Infosys Ltd (INFY) 2012 Q3 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Infosys earnings conference call. As a reminder all participant lines will be in a listen-only mode, and there will be an opportunity for you to ask questions at the end of today's presentation. (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. Thank you and over to you, sir.

Thank you, Marina. A very warm welcome to everyone on this call to discuss Infosy's financial results for the quarter ended December, 2011. I am Sandeep from the Investor Relations team in New York. Let me start by wishing you all a very happy New Year.

Joining us today on this earnings call is CEO and MD Mr. S.D. Shibulal, CFO Mr. V. Balakrishnan and other members of 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 ending March 31, 2012. Subsequently we will open up the call for questions.

Before I pass it onto the management, I would like to remind you that anything that we say which refers to our outlook for the future is a forward-looking statement which must be read in conjunction with the risks that 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 to Mr. S.D. Shibulal.

Thank you, Sandeep. Good morning to everyone. We had a good Q3 quarter. We have grown by 4.4% in constant currency and 3.4% in reported currency. Other revenue is $1,806m in reported currency and $1,823m in constant currency. Margins are up by 3% quarter on quarter from 28% to 31% operating margin. And net margin is also up quarter on quarter from 23.5% to 25.4%.

This has been a good quarter for client additions as well for deal wins. We have added 49 new clients this quarter; 18 of them net, six of them in Fortune 500. Interestingly enough if you look at the last nine months we have added 120 new clients, which is probably one of the strongest client additions we have seen in a nine-month period in the history of Infosys.

It means that clients are choosing us clients are choosing us as their partner in their journey. And as and when they decide to spend, as and when they become confident about their spending we will definitely benefit from that.

Quality of growth is pretty good. This quarter in constant currency in terms of pricing has gone up by our revenue products, which has gone up by 0.8%. Year on year it has gone up by 5%. And if you actually look at the last nine months it has gone up by 6.1%.

This is a reflection of our tremendous focus on high quality growth. We are focused on high quality growth. And we clearly believe that as long as we deliver business value, as long as we participate in the growth and the differentiation journey of the clients, as long as we strengthen our strategic partnerships we will continue to achieve that in the long run.

We had good wins this quarter; we won five large deals and one transformational deal. Two of the five large deals were more than $500m including re-bids. It's a strong quarter for large deals.

Growth has been all around this quarter. We have seen the non-top 25 grow by 4.9%, which means that the broader base of clients grew this quarter. Attrition has come down from what it was four quarters back. In Q3 of FY11 we had attrition of 17.4% and this Q3 we have attrition of 15.4%. So there is a 2% drop in attrition and on a quarter-on-quarter basis from last year this quarter to this quarter -- this quarter.

Our Product and Platforms strategy is working well. We have $300m of booked revenue TCV in the pipe and multiple deals. Finacle is also doing well; we had 10 wins this quarter. We have basically signed multiple large deals.

Now in this background I also want to give you color on the environment. The environment is definitely volatile, it is challenging. It is challenging for our clients. There is overall uncertainty in the market. The European crisis and unemployment in the US, a lack of political will to clearly sort out some of these issues, the coming election year and a downward trending growth in emerging markets, all of these are concerns for our clients and they definitely have less visibility about their future.

They are not confident about taking decisions. And that has been reflected in the velocity of decision making, velocity of business. There is a marginal downturn in the velocity of business from the beginning of Q3 to the end of Q3. We had noticed this early on, and in the middle of Q3 we had said that our revenues would be closer to the lower end of the guidance and that's where we ended up.

We have -- based on all this we remain cautions, we have given a guidance of flat to 0.2% growth for Q4. Budgets are being finalized. We expect the majority of the budgets to be closed before the middle of February. Early indication is flat to marginally down. That is the early indication. And the critical question is that even after closing the budgets will they spend. And that will be determined by multiple factors, the factors about the environment as well as factors about -- and their confidence in their future.

Being said that if you look at our new strategic direction of building tomorrow's enterprise and Infosys 3.0 it is very clear that we participate in all facets of client's business. We do transformational work which will enable them to create growth. We do operational work which will -- which is a driver for efficiency and productivity for the clients and also reducing total cost of ownership. We are doing -- we are seeing traction in the Product and Platform space which is a vehicle to deliver innovation through the building tomorrow's enterprise framework to the client.

So we clearly believe that as long as we are centered around the client, centered around client's priorities of growth, differentiation and return on investment, as long as we strengthen our strategic partnerships, as long as we deliver higher business value, as long as we build more and more capabilities in the local markets, we will be able to achieve our aspiration of high quality growth.

