Infosys Ltd (INFY) 2010 Q2 法說會逐字稿

Ladies and gentlemen, good morning, good afternoon, good evening and welcome to the Infosys second quarter earnings conference call. As a reminder, all participants' lines will be in the listen-only mode and this conference is being recorded. There will be an opportunity for you to ask questions at the end of today's opening remarks. (Operator Instructions).

I would now like to hand the conference over to Mr. Sandeep Mahindroo of Infosys Technologies Limited. Thank you and over to you, Mr. Mahindroo.

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

We will start the proceedings with a brief statement on the performance of the Company for the recently concluded quarter, followed by the outlook for the quarter ending December 31, 2009 and year ending March 31, 2010, after when we will open up the call for Q&A.

Before I pass it on to the 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 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.

We had another quarter of good performance, all round good performance, across all aspects of business, supporting our customers on the employee side as well as how we manage the business. We have seen good performance this quarter. We added 35 clients. The top 10 clients grew 5.9%. Our customer satisfaction has increased even in these tough times. We do a customer satisfaction survey and satisfaction has increased.

We have exceeded our guidance at the upper end. Revenue increased sequentially, volumes increased sequentially, pricing stable, utilizations improved. We have been able to transition some work offshore, so offshore has increased. We were able to sustain our operating margin, slightly improve. And we continue to add employees. Compared to last quarter, there is a net increase in employees this quarter. On the EPS side, we've exceeded again our guidance. Against the guidance of $0.51 we had $0.56.

Overall, when we discuss with clients, they feel that the worst is behind us. This is the second quarter where we are getting that signal from our clients. And of course we will have to wait for the next budget cycle to see how this is going to be sustained over the next fiscal year. But definitely we feel more confident about the current situation. We have increased our guidance for the rest of the year. We've given a compensation increase for our employees. And overall, all (inaudible) has had good all round performance.

Let me now pass it on to my colleague Shibulal, to give you more data on the segmentation and things like that.

This is Shibulal. As Kris said, the demand environment has stabilized. We are seeing customers willing to talk to us, discuss spending and projects. At the same time, we are also seeing the customers being very cautious and that is understandable given the environment.

We are not expecting a budget flash at the end of this year. Even though they have money left, we believe that the customers will keep it. We at this point expect the budgets to be flat or slightly higher next year.

We have had good client wins this quarter. We've added 35 new clients, three of them in Fortune 500. That makes the total number of clients in the Fortune 500 for us to 112. 330 customers give us more than $1m on LTM basis. Our top client is today 4.6% of our revenue. Top 10 clients give us 26.2%. The growth has been all around. The top 10 clients grew by 5.8% and the remaining clients, the non-top 10, grew by 1.8%. So the growth has been all around.

From a vertical perspective, we have seen better traction in BFSI, retail and energy and utilities. Manufacturing is lagging behind and we believe that makes sense. In BFSI segment we are working with five clients on their merger and acquisition related technology work. We are working on system integration opportunities related to the mergers and acquisitions in these cases.

From a service perspective, we are seeing better traction in business process management, infrastructure management and in system integration. System integration I believe is -- as I said, is a result of the M&A related work which we are doing in the financial services. Consulting and package implementation has come down marginally this quarter.

From a geographic perspective, US has gone up and Europe has marginally come down. Europe is definitely lagging behind in stability. This is as usual, because even on the downturn I think Europe was lagging behind.

We have added 6,000 people this year -- this quarter, net 1,500. We have increased our recruitment for the year. Now the recruitment for the year is 20,000 and this is in comparison with the 18,000 number which we gave you last quarter. The 2,000 additional people will be in BPO and in lateral recruitment, in ITL.

Our DSO is extremely healthy. It is 56 days. Last quarter was also 56 days. The DSO above 90 days is 77.9%.

So, with that, let me now hand off to Bala to give you the financial details.

Good evening, everybody. Good morning to some of you on the call.

This quarter has been extremely good. We have seen revenues increasing by 2.8%.(Sic-see press release) In constant currency it grew by 1.2% because most of the major currencies have appreciated against the US dollar. For example, Australian dollar appreciated by 10%, UK pound appreciated by 6%, also the euro. So we have seen the constant currency growth at 1.2% for the quarter. The volume growth has been 2.3% and offshore volume growth at 3%. That is very good news.

Pricing was stable. It increased by 0.4%. But in terms of constant currency, it declined by 1.1%. The gross profit slightly went up during the quarter and also the operating margin. Operating margin went up to 30.3%. We guided for a $0.51 EPS and we did $0.56.

