Infosys Ltd (INFY) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Infosys First Quarter Fiscal 2010 Earnings Release Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions I'd like to turn the conference to Sandeep Mahindroo. Please go ahead, sir.

Thanks, Alisha. Good morning, everyone, and welcome to this call to discuss Infosys financial results for the quarter ending June 30, 2009. I am Sandeep from the Investor Relations team in New York. Joining us today on this call is our CEO and MD, Mr. Gopalakrishnan, COO, Mr. S.D. Shibulal and CFO, Mr. V. Balakrishnan, along with other members of the senior management.

We'll start the proceedings with a brief statement on the performance of the Company for the recently concluded quarter, followed by the outlook for the quarter ending September 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 team, 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 an explanation of these risks are available in our filings with the SEC, which can be found on www.sec.gov. I will now pass it on to Mr. S. Gopalakrishnan.

Thanks, Sandeep, and good morning, good afternoon and good evening to every one of you. Thank you for joining us for this call at the end of Q1.

We have exceeded the higher end of our guidance by 3.9%. Our guidance was $1.06 billion to $1.08 billion, and we did $1.12 billion. Revenue increased sequentially by 0.1%. If course, in constant currency it declined.

Volume declined sequentially by 1.1%. It's slightly better than what we had predicted at the beginning of the quarter. Onsite volumes declined by 2.1%, offshore volumes declined by 0.6%. In constant currency terms, the revenue per employee has come down by about 1%. Utilization is slightly lower.

But given where we are, given the environment in which we are operating today, we feel we've been able to execute this quarter reasonably well. We've increased our operating margin by about 0.7%.

We've added 27 clients. We have had three large, what we call, outsourcing deals. We have won three transformation deals. We continue to add employees. We continue to invest in sales, marketing.

We continue to invest in solutions IT. We have capacity. If we see growth opportunities we can take advantage of that. And our ability to manage the margin in these circumstances gives us the confidence that we would be in a strong position.

If we look at the environment, medium to long term, we still believe in the growth story for the industry. In the short term it is going to be volatile, it is going to challenging. It is going to be unpredictable.

And that's why, if we look at our guidance, in dollar terms, we did not revise the upper end of the guidance. The lower end of the guidance reflects what happened in the first quarter. It has been increased by about $100m.

At the EPS level, for the full year, we are saying $1.97 to $2. It is a sequential decline from last quarter. And we feel very cautious in the short term, but optimistic in the medium to long term.

When we discuss with our clients they were actually probably more upbeat. A couple of weeks back, in the last two weeks, sentiment may have become a little bit negative. They also tell us that recovery will be some time in 2010, beyond this fiscal for us. So we want to be cautious at this point, and that is reflected in our guidance.

The currency is very -- currency is fluctuating quite volatile. We have benefited from currency movements, Bala will explain the details this quarter. Our philosophy always has been to take the exchange rate at the last day of the quarter and predict.

So, whatever is reflected includes what has happened in the first quarter, but it's based on the last quarter -- last day's exchange rate. And what is seen now is our forecast, our guidance, based on the current economic environment.

Now I'll pass it onto my colleague Shibulal to give you more segmentation details.

Thank you, Kris. I will just start with the pricing environment, the pricing environment continues to be challenging. We have an increase in our revenue per person this quarter 1% in reported currency. This is after a decline of 3% in Q4, the last quarter. But in constant currency terms actually the revenue per person has declined by 0.9%.

The pricing continues to be challenging. At the same time we believe that the negotiations are about -- most of the negotiations are over, at least for phase one. It doesn't mean that there will not be a second round of negotiations. That will depend on the economic situation going forward.

Utilization, 70.1% compared with 74.3% last quarter. This is excluding trainees. We have honored all the commitments which we gave to campus, people have joined.

Net additions -- sorry, gross additions this quarter has been 3,500 plus. Net addition negative actually, 900 plus. And the attrition is 11.1% which includes an involuntary attrition of 2.9%.

Client additions, we have added 27 new clients this quarter. Two of them are Fortune 500. We have 330 million dollar clients giving us $1m in LTM basis. 19 clients giving us more than $50m and four clients giving us more than $100m. Our total active number of clients is for 569 as of this quarter.

Service mix breakup, there is an increase in maintenance revenue as a percentage. It has gone up from 21.7% last quarter to 23.2% this quarter. This is very much in line with what we believe what the clients are trying to do.