With that, let me now hand it over to Bala.

Good morning, everybody. We have done better under a challenging environment that we are in. In the beginning of the quarter, we gave a guidance of 3.4% to something around 5% growth in revenues, because the client's budgets looked good and the indication was they could spend the budget. But as we went through the quarter the environment became much more challenging and concerns on global economic environment only increased. That made the clients more cautious on the spending.

So in the middle of the quarter we came and updated, saying that our growth could be somewhere closer to the lower end of the guidance. And if you look at the actual numbers that is where we ended up with. Our top line grew by around 3.4% and the EPS grew by around 11.8% for the quarter.

The operating margin increased by 3% mainly on the back of rupee depreciation. The average rate of rupee was INR51.37 for the quarter as compared to INR46.30 for the last quarter resulting in a depreciation of 11%. We could have technically increased the margins by around 4.4%, but we had some increase in other costs and the utilization too dropped to some extent. So net-net our operating margin went up by around 3% for the quarter.

On the non-operating side, the overall losses because of foreign currency was only $4m because we had a hedging loss to some extent was offset by the translation gain what we saw. And the interest income has gone up because the yield has gone up the average yield on our portfolio is something around 9.7%.

The effective tax rate is around 28.6%, but is on normalized and non-operating income. The effective tax rate on operating income is stable at around 27.8%.

The guidance for the EPS of $0.79 to $0.80; we ended up with $0.80. So net-net on the top line we are closer to the lower of the range. On the EPS trend we are at the higher end of the range what we guided for. We added 9,655 employees, our guidance was 8,000. The attrition rate too has come down to 15.4% for the quarter. Our DSO days are 61 days.

We have a hedging position of something around [$847m] at the end of the quarter. We believe the currency markets will continue to remain volatile, and we do take a short-term view on the currency and hedge for the next two quarters at any point of time. We are continuing with the practice, we are not changing that because we believe the currency environment will remain volatile for some more periods to come.

On the guidance we have revised the guidance for the full year. We assume the revenues to be flat from what we ended up in Q3 for Q4 too. We assume the currency at INR52 for the next quarter. We assume the pricing to remain constant from what we saw in the third quarter.

So if you put all this together, we believe our operating margins for the full year that is fiscal 2012 as compared to fiscal 2011 will remain stable within a narrow band of 50 basis points.

So net/net I think we are in a challenging environment. The clients are cautious, the budgets are getting finalized. We will have a better view of fiscal 2013 maybe in the beginning of April. But as long as the environment is stable, I think next year could turn out to be better. But if there are any catastrophes in Europe, probably it could impact the global markets and it could impact the sentiments of clients.

It's too early. The early indications are the budgets could be flat or slightly down. What [is a learn] for us is offshoring component in the budget. Hopefully if the environment remains stable and if there is not any big shock, hopefully the next year could look better.

With this, I conclude. We'll open it for Q&A.

Thank you very much. Ladies and gentlemen, we will now begin with the question and answer session. (Operator Instructions). We have the first question from the line of Edward Caso of Wells Fargo Securities. Please go ahead.

Hi. Good morning. Could you -- or good evening, could you talk about the difference between growth in Europe and the US? Somewhat surprisingly you had Q-on-Q growth in Europe, US was less so.

Let me request B.G. to give some color on the European growth, and Ashok to give some color on the US growth.

Hello, yes, this is B.G. Last quarter Europe we saw significant growth, primarily driven on two frames. One is existing clients with -- across financial services, manufacturing sector and retail. We saw uptake in growth from existing programs as well as cross-selling new services into these accounts.

We also saw a significant jump in the number of clients we added during the quarter, 14 new clients added in the quarter within Europe. Again the clients are spread across different segments. But also equally spread across UK and the Continent.

We also saw two large deal wins in Europe, and both in the order of magnitude of $500m each and some of it is existing business which is getting consolidated. And these are multi-year deals.

So we -- this is definitely one of the best quarters in Europe in the recent past. And while there has been a spike in revenues within the quarter it doesn't necessarily mean secular trend. But at the same time we have significant traction by adding new clients and adding new deals of sizeable nature and this could help us -- give us good growth momentum at least for the next two quarters.

The external environment in Europe continues definitely to be uncertain. There are no easy answers for fixing that problem. But at the same time we see a fair degree of stability within our clients in terms of their businesses. At the same time there's enough caution and the client IT spend indicators in Europe continues to be downward or flat. So this is what we see as of now.

