Infosys Ltd (INFY) 2010 Q3 法說會逐字稿

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

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.

Thanks, Poshil. Good morning, everyone, and welcome to this call to discuss Infosys' financial results for the quarter ended December 31, 2009. I am Sandeep from the Investor Relations team in New York. Joining us today on this earnings call from Mysore 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.

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 and year ending March 31, 2010. Subsequently we will open up the call for Q&A.

Before I pass it on to Infosys management, I would like to remind you that anything that we say which refers to our outlook for the future is a forward-looking statement and must be read in conjunction with the risks that the Company faces. A full statement and explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov.

I would now like to pass it on Mr. Gopalakrishnan.

Thanks, Sandeep, and good morning, good afternoon, good evening to every one of you. Thanks for participating on this call. This was an excellent quarter; we had all around good performance. The strategies we adopted in focusing on clients, meeting their requirements in terms of cost control solutions, increasing offshore, clearly helped us in this quarter to increase our revenue from our top -- our largest clients. This has helped us to grow this quarter by 6.7% sequentially. In constant currency terms this is about 5.8%.

Volumes increased. We were able to hold on to pricing, our pricing went up on blended terms by 1.1%. Utilization improved. We added employees. We gave a compensation increase this quarter. And so every one of the parameters we have done extremely well.

If you just look at the top 10 clients, top 10 clients grew 12.2% this quarter compared with the overall growth for the Company of 6.7%, almost double. So our focus on relationship building, our focus on engagement level investment, our focus on solutions, differentiation, all these things actually came together and helped us.

As the recovery happened in US international services sector, we were able to take advantage of that during this quarter. Going forward, we believe that given that the budgets have not yet been finalized we don't have sufficient data to forecast other than what we've done right now. We've guided for a very small increase in Q4, about 1%, and we expect the margins to be hit slightly because of increased hiring as well as the impact of rupee. Other than that the numbers are all with you.

I will hand it over to Mr. Shibulal to give you more details on the numbers and then followed by V. Balakrishnan, the CFO, on further discussion on the financials.

Thank you, Kris. Good morning, everyone. As Kris said this has been an excellent quarter. We have seen all around improvement, revenue has grown, volumes have gone up by 6.1% sequentially quarter on quarter. Pricing, a little bit, 0.2% in constant currency terms.

I will now try and give you some colour on other aspects. Pricing has gone up 1.1% in Q3; that means we have seen second quarter of sequential stability in pricing. The pricing environment has stabilized. We are not seeing pricing renegotiations. We are seeing a few of them, which is normal to our business, normal business, but we are not seeing unusual activity in the pricing side.

The recovery is led by US and financial services sector. We have had multiple conversations with our clients, almost 50% of our clients have finalized their budgets and for the most part, on an average, budgets for 2010 seem to be flat. So we are expecting a flat budget for 2010.

While the customers have started taking decisions and we are seeing velocity of decision making go up, other customers continue to be cautious about the business environment, about their business environment in 2010.

Now geographically US has gone to 64.9%, Europe has dipped to 21.9%. And from a service perspective the largest growth has been in business application maintenance, which has gone to 24.5% from 22.7%. Verticals, financial banking and insurance, financial services have shown a strong growth. Another vertical which has seen growth is energy and utilities.

From an employee perspective, we have added 8,700 people gross, 4,400 people net. Attrition on an [LTM] basis is 11.6%. Attrition excluding involuntary separations is 8.3% for the quarter. Our hiring number for the year has gone to 24,000 from 20,000. In Q4 we will be adding 6,000 people. We are also in the campus doing campus recruitment, our plan is to give 15,000 offers, so far we have given 8,000 offers.

Our top clients have grown 12.2%, almost double the Company average, and the remaining clients, the non-top 10 have grown 4.8%. So this quarter growth has been led by the top 10 clients. Number of client additions for the quarter, 32. Our $1m clients have now gone to 336, previous quarter it was 330. We have 22 clients contributing more than $50m on LTM basis. Out of the 32 clients we added, five were Fortune 500 clients. Number of clients in the Fortune 500 space is 119.

This quarter we gave a wage increase to our people, 8% offshore and 2% on-site.

Another important milestone this quarter has been the McCamish acquisition, which was done by the BPO, and from that acquisition we have gained $1.9m in revenue in Q3 and we have planned our guidance for Q4 is good at $7m of revenue.

