effective tax rate could go up somewhere around 14.7% in fiscal '09 to somewhere between 16%, 16.5% in fiscal 2010.

Okay. And then, just lastly, typically going into a year, and obviously the economy has gotten much worse, you guys have tended to be -- and going through your models maybe a little bit on the conservative side. Is that the case again this year? In other words, have you changed your guidance method at all or (technical difficulty) realistic numbers in your opinion?

No, our methodology for giving guidance still remains the same. It's a bottom-up exercise. We collect data from the field of what our clients are telling us, what they will be spending with us etc. Add it all up and we need, as we said, about 65%, 70% visibility for the next year. And, based on that, we come up with guidance.

We then also verify this with analyst reports and things like that. We have other sources of looking at this data. And then that's how we come up with our guidance. It's neither conservative nor aggressive. It is a reflection of the data we have and the model we have. It factors in that growth has come down, so that's what we have come up with.

All right, thank you.

Lisa, can we take the next question?

Thank you, sir. The next question comes from George Price with Stifel Nicolaus. Please go ahead.

Hi, thanks very much. Just piggy backing on Joe's -- one of his questions, any thoughts on the tax rate going into fiscal '11? I know that's a ways out, but going into fiscal '11, on the other side of the STPI exemption falling off, based on your current fiscal '10 growth outlook and the SEZ footprint that you see.

No, all the incremental growth could get into SEZ. But still the growth for fiscal 2010 is guided to be declining by 3% to 7%. It may not change materially for fiscal 2010. In fiscal 2010 is the last year for the STP Tax Holiday. We don't know whether the government will extend it. If they don't do it, in fiscal 2011 quite possible the effective tax rate could grow to somewhere between 20%, 22%.

I think that's a range that you've talked -- that you've thrown out at least loosely previously. Given what I think is probably, at least a modestly disappointing growth outlook now versus, say, six or 12 months ago, doesn't that suggest that you are going to have less incremental growth going into SEZs and the tax rate could actually go higher?

Yes, it could. But if you look at the SEZ revenues it was 5% of our overall revenues, and now it has gone up to 9%, 10% of our overall revenues. To that extent, the impact could be lesser. That's why I'm saying a range of 20%, 22%.

Okay. I just wanted to clarify something. There was some mention about investing more money in sales and marketing. And I think I heard 1,000 more and then 100 people more? Is it 100?

It's 100 people more for sales, 100. And the 1,000 is -- in this 18,000 gross additions, over 16,000 are at entry level and about 2,000 are experienced hires. Out of those 2,000 we plan to have half of that, about 1,000, outside the country, primarily in North America in the US.

Okay. Okay, got you. Could you talk about how your demand outlook tracked maybe on a monthly basis as you went through the quarter, January versus February, February versus March? Just to try and get a sense of how the client mindset on the year forward evolved as we've gone -- moved forward.

So we -- beginning of the year --- and I'm now comparing January to April. January, most companies had not finalized their budgets, there was confusion about the budgets, etc. Now about four weeks back it was about 61%; now we believe it's about 70% of the companies have finalized their budget. Even where they've finalized their budgets they're telling us that they will allocate money on a monthly basis in most cases and they may not spend all that money. So that's one data point.

The second is about 22% of the companies we talk to tell us that offshore will increase, but remaining 78% are saying that everything is affected, including offshore. So that's the second data point we have.

So from January to now there is some significant improvement in the situation with respect to demand.

I guess the way I was thinking about it is has there been a significant deterioration in the outlook as you -- from when you entered the quarter as to when you left it?

No. If you look at the pipeline, the pipeline still continues to be pretty robust and strong. It is just that the closure is taking much longer. As I said, previously if it took six months it is taking nine months. And the pipeline is actually pretty robust.

We added 37 clients in Q4, a similar number from Q3, so the customer relations still continue to be very strong. We've not lost any customer, no projects got cancelled.

So there are positives and negatives. The negative is cuts in budgets, maybe cut in offshore also, delays in decision making, further closures taking much longer, pricing pressure. These are the differences between, let's say, six months back to now.

Okay, last question. Pricing assumptions you're saying remains flat with levels in fiscal 4Q '09. And I guess, given the environment and given your comments about how clients are -- most clients are cutting back and rolling on a monthly basis and may not spend all of their budgets and think this could last into 2010. Is that a conservative enough assumption at that -- at this point? Why wouldn't pricing deteriorate further from fiscal fourth quarter levels?

Again, anything could happen in this environment. We have based it on our discussions and what we know today. So it is based on what we know today. Many of the negotiations, we believe, are behind us. So that -- and we have seen the impact.