So the DSO days are 56 days. The collection has been extremely good. The quality of receivables is extremely good. We are ending the quarter with $2.8b of cash.

As far as guidance is concerned, we revised our guidance to reflect the current environment. For the next two quarters, the upper end of the guidance assumes 1% revenue growth. We have increased the hiring guidance from 18,000 to 20,000. We are going to hire 2,000 more, mostly in the lateral with experienced people, because we have enough freshers in the system. And we need to build a middle layer and keep the model ready for growth when the growth comes in.

The top 10 customers grew by around 6% during the current quarter, which is extremely good. In constant currency terms they grew by 3.5%. Almost all the subsidiaries have become profitable. They are contributing positively to the bottom line of the Group, except Brazil, where -- which is still in a growth phase, investment phase.

Our guidance for the next two quarters assumes some 1% sequential growth in revenues, at the upper end of the guidance. For the next two quarters, the margins could get impacted because we have given a wage hike. Starting October 1, we increased the wages in India by 8% and outside India by 2%, which will impact the margin by 2 percentage points.

So first two quarters we have seen incremental positive margins. In the next two quarters it could get impacted by around 200 basis points. So for the -- overall, for the year, it could be between the 50 to 100 basis points band as compared to last year.

In the beginning of the quarter, we also spoke about some of the investments we are making in terms of hiring more on-site people and also increasing the sales and marketing that we will continue to do. We have already given some 126 offers for people to join on-site. Of this, some 72 people joined during the quarter. The rest of them will be joining in the next quarter. And we will continue this process in the future quarters also.

The incremental growth in revenues and some of the cost initiatives we took have yielded results, and that will buffer this investment. So, going forward, we'll be able to observe this investment. And the only incremental impact on the margins could be due to the wage increases which we are giving effective October 1.

So overall, for the year, the margins could be within a narrow band as compared to last year. It is an extremely -- a very good quarter. And the next two quarters our guidance reflects the environment and what feedback we got from the clients.

With this, I'll conclude. We'll open up the forum for questions.

Thank you very much, sir. (Operator Instructions). Our first question is from the line of Mr. Moshe Katri of Cowen and Company. Please go ahead.

Yes, hi. It's Avishai Kantor for Moshe Katri. Just two or three questions to begin. One, can you comment on the major drivers for the strong performance in both BFSI and retail?

I'll start with the retail and I'll ask my colleague Ashok to talk about some of the positives on the BFS base, where we are getting growth.

So in the retail, one, we work with some of the largest retailers in the industry, so we have a very strong relationship. I think we work with, I think, seven out of the top 10 retailers. Second, retailers are going through a couple of very interesting transformations. One is the move from print media to digital media, the digital marketing campaign -- digital marketing transformation they are going through. Second is digitalization of the information flow in the supply chain, so that they can get near real-time information about sales that is happening in a store all the way down the supply chain. The third is actually improvements that are happening in the store to provide better customer service, a better technology-based environment in the store for self-service and things like that.

So there is investment happening in the retail space even now. The third thing is we work with some of the largest grocery companies and in the downturn they are seeing actually a positive impact on their business. It looks like consumers are eating less in restaurants but buying ready-made meals or take-home meals or something like that, and that is also positively impacting retailers. And hence they are investing in technology; they are investing in IT systems. We also benefit from some of the consolidations that are happening, which is actually a common theme across many of the industry segments in which we are working.

Now let me pass it on to my colleague Ashok Vemuri, who heads Banking and Capital Markets, to talk about the BFSI space and where he sees traction.

Thanks, Kris. So clearly in Q2 we've had about 3.5% growth in the BFSI sector, and with the addition of six new clients in this sector, equally distributed between the US and Europe. We are seeing -- the good news is that decision-making is now happening. There is increased traction, which is getting converted -- is going beyond conversation to actual deals. The bad news is that the decision-making is still happening at the top of the house, and it is a fairly long decision cycle time.

So we are seeing interest in -- clearly in the asset management space. We are seeing it in securities and investment funds. We are seeing a lot of interest in regulatory compliance risk, internal audit. We've made some good strides and progress on work in M&A related deals. Retail banking I think is reflecting the high unemployment, so that's a little slow. Cards is slow but with some regulatory changes, etc., we do expect a significant portion of the cards business to come our way.

Europe is a little -- I think is a couple of -- is lagging behind. I think there is a phase lag there. But again Continental Europe, which has not been our stronghold, is showing signs of increased willingness to partner with offshore players. We are seeing traction in Australia. We are seeing traction in Asia as well, ex-Japan, and some amount of Japanese clients are getting active in regions outside of Japan.