Another major event this quarter was the announcement of Flypp, our platform for app store for the small and medium telecom service providers. With that let me hand it over to Bala for financial highlights.

Good morning, everyone. We've done exceedingly well this quarter; our revenues came much higher than what we guided. We ended up this quarter with $1,232m of revenues, which is 6.7% growth. Most of the growth came from top 10 clients, they grew by 12.2%. Non-top 10 grew by 4.8%. Overall we have seen a growth of 6.7%.

In the beginning of the year, when we guided for the full year, we said revenues could decline somewhere between 3% to 7%, we are guiding for the increase of 1.8% to 2%. In constant currency still a growth of 1.6% to 1.8%.

The operating margin has slightly gone up; it has gone up from 30.3% last quarter to 31.1% this quarter. We had an impact because of the currency; the average rate of rupee to dollar last quarter was INR48.39, this quarter it is INR46.62, so there was appreciation of 3.7%, it impacted the margin by 1.8%.

Pricing increased by 1.1% in reported dollars, in terms of constant currency it's 0.2%, most of the pricing has flowed down to the margin. Utilization has gone up by 1%, that has impacted positively the margin by 1.6%. And we had an intangible write-off, which negatively impacted the margin by 0.3%, and we had reduction in other costs, which contributed positively by 1.6. So net-net we have seen an increase in operating margin during the quarter.

The effective tax rate went up to 22.6% for the quarter, for the nine months it's still 21.2%. This year it could be somewhere between 21% and 21.5%. Next year when some of the highest [TP] units get rid of holidays, probably the effective tax rate could go up to maybe 25%.

We have seen all around growth, it's not related to one individual customer. Most of the growth came from financial services vertical and we have seen across the board growth from all the customers.

We increased guidance for manpower addition, increasing it from 20,000 we guided earlier to 24,000 and we are going to give some 15,000 campus offers for people to join next year.

So overall we have seen a very good quarter with all around growth and now I will open the floor for questions and answers. Thank you.

(Operator Instructions). Our first question is from the line of Moshe Katri of Cowen and Company. Please go ahead.

Hey thanks, congratulations on a very strong quarter. Bala, utilization rates went up pretty significantly during the quarter, I think about 300 or 400 basis points sequentially. Can you talk about utilization rate targets, I would say for the next six to 12 months? That's number one.

Number two, your stability to sustain operating margins during the next six to 12 months as well? Thanks.

So I will answer the first one, the utilization rate, and then Bala will answer the second one. We generally cannot have a utilization target because we honoured all the offers we gave to our clients -- our employees last time, so they have all come into the system. 8,000 people are still in training, we have expanded our training from four months to six months. So we have used this opportunity to build talent and some of the numbers you are seeing this quarter, last quarter is the result of that buildup, because we are utilizing that talent to generate revenue right now.

The utilization in a way is a reflection of the demand. We are quite comfortable having a utilization rate between 76% to 80%. As the demand picks up the utilization generally goes up. There have been quarters in the past where we have reached up to 82%, but that is not a good point to be in because that will place tremendous pressure in starting new programmes. So our comfort level is between 76% to 80%.

On the operating margin, Moshe, we have given a guidance for the next quarter. Next quarter, the operating margin could decline, one, because of currency, because average rate of currency this quarter was INR46.62, we assume INR45.75 for next quarter and that could have an impact of close to 100 basis points on the margin, and also adding more people, we have increased the guidance from 20,000 to 24,000; that could impact the margin by around 60 or 70 basis points.

But for the full year we will still be slightly higher than what we declared last year. For the next year we'll talk about that in April.

Okay and then final question, looking at the pipeline and some of the activities that picked up, what's the timeline, do you think, it will take for Infosys to go back to a more normalized growth level, let's say in the mid-teens to high-teen level going forward.

Moshe, again you have to wait until April for us to give you the guidance for the next year. What I can say is that things are looking better this quarter. NASSCOM predicts that the offshore IT services industry will be having double digit growth. Their own prediction is somewhere between 12% to 20% and of course Infosys tries to leverage its relationship with its clients and tries to grow a much or better than the industry. I would leave it at that and let's wait until April for the guidance for the next year.

Thanks again.

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

Hi, guys. I wonder if you could talk about if there was any specific projects or any kind of budget flush in the quarter that maybe was a one-time issue or [won't] take place going forward?