At the same time we continue to invest in Europe. We see from medium-term to long-term perspective there is enough opportunities for Infosys. We continue to invest in Germany, France which are still underdeveloped from an outsourcing perspective. But we have seen our investments paying dividends in the last two years. These two markets have grown at 40% to 50% year on year. On near-shore centers in Czech Republic and Poland we continue to invest and we are adding talent to support the Continental market. Thank you.

Hi, this is Steve Pratt. I'll just give a quick commentary on the US and then maybe Basab, the head of sales can discuss also. So the quarter-over-quarter growth in the US was 0.9%, which is less than Europe.

I wouldn't draw too many conclusions as sometimes our business, especially with big deals is lumpy, and so I don't think this is a trend we would see over time. The US business continues to be very healthy. We are strong across sectors.

And I think it's also important to keep in mind that we have just gone through a very important transformation of our company to what we are calling Infosys 3.0 which is really consolidating our service offerings around Business IT services, around Consulting and Systems integration and Products and Platforms which really gives us a simplified and consolidated organization structure and also aligned by verticals so we are closer to the clients.

So, with that -- the last piece of that went into place at the beginning of the last -- of Q3. And I think we are very well positioned to compete strongly going forward. So I'll turn it over to Basab.

(Technical difficulty).

Hi, my last question is just on apples-to-apples pricing. This is about that time of year where you're talking to your clients. Could you just give us some sense on some -- just the apples-to-apples base pricing in your different offerings? Thanks.

So, pricing we are seeing it stable actually. As I said pricing has gone -- our revenue productivity really has gone up. Even this quarter our earnings productivity in constant terms have gone up by 0.8%. Year on year the revenue productivity has gone up by 5%.

And actually if you consider the nine months it has gone up by 6.1%, which means that, our constant focus on delivering higher and higher business value, engaging with our clients better and better, building new capabilities in Consulting and System Integration, creating non-linearity through Product and Platform is yielding results. It has been a tough environment but it is yielding results. And right now we are considering the pricing as stable.

Thank you.

Thank you. The next question is from Joseph Foresi from Janney Montgomery Scott. Please go ahead.

My first question here is can you be more specific about what you're seeing in the macro. And is there a chance that this a specific or particular group of clients or particular area within the client base? In other words I'm wondering have you seen any delays. Are budgets being set later than usual? What would cause that [March] guidance and you think it's specific to a particular group of the revenue base?

So I did not get that question properly, but I believe your question was about budgets and decision making is that right?

Yes, that's right. And maybe you could just hone in on what's happened there.

So I will give part of the answer and then I will hand it over to Basab to give a wider picture. What we are seeing is velocity of business coming down. And it has marginally come down. In the beginning of Q3 still we said there is slowness in decision making and multiple (inaudible) of large opportunities.

We have seen that marginally increase during the quarter and velocity of decision marginally coming down. In fact, we noticed it halfway through the quarter and that was when we said that we will closer to the bottom of the guidance.

Now let me ask Basab to give you a little more color and then probably you can come back to me.

Okay, I also sort of only partially got the question, but just continuing from where Shibul left off. What we are seeing on the deal sizes especially with respect to how clients are seeing their own budgets, there is general cautiousness in our clients where they sort of -- they have the money to spend, they believe that technology is important for them, it gives them competitive advantage. They want to get that competitive advantage. But at the same time because of the things that are happening, especially what is going on in Europe and how that might impact their business, they don't want to make long-term commitments.

So even when we do a, let's say, a big transformational deal, the first -- we might do a big proposal, but the first statement of work will be for a particular scope which is more contained and if they choose to stop it after that they get some value for the money they have spent.

So that's kind of what's happening. I don't know if that answers your question completely or not.

And let me add to it a little bit more. Occasionally we are seeing that even in the programs which are implied where the ramp ups are supposed to happen there has been some delays in getting the ramp ups done. At the same time we are not seeing cancellations. It's important to note that we are not seeing cancellations.

But you see 30% of our work is in Consulting and System Integration. The average lifespan of a program is somewhere between nine to 18 months, which means that if I consider the nine months every three -- every quarter I have to refill the cup with one-third of the transformational work.

So, if the velocity of business comes down then that creates challenges in doing that and also growing on top of it. So when we talk about velocity of business and it's marginally down what we mean is delays in decision making, larger opportunities getting scrutinized multiple times, programs which are on ramp-up cycle getting slowed down. And a general caution in spending even though the budget is there.

Okay. I think in the past Infosys has talked about wanting to outgrow the industry. And it looks like this year's growth rate is falling in line maybe on the bottom end of where the industry is going to grow. How do you view that philosophy going forward with all the changes? And what can we expect in regards to that going forward?