Clients have reacted pretty fast to the deteriorating environment; this started somewhere in September middle. So they have reacted pretty fast. And we believe that a significant number of these are behind us. There is always a possibility that they'll come back and renegotiate; it's possible. And we have to wait and see.

Okay. Thanks for taking my questions.

Your next question comes from Julio Quinteros, Goldman Sachs.

Hi, guys. One of the things that I was wondering about, the timing of the revenue growth for fiscal year 2010, obviously, we were expecting to be down into the June quarter. When do you guys expect to see a constant currency sequential improvement in the revenue growth through the course of fiscal '10?

From second quarter onwards, a slight increase. We're predicting a slight increase, not a great increase, so maybe about 1% to 2%. That's what we have assumed at this point.

Okay, got it. And then when you look at the existing client base that you have, in the survey data that you guys compiled, did you guys get any sense on potential client share shifts away from you? In other words, are you seeing more competition in some of your larger clients, especially where it appears that there wasn't as much growth? Could you possibly have lost some momentum to wallet share shifts to some competitors?

No, we have not lost any major client or any major project. We have worked very hard at it. Of course there's some luck because, at least till now, none of our clients have completely gone bankrupt. They have been acquired, of course, and we have been also benefiting from some of those acquisitions.

So I think it's a combination of our relationship, hard work and some luck.

Okay. And then, maybe for Bala, what was the level of doubtful accounts that you guys are reserving for at this point in your AR?

It's very small. We provide for all account receivables which are more than 180 days. We also provide for receivables which are doubtful. In the fourth quarter we made a provision of around $4m. For the full year we made a provision of $16m. So it's not very big compared to the kind of receivables we have.

Okay. And then if -- I'm not sure who would be best to comment on this. But can you guys talk specifically to -- I guess I'm trying to define if there's any linkage at all between some of the backlash impact that we're seeing in terms of the political environment here in the United States, especially on some of the TARP clients.

How much of that is spilling into the longer sale cycles, or even delays or hesitancy from the clients to actually ramp-up work, just given the kind of political back-up that we're seeing right now here? Can you guys address that directly, please?

Yes, this is Kris here. We've not seen any impact till now at this point. If we look at the number of visas being applied, this is the H1 season, right, the numbers have not exceeded the limit. So less numbers of visas are being applied.

So we're not seeing an impact when -- I think Congress also put a condition that the companies who have taken TARP money should not use H1B. They did not say should not outsource. So we're not seeing an impact now.

Again, this is definitely an area where we are watching the situation. It is possible that some new regulation may come in this regard. It is possible. But in the past we have seen that the impact has not been there.

Okay. And then, just finally, can you provide some sense on what it costs you guys to carry a bench of freshers who are in training? So any sort of range as for what the actual carrying costs would be to put some money into training but not have them billed out?

It is about $5,000 per year is the carrying cost per employee, in training.

Great. I got it. Thanks, guys, good luck.

Thank you.

Our next question comes from Ed Caso with Wachovia Securities.

Hi, thank you and good evening. Following on, on Julio's question here, what steps are you taking to address the growing protectionist environment in the US? Are you hoping to hire more natives, set up more offices here? Can you give us some thoughts, please?

It will be a combination of multiple things. We have to look at hiring more employees in the US. One of the things I've said was that, out of the 2,000 experienced hires, we are looking at 1,000 outside India.

Second is shifting more work offshore. We have seen this in the past that when it becomes difficult to get H1 etc., clients actually are willing to come to India and work with us in India. So those are again some of the possibilities.

The third is near-shore centers. We have center in Canada, we have center in Mexico, so there are multiple options that we can use.

Can you talk a little bit about what's happening with Satyam and how that's impacting your business? Particularly in regard to maybe any moves on their part or others to be more aggressive on pricing.

We're glad that this issue is now put behind us, resolved. The Government of India has acted very quickly to bring in a new owner and things like that.

We have always had competition. Both companies were competition; now they're joined together. But we believe that it's not anything new. We know these companies, we've competed well and we'll continue to do well against all kinds of competition. We're -- and we have done this many times so there is a confidence here that we can manage competition.

Can you talk a little bit about any consolidation in the markets you're seeing? And particularly how maybe irrational in pricing some, say, smaller players might be at this time?

We are not seeing a significant amount of consolidation. There is some cross-border acquisition. Satyam is a case where there is some consolidation within the same geography. But by and large most of the acquisitions have been cross-border.

This industry always had a long tail. In Bangalore alone there are more than 1,000 companies registered. Across India there are more than 8,000 companies registered in the IT space.

And even in the US, except for a handful of companies who are seen as leaders in this industry, there have been hundreds and thousands of companies who have been there actually, and some continue to do well, some continue to just stay around etc. So this industry has always had a pretty long tail.

Thank you.