Rather than budget flush, what we saw was that confidence returning to clients, decisions being made faster, because they're seeing a better future they're starting to spend. We worked very hard in building and rebuilding relationships with our clients. We met their expectations, their requirements in terms of costs and things like that by increasing our fixed price engagements. We built solutions which will give them faster time to market, better value. So we did many things right and that helped us actually grow.

If you look at top 10 clients grew at 12.2%, so that clearly is an indication that our relationships are one that is helping, it's really not the budget flush that is helping us in this regard. The relationship with people [person] concentrated, that's what is helping. Similarly if you look at service side revenue, maintenance revenue has gone up so we made sure that we listened to our customers and met their expectations.

So you'd expect this confidence to continue based on what you saw this quarter?

Yes, we will get a better view on this once the budgets are finalized by the end of January, first week of February. Current indications are that even though budgets are going to be flat offshore spending will increase. The majority of our clients are indicating that cost pressures will continue hence offshore will go up, they are deciding today. Previously, even though that was the logical decision, decisions were not being made. Now they are ready to take decisions and that's the difference now, now and six months back.

As you guys start to talk about your own budget for next year, maybe you could just give us your views on what the margin sustainability profile looks like with rupee and wage increases, probably, creeping back up.

For next year we believe that, if this year is any indication, our ability to sustain margin is very, very high. Actual numbers we will give you in April but we have demonstrated that we are able to sustain margins even in very difficult conditions, very difficult situations.

In terms of some other indicator, we are quite positive, in Q4 we are going to hire 6,000 people, for the year we are hiring 25,000 people. For next year we are making 15,000 campus offers, 8,000 already made. So those are some indicators of our confidence in the current environment.

And just one last one, if you could point to one reason why you think your margins have been more sustainable and maybe address it in referencing to maybe you're sacrificing some growth, if you could just talk about those two factors.

Here rather than us looking at it as sacrificing growth, what we see it as disciplined growth. The key is to maintain a certain discipline in your sales and things like that. Ultimately if you undercut what happens is when things improve those businesses won't be sustainable and somebody will always be lower than you and that is a no-win situation for either party. The clients lose ultimately because you can't serve the clients; we lose because we find that it's not a sustainable business.

So what we have done is we still listen to customers, so we have increased the fixed price, we've tried to meet their expectations on cost, we have definitely met their expectations on value, it's a disciplined approach to sales, that is what we are focused on and that is what we are trying to do. And we're happy that when growth came back the clients spent that money with Infosys and that's what is reflected in this quarter's numbers.

Okay, thank you.

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

Thank you and very good execution. I have two questions. The first one is regarding Windows 7 and its upgrade. Are you seeing any increased business activity which has helped your business because of the launch of Windows 7? And then I have another question.

Unfortunately, I don't have any data on Windows 7 adoption. Definitely we have a service around Windows 7 migration as we had for Vista, as we had for other Microsoft products and things like that, we are a large partner for Microsoft. So we have a service around Windows 7 migration, I don't have any data on the adoption at this point.

The second question I had was regarding the apps store you have created for your mobile operators. Two sub-questions here is, is this apps store available for global scale or only for a few operators?

And second is there are three, four platforms which are (inaudible).

Excuse me, this is the operator. I'm sorry, Mr. Chowdhry, could you mute your line when you're asking a question, there seems to be some disturbance on the call.

Okay, can you hear me better?

Yes, are you using your handset now?

Yes.

Thank you.

Hello, can you hear me.

Yes, please go ahead.

The second question I had was regarding mobiles. The apps store you have is it for the global scale or is it only for a few operators?

And the third question I had further is there are about two or three operators available -- I mean the platforms which are popular these days Blackberry, Android, and maybe iPhone, which platform IP are you creating these mobile app stores for? Thanks.

Hi, this is Shibulal, I'll take that question. The Flypp platform is a third party white label application store platform available for operators everywhere in the world. We have kicked it off with our first client ASL in India but we are in negotiations with other operators as well, both in India and overseas.

As regards how does it compare to the platforms you just mentioned, the platforms you have mentioned are largely device centric app stores, whereas this one is designed to be more operator centric app store. That is one difference. And the second is that this is a third party running it, so the developers who contribute their applications to the application store, they do not have to go and sell this to every device or every operator. Once they come on this store they can be distributed to, theoretically, all the operators who sign up and, theoretically, to all the devices that are supported by the operators. So that's the difference. We believe this is a superior model of creating an equal system of apps and connecting the consumers, or the ultimate users, with the app developers.

