Infosys Ltd (INFY) 2014 Q1 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Infosys earnings conference call. As a reminder, all participants' lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. (Operator Instructions).

Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Sandeep Mahindroo. Thank you, and over to you, sir.

Thanks, Linda. Hello, everyone, and welcome to Infosys Q1 '14 earnings call. I am Sandeep from the investor relations team in Bangalore. Joining us today on this call is CEO and MD S. D. Shibulal, CFO Mr. Rajiv Bansal, along with other members of the senior management team.

We'll start the call with a brief remark on the performance of the Company for the recently concluded quarter, followed by outlook for the year ending March 31st, 2014. Subsequently, we'll open up the call for questions.

Before I hand it over to the management team, I would like to remind you that anything we say with regard to our outlook for the future is a forward-looking statement, which 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 to Mr. S. D. Shibulal.

S.D. Shibulal^ Good evening, everyone. Welcome to the earnings call. Thank you very much for joining the call.

Let me begin by giving an overview of the recent quarter, Q1. We have done reasonably well in Q1. We had 2.7% growth quarter on quarter on a reported basis. In constant-currency terms, growth was 3.4% quarter on quarter. Our growth was driven by retail and CPG segment and manufacturing amongst verticals and Americas by region.

Our top 10 clients grew by 4%. We added 66 new clients during the quarter. We added 10,000 employees, gross addition, Q1. Our attrition during the quarter was 16.9%.

Our margins were flat sequentially from Q4 to Q1. The benefit of a weaker rupee was offsetted by residual impact of our last year's compensation increases and investments we made in the business.

I will now talk about some of the key drivers and opportunities that we see in different verticals. Financial services continues to see challenges with the downsizing in the industry creating pressure on budgets and spending. Cost reduction continues to be the primary focus area, leading clients to focus on optimization and consolidation of IT and operations' spend.

Focus on compliance-related spending, vendor consolidation, infrastructure modernization, information management and cloud are the key initiatives visible in this sector. Insurance companies are focusing on customer centricity, with a strong focus on business and technology programs concerning digital and information management.

Pricing trends in this sector are challenging as clients continue with belt-tightening initiatives. With the industry still seeing tough times, we believe we will continue to see volatility in this sector.

In retail and CPG, we see increased vendor consolidation and focus on reducing cost of operations in Americas region. In Europe, we see demand for omni-channel commerce in retail and demand for SAP, mobility and platform capabilities in CPG. In APAC, retailers are focusing on omni-channel integration and expansion into regional markets. In life sciences, we have seen continued activity towards mergers and demergers and business and IT initiatives being taken in support of the same.

Overall, in retail and CPG, due to continual focus on reducing nondiscretionary spend, even though there are opportunities to work with clients in many areas, we are seeing more aggressive procurement practices and requirement from vendors to have a higher risk appetite.

Coming to manufacturing, we see various trends by sub-verticals. High-tech companies are focusing on cost optimization, asset-light operating models and expansion into emerging markets. [ISCs] are focusing on process transformation to enable new license models and subscription commerce. Auto companies are focusing on connected cars, connected vehicles, digital consumer and leveraging the power of emerging economies. Aerospace companies are focusing on increasing production levels to meet order backlog.

Clients are looking at doing more with less and looking for quantifiable ROI for spending programs. Here in this segment, discretionary spending is under pressure. Pipeline of large deals in manufacturing is not as robust as we would like it to be.

In energy, utilities and communication services space, spending is under pressure in most of the areas, primarily due to revenue challenges faced by the clients. Pressure on IT spending is visible in the form of focus on cost reduction and operational efficiency in telecom, steep reduction in budgets in some large energy clients and inability of large utility companies to drive rate card increases, thereby hurting their revenues.

Pricing in this segment is broadly stable, though large deals are coming at a lower margin due to competitive intensity in the market. Coming to large deals, most of the pipeline is driven by clients looking to restructure existing spend, with a bias towards ADM and infrastructure management.

We won seven large outsourcing deals in Q1. Six of the seven deals were in Americas; three of the seven were in financial services, two were in manufacturing. The pipeline of large outsourcing deals continues to be stable, though closure rates and pace of ramp ups on these deals are uneven.