They are trying to reduce their total cost of ownership of lights on work. So they are trying to convert their fixed costs to variable costs as well as do some partner consolidation, which is showing up as an increased revenue in maintenance, application maintenance. Meanwhile the consulting revenue has dropped from 25.4% to 24.4%. This is a reflection of the tightness in the discretionary spend.

As far as the vertical split is concerned most of them have remained stable. Insurance, banking and financial services give us 33% this quarter, exactly the same as what it was last quarter. There is a marginal increase in telecom, 16.9% this quarter compared with 16.7% last quarter. Fixed price has remained stable. North America is 64.7% of the revenue. Again, quite stable compared with last quarters.

With that let me had over to Bala for the financial update.

Good evening, folks. This quarter has been extremely good, much better than what we expected. In the beginning of the quarter we said we will have a revenue of $1,060m to $1,080m. We did $1,122m, because we got some benefit because of the cross-currency movement of something around $23m, $24m. This effect is due to better volumes and pricing than what we expected at the beginning of the quarter.

We had a gross profit of 42.7%, last quarter was 42%. The sales and marketing expense remained constant, and our operating income was 30.1%. Last quarter was 29.5%.

If you remember in the beginning of the quarter we said, for full year, the operating margin could come down by around 300 basis points because we want to make investments outside India, and want to hire locals in all the markets we operate. And we also want to put more money on sales and marketing.

Those investments have not happened in the first quarter. In the next three quarters we will be making those investments. And we also reconfigured those costs. So net/net for the full year, from the earlier expectation of 300 basis point drop in operating margin it could be something around 150 basis point drop in the operating margin. So to that extent the effective tax rate could go up some 17% to 20%, this is already factored in the guidance.

For the current quarter, our net margin was 27.9%. Last quarter was 28.6%. All the subsidiaries did well this quarter except for consulting which made a loss of $2.5m. Most of the other subsidiaries had turned profitable, and to some extent that improved our margins.

For the full year we have revised our guidance at the lower end not in the upper end, we revised upwards the lower end guidance by $100m. We want to keep the upper end of the guidance at the same level, because we believe that uncertainty in the environment still continues, and we don't want to go overboard.

On the currency side the rupee appreciated by around 3% this quarter. Technically it should have impacted our margin by around 1.2%. But the cross-currency movement has benefited us, so we have not seen larger impacts of currency movement on the operating margins, because the rupee movement has been offset by the cross-currency movement.

At the operating margin level we had an impact of $8m because of the currency. On the non-operating level we had a benefit of $7m, because we had a translation impact of $13m which was offset by hedging benefit of $19m. Net/net, at the net income level, the impact due to currency is only $1m.

We have a hedging position of $598m at the end of the quarter. Last quarter end we had $506m. We continue with our strategy of hedging for the next two quarters at any point of time. We don't want to go beyond that, because the volatility in the currency is huge. And if you take a long term view it could hurt us.

For example, this quarter the Australian dollar moved by around 15%, euro moved by around 5%, and UK pound moved by around 8%. So in this kind of volatile situation there is no point in taking a long term view. So we will continue to take a short term view and cover our exposure for the next two quarters.

We ended the quarter with $2.5b of cash. Our DSOs are under control, DSO days are 56 days, only 5% of receivables are more than 90 days. So all in all it was a great quarter. We want to be cautious for the full year, and that is reflected in our guidance.

With this I conclude. Now we can open up for Q&A.

Thank you. (Operator Instructions) Our first question will come from George Price with Stifel Nicolaus.

Hi, thanks very much, a couple of questions. First of all, nice results. The fiscal '10 constant currency revenue growth guidance I understand is coming down versus what was given last quarter despite better than expected volume performance in the quarter, and what looks like a reduced pricing headwind. What's -- why is that? What's changed in the view over the next three quarters to cause that?

Well, it's basically because we don't want to change the guidance at this point of time. We know by -- with constant currency it is slightly coming down from what we guided in April. But at the end of the day the uncertainty in the environment continues. Even though we have done well in the first quarter we don't want to increase our guidance in the next three quarters.

We want to wait and see how the whole environment changes, because even though there are some positive news coming at the macro level, at the macro level things have not changed much. So basically we want to be more cautious, so we have not changed the dollar guidance, that reflects a small decline in constant currency that's it.

Is that --

Just to add to that if you look at our first quarter there is a volume decline of about 1%. And since there is a volume decline we -- it's not a growth, right, so we said let us be cautious at this point. So we've given -- it turns out to be flat actually for the rest of the three quarters.

Previously we had said that slight growth in the next three quarters, now it's actually flat for next three quarters. And the net result of that is, in constant currency terms, a slight decline.