Very good, thank you.

Thank you. Our next question is from the line of Bhavan Suri of William Blair and Company. Please go ahead.

Hey, guys, just a couple of quick questions here. You said that 50% of clients have finalized budgets and the confidence has returned to clients, so I'm a little surprised by the muted guidance for the next quarter given that 50% of clients have finalized budgets. Any commentary on that?

Our guidance is based on the data we have and given that only some of the clients have finalized their budgets there is some uncertainty. Second, there is an uncertainty about the sustainability of the recovery, there are at least a few reports that said that there is a 40% chance that the recovery can actually backtrack.

So given that we have limited data, given that we need probably more quarters of growth before we can confidently say that normal sales returned, we have given this guidance. Yes, it is a cautious guidance and that's where it is.

Okay and then one quick question on the new models. Can you give us a little color on the traction you're gaining with new models? If I recall, last quarter roughly 5% of revenue was coming from the new transaction type of models, the non-linear pricing. How has that grown this quarter?

And then also just on how are you funding CapEx, or how should we think about CapEx funding for these new models, which require investment in hardware, software, R&D, so on and so forth?

Okay, this is Shibulal again, I'll take that question. We are tracking around that same percentage at this point in time. We have -- that number has almost doubled in terms of contribution to our revenue since the last fiscal year, so we are very encouraged by the profits we have made in the new engagement models and the non-linear price deals.

On how are we funding the CapEx part of it, we are being selective in what platforms we build, we are building those where we see latent demand from our clients and from prospects. We are also looking at those which have higher leverage where a relatively lower capital investment gives us larger size deals or deal mandates. So we are being selective, I think that's how we are controlling because there is no limit to how many platforms one can build and start imagining taking almost every engagement into a non-linear model. So we do pick and choose those platforms where we make up -- some capital expenditure investments and offer the OpEx model to the clients.

Thanks a bunch, I guess longer term though, as the model shifts to a greater portion coming from these platforms, the CapEx model emphasis is going to have to shift from the CapEx per FT or per person to more investment into assets. And maybe Bala can answer this, how should we think about that transition in CapEx?

We are also partnering, so for example when there is a hosting required we may actually partner with somebody who can provide that hosting and we will come up with the revenue share, back to back revenue share with that company.

On the software licences also, we have back to back agreements, revenue share agreements, etc. So we are also looking at how can we balance the CapEx with our capacity to invest in things like that. Capacity of course exists but we are also looking at this in a smarter way.

Okay, thanks. Good quarter guys.

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

Hi, thanks very much, nice quarter. I just wanted to see -- I know IT budgets are -- they still haven't been totally finalized although it sounds like flat to up modestly, depending on who you talk to. But would you be still fairly confident that offshore growth would be -- at least maybe in the low double digits when you look at just the offshore portion?

That is the indication we are getting currently, every one of the descriptions we have indicate that their allocation to offshore should increase. We looked at industry analyst reports, we looked at NASSCOM itself, so this is the National Association of Software and Services Companies in India, they also say that the offshore IT industry should see a growth of somewhere between 12% to 20%. So some of those data points indicate that offshore allocations should increase.

Okay, in terms of M&A, I know you've commented on this a lot, it's a typical question, but specifically what types of services would you be most focused on? And does the recent uptick in M&A in the industry, particularly over here but I think just in general, does that make you feel that you have to move a little quicker? Does it change at all how you think about your M&A strategy?

We have done an acquisition this quarter, a small acquisition, McCamish Systems. It is a platform serving insurance industry. They manage life insurance policies and things like that. It's a platform that can be scaled up. But the reason why I talked about it is that that gives you an indication of our strategy for acquisitions.

We look at the strategic fit, we look at the ability to leverage that acquisition further, ability to integrate that, retain the employees. The company must feel that their joining with Infosys is going to enhance their ability to serve their clients. So there are various things we look for. And the bottom line is strategic fit, ability to retain employees and at the right price. So those are the things we look for.

We don't want to be forced into an acquisition. That definitely is not how we look at acquisition. We don't have goals like one acquisition per quarter and things like we don't have any such goals. If we find the right company then you will see Infosys doing an acquisition.

Okay. Last question is, just beyond M&A, which would be an obvious use, you have a lot of cash, you continue to add to it, what are you going to do with it? Thank you.