We continue to operate in an uncertain macro environment. As I mentioned earlier in my vertical commentary, clients' willingness to spend in discretionary areas is limited. Key leading indicators like decision cycles and pipeline of deals have improved, but at the same time, pointing to a sustained improvement in discretionary spending.

There is an acute focus on cost cutting and optimizations, which creates a downward bias on realization of [proportion] realization. There is uncertainty on the political paths, final outcome and timelines of the immigration bills in US. We are not seeing the bill impacting clients' decision making. Although some clients are focused on mitigation plans, they have expressed their optimism about our ability to provide them uninterrupted services.

Cross-currency challenges have become more acute since last quarter. This quarter, we have lost $13.7m in revenue due to cross-currency challenges. Because of the above factors, we have kept the full-year guidance unchanged. Even though we grew faster in Q1 than the 0.5% to 2% growth which was needed a quarter back to meet the upper end -- upper and lower end of our guidance, it is too early to upgrade guidance after just one quarter.

With that, let me now pass it on to Rajiv to give you details on financial highlights.

Thank you, Shibu. Good evening, everyone.

As Shibu said, we had a reasonably good quarter. Our revenues for the quarter grew sequential by 2.7% in dollar terms. On a constant-currency basis, our revenues grew 3.4% quarter on quarter. Our EPS for the quarter is at $0.73, as against $0.76 last quarter. Our gross margin in Q1 was flat at last quarter's level of 34.9%.

Operating margins for the quarter were at 23.5%, same as Q4 '13 level. The rupee depreciated by 4.9% quarter on quarter to INR56.56 from Q4 levels of INR53.93. The benefit of rupee depreciation was offset by an one month's additional impact of last year's onsite salary hike and the recently announced hike for sales employees, effective May 1. We continued making investments in the business, which also had impact on the margins.

Our net margins were 21% in dollar terms this quarter, compared to 22.9% in Q4. The decline in net margin was due to lower exchange gains on the non-operating side of our income and the R&D tax credit, which was taken last Q4, and also because of increases in [asset] tax rate in India from 32.45% to 33.99%.

Volume growth was at 4.1% quarter on quarter, though realizations dropped by about 0.7% during the quarter, due to adverse cross-currency moves. Though inflation has moved up this quarter, it is still low, which gives us some leverage for the future.

Our utilization for IT services, including trainees, increased to 70.7% in Q1, as compared to 68.5% last quarter. Excluding trainees, it increased to 74.3% in Q1, as against 71.4% in Q4.

We have given 8% compensation increase to sales folks effective May 1st, 8% increase to onsite offshore staff, effective July 1st, and 3% to onsite workforce, also effective July 1st, except for people who have already been covered in the last cycle wage hike. This has put an additional pressure on the margins for Q2 to the extent of roughly about 300 basis points.

Our utilization has been able to offset some of this. Also, there's a 5% depreciation in currency from Q1 realized rate of INR56.56 to the Q2 assumed rate of INR59.39, which should provide an upside of 125 basis points on the margin.

Our cash and cash equivalents, including available-for-sale assets were at $4.054b. Cash generation continues to be strong. Our operating cash flow as a percentage of net profit this quarter was 100%, so the DSOs have marginally gone up to 66 days.

We saw significant volatility in currency during Q1, with the rupee depreciating by 9.4% against the dollar from end of March to the end of June. Our hedging strategy has resulted in a net positive impact of $3m. We had outstanding hedges of $1.173b as of June end.

We saw US dollar appreciate across the board on (inaudible) of [Federal Reserve] and better-than-expected economic data from the US, but GPP and euro were fairly stable. Australian dollar was the biggest loser, depreciating 11.4% from March-end rate.

We have maintained our guidance at 6% to 10%. Our current guidance if restated based on (inaudible) guidance ex currency rates will be 7% to 11% since the impact of currency over the last three months on FY '14 revenues is roughly about $72m.

Our current guidance if stated based on FY '13 cross-currency rates would be 7.4% to 11.4% since the impact of currency on FY '14 was $114m compared to the rates in FY '13. With that, I'll open it up for questions.

Thank you very much, sir. (Operator Instructions). Our first question is from Joseph Foresi of Janney Montgomery Scott. Please go ahead.