So the constant -- so the lower constant currency is primarily a volume issue. Is that just a slower than expected ramp up?

No, no. Basically we want to be cautious because there was a volume decline of 1% the first quarter. We believe that things have not stabilized in the environment, so we are more cautious about the environment, that is reflected in the guidance.

Okay. Next, Bala, if -- could you just kind of step us through the specific new drivers of the 150 bps of operating margin decline in fiscal '10? What's the new expectation on pricing impact, operating margin in the year, currency, utilization, investment that kind of stuff?

No, earlier we said we could be spending close to 300 basis points for the two initiatives which we spoke about. One is the onsite hiring in all the geographies where we operate. Second one is increased spending on sales and marketing.

In the first quarter we are not able to spend that because it takes some time to spend money. So in the next three quarters we could be spending that and it could spill over to next year.

We also reworked that cost, based on the current realities, and the revised expectation is the impact would be around 150 basis points on the margins.

On the utilization side we are still going out with the 1,800 hiring, which we said in April, so utilization could come down for the full year. We are keeping the model ready, we are keeping the people trained so that if there is a turn in the environment we will be better positioned to take the growth.

Onsite/offshore mix we are assuming same level of first quarter to remain for the next three quarters. Normally our guidance assumes the same pricing level what we see in the earlier quarter for the rest of the year. So whatever pricing level we saw in the first quarter we assume to remain constant for next three quarters in our guidance.

Currency rate we normally take the quarter-end rate and assume that to be remaining constant for the rest of the year, because these are variables which we don't know how is going to move. So all those factors are reflected in the guidance, and the revised guidance fully reflects all these assumptions.

Yes, but typically you can break those out in terms of the basis point either a hit or benefit to the delta and operating margin, to get us to the delta and operating margin. Can you do that for us based on the new assumption?

Those assumptions remain, for every 1% utilization there will be a 40 basis point impact. For every 1% movement in rupee/dollar rate there is a 40 basis point impact on operating. Those assumptions remain the same, but the variability will be the percentage of those.

Okay. When you say the investment cost or the costs of the investments you intend to make have been reconfigured, obviously they are lower. But can you give a little bit more detail as to why they are lower? What investments you are not ultimately making?

That will be too much of detail. There are two initiatives, which we reworked the costs and also it got deferred for the next two or three quarters. And the overall reduction is the 150 basis points.

Okay. I guess last question on the investments, how should we, as you go forward, how should we think about they are going to impact margins on a quarterly basis as we move through fiscal '10? Are investments going to be more weighted to the back half of the fiscal year? Are they going to be relatively evenly distributed? Any color along those lines?

We have given you the margin figures and the EPS figures so it is reflected, and we've given it for the next quarter also. So it is there, the numbers are there actually. Bala, you want to add anything?

No, we have given the guidance for this year. What will happen for the next three quarters is already factored in that. What will happen next year we'll say somewhere in April next year.

Okay. Thanks for the clarification.

We'll go next to Ed Caso with Wells Fargo.

Hi, good evening, good morning. My question -- I am just trying to get some clarification on the higher tax rate. Is that because your -- with the flat revenue assumption that means less work is going to [SECs] and you having some of your STPI facilities hit their 10 year targets, so -- because of the lack of growth you are sort of having a mix problem with your tax rate? Is that the right interpretation?

No, tax rate normally changes for -- more revenues come out of that tax holiday. This year some of the units are getting out of the tax holiday. When we gave the guidance we assumed the margins to come down by around 300 basis points, prediction the tax also was less that's why we said 16.5% to 17%.

Now the margin is going up by 150 basis points from the earlier assumptions, so the effective tax rate could go up by around 2%. So it could be in between 19% to 20%, we assume 20% because it depends on the growth.

If the incremental growth comes in that could go (inaudible). We have to see how much of incremental growth is going to come out and mix is going to change. Right now I think it is safer to assume 20% because the margins went up and the effective tax rate has to go up.

My other question is on the H1-B visa issuance. I believe you've dramatically reduced that number this quarter versus a year ago. What kind of expense implications did that have in the June quarter?

And so the demand is flat at this point, in fact volume came down a little bit. And so our needs for additional visas have also come down, and that's the only thing.

And we also knew, or we kind of anticipated that the quota would not get filled up because the demand is low. And in fact the quota has not filled up. I think I am told that the number of visas applied is about 45,000 out of the 85,000 or so.

So we felt that we could do just in time if need be, and so we did not apply for the number normally we would have applied. We have sufficient visas at this point and that's really not a concern.