Again it was not clear, but I believe your question was about how do you see the future, is that right?

That's right (technical difficulty) 16%, 18% for this year. You've talked about outgrowing that rate on a consistent basis. But you're at the lower end of that so I'm curious as to how you view those comments going forward.

So, it is too early for us to comment on the next year, but there are some fundamentals which have not changed, and I think it's very, very important to keep that in mind. So, it's early for us to give any guidance on next year.

The budgets are getting closed. We expect them to get closed (inaudible). We expect them to be flat, and the early indication is that they will be flat or marginally down. So that is on the budgets.

The critical question is will they spend the money next year. Our belief is that if there is no catastrophe, if there is no -- not -- there is no event which is a catastrophe event, the clients will get used to the new normal and then they will start taking decisions, because they all -- they have to do it, right, because they need to do it. So our belief is that if there is no catastrophe then clients will start taking decisions. That is the number -- that is point number two.

Point number three is that they will go with partners whom they have chosen. That is where the new client openings, the existing client base favors us big time. When we talk about 120 clients being opened over a period of nine months, even if the net is about 50 or 60 that means we have opportunities to grow in new accounts 50 or 60 of them as and when they take their decisions.

Clients have made their choices on whom they want to spend their money on. So if the second argument is correct then as and when they start taking those decisions it will benefit us. That is number two -- number three point.

Number four is if you look at our strategic direction we have made a clear, we have made a clear direction towards making sure that we are part of the journey in every aspect of their life. They will spend money on transformation to create growth because they need to create new products, new services, new consumer experiences.

They will spend money on operational efficiency because they need to reduce total cost of ownership. They need to drive productivity improvements. They need to drive better efficiency and better alignment. That is where our operation sercvices come in the picture, and today having integrated operations that really place us in a very, very good position to take advantage of that opportunity.

And number three is about innovation, our production and platform players as well as our building tomorrow enterprise framework gives us a clear opportunity for us to co-create or co-innovate with our clients. In fact, every conversation I am having with the CXOs is leading to a co-creation workshop. And this quarter we have -- last quarter we had closed a deal which is moving a client from country-centric approach to client-centric approach.

This quarter we have closed a deal where we are moving a client from a non-profit to a listed corporation. All of this has been done in the building tomorrow's enterprise framework and either through transformation or through the TPS track.

So we clearly believe that the strategic direction we have taken will put us in enormous benefit as long as we continue to focus on the client, continue to partner with them on their growth journey, on their transformational journey and provide better and better business value. So in the long term we believe our strategies will definitely help us produce superior financial results and that is high quality growth.

And lastly, just really quickly, have you changed your approach to guidance at all and methodology, just given the volatility of (technical difficulty)? Thank you.

No, there is no change in the guidance methodology. We have always said that our guidance is a statement of facts as we see it in the -- at that point in time. In the beginning of the year we had given a guidance of 18% to 20%. Last year, purely due to currently fluctuations, purely due to cross-currency movements we had re-casted that guidance from 17.1% to 18.1%. In the middle of the quarter we had said that we will be closer to the lower end of the guidance due to emerging situations. Now, given where we are, we have given you a flat to 0.2% guidance for Q4.

Thank you.

Thank you. The next question is from Moshe Katri of Cowen and Company. Please go ahead.

Thanks. Bala, what's embedded in terms of the performance by the specific verticals in your March quarterly guidance? You were talking about roughly or sequentially flat revenue growth. Are we going to see some verticals underperforming, being down year over year versus others, and maybe you can give us some more color on that?

And then should we expect anything in terms of major movements looking at North America versus Europe on a sequential basis? Thanks.

So we are not seeing major differences across verticals and we are not expecting that next quarter either. And interestingly enough even during the downturn in 2008, 2009 our financial -- segment was within a band of -- within a very narrow band of 33% to 35% of our total revenue even during that major, major downturn.

So, we don't expect any material change in our performance. There will be marginal changes but no material change in our ratios neither in vertical nor in country.

You mentioned that (technical difficulty) deferrals in new project starts. Is there -- are we seeing that maybe more in BFSI, are we seeing that in specific verticals? In the past, recently you spoke about deferrals that you are seeing in Continental Europe by some of the banks. Maybe you can kind of elaborate more on that I am assuming we are seeing more -- I don't know if it's even across the board or this is really coming in from one or a couple of specific areas.