Hi. Good morning. I guess my first question is, we've seen some inconsistent execution over the last, I would say, two or three quarters. Any sense on whether that inconsistency is starting to level out, and if you could provide any color on why you feel that way, that would be helpful.

It is true that our performance has been volatile over the last two, three quarters. We do have a higher level of dependency on discretionary spend. But as you rightly said, it has been volatile over the last two, three quarters.

In fact, I would like to say this again, I will not consider one quarter as a secular trend. We are operating with a certain number of challenges, which I outlined, and these challenges does create volatility in our performance. This quarter, we have done relatively well. We have not changed our guidance. We are cautiously optimistic about the coming quarter. We would like to see a couple of more quarters before we consider this as a secular trend.

Okay. And then, on the margin front, could you just walk us through the puts and takes on what could be impacting margins over the next two or three quarters? I know you talked about wage increases. I know we've got the rupee moving a certain way. I think you've talked about investments in the past. So I'm just trying to get a feel for what the margin outlook is for the business.

If you look at our margins this quarter, in April we spoke about certain headwinds in our margins for the quarter, and to some extent, that has been negated by the depreciating rupee.

The rupee has [held up] to the extent of about 1.2% this quarter, rupee depreciated on an average of about 4.9%. We had the wage impact -- full-quarter wage impact of wages hike that we gave in February of this financial -- or of last financial year. We had a cross-currency impact, because the loss -- gain that we got on the rupee were negated by the cross-currency movement.

As I was saying, our growth in constant-currency basis this quarter was 3.4%, as it is reported number of 2.7%. We lost roughly about $13.7m of revenue by cross-currency movement, which also impacted the margins.

We have given promotions in January, and the linked hikes for that was given effective April which has impacted our margins for the first quarter. We also had realized rate drop of 0.7% during the quarter, which impacted our margins by roughly about 0.5%.

So there are many factors which have contributed to margin increase or decrease, but I think we have done reasonably well in terms of keeping our margins at [23.5% for the quarter in spite of the headwinds that we spoke about in April.

As we move into the next quarter, we have -- as I mentioned that we have given wage hikes effective July 1st to the majority of our people, and that is going to have an impact of roughly about 300 basis points on the margins. But it could negated by a depreciating rupee.

My average rupee rate for the first quarter has been INR56.56, and the closing rate as of June 30 has been INR59.39, which is a 5% depreciation of rupee, which should help me on the margin front by roughly about 1.2%, 1.3%. And, also, when I see growth, there would also be an uptick in utilization and some of this margin impact headwinds that we're talking about could be negated by the utilization uptick.

So I think though we have some [headwinds] on the margin front, we still have some upside and some cost levers that we can look at in terms of increasing our margin, but I think the wage hike would impact the margin in the coming quarter.

And also, if we look at our utilization of 74.3%, we would like our utilization to be about 80%, 81%, so I have clearly about 5.7% to 6.7% elbow room on the utilization. So a lot of margin will depend on how much is the growth for the year, and if we see a big growth for the year, I think a lot of the impacts that we're talking about right now, headwinds, could be managed in terms of the utilization going up and the rupee depreciation that we're talking about.

Great. And then just one last quick one for me. On the visa reform stuff, can you share with us any contingency plans that you have in place, or I think you mentioned in your commentary that maybe clients are starting to put in place?

So on the immigration front, as you know the details and the Senate has passed a bill. The House bill is actively presented, and finally, they will have to consent. There is quite a lot of uncertainty around the shape or form in which the bill will finally come through. All we can do at this point is plan for it, plan for various contingencies.

The first and foremost thing from our side is to make sure that our services do not get interrupted to our clients. That definitely requires close cooperation with our clients. We are talking to our clients, especially the [immediate] clients. We are discussing with them the various aspects of the bill. We are not seeing any impact on decision making because of the bill at this point in time. Our relationships with our clients are very long term. They understand that this is not an Infosys issue. This is an industry issue, and which basically tackled.

Now, the contingency plans can include a change in onsite/offshore ratio, going in the way -- a three-tier approach of delivery. That means very few people on the client site; you can have development centers in the same time zone or the same region, along with offshore.

We're recruiting more people on site which are local nationals, applying for green cards for certain type of people. So there are multiple mitigation ideas and plans which one can formulate, and some of them we are discussing with our clients. We are in the process of figuring out how to execute.