Bala, what's the financial impact in the quarter?

Well, the visa cost has come down. Last year first quarter, I think, we had some $15m visa costs. This quarter I think it's around $4m, $5m.

Thank you very much.

We'll go next to Mark Marostica with Piper Jaffray.

Hi, it's actually Mark Skitovich for Mark Marostica. Just a follow up to an earlier question about the reduced investment, I am just wondering if this sort of parallels with your slightly more cautiousness for the year. Simply put are you reducing your investments because you are just not seeing a return there?

And then could you also talk about what the mix of that 150 bps will be broken out between investment outside India and the selling and marketing line?

We are cautious at this point. We are very clear there, the environment continues to be challenging, and we are cautious. We want to make sure that, of course, the investments give us returns in the medium to long term. We don't expect it to give in the short term.

These are sales investments. These are the recruitment in the market, so all these are actually outside. In India we have already factored in 16,000 people and that's all factored in, lower utilization that's factored in.

So these are primarily outside India. And we had, in the beginning, said we would recruit about 100 people onsite, 1,000 people outside India. It is taking more time for us. As Bala said, some of this is getting shifted may even get shifted to next fiscal year. So that's partly the reason.

Second is we continue to run the business as efficiently as possible. One of the other examples we just now talked about is the visa and things like that. So we make sure that we keep our expenses under control, and we will continue to do that for the rest of the year.

And so we recomputed all that, and there are quite a few items here and that is the reason why we are not breaking these things out. And we will make the right choices as we go along this year. If we feel comfortable that we can accelerate growth by recruiting more aggressively we will do that.

Okay, fair enough. Utilization I think last quarter you'd mentioned for the year you expected it to be down roughly 500, 600 basis points. I am just curious, are you still looking at that target which would put you at around the 68% level? And if so, what quarter do you see a bottom on the utilization front?

We have involuntary attrition that has gone up by 1%. Our overall attribution is 11.1%. In fact for the first time in many quarters our overall employee count has come down this quarter by 945.

So, yes, utilization is going to come down, but to a certain extent it is going to depend on attrition it is going to depend on volume growth and things like that. We are -- we need to recruit in certain services, for example BPO, we have to recruit at this point.

So there are certain areas we need to do the recruitment because the business is there, growth is there. So utilization will depend on that.

Second, we are also extending training. We want to make sure that given that there is slack we train our incoming batch properly. So utilization will come down. Is it going to be exactly 68%, somewhere in that range, somewhere in that range it will be. It may be even lower than that actually for a brief period.

Okay, great. Thanks very much.

We'll go next to Joseph Foresi with Janney Montgomery Scott.

Hello, gentlemen. My first question here is we've heard some early signs of a movement towards stability. I wonder if you could be clear. Are you seeing this -- it sounds like on the macro side of things you are seeing some movement there. And how do we reconcile that versus your cautious tone?

Yes, so this is Ashok. Relative to about six months ago we are definitely seeing a lot more stability if you will. But there is a lot of contradictions from a macroeconomic perspective. The data is leading us to believe contradictory things actually, let me put it that way. And some of that is actually getting translated into client behavior as well.

So it is true that we are seeing some amount of client traction. Conversations are getting converted into transactions. But at the same time we are also seeing -- we are not seeing any change in the amount of due diligence or the fact that sales cycles are still very long, and that decision making is happening at the top of the house.

And also recent data is also creating some amount of hesitation as we see from our clients, whether it is increasing delinquencies or the other macroeconomic environment. And we are continuing to see forced attrition from our clients of their employees.

So a combination of all these things. In spite of the fact that we have shown reasonably better numbers this quarter, we want to be cautious because it is a little difficult to look out and see how this is going to pan out. We hope it will pan out in the same fashion that it did in the quarter that just preceded us, but we cannot be sure, hence the caution.

Okay.

And just to add to that actually, you see, if you look at technology analysts' predictions they said that the beginning of the quarter IT spending will be 3% to 4% down. Now actually they have revised it to 6% to 11% down.

So, maybe if all our clients they have not changed their stance about when they expect recovery to happen. Most of them said beyond March 2010 that means beyond this fiscal year. Technology analysts have predicted a downward trend in IT spending.

I saw some financial analyst reports also which said the same thing saying that IT services spending will be muted and most companies will conserve cash and will really look at -- maybe keep the lights on, as Shibu says.

We have seen a dip in discretionary spending and application development has come down. Our enterprise solutions consulting has come down slightly. So we have factored all these things in. We have several data points and there are some positives but enough negatives to tell us that we need to be cautious at this point.