I'm going to ask our CFO, Bala, to talk about it.

Right now we are keeping it in the bank and make sure that it exists. We'll look at the opportunities, as Kris said, if we find a good opportunity on the way we can use some of it. And if you don't find a use we always return to the shareholders. We've done it two or three times in the past. So we'll wait and watch for some time. A lot of things happening in the environment. Any good opportunity comes we can do something.

Okay, great. Thank you.

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

Yes, guys. Is there any reason to expect that sequential growth, as in the December quarter, may not repeat itself in the upcoming March quarter? I mean do you see any particular obstacles other than the absence of finalized budget data from your clients?

Well, without data I cannot say anything, right. That's exactly the position we are in. With the data we have we have given you the guidance. Things look better, what numbers would end up we don't know at this point. We have given you what we know.

Also, what this quarter has demonstrated is that the Company is well prepared to take advantage of accelerated growth. We have the bench, we have the capacity, we have the right services, we have the relationships. So [just] let us say there is acceleration or opportunities out there then we can take advantage of them.

Got it. You've increased your hiring plan by about 4,000 people, is that new hiring plan reflecting a revenue trajectory that might be a little bit better than what you've given in terms of guidance to the Street?

We believe -- we believe in strategic bench, we're building. We believe in capacity. So if the opportunity comes then we can take advantage of that and grow faster. Whatever we see in revenue we have given you as guidance.

Okay. And then in the hiring plan where you've increased it by 4,000 people, should we assume that some of these added hires will not start work until fiscal 2011? Or will a meaningful portion of those new hires potentially start in, during the March quarter?

So I'm going to request Mohandas Pai to talk about how the hired people get billed, what time-frame in which they get billed, what is the training schedule, etc. So he will talk about when will they become billable, when they get billed, etc.

Thanks.

The freshers -- can you hear me?

Yes.

The freshers will take about ordinarily 29 weeks to get billed because we extend the training to six months. We do have flexibility to put them into delivery for billing after nine, after about 20 and -- 20.5 weeks. As far as laterals are concerned, they can get billed within 30 days from the date of joining in case we do have the work.

The additional people that we are hiring this quarter consists of a substantial number of freshers who are joining us and are part of the earlier commitment that we made so that they cannot be billed this quarter. Two, of the laterals that we are going to hire, a fair number could be expected to come in the last 45 days of the year. So a fair number will not be billed. So what will be billed this quarter will be the freshers who are being released from training and a part of the laterals who have been hired and come on board in the month of December.

And we have increased the number from 20,000 to 24,000 to take care of any growth requirements for the next year, because the freshers coming next year from the colleges will be ready to build [one the] earliest by November, December. And that's why we need to have in advance some people in the system to take care of our needs.

Great. And then one other question on headcount mix. I mean should we be expecting in fiscal '11 that your mix of onshore staff that's not working on a visa to go up meaningfully? I know that's been something you've been working on in the last year. And should we expect further, I guess, call it progress, in that regard in increasing your onshore staffing mix of non-visaed workers?

Yes. We are still going ahead with the move to hire 1,000 people. We've got about approximately 150 to 160 people in the system and we are accelerating that. So next year end we should have more people who are local residents for countries where we work in the entire system compared to where we are today.

Okay, great. Thanks, guys.

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

Thanks. I wonder if we could just go back to the quarter. I mean you've -- you highlighted the growth of the top 10 being 2 X the sequential growth of the base of the business, the average for the business. Can you help us better understand is this reflecting some of the price concessions that we talked about earlier, I guess in the year, where we were talking about price concessions in exchange for higher volumes? Or is this really just a straight improvement in the overall environment and increase in economic activity among some of the other things you talked about?

So, David, there is a combination of both. Where we had to meet the expectations of our clients, we have tried to meet them in a disciplined way as I said. We have tried to fix price, our fixed price have gone up. In some cases, yes, we have reduced the rates. But by and large we have created a win-win scenario for our clients. We have met their expectations on things like that.

There is also an improvement in decision making. Clients are confident about the recovery and they are now starting to spend. And that is also reflected in the growth.

And in terms of the pricing I think this is, if I'm not mistaken, maybe last quarter you had flattish sequential growth at constant currency and pricing. Is there anything structural, or, given the visibility you have, that we would see any reversal in the trend in pricing that we saw in the current quarter?