But the most important thing is to make sure at this point that we are in close contact with our clients, continuing with the discussions on various aspects of the bill -- various aspects of the bill and watch the progress of the bill very closely.

Thank you.

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

Yes. I want to ask a question about high-level strategy, especially with Chairman Murthy returning to the Company. Can you just articulate the latest strategic plan to drive improved earnings and revenue growth at Infosys? And if you could also, as you speak to the high-level strategy, if you could articulate what the investment and longer-term margin implications of that strategy would be, that would be very helpful. Thanks.

As you know, Mr. Murthy's focus is always to create superior financial performance. He has done that in the past and sis coming to -- our focus will also be the same, which has two parts to it. One is to create high-quality growth. The second is to have leading margins.

So let me address the growth piece first. We have three segments of growth, three segments of -- three offerings in the markets, and the number-one thing is to provide higher and higher customer value through these offerings. At the same time, growth is important in these three offerings in various dimensions.

Let me start with the smallest so that I can answer the rest. If I look at product and platform space, even if it grows at a very large percentage, it is on a smaller base. That alone -- that is not enough for us to actually meet our aspirations. [Consolidated system integration has grown above our average, our Company average, for the last I should say few quarters.

Business and IT operations has grown below our Company average. That is the largest segment which we have. That is 62% of our revenue, and if we don't create growth there, we will not be able to meet our aspirations.

Over the last two, three quarters, you have seen the deal wins pick up in that space. Now, this quarter, again -- so the growth in this space comes through large outsourcing deals. We have made investment and we will continue to make investments in winning large outsourcing deals. This quarter, we had seven wins totaling to $600m of revenue in the outsourcing space.

Now, the challenge in this space is, number one, this is a space in which differentiation is difficult, so we need to invest in building solutions. We need to invest in automation, in productivity improvements, creating efficiencies and use of tools and technology to make sure that we differentiate.

Number two, it is a price-sensitive space. If you see some of the industry reports, a fair part of this space is rebids. That means clients are rebidding at the end of a contract, and they are even more price sensitive. So we have won $600m of deals, seven deals in this quarter. At the same time, and in the beginning of the deals, these deals are margin dilutive.

However, our objective is to make sure that they are margin neutral through the life of the deal, and that is where we need to focus -- we need to put an energy, and that is achieved through some of the levers I talked about. So that is the focus on growth.

On the margin trend, there are multiple levers which we need to modify. Number one, on the large outsourcing deals, we need to drive automation, productivity improvement and things like that to make sure that on the lifetime margin is margin neutral. Second is to look at other cost levers, like onsite, offshore ratio, reducing nonproductive spend, changing various other levers, driving various other levers, to make sure that we take out cost in the system and drive towards better financial performance in the margin dimension.

These are the areas in which there are discussions and action plans. It is definitely too early, because Mr. Murthy has been here for only the last less than two months now, and these are the areas where the discussions and action plans are being formed.

But as I said in the beginning, his, as in the past, his priority is always superior financial performance, which is high-quality growth and leading margins.

Okay, great. That's extremely helpful, and just if I can clarify the financial implications, what I heard there is that you're adding focus to winning large outsourcing deals. And if I heard you correctly, that is probably going to cause margin pressure in the short and medium term, but in the long run, if you can work on things like automation and other efficiencies, you can make those margin neutral? Is that an accurate summary of what I heard on the financial implications?

Yes.

All right, wonderful. And then, can you just define the timeframe there? Short- and medium-term pressure on margins, is that a one- to two-year type of a timeframe before you would have time to drive the efficiencies to make that margin neutral? Or is it a shorter period or a longer period than one or two years?

So there is one element I mentioned which I want to add when I talked about it. It's not only about the large deals where we will create automation and other productivity improvements to create margin neutrality over the life of the program. There are other cost-optimization measures which are being put in place. I mentioned some of them. That is removing nonproductive spend, whether it is on site or offshore, driving the performance culture, number two. Number three is there are other levers, right? For example, utilization is a lever. It has gone up from 71% to 73%. So if I can drive the utilization up through better planning, better recruitment and better deployment, that's a margin lever.