Okay, that's fair. Shibul, you talked about completing pricing and that you are through phase one but there could be a phase two if I understand that correctly. Maybe you could just talk about what phase one entails. And then what would cause there to be a phase two, and if there would be further price decreases, because it sounds like initially you thought it was 6% down this year and now you think it's 5%.

So what we meant by that is one round of price negotiations are over, one round is over. And potentially, we are not saying that it will happen, potentially because the clients are saying that they may come back, if the environment becomes worse they may come back. So potentially there could be other rounds. So -- see that's the uncertainty in this environment. There is a little bit of unpredictability in this environment.

At the beginning of the quarter we said we expect revenue per employee to drop by about 6% this year. But now that we have better information, we have seen one quarter, we have seen the impact, we've have changed it to 5% so that's the current prediction for the year in terms of revenue per employee.

Okay. And then just lastly here maybe you could talk about -- so what -- again you talked about some key factors it sounds like polling your clients is where you are getting most of your data from.

But in your conversations with your clients what would generally be the correlation that would drive things down lower? Would it be continuous economic instability or is that just correlated directly to the economy in general?

See, clearly the ability of clients to forecast and control their own revenues that's what drives it. It's all driven from the CEO downwards. If the CEO sees that their revenue dropped by 20% there is an immediate cut on expenses by 20%, staff by 20%. This is in the US of course, Europe the way they've handled these things is slightly different.

So, it is CEO down. It is their ability to forecast their revenues. It is their ability -- if it's a growth they see, the impact on their own business. So it's really driven top down. And IT departments and various business functions react to that actually.

We have had clients tell us that in March/April, etc. their ability to forecast was one of the lowest in recent memory. They had absolutely no way to forecast their revenue. May/June we got the feedback saying that we're feeling slightly better.

But in the last two weeks that Ashok already talked about again there is some slight, let's say, tentativeness again. So this is the uncertainty we are faced with today. And nobody is able to give the comfort. And then we read all these economist reports, analyst reports, etc. And so we felt that we have to be cautious at this point.

If we look at cross sectors, manufacturing, retail clearly they are going to take much longer to recover. So there are sectoral differences. There are overall economic impacts, our client surveys. Lots of data points actually, and we have tried to look at all of these things.

And as I said clearly the negatives at this point outweigh the positives. Even though we had a good quarter we felt that we cannot change the guidance at this point, and that's why we left it at this point. And then, of course, -- then you start back calculating from that guidance various other parameters and you get the rest of the numbers.

A very complete answer, thank you.

We'll go next to Moshe Katri with Cowen and Company.

Thanks. I think BFSI was sequentially flat for the quarter and telecom was up, I think 1% or 2% for the quarter sequentially. If we focus on -- talk to us about trends in both of these important verticals, talk about bookings for the quarter, project ramp and pricing? Thanks.

You were breaking up a little bit but from what I caught you are asking about BFSI trends and pricing situation. So let me actually give you a quick update on BFSI. So basically BFSI was fairly flat this quarter as compared to the previous quarter. We have, in the BFSI space, we've actually, of the 27 new accounts that we have opened this quarter, nine of them are from the BFSI space equally distributed in the US as well as in Europe.

We are beginning to see some traction in a variety of areas, especially around productivity improvements, efficiency, projects on agility, etc. Some programs, etc. have started and we're in active conversation on post-merger integration work, not as large as we thought we would see. But even then we are seeing some of those programs start. We're seeing a lot of work on consolidation. We're seeing a lot of work on elimination of process duplications and replication, a lot of work on, as I said, agility and process improvement.

Specifically, we are being invited increasingly to areas where we were not being invited. And I mentioned post-merger integration as one of them.

We are seeing a lot more traction on some of our platform-based solutions, especially in the payments area. We are seeing opportunities in the replacement of -- excuse me, replacement of legacy transaction systems, especially in core banking. We're seeing some opportunities in securities trading and processing, wealth management, an area that's been of -- has been a forte of ours, we've seen it there. We've seen activity in our risk management and compliance solutions, especially on internal audit. And I also mentioned the post-merger integration and consolidated IT cost reduction opportunities in certain lines of businesses and in certain geographies.

We're also seeing increased traction, if you will, in new geographies which are typically not our areas of strength, especially Nordic. We've seen some traction in Continental Europe, in Australia, as well as in South Africa.