So, on the whole, I would say that we are beginning to see some traction. I would still think we are in the woods, so to speak, and we will have to wait to see how the budgets, etc., pan out before we actually are able to conclude whether we are in a better position than we were previously.

Thank you. My next question, you had a very nice sequential up-tick in client wins from 20 -- going from 27 up to 35. Can you please break down the client wins by verticals, basically BFSI, retail and telecom? And also, what was the sequential growth in your largest client this quarter? Thank you.

May we move on to the next question?

The client wins have been -- hi. This is Shibulal. The client wins have been across the verticals. As I said, three of them are in Fortune 500. There is no specific vertical where there is a major win. I do not have the sheet in front of me, but I remember seeing a number like seven in BFSI. The remaining is spread evenly.

Seven in BFSI?

Seven, yes.

Thank you very much.

Thank you, Mr. Katri. Our next question is from the line of Mr. Mark Marostica of Piper Jaffray. Please go ahead.

Good evening. It's Mark Zgutowicz for Mark Marostica. Just a question on your revenue, guys, just a little bit of a disconnect. Your revenue guidance implies relatively flat growth in the second half and obviously you've seen a couple of good volume trends sequentially over the past couple of quarters. I am just curious, is there something on the horizon that you are seeing that gives you caution there?

And then, along those lines, can you speak to your expectations for growth in Europe in the second half?

No. Typically, the December and March quarters are soft quarters, because December is more a holiday season and March because it's the first quarter when the clients finalize the budget. Our guidance reflects the environment, because clients are still very cautious. Even though they are seeing some optimism, they are still cautious about the future. And quite possibly we'll have much better visibility when they finalize the budgets for next year. That could be somewhere in January timeframe. So, we have given a sequential growth of 1%, at the upper end of the guidance, for next two quarters to reflect what the client is telling us about their business environment.

And on Europe I'll ask Shibu to talk.

Europe at this point is lagging behind US on stability, which is expected because even on the downturn Europe has lagged behind US on the downturn. And so that's what we are seeing. And across the board UK as well as the Continental Europe is lagging behind. At the same time, we are quite positive about Europe in the long run. We are investing in different countries in Continental Europe. We are investing in Germany, in France. We believe that this will be of -- these markets will be of great importance to us in the future.

Okay. And then just a couple of related questions. On headcount, the 2,000 incremental that you've added to your guidance there, what percentage of that is lateral? And if you could comment on what your fresher/lateral mix is right now.

Well, it's mostly lateral -- all of it is lateral for Infosys Technologies. And it will be a fresher and lateral for the BPO, because the combination at the corporate level is for everybody. So there will be two levels, one for Infosys Technologies, so the parent company, and for the BPO. The BPO has seen a reduction in the headcount for this quarter, compared to the previous quarter. INFY has added -- INFY does not require any freshers, but requires laterals. Laterals are people of experience of more than two and half, three years.

And your current mix there and sort of maybe trends next year on the lateral hiring side?

No, we don't have a view on lateral hiring for the next year. We only have a view for this year, because we don't have the numbers for next year. And for the lateral hiring for the parent company, the hiring will be in specific areas where we've seen growth, like Infrastructure Management Services, or where there are very special skills required, as in the Enterprise Solution Group, and not across the board for all units.

Okay. And your current mix on the fresher/lateral side of the equation today?

What is that?

What is your current fresher/lateral mix today?

Well, out of 20,000 people that we are going to hire gross today, 15,000 will be freshers and 5,000 will be laterals. Our normal percentage could be 60/40, 60% freshers and 40% lateral. But this year the hiring is less. And the fresher hiring is because of the offers we made last year, not out of necessity but the need to keep our commitment, so the ratio will be slightly different this year.

Okay. That's helpful. And then just one quick final question. On the selling and marketing front, could you just talk about investments that you're making here and whether the levels you are running at now as a percent of sales are sustainable through the remainder of this year?

No, we had given a guidance. We said we will hire some 100 people this year. We already hired some people this quarter. Next two quarters we will be hiring balance of them. It will not substantially change as a percentage of revenue, because most of the cost is the employee cost.

Great. Thanks very much.

Thank you, Mr. Marostica. Our next question is from the line of Joseph Foresi of Janney Montgomery Scott. Please go ahead.

Hello. My first question here is on discretionary spending. It looked like volumes were up. Have you seen -- but obviously development looked like it was down. Have you seen any pickup in discretionary spending, quarter over quarter?