You have onsite/offshore ratio as a lever. It has actually gone up and I understand it has gone up because of some of the projects and things like that. If we can move it back by, I don't know, maybe 5 points, 6 or 7 points over a period of let's say next five, six quarters, then that is a margin level which we can look at.

So there are multiple cost-optimization opportunities for us, and Mr. Murthy, as I said, is very focused on performance, on growth and on margin.

Okay. And just one other quick clarification, you went through the puts and takes on margins in the upcoming quarters. Your current operating margin is at 23.5%. Are you roughly expecting your fiscal '14 operating margin to be around 23.5%, given the move in the rupee that has been experienced over the last three months? Are you thinking margins will be relatively stable for the full year?

No. As I said, we have not given a margin guidance or an EPS guidance for the year, and the reason being a lot of our margin will be driven by the growth that we see during the year. I clearly laid out the headwinds and the tailwinds that I've seen on the margin as we move into the next quarter and we clearly articulated about the headwinds that we saw at the beginning of the financial year. So as I said, in the first quarter we have been able to maintain our margins same as what was in Q4, primarily because of the rupee depreciation and also the utilization benefit which helped us -- which gave us a benefit on the margins. But that was negated by the wage hikes, the promotions and the productivity drop, the productivity drop that we saw.

As we move into the next two quarters we have headwinds in terms of the salary hikes that we are giving effective July 1. As Shibu was saying in the light of sourcing deals there is more competition, there is more price sensitivity, so there would be some pricing pressure unless we see discretionary spend come back.

To that extent I think the depreciating rupee helped certain negating the impact or the headwinds that we are seeing in the margins. And I am seeing clearly about -- if the rupee is doing say about INR59.39 or up I'm then seeing about 1.2%, 1.3% uptick in the margins from there which would help negate some of the margin negatives on the salary hikes.

So I would not like to say where our margins are going to end up in the next two or three quarters, because a lot of it will depend on what the growth is, how much is the utilization uptick that I can get. And that will help in negating some of the impact of the salary hike. So we are all trying to increase our growth trying to see how to get (inaudible) growth that we spoke about. And any growth would help us in keeping our utilization which will help us in maintaining our margins.

All right, thanks guys.

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

Hi. I'd also like to ask a couple. First, you mentioned that you're subject to discretionary spending. Your consulting package implementation area actually had some good growth and increased as a percent of total revenue. How are you thinking about that business? And what's driving it, particularly given that's more of a discretionary item? How are you thinking about that business in terms of the growth for the balance of calendar year '13?

I am really sorry the line was not clear. Will you please kindly repeat the question?

Yes, no worries. The consulting package and implementation revenue by service offering was strong. Can you talk about what drove that and how you anticipate the growth of that going forward, particularly since the consulting side in particular is more subject to discretionary areas? And you highlighted that as a risk, so it did well is that going to continue to do well and if so why?

So first of all I think we are well regarded in that space, definitely well regard in that space especially in certain verticals like the retail and manufacturing.

Number two some of the revenue growth which we are seeing this quarter is [as respect of Lodestone. The Lodestone integration is now complete, and we are getting much more closer to the plan there and the planned growth. And the synergies of Lodestone is allowing us to win better deals in Europe.

See the environmental challenges do exist in that space, but we have a strong base. We have a strong systems and consulting integration in the US in two or three verticals. Retail for example we work with 10 out of the top 10 retailers in the US in the business transformation space.

In manufacturing, we work with many of the high-tech manufacturers on their transformation and the [optimum implementation space. We do get deals where it has been -- we do actually get failed deals for lack of any other term, where we take over deals -- we take over transformation programs which are not done well or clients are trying to do it for the second time.

I think let me ask Steve to add to this.

Yes, thanks, Shibu. Yes, it interesting, we've developed a little bit of a specialty over the last few years of picking up projects that other consulting firms have failed to do and then doing them successfully. There are some notable examples and one of the major CPG companies in the world have a major program to help them completely redesign their strategy processes business and technology for how they did order the cash and their supplier interface.

One -- another company in Europe is an agribusiness company, a very large agribusiness company where again one of the other major consulting firms had done a roughly $100m failure and took that over and made it very successful.

So I think that we've really come into our own in consulting and can go head to head with anyone. We are especially proud of the fact that we think we pioneered the use of global delivery as applied to management consulting, and the implementation of other's recommendations starting in the 2002, 2003, 2004 era.