As regards pricing, we -- as Shibu had mentioned earlier, we do believe that most of the price renegotiations are behind us. So the slice to procurement that happened at the beginning of the quarter, and there was a little bit of an overhang into the quarter as well, that is over. But having said that, we do not eliminate the possibility of revisit in certain cases to that. The pricing, but our pricing, having said that, our pricing continues to command a premium as we understand from our clients as well as from the industry analysts, continues to command maybe a little lower, but command a premium over the pricing that our competitors are charging.

And then telecom had a slight uptick sequentially for the first time since the September quarter of last year? Can you talk about what you're seeing also on the telecom side? And I noticed also that your -- this customer fell as a percentage of revenues by about 100 basis points. Thanks.

Hi, this is Subhash Dhar to take the telecom question. So in telecom we did see a slight increase, although it's more like a flat revenue this time. And then basically this is because of revenues coming from certain clients, balancing out some of the fall which we may have had in other accounts.

As you know, telecom business is quite lumpy for us in terms of revenue per customer. It tends to be pretty high, the revenue concentration. And therefore decisions or slowness of decisions by even one of those clients can create some of this unevenness across quarters. So I wouldn't read too much into this quarterly number. I think the overall trend is that the telecom demand has not been seriously impaired in this downturn. However the main issue has been the slowness of decisions. And that is the main concern area for us in telecom.

I didn't quite catch your last point. Was it a separate question or was it the same?

No, I was just saying, you mentioned that your -- the revenue contribution from your largest clients, and I'm assuming it's a telecom client, declined sequentially during the quarter.

Yes --

One last question. Sorry, go ahead?

No. Yes, I agree. Go ahead.

One last question. China. You mentioned that the China operation lost -- sorry, not China, the consulting segment lost more than -- a bit more than $2m during the quarter. What sort of estimates or [particular] factor in terms of profitability of this unit for fiscal 2010?

And then can you also give us an update on your operation in China? Thanks.

The consulting subsidiary is a category reporting. And so don't look at it too much because consulting overall is split between the parent and the subsidiary. And overall consulting is doing well. It is profitable. They have actually a higher utilization than overall company and doing well, actually. They have, if you take combined entity, their margins are pretty good actually, about -- in the transformation business they're working on, their margins are better than company average. If you just take consulting alone, their margins are a bit closer to 68%, actually.

So overall consulting is doing okay. China is still incurring a very small loss. We have now multiple, multinational clients. Most of the clients we are working out of China are multinational companies who are entering into China. The number of employees is about 1,000. And we're happy with the progress we're making in China.

Of course, our foray into domestic Chinese market is yet to yield results. But clearly we are in the right direction in China and we -- we're happy with the progress we are making. The quality is very good and they are at the highest level of the capability maturity model already. And the quality is pretty good.

Okay, thanks, congratulations.

We go next to Ashish Thadhani with Gilford Securities.

Yes, good evening. I have a question on visa legislation, specifically the 50/50 provision. Can you describe what a worst case scenario might look like for Infosys in terms of disruption or costs?

It is very difficult to paint a worst case scenario. Let me try. A worst case scenario would have to be that the law comes into place and it is effective immediately. If it is actually -- if it gives some time to companies to meet their targets, let's say six months, a year, to meet their targets, or if it's only for new visas, etc., the impact is much lower. And it gives us the time to adjust to that. So what we would have to do is recruit additional people and bring back some of the existing people, replace them with people hired locally in the market. And there is a [blatant] cost temporarily because there is an overlap between the two teams. But then when it reaches to this state, offshore would probably increase slightly, onsite will come down. Onsite teams will be mostly -- about 50% will be hired locally. And it will come to predicted after that. So that's the scenario, it's most likely, if it really goes through.

But given that the quota is not through, I don't know where it's going to go on an [blended] cycle. It's really not clear at this point which way it is going to go. And again before this all happened, we had been recruiting in the US and we continue to recruit in the US. This year also we have said that we will be recruiting about 1,000 people. We are adding sales capacity in the US. So we continue to recruit in the US both at experienced level as well as in colleges. So we continue to recruit and we'll have to wait and watch at this point.

And based on your analysis of what the temporary interim costs might be, is there any way that you can put a boundary around that? Or quantify it?

No, we have not attempted to do that. We may have to recruit maybe about 2,000, 2,500 people to meet the numbers, or we have to acquire a company. We can also acquire a company. So we may have to do something like that.

Okay. Thank you very much, nice quarter.

We go next to Julio Quinteros with Goldman Sachs.