Our next question from Moshe Katri with Cowen & Company. Mr. Katri, your line is open. Mr. Katri, your line is open.

Lisa, let's move on to the next question.

Thank you, sir. The next question comes from James Friedman with Susquehanna.

Hi, good evening. Thanks for taking my questions. I just had three. First, about Infosys BPO. It seems like that did have a good quarter. The operating margin there was better in the fourth quarter than it was at any time prior in the year. I was wondering, Balakrishnan, if you might give some commentary about Infosys BPO's operating margin?

We have Amitabh Chaudhry, who is the CEO of Infosys BPO. I'm going to ask him to respond.

Great.

Hi. Yes, I think this quarter we did, I would say, a good turnaround, in the sense that we had a negative growth in the third quarter and this quarter we've grown by 3.1% quarter on quarter.

Our operating margin moved up, partly helped by the fact that the rupee continued to depreciate, and we've benefited from that. Over and above that, we also have been improving our utilization in a very significant way over the last couple of quarters, and we benefited from the improved utilization.

So the combined impact of the rupee depreciation, the fact that we were able to hold our prices, the utilization went up and, as we were able to manage our workforce well, we have seen obviously there is an impact of that on operating margin.

Also, please understand that the Philips deal which we did in October '07, the profitability of that deal continues to improve and we are, again, benefiting from that, and so is our operations in international centers. So that is the other factor which is helping us in improving our operating margin.

Thank you, that's helpful. If I could just ask, related to that, is Philips a top-five customer?

Yes, for BPO it is.

Thank you. And then I wanted to segue into Consulting. So that's a less sanguine subject. The Infosys Consulting division appears to have lost about $6m, $7m in the quarter. And I guess as it -- if you could share any observation. Is there light at the end of the tunnel there?

It looks to us like the fiscal fourth quarter was maybe the worst of the year in terms of the losses, because you only lost $12m for the year but you lost $7m in the quarter. So what's going on there?

The IC subsidiary has no meaning any more in the business environment. It's a subsidiary which holds a bunch of people, it was created a long time back and it is kept there because of employee contracts and various other factors. Today Consulting operates across IC subsidiary and ITL. There are a lot of people in ITL who work with the Consulting as one single unit.

So, as a Group, one has to look at the MIS numbers rather than the numbers published for that subsidiary. And the MIS numbers are very different from what you will see in the subsidiary numbers. So that -- there is no reason to look at the subsidiary numbers.

Okay, I apologize. I didn't realize (multiple speakers).

No, no (inaudible). It's just simply that today -- you remember one year back we mentioned that we have created one group by consolidating the Consulting and Solutions space. And the Solutions people were created as a separate division, ITL, and merged with IC on MIS business. But it was never moved. So it spans across the organization. And the net income is 2% to 3%, if I look at the MIS report.

Okay. And then if I could sneak in one last one about products, which is Finacle. So it looks like that generated about $45m in the quarter. So that looks like a pretty good quarter on the products -- software Finacle. What can we expect for that? It would seem like software is one of the harder sells in this environment. Is that $45m -- is that sustainable going forward or should we expect that to trend down?

Finacle is doing extremely well. Actually, it's finding good traction. Haragopal, who heads our Finacle Group, is here. So I'm going to let him answer this question. Haragopal?

Hi. Yes, like Kris said, we are seeing good traction, including in the markets like the US as well as UK. Having said that, some of the decisions are taking longer than what we would expect, including some of the decisions of Q3 spilling over to Q4.

Secondly, some of these decisions they are looking at in a staggered fashion, going in a phased deployment and which is -- it's not that whole sum transformation in one go.

So, overall, I think in some geographies we were seeing a slowdown in some of the markets, definitely is picking up. And some segments, typically the Tier 1, there aren't quick decisions as yet. But the mid-segment banks are really looking at the transformation using Finacle as a platform.

Thank you so much.

Just to add to that, Finacle has had sales now in North America, in US, in Europe, in Australia, in Singapore so it is now finding traction in developed markets. We are working with the medium to large-sized banks, so it's progressing in its level at which it's now selling.

And we are also getting multi-country rollouts where Finacle is being used as a standard. And there is a phased manner in which they implement. They implement in smaller countries first and then slowly migrate to home country. So Finacle is actually doing very well at this point.

Thank you for taking my question.

Our next question comes from Rod Bourgeois with Bernstein.

Great. It looks like the pricing environment was somewhat of a surprise over the last three months, given the changing tone on the pricing front. As a result of the pricing environment and other competitive dynamics out there, is Infosys changing its competitive and financial strategy in any way to address that environment?

In spite of selling and pricing, if you look at the actual impact it's minus 1.4% in Q3 and minus 2% in Q4. So we have handled it reasonably well. We've been able to sustain margins. And the impact is there, but it's not that much.