Pricing will be flat or stable. We don't believe we can increase pricing in this environment. What we are trying to do is we are trying to play with the business mix rather than pricing. And that can give us some improvement in revenue per employee.

I see. And then, just lastly, I think Rod just asked about the hiring plan for the mix on sites. And I think we've talked about this in the past, and when we last spoke I think you were a little bit behind plan. I was just curious, have you caught up here, your targets, at least to where you wanted to be at this point in the year? And, if not, maybe you can help us better understand what some of the challenges may be or that you've been facing in terms of ramping your non-visa headcount locally?

We are slightly behind. The reasons are many. One, it is still difficult to find the right set of skill sets and things like that. Second, we have to cast our net far and wide so it takes more time. It's also some of the good people actually require time to join. They don't join immediately. Sometimes as much as six months actually. So even though we have made offers they have not yet joined the Company.

So there are various reasons why we are slightly behind in the numbers. But we are focused on increasing these numbers. As Mohan said, we want to recruit more people at our client locations.

Okay. And just lastly, I guess this is on the tax rate. Is there -- what is the current thinking in terms of the tax holiday and is there a chance we could see another extension? Or does it feel like we've played that out and we should just pretty much assume we're going to see the [SCCIs] go out and that will come in and just play out pretty much as you've outlined next year?

As of now, we don't see the tax holiday being extended. Maybe if all of you maybe write or maybe come during that come and write or talk maybe there'll be some hope. But right now there is no hope of extension of the tax holiday.

Okay great. Thank you very much, Kris.

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

Thank you. I just have two questions, one a clarification. Could you just clarify how much you, and not the industry, expects offshore spend to be up this year?

And then my second question, of your IT budgets that have been finalized, how many of those clients that you expect will spend linearly throughout the year? And how much will be a bit more tentative and spend in line with economic trends? Thanks.

We have given you the guidance for Q4. We will give you the guidance for next fiscal year in April, and our fiscal year starts on April 1. And next fiscal year in April. That is the reason why I gave you industry data rather than Infosys data.

We don't break up the budget visibility we have, we just give you some indication on what is the qualitative commentary on the budget. So we believe that the majority of the budgets will be finalized by Jan end, the 31st week. We believe that the budgets are going to be flat in most cases. We believe that, at least in about 50% of the cases where we have had discussions we have indicated that the offshore part of the allocation would increase. So those are some of the data points I can share with you at this point.

Okay. Then maybe just qualitatively, high-level speaking, if you look at your client base, is there any concerns you have in terms of the pace of that spend? Or is your backlog strong enough over the -- if you look over the next six months that you're not -- six to 12 months -- that you're not really concerned about the pace of the spend of those IT budgets?

Definitely we are in a better position and that is indicated by the growth in Q3. There is confidence within clients and they are spending the money, so decision making is happening, let's say, like normal times or near normal times.

Okay. Thanks very much. Appreciate it.

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

Good morning, good evening. I had a question on, I guess you were particularly strong in the applications maintenance this quarter and I'm wondering what you were seeing on the other side on the new initiatives that are more discretionary spend driven? Especially given the comment about around improved velocity of decisions.

So on discretionary spend, the environment is better. We won four transformational deals last quarter. That is an indication of near normal decision making, so we believe that discretionary spend transformational projects would see further traction.

On pricing, I know it's up a little bit, but with the big step-up in applications management, which is generally lower margin work, was -- how were, within the particular service offerings, how were pricing? I mean were -- if you forgot about the mix shift, what was the trend in pricing?

Pricing is stable or flat. Most of the renegotiations are behind. Of course there will be some periodic renegotiations which are based on annual calendar, and things to that. That happens in every -- that happens every year. But the renegotiations which were tied to the downturn, etc. seem to be behind us at this point. And that's why we expect pricing to be stable or flat.

Last question. If Bala could update us on the subsidiaries and how they came in relative to your expectation?

Well, most of the subsidiaries are profitable now, expect for the new ones like Mexico and Sweden. If you take Consulting for example, and they are profitable, they had a net margin of 4% this quarter. China is profitable. Australia was always profitable. So they have started contributing positively to the Group profit now.

And how was that relative to what you were expecting?

Well, it's as our expectation because we expect all the subsidiaries to deliver on the margins and most of them are doing it now. Of course the new ones have to start to deliver, that will take some time.

Thank you.