It is all -- as I said we are not seeing project cancellations in -- project cancellations at all and nothing abnormal there. The delays in decision making we are seeing across the board. We are seeing it in BFSI, we are seeing it in manufacturing, we -- in small chunks in -- across the board. But when you are trying to grow and if you have discretionary spend is under strain then that becomes a challenge.

All right. And then final question are you considering or reconsidering your (technical difficulty)?

No, we are not reconsidering the recruitment plan for this year. We have -- all the people to whom we have given offers last year are joining now. Our utilization has marginally come down because of that, because people will get released to production. We had planned for 45,000 recruitments this year and I think we'll end up at 47,000 gross. And we have given 20,000 offers for next year.

We are not reconsidering our recruitment plan because of all the reasons I told you before. Budgets are getting closed. Unless there is a catastrophe when things will start, our view is that decisions will start happening. Then we are participate -- we are very well positioned with our strategic direction, as well as our building tomorrow's enterprise framework. So we believe that the decisions will really favor us as and when it happens.

Thanks.

Thank you. The next question is from Rod Bourgeois of Bernstein. Please go ahead.

Hi, guys. So just a quick clarification question on the demand environment, has the decision slowness of clients that you're citing, has that changed only marginally over the last three months? I think you used the word marginally. I just wanted to clarify if that was your intention.

Yes. From the point in which we gave the guidance last time to last quarter to now, it is only a marginal change. But we have given some color at that time when it was happening. So from there to here it is a marginal change.

Right. Yes, you've been citing decision slowness over most of the last year. So all right, so that's helpful. And secondly, in the vendor consolidation events that we see happening around the industry, and this has been around for the last several years, are you doing anything new with your strategy to better compete in those vendor consolidation situations?

So we clearly believe that the new Infosys 3.0 architecture is extremely well placed for those vendor opportunities. What we have done is to -- we had service lines like IVS, IMS, that is infrastructure management, independent validation service, etc., as well as other service lines. Now we have combined all our service lines under the verticals. And our go to market always has been the verticals. So now we are able to create integrated offerings, very, very strong integrated offerings. For example, infrastructure management and application management, infrastructure management and independent validation, and then independent validation and application development. We are to create very, very strong integrated service offerings. And I clearly believe that that is of great help.

And also on the platform side, we are very strong -- very strong, sorry.

Okay. It's just that the platform part of your business is fairly small at this point in time.

Yes. I can ask and get the views of (technical difficulty).

So on the plan -- this is Sanjay here. On the platform side of business, so now we have 12 platforms in the market and last quarter also we have picked up another four clients, taking our overall clients to about 23. We have booked about $300m in [TCB]. This of course is a different kind of a model because the revenue momentum comes over time rather than coming up as upfront. But what's more important for us is to ensure that we are onboarding more and more clients and we are seeing traction every quarter in terms of onboarding onto the 12 platforms, the Infosys Edge platforms that we have in the market.

So the good part today is that we are seeing a quarter-on-quarter increase on total contract value and the number of clients that are onboarding on the platform. So while your observation is right that the current revenues are small but what's important for us is to build the momentum so that we are able to bring this to a substantial revenue stream over time.

All right. Great. And excuse me, just one final question on a similar note. Obviously your growth outlook is not just a function of macro trends since in 2012 you had expected back-end-loaded growth in the fiscal year, despite macro issues that you were citing. So I guess the question that raises is do you expect your overall quarter-to-quarter revenue growth trajectory, adjusted for normal seasonality, do you expect that growth trajectory could improve after the March quarter based on the strength of your pipeline and some of the growth strategies that you say are gaining some momentum here?

See, really you're asking for the guidance for the next quarters, which is very difficult for us to give at this point because there are many factors which go into that kind of -- current kind of a prediction, right. So we are very closely involved in the clients' budgeting and spend process and we will have a much better view on this coming April.

But I want to say this. We clearly believe that the strategic directions we have taken in building tomorrow's enterprise framework, Infosys 3.0, the ability to align in front of the clients, the ability to create deals which are cross-service oriented, the ability to win large deals and the ability to drive consulting and systems integration revenue. All of those things are meant to create high-quality growth. They are meant to create high-quality growth.

We also have the capacity. Our utilization is 77%. We have the capacity. We have recruited people who are in training. All of those things are meant to create high-quality growth.

So we are very well prepared to take advantage of the situation. And we believe that all the strategic directions should allow us to create high-quality growth in the long term. There may be other challenges in the short term.

Excuse me, this is the operator. Mr. Bourgeois, do you have any further questions?

No. Thank you. The question was well answered. Thanks.

Thank you. The next question is from [Dave Gay] of Baird. Please go ahead.