The volumes were up by 2.3% this quarter, on-site volumes 0.5%, offshore volumes 3%, so definitely volumes are up this quarter. We are seeing some discretionary spend happening in retail and BFSI, discretionary projects being sanctioned, etc., sometimes maybe due to regulatory changes or related to compliance risk, new risk models in the BFSI space, as Ashok talked about, I talked about retail. So there are discretionary spends happening, maybe not discretionary, quote/unquote, but definitely new projects.

And then it looks like we are seeing some positive indicators, hiring is increasing, you are putting through wages again, pricing stable. At this point, do you guys get the sense from your clients that you've maybe bottomed in the prior quarter now and that things are probably going to improve going forward?

Yes, we will get better or more confidence in that when we see the next year's IT budget. This year, the IT budgets are estimated to be down by about 6% to 8% from last year. Current indications are that IT budgets are going to be flat from the current level to next year, which I think is an improvement because that shows that companies are able to maintain the current level of expense going forward. But they are going to put that money to better use. They are going to look for more efficiencies. They are going to look for more flexibility, which means outsourcing and variable cost. So -- and we are seeing discretionary spend going up. So the environment definitely is better today than last quarter and seems to be improving.

Okay. And then just one last quick question on budgets, since you mentioned it. When do you expect to get visibility on those budgets? And do you think, again, visibility will be better next year compared to this year, just so we can get a general timeframe of when you think things will start to [come into picture]?

Current indications are that there should not be too much delay in budget finalization. We expect budgets to be finalized in the first quarter, maybe mid-Jan to mid-February timeframe.

Does the lack of a flush mean there may be some pent-up demand next year?

Yes. We expect the flush not to happen this year, maybe, and the monies to be carried forward direct to next year's budget.

Okay. Thank you.

Thank you, Mr. Foresi. Our next question is from the line of Bhavan Suri of William Blair & Company. Please go ahead.

Thanks. Hey, guys. Just a couple of questions on the pipeline. Could you just give us a little color on how the pipe is looking and what the quality and size of deals is that have been added year to date this year?

See, there are two parts -- a two part answer to this. One is when you look at large deals, these are deals which require investment of six to eight months of effort and things like that. So here, to some extent, the pipeline is based on the investments we want to make in such deals. So we do a lot of due diligence. We qualify the deal strictly. And typically we pursue about 12 to 15 deals, and we have 12 to 15 deals in the pipeline which we are actively working on. And the good news there is we are seeing confidence returning and clients wanting to close deals. We don't know yet how fast is it going to be, but definitely there is confidence returning on that.

The second is our traditional model of working with clients, working with existing relationships. And as projects close, typically they start some of the projects so that the capacity can be retained and the knowledge can be retained within the project and things like that. Again, our repeat business has been 98.8%, I think, this quarter, which is as strong as it has been in recent past, actually very strong repeat business. We have not lost any major customer.

And one more data point is that our top 10 customers grew 5.8% this quarter, much higher than the Company. So all this points to actually better traction at this point.

A couple of quarters ago you mentioned that deals may enter the pipeline for, say, $150m but by the time discussions are complete the deal value was much less. Is that pattern still continuing?

Yes, it is still continuing. That is because the clients are much more sensitive to what size. They qualify these things very well. They cut any unnecessary requirement and things like that, so yes. And also, sometimes it gets split across multiple suppliers. So there are many reasons why when we finally win it is much smaller.

Okay. And then just one last quick question on the hiring of sales people and domain experts. It appears that's been tougher than expected. You didn't expect -- you didn't spend in the first quarter and margin was better because you didn't hire all the sales experts in domain resources. Is it tougher to get those? That seems a little odd, given the environment, so a little color on that, possibly.

See, we have been always very selective. First of all, it is difficult to find good people even in this environment. And we are always being very selective. Second, good people are still continuing to work where they are. They are not switching. Right? And so it is sometimes difficult. Third, once we make an offer, it takes some time for the person to join. It's not that next day they will come and join. So, as Bala said, 126 offers, 70 people joined, rest are going to join next quarter.

So we are making effort. We are finding the right people, trying to find the right people and bringing them in. We will continue this hiring. It is counterintuitive, in some sense, but good people are difficult to find, even in this environment.

Okay. Great. Thanks, Kris.

Thank you, Mr. Suri. Our next question is from the line of Edward Caso of Wells Fargo. Please go ahead.