Thank you, Mr. Caso. (Operator Instructions). Our next question is from the line of Mr. Moshe Katri of Cowen & Company. Please go ahead. Mr. Katri, your line has been unmuted. If you have a question please go ahead.

Yes, thanks. Just a follow up. Can you talk a bit about Europe? North America obviously drove the significant portion of the upset in terms of accelerating revenues on a sequential basis. Europe seems to be trailing. Maybe talk a bit about the timeline here. When you -- when could we expect Europe to pick up? Maybe also talk about the UK, which, I think accounts for a pretty significant portion of your revenue based in Europe? Thanks.

Hello. Hello.

Yes, please go ahead, sir.

Yes. This quarter we have seen Europe sequentially grow by 0.9%. While these are early indicators we expect Europe to always pick up with a lag. And our belief is it will be between three months or six months time period where we will see Europe picking up assuming the overall economy across US and Europe will remain stable, and there's no new surprises.

We are already seeing some traction in terms of backlog across sectors, both in UK as well as in the Continental Europe. Interestingly, in this quarter we saw the Continental Europe sequentially grow by 5%. So that's, again, an indication of things to come.

Okay. And also telecom remained muted, can we talk about the outlook for the telecom vertical and some of the activity that we're seeing there?

Yes, this is Subhash. Yes, the demand for the telecom related services are picking up, thanks to the investment in the upstream investment in the networks that we have seen across the globe from major incumbent service providers. However, we believe there will be a lag, a phased lag, between the network investments and the system spend. We hope that should be a couple of quarters and -- before it becomes a strong demand for us. But we did see some of that in the last quarter and that got reflected in the growth that the segment has demonstrated.

The other reason why there's going to be a bigger spend in the networks is because of the proliferation of the devices and applications which are potentially choking the networks. So that's a good problem for the service providers, except that they need to now get into the capital expenditure more. So that's good news, but it's probably early days for services that we are offering in this market.

And then the final question for Bala. Bala, what's your outlook for the six to next year -- six to 12 months outlook for the rupee? And obviously that's going to be probably one of the bigger challenges to deal with down the road. Thanks.

I hope I know that, Moshe. It's very difficult because the currency could appreciate in the short term. A lot of money coming into the country. But it'll also follow the global events. The dollar carry trade is a big thing across the globe. So it'll be volatile and that's why we are taking a short-term view and covering for next two quarters. We are not going beyond that.

Okay. Thanks.

Thank you, Mr. Katri. (Operator Instructions). We have a follow up question from the line of Bhavan Suri of William Blair & Company. Please go ahead.

Hey guys. Just a quick question, I know we're wrapping up the call. But, given the 8% wage increase in October, have you given any thought to what compensation increases in April might look like?

For April we are not decided as yet, but we're going to examine it. We're going to see how the growth, the near term is, and what we can afford. In the third quarter, we have paid 100% variable to all our staff at an average. It could vary depending upon your performance but we're paying 100% this quarter. So we'll take addition possibly later in this quarter. We've not decided as yet. But we are open to looking at a wage hike at this point of time based upon the information we have.

I guess, though, should we expect a wage hike in April, as you traditionally do?

I don't want to comment on that because we're not taking addition, because every quarter we all sit down and look at how the economic environment is and then take addition. For the first quarter, after the first quarter results we looked at it, our second quarter results we looked at it and decided that in third quarter we're going to pay. And this quarter we have given 100% available payment. So end of the fourth -- this quarter, we'll sit down and look at it and take addition. Right now, I mean I don't want to hazard a guess.

Okay. And then any update on the traction in the government sector? I know you hired the CEO for the government business unit you established in the US, I -- and it's early days. But any sense of how that's tracking and what sort of deals you're pursuing there?

We have not yet hired. That hire did not work out, so we are still looking for the -- for the CEO for that position.

And any traction in that or are you just holding off until you hire a head of the business unit?

Yes. In the US, we will hold off until we get the CEO. But in India, we have significant traction in the government sector.

Great, thanks.

Thank you, Mr. Suri. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Sandeep Mahindroo for closing comments.

Thanks, everyone, for joining us on this call. We look forward to talking to you again in third quarter. We'd like to hand it all back to the management team in Mysore for any closing comments.

Gentlemen of the management, would you like to add any closing comments? Ladies and gentlemen, on behalf of Infosys Technologies Ltd., 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.