Great. Just to start off quickly, on the margin trends and also the earnings trends. Typically the seasonality for September quarter tends to be flat to up when we look at margins or earnings expectations. But it looks like even this quarter, when you go into the September quarter, the expectation based on the implied earnings is that we would actually see a down tick in earnings. What is driving that? Because typically it seemed like September has been one of your strongest quarters.

Julio, we are considering this as an extraordinary year. We never had any year of zero growth, right? It's an extraordinary year. And uncertainty continues to be very high. I really just now read the Goldman Sachs report where you said, the report said that IT services and offshore, you're quite negative, actually. So just now I read that report. So we read all these reports, and we are also concerned. So we felt it is better to be cautious.

Got it. And then when you look at the margin build-up, I think when we had some numbers last quarter, I guess this question's more for Bala, we walked through some scenarios in terms of how much you'd get of a benefit from rupee. So the rupee was going to benefit you 450 basis points. And then you told us that pricing would be down, through 250 to 300 basis points. And you told us that utilization would be a drag of 200 to 250 basis points. Along with that you told us that reinvestment and sales in marketing would also be a drag of anywhere between 200 to 300 basis points. The change in your guidance this time around for the operating margin assumption is purely the reinvestment in sales and marketing? Is that what you're suggesting?

You're right, Julio, it is basically the change in the investment because we talked about two investments. One is on site hiring, second is sales and marketing. So those things we're not able to spend in the first quarter, that would get spend in the next three quarters. So to the extent there is some correction in the spending.

And number two, we also reworked the cost, and what all the savings are 150 basis points.

Okay. And can you just clarify the cross currency benefits? Historically, we had only worried about the rupee and the rupee impact to the margins. But obviously with everything that's going on now with the pound and the euro, etc., some of those things are working either with you or against you. And I didn't understand what you were trying to suggest about how much those other currencies either helped or hurt relative to what the rupee was doing in the current quarter. Can you lay that out a little bit more clearly, please?

Yes, life has become tough with the cross currencies. Because earlier we had to worry only about rupee/dollar, now there are multiple currencies which are moving up and down. Here, most of the European currencies are (inaudible) against the dollar during the quarter. When you (inaudible) our reported dollar revenues looks good. And to some extent the benefit flows into our margin. So this quarter, we had a 3% appreciation in rupee that could impact on the margin by around 1.2%. But we had that cross currencies moving in our favor. It more or less offset the impact.

It's very difficult to put a number for a cross currency like the Indian rupee. Because rupee/dollar for every 1% move we can quantify it as a 40 basis point impact. Cross currencies are difficult, because each one moves in different directions. For example, Australian dollar appreciated around 15%. UK pound appreciated around 8%. Euro appreciated about some 5%. So under that sort of currencies and the percentage of revenues coming from those currencies also vary. So very difficult to put an exact number for the cross currency movement.

Okay. So the 3% rupee change would have been a 1.2%, I think, were you seeing a drag or a benefit?

What I said was, 3% appreciation of rupee could have impacted the margin by around 1.2% (multiple speakers)

Negative?

Because of the [eventual] movement of cross currency.

That would have been a negative drag, right?

Negative.

Yes, negative.

Got it, okay. All right. And then the other parts, so there's a lot of other noise so it's hard to quantify this, so I got that. And then I guess, just to be clear on the reported, sorry, the constant currency assumption. At the beginning of the year we were thinking a range of constant currency flat to down 4%. And you're now saying constant currency is going to be down 3% to 4%. Most of that is, I think you guys have explained, it's just you're being cautious, the environment stinks and we did write a report saying that things are still pretty bad out there. So I agree with you guys that it probably makes more sense. Is that -- but that is correct, that the cross currency number is moving towards the lower end, is that correct?

Yes, constant currency is minus 3% to minus 4%, yes.

Okay, got it. And then I guess just lastly, just one of the questions I was being asked, and I'm looking at the metric sheet that you guys provide. On a quarter-over-quarter basis in constant currency terms, it looks like the only vertical that improved, from what I can tell, is BFSI, but manufacturing, retailing and telecom all seem to be actually doing worse on a quarter-to-quarter basis when I look at the vertical constant currency breakouts. Is that -- is this the worst? Is the worst behind us? Or are you still assuming that some of these other verticals could stay squishy?

And I guess related to that, just my last question, is the telecom client done, that has been decreasing, is it done, showing the atrophy? Or could you guys still see more pressure there?

So when you look at industry verticals, we believe that manufacturing, retail, etc., would take much longer to recover. Having said that, there are specific clients who start spending early. And we may see some of that also. They may in anticipation of recovering stock, retailing (inaudible) also. And we may see some of that. Then we may see a better growth on one of these sectors.