Good evening. Just wondering if you could give us a sense of the pace of vendor consolidation and your sort of relative wins and losses in that area.

So, Ed, out of the nine large deals in the first half, about I think [six are consolidation deals] -- three are consolidation deals. We are able to win most of the consolidations. I can't see any one large one we lost, actually. Some were announced publicly, also. Okay, one. And Shibu tells me one we lost from the consolidation, but three we won.

Could you talk a little bit about your move here to raise wages? I was under the impression you really didn't need to do that, and maybe talk about why you're doing it at this time. And do you expect your competitors, particularly the tier two, to have to follow?

Till now, nobody has done as broadly as Infosys has done. They've talked about some increase to some people. We are giving an average 8% increase in India and 2% outside India. And the reason for this is that, Ed, we have done reasonably well under the circumstances. We have sustained our margins under the circumstances. It was challenging, but we have sustained our margins. And unlike developed markets, in India there is growth. GDP growth is around 7% and it is expected to go to 8%, 9%.

We have seen signs of increased saturation in BPO already, because as situation improves people start looking for opportunities to switch and things like that. To some extent, we felt that it is the right thing to do, to reward our employees, because we have done well this quarter. Second, we want to make sure that we are able to retain the good people, so we will choose -- we will use this amount wisely and reward the right people.

Great. Bala, can you talk a little bit about your foreign exchange assumptions, particularly against the rupee/dollar? Did you take the quarter-end number in your guidance? Did you take -- it's moved a fair amount in October. Have you taken last night's close? Can you give us a sense of what numbers you're using and what the impact is to margins in your guidance?

Normally, we take the rupee/dollar rate at the end of the quarter to project for the future quarters, but whenever there is a drastic change in the currency environment we do take the current rates. The rupee ended at INR48.11 or so to the dollar by end of September, but we do -- took INR47 for the next two quarters. That means appreciation of something around 3%, which will have something around higher than 20 basis point impact on the margin, but is absorbed because we have seen some growth. And incrementally we are guiding for a higher number for the full year.

We believe that, in the short term, rupee could appreciate, because there's a lot of money coming into the country that is putting pressure on the currency. So next two quarters, anyway, we assume that INR47 appreciates substantially from that level. Probably, it could impact the margin more than what we guided.

Last question. Efforts to combat protectionism in the US, particularly as now business is starting to pick up, it actually will become a concern. Are your efforts -- is your approach in line with that of the approach taken by NASSCOM?

Yes, we are completely in sync with NASSCOM. We are participating in all initiatives by NASSCOM. This is definitely an area of concern. We do believe - and I talked about it as an answer to the previous question - that it is challenging to find the right people with the right skills and things like that, even in this environment. So we will work with NASSCOM.

Thank you.

Thank you, Mr. Caso. Our next question is from the line of Glenn Greene of Oppenheimer. Please go ahead.

Thank you. Just a quick question on pricing. If you could just give a little bit more color. You talked about stability, but is there any way to contrast across verticals and geographies any disparities, or is it stable across the board?

So it is not across the board. We are seeing stability in financial services and their focus is on getting system integration done, especially wherever there is -- there has been structural changes and M&A activities. We are seeing traction in retail, because of our thought leadership, predominantly. We work with eight of the top retailers in the US and about nine or 10 of the top retailers across the world. And we have invested heavily in retail over the years, so we are seeing traction there.

Energy and utilities is another space where the downturn impact has been different, or different. We are seeing traction there. In manufacturing, we are not seeing stability, which is expected, because the retail sales have not picked up, and whatever pickup has happened is still taking care of the supply inventory overhang. That means that the manufacturing will not pick up, and that is what we are seeing in the manufacturing segment.

Europe is lagging behind US in being stable. Of course, I believe they were lagging behind even in the beginning, in the downturn, so they are lagging behind on stability, also.

So are you talking about stability in demand or pricing, or they're sort of following and tracking together, the pricing with the demand?

No. My comments were more related to demand. From a pricing perspective, I think we are stable all around. Most of the pricing renegotiations are behind us. We are not seeing a second round of renegotiations. There are some sporadic ones, but that is part of normal business.

Okay.

We will see an impact of the pricing renegotiations which we did last two quarters, or four quarters, for the next two or three quarters. This quarter, we have seen a downturn in revenue productivity of 1.1% in constant currency. So there is still tailwind effects which will show up. We had predicted a downturn of 5% in revenue productivity from the beginning of the year. For the year, we still expect somewhere between 4.5% to 5%.