Having said that, we are giving our clients many more options and choices, increase offshore, fixed pricing, other pricing models like pricing based on tickets or number of maintenance requests or number of devices we manage. We also have platform-based solutions where we take the initial investment and the client pays for use.

So we are giving them multiple choices so that they can look at what they want to achieve, what their goals are and still we are able to -- through productivity improvement or through efficiencies of scale to creating a shared services model, we are able to also get the margins we want.

So we have been able to do this smartly, and the bottom line is actually the bottom line itself. We have been able to sustain the margins.

That makes sense. I guess, though, on top of that, it looks like you're increasing your aggression in investment in sales and marketing. And that may be somewhat of a reaction to the environment that we're in where you're trying to invest more aggressively to preserve your market share in the offshore market. So I guess the question there is, is the increased investment in things like sales and marketing, is that a temporary investment just for the current environment? Or is that a level of investment that is likely to reflect a more permanent part of your cost structure and it is essentially a change somewhat in your strategy?

Typically, we would invest in sales and marketing along with growth. Since growth is not there, we believe that to kick-start growth we have to invest. And in normal years, because of the growth, the percentage would not change. But here, when the growth is not there, the percentage would change.

These investments are into new areas. We want to enter new markets. We want to enter the new industry verticals. We want to look at public sector government. So there are various things we need to do on an ongoing basis, to expand the market footprint we have, the industry footprint we have, etc.

We're also investing in solutions and new services. That will require investment in sales. So there are many reasons why this is required. It's part of the plan. And when the growth comes back you will see that, as a percentage, it will drop back to traditional levels.

Are you increasing your investment in onshore relationship management type functions, to have more account management and vertical expertise local with the client?

Yes, we are. But, again, over time we will balance that. We've done this very well. Because when we do these investments we also simultaneously tweak the model so that we are able to get back the margins.

What I think we have demonstrated very well over many, many years is that, despite currency movement, despite changes in business etc., our ability to sustain margin is pretty good. And that's because we have several levers. For example, today, if we look at -- utilization has come down. Traditionally, we would look at utilization of 70% to 80%. That's just one example of the levers we still have within the business.

Are you maybe suggesting there that the 300 basis points of margin degradation in your outlook is a potentially overly-conservative outlook? You're getting over 400 basis points of benefit from the rupee, but still guiding to 300 basis points of margin contraction. So that's a pretty meaningful change in the margin structure, unless that's a highly, highly conservative outlook.

No, it is not conservative or aggressive, or anything there. It's the model we have. It's -- we said we are increasing our sales. We have reduced -- the utilization is going to be lower. And then the pricing impact will be felt.

So it's based on the data we have and the model we have, and that's what it is about. Our aim always has been to get the highest margins in our industry, or one of the highest margins in the industry. In the industry you will have a range of margins. And to get to the top end of that, that's always our aim.

It is a self-driven thing. It's not something which somebody outside is telling us. This is the philosophy of the Company always.

Well, the investment is very --

And we have demonstrated that we are able to do that. Even in BPO, if you look at BPO margins, we have again one of the highest. It's a business which was started five, six years back and, again, we've one of the highest margins in the industry. Nobody has anywhere close to that margin in BPO.

Yes, the margins are definitely impressive relative to the rest of the industry. One of the things that came up on the 4.30 a.m. conference call -- and that is Eastern time frame -- there was some indication that there might be a bit of a recovery happening in the financial services vertical.

And I just wanted to -- maybe even Ashok could elaborate on that. We're seeing maybe some stabilization where things are not dropping at the same rate in that vertical. But it's unclear to me that there's really a recovery happening. So, not to fight over semantics, but -- and without looking at analysts' reports and things that are out there, are you guys seeing a recovery or a stabilization type of a scenario there?

No. Let me explain. What we have said was, if you look at the results announced by some of the banks etc., there seemed to be some maybe stabilization, recovery. I saw some news reports where regulators comment, officials in the US saying that maybe this is the start of the recovery.

All I said was from the data we have, because based on our client survey etc., we are not assuming any recovery. We are assuming that first quarter is going to be tough quarter. It is a sequential decline again.

But at some point the recovery must happen and, if that happens, it'll be a positive. That's what I said. But there are some signs there, out there, saying that it may be a start of a recovery. I said that let's hope that it is true, it's real and it's sustained. So let's see that.

That's helpful. Thanks for the clarification.

Unfortunately, we are completely out of time. I want to thank everyone for participating in this call. Our investment relationship managers are always there to answer any further questions you have. And we look forward to interacting with you during the quarter, or at the end of the next quarter. Thank you again.

And that concludes today's teleconference. Thank you for your participation. Have a good day.