And I think that right now we are working very hard to break down the barrier between strategy consulting and implementation. And so, on every one of our programs we link every business activity to the creation of business value either through free cash flow or the increase in shareholder value. And so it's working in the market. I think the clients are seeing the value that we are delivering to them. We are cost competitive. We have great people. And I think that's why you seeing us I think outperform some of our competitors at both the top line and the bottom line.

All right, fair enough. And the second question I wanted to ask is about headcount growth objectives, what are your targets? And specifically you mention utilization, how do you balance your growth objectives on headcount? And I think you said target -- increasing utilization if you could just talk about where you think -- how you think your headcount is going to increase? And what do you anticipate or what would you like to achieve say by yearend in terms of your utilization rates? Thank you. And that's it from me.

Utilization has moved up from 71% to 74% quarter on quarter. We have added 10,000 people during the quarter. At the same time the net addition has been 565. Out of the total 10,000 which we added 5,000 people, 5,000 plus, I am giving approximate numbers, 5,000 people joined Infosys Ltd. Now our aspiration of utilization is somewhere between 78% to 82% that will be our optimum utilization. So we do have some way to go to get there.

Meanwhile there are about 5,000 offers which we have given for people to join this year. This was done last year. If I apply 80% conversion rate somewhere between 3,500 to 4,000 people will join during the year.

Finally, utilization is a reflection of growth. Why did the utilization go up quarter on quarter? Because our volume went up by 4.1%. So it is definitely a reflection of growth. And growth -- there are three aspects to utilization, growth, intake and attrition. So with better planning and better growth we are hoping that utilization will get closer to our aspirational range of 78% to 82%.

Okay, thank you.

Thank you. Our next question is from Glenn Greene of Oppenheimer. Please go ahead.

Thank you. I just wanted to go back to business operations for a second. I know the last few quarters you talked about pricing pressure there and we kind of look at your aggregate realization and that was overall flattish. And I suspect that was largely mix with TSI increasing as part of the mix with the benefit from Lodestone, so I just wanted to clarify that.

But really wanted to get -- to drill down and get a better understanding for what you're seeing in like-for-like pricing within business operations. And is it any better or worse than it's been the last few quarters?

So the business operations space is definitely difficult to differentiate and more commoditized than other areas. Even in business IT, business and IT operations there are certain areas even more difficult. So I would say certainly there have been -- business operations space is more difficult.

The large outsourcing deals especially the rebid ones are price sensitive. They are margin dilutive in the beginning. It will also require us to invest in one way or the other. So for example if you look at the Harley Davidson deal, we'll build a development center in Milwaukee for that deal, so things like that.

I will ask (inaudible) to make them margin neutral during the life of the program through all the interventions I talked about. At the end of the day one needs to look at these things as a portfolio. That means the consulting and system integration, the business IT operations, products platform, cloud, mobility, engineering all of these as a portfolio. And our objective is to make sure that they can meet our aspirations by managing it as a portfolio.

I don't want to comment on what percentage we presently see, and that is -- it's a very deal specific decision to make. It depends upon the size of the deal and longevity of the deal and whether it is a strategic customer whom we are trying to defend. All of these factors go into the deal pricing.

Okay. And then another question, different direction but the public services area saw a couple of quarters in a row a very nice sequential strength, maybe you can comment on what's driving that and has there been a few large deals and this is sustainable going-forward trend from here?

Yes, hi, this is Ashok. The basic growth in our healthcare business has been on the back of the large District of Columbia Health Exchange program. After that win, based on that performance, we've had a couple of other wins in the healthcare sector.

So we think that in the short to medium term this is fairly sustainable, the growth that we have seen in that. And of course the fact that many of the states are unable to meet the timeline to build their exchanges and therefore required to patch themselves onto the federal exchange will diminish some of the volumes that we anticipated as we hit the end of the year.

But overall with what's one of the larger deals we have won, as Shibu was alluding to earlier, being in the healthcare space that has also given us some traction which we will build on through the course of the year.

Okay. Thank you.

Thank you. Our next question is from David Grossman of Stifel. Please go ahead.