Okay. Then, just back to wage inflation for a second, was this sort of an off-cycle wage increase? Is this your normal cycle for doing wage increases, or something that prompted you to do it now?

And, secondarily, do you think that we're at a range of call it mid to high single-digit wage inflation going forward in out years, or is it too early to tell?

See, every year, we give a compensation increase in April. That is our cycle. This year, we deferred it because of the challenges in the environment, the slowdown, etc., but we told our employees that if situation improves we would look at a midyear increase. We have seen improvement in the situation and we felt that, given the environment in India, etc., this is appropriate.

Regarding next year, we have to wait and see at this point. If, let us say, overall situation in the industry increased and there is a mismatch between supply and demand, the growth picks up and supply is limited, then definitely compensation would go up in the industry.

Okay, great. Thank you very much.

Thank you, Mr. Greene. Our next question is from the line of Karl Keirstead of Kaufman Brothers. Please go ahead.

Hi. Thanks for taking the call. I've got a question about Infosys' growth rate relative to overall IT budgets. Kris, you mentioned that IT budgets were down about 6% to 8% in fiscal '10, and it looks like Infosys revenues will be about flat. So, in other words, you outgrew enterprise IT budgets by about 6% to 8%, and I'm wondering, do you think that relationship is likely to hold or to increase next year and the year after? Thanks.

See, offshore growth has always been higher than IT services growth globally, so when you compare offshore industry, you typically look at growth of Indian IT industry. We have been around the same number or slightly better. We have been leading the industry. Now, this year, NASSCOM has projected a growth of about, I think, 4% to 5% for the industry for the year, including BPO. So we have to wait and see where we end up at the end of the year.

But do you think it's fair for us to assume that Infosys next year can outgrow overall IT budgets by a similar magnitude, call it 5% to 10%? Is that a reasonable assumption for now?

I can't project out next year. All I can say is that Infosys has been on par or better than industry, and I will leave it at that.

Okay. Thank you.

Thank you, Mr. Keirstead. Our next question is from the line of David Grossman of Thomas Weisel. Please go ahead.

Thanks. I guess the first question I have is on the margins. Despite multiple headwinds, you're reporting exceptionally high levels of profitability the last three quarters, even after normalizing for currency. So I guess the first question I had is really what underlies this strength?

And I know you've guided down in the second half of the year to reflect hiring and the decision to put in the annual wage increase. But can you perhaps give us some insight into how we should think of the margins in a more normalized environment, relative to your historical levels of profitability?

No. We have been saying all along that we have multiple levers on the cost side, but as utilization or revenue productivity or the scale benefits we get on SG&A or the mix of business, we use some of the levers at some point of time to make sure the margins are not impacted. And we also focus much more on the cost side during the year, because the environment was bad. We had to make sure that we put the money in the right areas for us to incrementally grow faster.

So the revenue growth comes in. That will still be the big buffer for the margins. So we used all these levers at some point of time to make sure the margins are not impacted. Having said that, the currency is one issue which is external to us. We don't know how it's going to behave. That could have an incremental impact on the margins, and also the tax rate.

By the way, I think on operating level side we have managed it well, and we believe that we have enough levers on the cost side to make sure the impact is minimized.

Right. So you've done a great job of managing the margins during this period, but I guess I'm thinking when you go into a more normalized growth mode, should we expect the margins to come down perhaps to the levels that we saw back in the '07 and '08 timeframe, when you were growing at more normalized rates? Again, currency aside.

See, David, we have two aspirations. One, highest margin in the industry, in our industry, and, two, we want to limit it and our limit is the cost. We said it should be highest -- we said we should be around a net income of about 26%, 27%. So in a normal environment, we do start investing in multiple new initiatives, so then what happens is investment dollars increase, investment in sales and marketing increases, brand building increases, etc.

Currently, the environment is such that we need to pull back some of those investments. We are being very selective. As Bala said, now we pick and choose. The choice is very, very important, to make the right investments in this environment. So we are still investing into, but much less than what we would do in a normal environment.

I see. Thank you. And just one other thing. I heard what you were saying about the hiring and the wages and some of the rationale for that, but it's hard not to read that as a fairly bullish sign, despite your cautious outlook. So I guess my question is are you taking some of these actions in response to, I guess, the strength of your confidence in the visibility in your pipeline? Or are you just looking at risk/reward in terms of what the actual cost versus the benefit of building a bench in India right now at this point in the cycle?