But generally we feel that manufacturing and retail will take much longer to recover. Telecom, because they had gone through a downturn in 2001, probably the memory's quite current, seem to be handling this better. BFSI has reacted very quickly, has also got help from government. So -- and this is all North America. Europe is a very different behavior, actually.

Then the second part of your question --

Yes, the telecom client, do you guys think he's done -- or is he still shrinking?

I think -- we want to retain all our clients. We have good relationship with all our clients. It has declined. We hope that at some point it will start growing back again. And our endeavor is to continue to work with all our clients and there's nothing else at this point. Different companies are affected differently, they spend differently, they look at their partners differently, all those things. It's just that this quarter we have no $300m plus client, that's all. There's nothing more I would want to say here at this point.

Okay. And then, I'm sorry, just -- I have one last one. The headcount decline this quarter, I think that's the first time I've ever seen you guys actually have net headcount adds go negative for a quarter. But I think you're still saying 18,000 adds for the year. Is that a -- that's a gross number, correct?

That's a gross number. Involuntary attrition go up by 1%, in this quarter the involuntary attrition is 2.9%. If you exclude that actually attrition has come down by 1% this quarter. And overall 18,000 gross and first quarter we had about 3,500 odd gross number. And so we are looking to hire about 5%, 5,500 in the second quarter and 18,000 for the year. That number, overall number, has not changed.

Got it. Okay, guys, thank you very much. Good luck.

We go next to James Friedman, Susquehanna.

Hi, thank you and congratulations on a good set of numbers. I want to ask first about the BPO operating margins. I don't know if Amitabh is on the line, but they nearly doubled to 18%. And I was just wondering to what that might have been due? And was that contemplated when you gave the original guidance?

We had contemplated meeting these numbers when we had given the guidance originally. Of course, there's been a small margin improvement by about 1.3% as compared to budget and this is because of the cross currency movement which has been in our favor. So overall when we had given the guidance for this year we anticipated that we would be meeting a profitability of approximately 20% on overall basis. And we are in line with meeting that target.

Okay, thank you. And then I had a question, Bala, with regard to the unbilled revenue. So the unbilled revenue seems to have risen both in absolute terms and as a percentage of revenue. Historically I thought that that moved in concert with fixed price contracts. But they actually declined. I'm just trying to understand why it was that unbilled might have moved up if fixed price moved down?

Well, the way to look at it is you have to see the net of unbilled and unearned revenues, that normally, the incremental movement is something around $10m to $20m. That is what happened this quarter also. Especially the unbilled revenue would have gone up slightly because of the currency factor also, because the dollar declined against European currencies. So if some of the fixed price contracts are denominated in European currencies, the dollar value of that could look higher this quarter.

Yes, okay, that makes sense. My last thing is to Bala. I guess the subtext to some of the questions on this call seem to be that you may have sandbagged the guidance, both for this quarter and for what remains for this year. One question I had was with regard to the onsite offshore mix. Because your onsite offshore mix came down actually about 100 basis points which, I realize it takes a while to spend what you had contemplated in your guidance, but that number in particular seems more mechanical. I guess -- and because of the related visa costs and the profitability profile, that does seem to be potentially an important margin factor. I guess, my question is, with regard to onsite offshore, what are you contemplating now? Are you moving more people here or there? What is the overall trend for the year in the onsite/offshore mix?

In our guidance we have assumed the same level. When we negotiate with clients, clients want lower costs, etc. One way to give that to them is to bring more work offshore. So slight, don't read too much into a quarterly number, but yes, there is some benefit to clients, some benefit to Infosys if we do more offshore in this environment. That's one factor that is driving it. But quarter upon quarter there will be some small variations. It may depend on -- there is reduced development work now, discretionary spend is lower. So it's possible that some of those people have come back. So that's where it is right now. It's not a trend yet, and let's wait for more data points in the future quarters before I say we are definitely moving work offshore.

We're also going to recruit onsite. That we've already stated. And hence some of those costs are going to go back into the model over the next three quarters. So that's where we are.

Unfortunately, we've completely run out of time. Our Investor Relationship Managers are -- Sandeep, Shekar, etc. -- are in touch with you and so they could answer any questions or arrange calls with us if need be. And let me again thank you all for taking the time to interact with us. Thanks, and look forward to interacting with you during the quarter or if not, at the end of next quarter maybe I'll see some of you during the quarter also. Thanks again.

That concludes today's conference. We thank everyone for their participation.