Yes. Hi guys. I wanted to just ask a very high-level question just on this year's growth and kind of, I guess, a little more on the trajectory. But if we break down the 16% revenue growth, it's about 10%, 11% from just core volume, 4% to 5% from price and 1% to 2% from FX. That's pretty clear that that breakdown, based on what we've seen so far year to date and the way you're guiding for next quarter.

As we look next year, you're talking about much more a flattish pricing environment, which we've seen for about four quarters now. So year over year now we expect the recent sequential patterns to drive pretty much flat pricing growth and FX is actually a headwind. So unless we see volume reacceleration, it's hard to grow 10% next year. And I don't expect you to give guidance on that core volume growth, but is it at least fair to think that the pricing environment is stable and FX is a headwind. So to see anywhere near growth that you saw in fiscal '12, we'd need to see a pretty nice reacceleration in core volume. Is that at least a fair way to put this all into perspective?

So for all practical purposes, we are assuming that the pricing will be stable, which means that the majority of the growth will come of the volume; that is true. But at the same time -- at the same time we will continue to build capabilities and implement strategies which will allow us to -- which will allow us to increase our revenue productivity. But for all practical purposes, we assume stable pricing, which means that majority of the growth will come from volume.

Okay. That's great. And just second question, over the last several years there's some pretty big growth in the interest component or the other income component of pre-tax earnings. So this year it looks like the interest component will be about 15% of pre-tax earnings. So it's pretty important that rates hold up. Are you -- I would imagine you're seeing a little bit of interest rate weakening with the rupee being weaker. Is that fair? Maybe to put in context, what sort of interest rate do you see on your cash over the next several quarters?

Well, we do focus on operating margins, non-operating income related to what we hold in the balance sheet. The interest rate regime is in favor of us now. Today we get a yield of something around 9.7% of our portfolio. Go forward, when the inflation comes down in India, then it will probably be that interest rates could come down; you're right. But our focus always has been in maintaining or increasing the operating margins. And non-operating is non-core to us but we do hold strategic cash to meet our strategic objectives. So that is not a focus area that could go up and down. The key for us and the key focus area for us is maintaining the operating margins.

Yes. That's a good philosophy and thanks for that. I appreciate it.

Thank you. The next question is from David Grossman from Stifel Nicolaus. Please go ahead.

Thanks. I'm trying -- I think the revenue deceleration, I got that piece, but I'm still trying to reconcile the margin dynamic. Can you help us reconcile the reported margins for growth on operating, factoring in the different variables, including pricing, utilization, the incremental investments you're making in the business and then obviously the impact of currency?

Well, David, we don't look at it by vertical. We focus to manage the whole business as a portfolio. Of course, our revenue productivity depends on different aspects of the business, whether onsite/offshore mix or the geography mix or the services mix or the vertical mix. So we take a portfolio approach. We don't try to look at each industry vertical and try to see the utilization, margin and stuff like that, because some of the new verticals we start, these are too strategic, some of which could be in investment phase, some of it could be losing money. But on overall company level we need to focus on our high-growth areas and try to manage it as a portfolio.

Right. So I guess what I'm trying to understand, Bala, is appears that you're talking about flattish pricing trends. I guess utilization is off modestly as you continue to ramp hiring in the face of some deceleration in revenue. But -- and obviously you increased investment. So you had a fairly significant tailwind from depreciation of the rupee. So I guess I'm just trying to understand the magnitude of all these different things and how they are impacting the margins.

Right now rupee is a tailwind because rupee has depreciated. But we've gone through times when the rupee appreciated too. See, as we keep saying always, we have different levers within the business. We have a utilization rate. We have the onshore/offshore mix. We have the services mix. And of course the currency comes and [builds this or impacts us once in a while.

We have demonstrated again and again at different currency level, our ability to maintain margins because we do focus on high-quality growth. That gives us enough flexibility to maintain the margin to some extent in spite of currency levels. It doesn't mean we'll be able to do it in the future but we have done it in the past and our model has enough flexibility to manage it.

Okay. Maybe just a different tack. The -- you obviously decided to maintain your hire rates and actually exceeded them in the quarter. How should we think about your bench relative to how you've managed it historically? Is this really more a time and place thing just because demand trends have softened or are you thinking to continue to drive growth you may want to maintain perhaps a bigger bench than you've done historically?

Well, we always said we are comfortable with the utilization, excluding trainees, in a band of somewhere between 76% to 80%. The peak in some years, we went to 81%, 82%. We want to retain the flexibility because if you are looking at the opportunity to grow, you need that capacity in the system because when the growth comes, we don't blink.