So it reflects the confidence in the strength of the model. It reflects our relationships with our customers and our ability to sustain those relationships. Third, even in this environment, there are requirements for specific roles and skills, etc., so we have to continue to recruit. And, lastly, yes, if we find an opportunity to build up a certain segment or sector in anticipation of some growth coming in, we would make those investments. So, for example, we are starting government sector now, public sector. We are investing in India at this point, because we believe that's important for the future.

So we will continue to make investments in certain sectors for creating future engines of growth. One more point I would like to add, we also honored all the offers we made in campuses and things like that, and that is the bulk of the recruitment this year. We enhanced the training from four months to six months. But we feel -- you have seen the utilization starting to pick up, so when things improve we will improve utilization, utilize those people, and then start recruitment again.

Thank you very much.

Thank you, Mr. Grossman. Our next question is from the line of Mr. Trip Chowdhry of Global Equities Research. Please go ahead.

Thank you, and good execution. I have two quick questions. First is regarding consolidation. Excluding M&A-induced consolidation, what are you seeing, like which systems are getting consolidated and what applications are getting consolidated and where are they moving from? Like, what were they doing before and what are they doing now? And then I have a follow-up question.

See, it's a very detailed, lower-level question, actually, which technology to which technology. See, it's really -- broadly, we can say that when M&A happens you have two systems now. You have to decide and consolidate to one system. And this is applicable to financial systems. It's applicable to HR. It's applicable to other platforms they have. So it is actually very, very -- it's typically standard practice in M&A and things like that. It's not about people moving from one technology to another technology. That's also happening. But this is -- when we talked about consolidation, it's about M&A-related integration activities.

Perfect. The other question I had is regarding, say, capabilities. The world, have you seen any shift or changes in the business environment, like the world before recession, during recession and, say, post recession that you think Infosys will need to adjust the capabilities, because there may be some underlying shift maybe in technologies, procurement, anything you are seeing? Because definitely the world is not the same before recession and during recession, and history tells the post recession may be very different, also. So what are you seeing in that space? And thanks. That's all.

Yes. It never is the same thing, right? It doesn't go back to the same situation afterwards. I'll just give you -- that's a rather philosophical statement, but let me be very specific. See, in this downturn, we saw an increased acceptance for pay-as-you-go model, where the customer wants true variability. They want to actually work with you on an operational expense model, rather than a CapEx model. And we have seen traction. We have provided those kind of services to our clients. We have, for example, two clients in HR outsourcing, which is priced per employee, rather than based on effort and things like that.

So that may be a trend which is going to be sustained beyond this downturn and may see a pickup of pay as you go. This is also based on the trend of cloud computing and things like that.

Very good. Thank you.

Thank you, Mr. Chowdhry. Our next question is from the line of Mr. Rod Bourgeois of Bernstein. Please go ahead.

Yes, guys. I just want to understand, in your guidance for the next couple of quarters, are you assuming the current demand environment continues at its same pace? In other words, your commentary today says clients are more optimistic and discretionary spending has improved. Are you assuming those precise trends remain in place, or does your guidance leave room or some buffer in place in case those trends start to fall through again?

Can you just repeat it quickly? Briefly, can you just repeat the question?

Yes. I'm just trying to understand if your guidance assumes the current demand trends remain in place at the same pace, or if you're including buffer in your guidance in case --

Sure, sure. Yes, yes.

-- the macro trends go the other way.

No, no. See, the environment continues to be challenging. This quarter, we saw a sequential growth of 2.8%, but we have assumed only 1% growth in the next two quarters, at upper end. So, clearly, we are not going overboard. At this point, we are being cautious. And it's based on a model we have. It's based on visibility we have. It's based on our reading of the situation. Typically, the first quarter of the calendar year, budgets get finalized, it's better to get visibility into that and then say, yes, things have really improved. So we want to be cautious at this point. I wouldn't call it buffer, as it were. I would just say we want to be cautious.

All right. And then just a real quick question on the tax rate side. When you started the year, you had a certain plan in place to increase hiring onshore, and I presume that that affected your tax rate mix and your overall tax rate outlook. Given how your onshore costs ramp-up has played out, is there any material changes to your tax rate outlook for this year and also into next year, based on how the onshore costs are playing out at this point?

No. The changes in the tax -- the effective tax rate is based on India, rather than outside India. It is based -- because outside India the mix actually matters, and the revenue mix has not changed that much, offshore versus on-site. In India, we have some tax incentive schemes, etc. Some of our units have come out of that and effective tax rates have gone up because of that. That's all. So it's about India.

So what tax rate range should we look at for the next few quarters, and then also for fiscal '11?