Thank you. So while I understand your commentary about the skill of the core outsourcing business and the need to recapture share and grow it, this segment by your own admission is commoditizing. So that said, perhaps you could help us better understand what your longer term objective is in investing in this segment given that once the utilization dynamic plays out and the business becomes more difficult to grow profitably, particularly if the currency trend reverses. So perhaps again you could help us understand again what the longer term objective is as you re-up if you will in this segment of the market.

So we have -- when we look at our offerings to our clients, there are three major offerings, consulting system integration, business and IT operations and product and platform. We have to get growth in all of them to achieve our aspirations. Again, I don't believe that we can grow one segment to counter or to balance the lack of growth in another segment. I don't believe it is possible.

Products and platform even if it is growing faster, let's say even if it's growing 30%, it is not going to make the (inaudible). Business and IT operations is about 62% of our revenue. All that is not commoditized. There are certain areas like for example application management is getting commoditized.

To create aspirational growth we need to grow all the three segments. Now in consulting and system integration that growth will be at higher revenue productivity, bigger onsite and probably better margins. In business and IT operations, what we need to do is to drive efficiency, productivity, high utilization, [life scaling], automation and other things to make sure that our margin aspirations are met.

At the end of the day, margin is a reflection of the price and the operational efficiency within (inaudible). So in a space where pricing is more -- there are pricing challenges, we have to drive more operational efficiency to make sure that we meet our margin aspirations. So that is what we are trying to do in that space.

Even long term I am very clear that all these three segments have to grow. Products and platform will grow at a higher percentage, and it will eventually catch up to a more balanced portfolio. But until that happens I think all the three segments have to grow. And we have to come with strategies to drive operational efficiency in the -- within the IT operation space which will give us -- which will allow us to realize our margin aspirations.

So just to clarify a little bit, as you probably know, Shibu, the traditional asset-based outsourcing business went through that cycle as well and it became very difficult over a period of time to not only realize those efficiencies but also to pass them through or realize those yourself without passing through those savings to the customers. So perhaps you could elaborate on why you think this segment will be different and play out differently than it did in the asset-based game.

And then secondly when you look at those growth initiatives in your current base of business how much of that is with existing outsourcing clients versus perhaps just new logos, so they are just buying those newer services.

So as you can see we have over the last 10 years, so over the last 10 years we have invested heavily in the building of very strong consulting and system integration capabilities. And I would tend to believe that while we are -- we have established we have a long way to go, and a long run rate for us to execute on that strategy.

If you look at our consulting and system integration system revenue, which is 34% of our revenue today, the industry average is probably 18% to 20%, probably 18% that's the number I remember, which means we are way ahead of the industry in creating an offering which will in a sense counterbalance some of the challenges which we have in the -- within IT operations. That we have done over the last 10 years.

In the last 18 months we have started on our journey of product and platform. We have $730m of booked business in product -- in the platform space, 46 clients on boarded, 79 clients including products and not including (inaudible). That business is in an investment phase. Over the coming years as we execute on our strategic direction that percentage of revenue will go up.

So as we have articulated in the past, eventually these three offerings will balance out, one providing higher revenue productivity, one providing higher -- and also when we look at business and IT operations, today our onsite/offshore ratio for business and IT operations is very similar to consulting and system integrations. While I see the consulting and system integration probably going up a bit, we can look at business and IT operations coming down. Platform and product business is predominantly offshore business.

So the whole strategy is about creating a portfolio which will provide -- which has various differentiated characteristics and which will allow us to meet our aspirations as a portfolio. So if I look at it five to seven years out because these kind of changes do not happen overnight, our aspiration is to make sure that our portfolio balances itself out, and it will allow us to realize our aspirational margin.

Now by then we will have another set of challenges and we will have to come up with another set of strategies. But from here today this is what I see.

I see, great. Thank you very much.

Thank you. Our next question is from Jesse Hulsing of Pacific Crest. Please go ahead.

Yes, guys, thank you. Shibu, to come back to your commentary around larger deals and the pricing trends within that segment of your business, do you see any signs that the declining pricing has been occurring over the last few years will ever stabilize? And what would be the driver of that if so?

I think the pricing apart from any strategy, specific (inaudible) also reflect the demand/supply environment. So the demand picks up and the pricing power comes back in all services lines, some service lines better than others. That's number one.