We added more people this quarter than what we targeted. In fact, we targeted for 8,000 hiring and we ended up with 9,655. But don't forget, whatever we hired from October, that is for next year, not for this year, because we have a lead time of around six months' training for people we hire from the campus and then they become billable.

So what are we hiring now ready for next year? On overall utilization trend, we are comfortable with 76% to 80%. We want to retain the flexibility if we can, because we don't want to miss on the growth.

Okay. And then just one last question is in terms of your visibility and not getting into clients necessarily or verticals, but is the visibility a lot different? I think I understand the dynamic in terms of the economic environment, but in terms of some other customers, is the visibility getting worse or is it getting -- did it get better over the course of the quarter in terms of what their spending plans are going to be over the next six months?

So we expect that once the budgets are closed and the decision making starts, we will have a better visibility. See, there's another point I want to give you at this point, at this time. Our pipeline is pretty strong. It is not like our pipeline weakened. So it is not lack of opportunity or lack of pipeline. What is happening is that the decisions are not happening; that is what is creating the issue. So from a pipeline perspective, we have a pretty good pipeline. We have closed five large deals this quarter, which is pretty good and two of them $500m and above.

So the deal pipeline is pretty strong. The decision making is where we are seeing an issue. Now we can definitely hope that after the budgets are closed and people will consider the current environment, our view is that the decision making will happen.

I see. Okay. Thank you very much.

Thank you.

Thank you. The next question is from Keith Bachman of Bank of Montreal. Please go ahead.

Hi. Thank you. My first question follows from the past line of questioning. If you continue on with the hiring plans and growth doesn't improve, aren't you at risk for compressing your margins from where we are here and how do you respond to that scenario?

So, we are quite comfortable between 76% to 80%; we have operated in that bracket even before even slightly lower. Now as we know, and another point is, as I said, our pipeline is strong. We are not -- see, you are looking at one quarter and trying to think it's a secular trend and we are not -- we are not considering it that way. We are not seeing a secular trend of downturn. We are, at this point in time, given all the information, we have given you the guidance. Last quarter we gave you a guidance. And when the situation changed we actually talked about it.

We are not considering a secular trend of downturn. And we clearly believe that in the long term we will need these people. So that is why we are continuing with the recruitment.

Okay. Let me ask a different question there. It looks like your top clients, the revenue performance of your top clients is less than the broader revenue performance for the Company. Is -- can you speak to why? And does that continue?

So actually, if you look at the eight quarters and we have -- if you look at them you can see there are multiple quarters in which the top clients have grown faster than the rest. The rest of the world has grown faster than the top clients. This quarter the non-top 25 actually has driven the growth. So in that sense the growth is quite broad-based, which is a good thing and which also through the new clients we have added, we are able to create growth out of them. So I wouldn't consider that, again, as a secular trend. It will be a quarter-to-quarter aberration.

Okay. The final one for me then relates to that when, during -- over the next few -- over the next month we're going to get more reports from other companies, and how would you anticipate share to shake out in terms of your relative share in the markets that you're serving this quarter and over the next couple of quarters, both in terms of client additions and/or revenue -- relative revenue performance, because it looks like you're -- again, particularly relative to Cognizant, it looks like you're losing a little bit of share. But I wanted to get your views on how you would anticipate share dynamics to unfold over the near term.

So I think there are two factors to this, right, because there -- the performance is a reflection of the strategic direction and aspiration that each corporation has. And different corporations take different strategic directions and different aspirations. And that is what is reflected in my mind in the performance. So when you compare performance, it's very important you keep in mind that what is the foundation on which the performance happened.

In our case, we are looking for high-quality growth. We are looking for high-quality growth. What does that mean? Superior growth, superior margins, that's what it means. And that is our aspiration. I'm not guaranteeing that that's going to be happening every turn of the next future, but that is our aspiration. All the strategies we have put in place, increasing consulting and system integration revenue, building tomorrow's enterprise, Infosys 3.0, integrated service offerings, local investment in Germany and France, local recruitment in US, all of these are meant to achieve our aspiration of high-quality growth, which is higher growth and industry-leading, or at least one of the industry-leading, but otherwise the industry-leading margin, and that is our aspiration.

So when you measure -- compare performance, this is an important benchmark to keep. If you compare performance of the piece rather than the whole, then the observation will not be the right one. So from high-quality growth, that is the benchmark which we need to compare rather than only one aspect of the performance.

Okay. That ends my questions. Thank you.

Thank you.

Thank you. The next question is from James Friedman of Susquehanna. Please go ahead.