Right now, our effective tax rate is about 20% --

Right now, the effective tax rate is somewhere around 20%, 21%. That will remain so for the full year. It could change next year, depending on how much work we do in (inaudible) and cities. Hopefully, it could be somewhere around 25%. So this year it could be somewhere between 20% and 21%.

Thank you, guys.

Thank you, Mr. Bourgeois. Our next question is from the line of Mr. George Price of Stifel Nicolaus. Please go ahead.

Hi. Thanks very much. A couple of questions. First, just I wanted to make sure I understood the 8% wage increase. Does this include any impact from promotions or is the 8% a fully like-for-like number?

Everything is included. This is the average, including everything.

Okay. So I guess --

For offshore, 8%, on-site, 2%.

Okay. Right, right, right. So can you -- I guess, do you have any sense of if you took away the upward bias to your wage base from promotions, so that you're just looking at what raises for people staying at the same level, what would the increase rate be, roughly?

See, the number of promotions would not be very large compared to the base, actually. The base, today we have effectively about 85,000 employees would be eligible for some kind of raise, actually, the parent. And then promotions are because of some -- we looked at some of the roles and things like that. So we have done some analysis. And effectively, the impact of the promotions may be for about -- a small percentage of people at this point.

Okay. So now it doesn't sound like much of an impact to that 8%.

No, it's not. It's not. So that's why the impact of promotion is very small.

Okay. And you said that -- when somebody previously asked a question around the wage increase, and you mentioned -- you said something around the lines of, given the environment in India, you thought this was appropriate. So should we think about -- given the macro growth that's in India, relative to the more developed economies, where most of your revenue comes from, though, should we basically think about wages having a much quicker and more sizable up-tick early in the cycle, more quickly, I guess, getting back to the kinds of increases that we saw in the last up cycle?

No, I don't think so. I don't believe so. We have to wait, actually. We see that across the industry growth is picking up and -- see, right now, there is actually sufficient supply. We felt it is the right thing to do for our own employees, because they worked very hard in delivering this result. So we have to look at what the industry does, what our competitors do, etc., and what the situation is next year before we can say. At this point, I don't know.

Okay. You mentioned the up-tick in energy and utilities. What kind of work is going on there? You've talked a little bit, obviously, about what's happening in BFSI, but can you talk about some of the key areas where you're seeing strength, in terms of types of spending, types of projects, in energy and utilities?

SAP implementation, one large chunk. We're doing some interesting work on sustainability in the area of smart grids and things like that. I think it's -- I'm not an expert, but some things to do with gas meters and things like that. So some very interesting work in energy, utilities. Of course, there is some traditional maintenance kind of work, also, maintenance and sustenance kind of work.

Okay. Last question.

We have a broad range of services today. Infrastructure management is growing as an interesting service for utility companies, SAP-related work, and then some innovation-related work in sustainability, climate change, etc.

Okay. Last question, just -- and there was a question before around margins and normalized margin ranges, when you get back to a more normalized growth range, and I wanted to kind of piggyback on that.

I just noticed, since fiscal '04, sales and marketing - if I pull that out as a percentage of revenue, if you kind of look at it on a trailing four-quarter basis to smooth out any one-quarter movements - on a trailing four-quarter basis, sales and marketing since fiscal '04 has declined from about the mid 7% range to now under 5% for the first time. And since fiscal 2Q '08, the absolute dollar spend in sales and marketing has actually been flat to down. What do you think about that trend? How should we think about that trend and the implications going forward?

See, sales and marketing is not proportionate to revenues. It's based on the number of customers, etc. Please see that repeat business is growing, our customer size is growing. That is, the number of larger relationships is growing, etc. So it does not grow proportionate to revenue. It grows proportionate to probably the relationships. See, one of the things we did in this downturn is that we tried to rationalize our customers. About 100 customers give 87% of our revenues; 100 customers give about 87% of our revenues. So we did some -- we didn't discontinue any relationships, but we brought in more efficiency in our sales and things like that, and that did help us with some cost control.

Okay, great. Thank you very much.

So thank you, everyone. Unfortunately, we are completely out of time. Wonderful questions and, as always, your support has been tremendous, participation has been very good. Our investor relationship managers are all known to you. So if you have further questions, you want to talk to any one of us, please put in your request and we will connect back with you. So thank you again and have a wonderful day.

Thank you, gentlemen of the management. Ladies and gentlemen, on behalf of Infosys Technologies Limited, that concludes this conference call. Thank you for joining us on the Chorus Call conferencing service and you may now disconnect your lines. Thank you.