I don't see any secular trend in the lower [cell] of that trend. At the same time I am also seeing that wherever you are able to bring in innovation, so for example if you look at our alliance with IPsoft which is a very innovative thing to do, that allows you to actually differentiate in the market and get better pricing power.

So even in commoditized services you have an opportunity to be innovative and get pricing power. In some of our solutions which are [multi-tier] solutions where we combine infrastructure and application management or where we do a run and transfer kind of a program in the interest of this space, because of the uniqueness of the solution we are able to get -- we always get a pricing premium, but we are able to get a better pricing premium.

So even in commoditized services if you can bring in innovation, if you can bring in unique solutions you are able to demand pricing premium. So when I look at the future two aspects one is demand/supply balance, second is innovation which will allow you to create pricing power.

I am going to ask B.G. to add to this. I am going to ask B.G.

Thanks, Shibu. To give a specific example, one of our large investment banks particular opportunity was about research and publishing reports and this opportunity came while our clients were looking at consolidation of the services. They had three other vendors doing it and they had their own captive doing -- carrying out these services. When we were allowed to bid for this we not only came out with the response of how Infosys has the capability to carry out this kind of research and publish, but more importantly we positioned our platform, [ResearchEdge] which actually [recruited the way not only the research was carried out but published in real time.

And none of the other vendors had anything close to what we could demonstrate in terms of differentiation, because we were able to position our platform to service this operational need. So this involves particularly IT and BPO service offering which is typically commoditized. And when we were able to showcase our platform in lieu of just offering a [few] service dimension, there was simply no competition. And this is how we will be able to drive the conversation if we are able to bring in our IT to bear on even traditional outsourcing services.

Great. That's great color, B.G. And to follow up along the same lines the rupee depreciating is great for supporting near-term margins but it also creates the risk that dollar pricing can come down because your offshore labor costs are going down. Have you had any conversations like that with customers where they see the rupee at INR60 to the dollar and are wondering where their rate negotiation is?

And have you seen any competitors start to use that freedom or waffle room this rupee depreciation creates as a means to get more aggressive with pricing, particularly on these larger deals?

This is Ashok. Typically we have not found any of our customers wanting to engage with us in situations where there is any change in the currency. They spend in the currency, in the local currency and we bill them in the local currency. And it's a fairly slippery slope if you start negotiating, if the client starts negotiating every contract based on where the FX rate is because they could lose some and they could win some.

We have not been invited to any conversation of this sort. I don't think they necessarily pay attention to a depreciation rupee and ask us to come back to the table and renegotiate a contract.

Great, thank you. And I guess as a final looking at this from a bigger picture perspective, Shibulal I know your strategy is to land larger deals and increase the available volume to your company and then drive efficiency through scale over the long run.

This isn't a new strategy within the industry your competitors have been doing this for a while. I guess looking at where pricing is trending do you think there is a limitation to how much efficiency you can squeeze out of these larger deals?

And if I look at the industry you've been a $1b company for almost a decade now, how much more innovation on your delivery and is there left to drive the type of efficiency necessary to make these contracts profitable in the long run?

Please remember that is not the only strategy. So we have different strategies in different parts of our business. In the outsourcing space, and when it comes to large outsourcing deals, I agree with you that's the strategy. And so in consulting and system integration, within product and platforms, in cloud, in mobility, in big data, in [blind] technologies that is not the strategy.

So strategy which you are talking about is -- and this strategy does not apply to all the deals in that space. It applies to a certain number of deals in the large outsourcing space where either we want to win it or it is specific to us or it is a specific client. That is number one.

Number two there is a limit to what you can do; there is no doubt. But as time goes by there are new limits being formed. So for example in infrastructure management with the IPsoft alliance we are able to take that to a new level. In some of the large outsourcing deals by applying one of the platforms that B.G. talked about these could not have been done, actually we could not have done it two years back. So there are new levels of innovation which we can bring.

But I agree with you there is a limit to which you can go. But the important point is to know that this is only a part of our business where we are trying out that strategy.

Mr. Hulsing?

Thanks B.G., thanks, guys. B.G., Ashok, Shibu great commentary thank you.

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

Thanks, everyone, for being a part of this call. We look forward to talking to you again. Have a good day.

Thank you very much, members of the management team. Ladies and gentlemen, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.