Yes. Thank you for taking my question. Shibulal, with the two transformational deals that you announced, over $500m, what vertical was that in?

So I'm going to ask Prasad, Prasad Thrikutam, who heads our Energy Utilization Services market to talk about it.

So hi, this is Prasad. There were two transformational deals. One was in our manufacturing vertical where we actually used our building tomorrow's enterprise as a platform for creating a future of specific business process for this organization. So we are actually designing the business process and innovating the business process using technology.

And the other one which Shibu kindly mentioned at the beginning is a company that is based in the US. It's in the services sector. They were moving from a non -- not-for-profit status to a for-profit status, which means the entire enterprise architecture, not from a technology standpoint but from business functions, how do they do forecasting, how do they manage their financials, how do they manage their product development strategy, how do they manage their supply chain strategy, the entire set of operating functions of the company were reviewed. And then a new strategy was developed. So that is the second transformational win that we talked about. I hope I answered the question.

Yes. Thank you for the clarification, Prasad. My second question was for Balakrishnan. I was wondering, Bala, with regards to the dividend, the Company's been generous with special dividend, the cash flow remains healthy, the growth may be decelerating, I'm wondering if, similar to others in the industry, IBM, Accenture, would you consider raising the regular dividend?

Well, right now we pay up to 30% of our net profit as dividend every year. And one-time dividend comes in only when we don't have a use of cash. Today we have close to some $3.7b of cash. We believe that's strategically required in the business because one of the areas we look at for our growth is also strategic M&As. So if we find some nice strategic fit, we'll use the cash.

And I'm not -- I don't agree with you that our growth is not decelerating. Even if you look at fiscal 2012, we are still growing at 16%. 16% is not a small growth. And we believe if we look at our opportunities in the market, we had the ability to grow at a much faster pace. You do get impacted by short-term economic environment, but if you take medium- to long-term view we have a potential to grow double-digit for many, many years. There are opportunities on the market.

So I don't think we are come to a strategic point in growth for us to look at making a permanent accelerated dividend payouts.

Okay. And my last question, maybe for Sandeep, is am I correct that your number one customer, which did continue to decelerate, is still in the BFS vertical?

Can you please repeat the question?

Your number one customer, is it still in the BFS vertical?

Yes. It is in the financial services vertical, yes.

Okay. Thanks, Bala.

Thank you. The next question is from Nabil Elsheshai of Pacific Crest Securities. Please go ahead.

Hi, guys. Thanks for taking my question. I just wanted to ask about the investment in sales and marketing. You're seeing some pretty steady increases in that and then it declined substantially this quarter. I'm guessing some of that's the euro, but it seems to be down even accounting for that on an absolute basis. So are you cutting back in investments in that and what's that going to look like going forward and, if so, how does that align with the more long-term focus you guys are talking about?

So this is Basab Pradhan. So quarter-to-quarter changes in our sales and marketing expenses are really -- shouldn't be taken as a trend. We have some lumpiness in marketing expenditure because of some major events that we -- either third party events that we do or our own events as well.

But I think the headline news here is what we are doing on re-architecting our sales force for the future. That is going very well. We have a very good handle on what we need to do for our sales force to be able to take the Company into the 3.0 realm of things that -- the strategy that we've put in place. And that is going quite well and hopefully I will have more to talk about in the coming quarters about this.

So we should expect to see that, just lumpiness that reaccelerates going forward?

It's lumpy so it goes up and down, that's what I meant by lumpy because we do have some major events. We sponsor -- at this time we were lead sponsors on, for instance, Oracle OpenWorld, on an SAP event as well. So these are fairly large commitments from us. That's what I meant by lumpy.

Okay. That's fine. Just one other question I have. I apologize if this was covered earlier, but just on the wage front, given maybe a little bit of slackening in demand, what are you seeing on the wage inflation side and the hiring market maybe easing up a little bit.

Wage is functional supply and demand. This year is going to be geared around 10% to 13% increase in offshore wages. It's too early to decide on basis for next year. Probably we'll get a better view in April. But looking at the situation today, we believe the rate increase for next year offshore could be in the high single digits, not more than that.

Okay. Great. Thanks for taking my questions.

Thank you. Ladies and gentlemen, due to time constraints that was the last question. I would now like to hand over the conference back to Mr. Sandeep Mahindroo for closing comments.

Thanks, everyone, for joining us on this call. We look forward to talking to you again during the course of the quarter. Thanks and have a good day.

Thank you very much. On behalf of Infosys, that concludes this conference call. Thank you for joining us and you may now disconnect your lines. Thank you.