Infosys Ltd (INFY) 2014 Q2 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 now hand the conference over to Mr. Sandeep Mahindroo of Infosys. Thank you and over to you, sir.

Thanks, Inba. Hello, everyone, and welcome to Infosys' Q2 FY14 earnings call. I'm Sandeep from Investor Relations team in New York.

Joining us today on this earnings call is CEO and MD Mr. S.D. Shibulal, CFO Mr. Rajiv Bansal, along with other members of the senior management team. We will start the call with some remarks on the performance of the Company for the recently concluded quarter, followed by outlook for the year ending March 31, 2014. Subsequently, we will open up the call for questions.

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

Thank you, Sandeep. Good evening, everyone. Actually, good morning, everyone, and welcome to our earnings call.

I will begin by giving an overview of our performance of Q2. We have done fairly well in Q2. We grew 3.8% in reported currency terms in Q2. In constant currency terms we have grown 4.2%. Our volume growth has been 3.1% quarter-on-quarter in Q2. Onsite volume increased by 0.7% and the offshore volume increased by 4.3%.

Our realization increased marginally, by 0.6% in reported currency terms and 0.9% in constant currency terms. In constant currency terms, the offshore revenue productivity went up by 1.7% and the onsite revenue productivity went up by 2.0%. Our utilization also has gone up. Our utilization excluding trainees is at 77.5% at the end of Q2.

We have seen very strong client additions in Q2. We have added 68 new clients, taking the total to 873. The net addition of clients during Q2 has been 37. More importantly, five of those clients are Fortune 500 -- Global Fortune 500, which is a very good sign. These are the clients which will give us growth in the coming years.

We have added 12,000 employees during Q2. Our total strength today is at 160,227.

Our operating margin is 21.9% after the provisions we have done of $35m. Without the provision, our operating margin is flat from Q1 to Q2, at 23.5%.

Let me give you some color in different verticals, and we'll start with financial services. We have seen some increased momentum during the last three months, both in US and Europe. It is predominantly driven by additional strength in the area of new products and channels. We are also seeing interest in cloud and mobility -- increased interest in cloud and mobility compared with a year back.

The spending on compliance and regulatory related matters continues in financial services. At the same time, we are seeing positive momentum towards managed services, social media and business-facing platforms and products.

However, in financial services the overall discretionary spend continues to be muted, with a flat to negative outlook. Clients continue to focus on savings and reducing their operational costs. Vendor consolidation, infrastructure modernization, digital transformation continue to be of interest to clients in financial services.

In retail and CPG, we are seeing a new wave of vendor consolidation happening. Digital marketing continues to see strong investment. At the same time, we are seeing strong focus on reducing non-discretionary spend, and this one is leading to creation of large legacy opportunities for us. We are seeing a slowdown in large transformational deals in retail and CPG.

In the area of business intelligence and digital commerce, we are seeing better momentum compared with last year.

In manufacturing, the momentum in high-tech remains positive, even though the client spend is relatively stagnant due to sluggishness in PC markets and slower growth in Europe and emerging economies. We are seeing spending; we are seeing spending in automotive, aerospace and other industries, driven by increased spend on technologies like digital, connected vehicles and analytics.

Global expansion continues to be a priority to our manufacturing clients. The primary growth driver for manufacturing will continue to be Americas, with Europe expected to see some challenges as some large transformational programs are nearing completion for us.

Energy and utilities -- continue to see energy and utilities and communication service providers space continue to see challenges. Especially the wireline telecom space continues to be a challenging area for us. We have been focused on increasing our revenue in wireless and cable during the last couple of years. While our percentage of revenue from wireless and cable has gone up, it is early stages for us to mitigate the risk of the wireline space.

There is limited discretionary spend in this vertical, and these projects are driven by the business. We are focused on proactively creating large deals, and that has led to better pipeline compared with last year in this industry vertical.

Now let me give you some color on our service offerings. Let me start with business and IT services. Overall, most deals in this space are focused on vendor consolidation, end-to-end application management and application modernization.

We have won five large deals in this quarter, with a TCV of approximately $450m. Three of these deals were in FSI, one each in RCL and manufacturing. Two deals were in America, two in Europe and one in rest of the world.

Most of the pipeline -- most of the large outsourcing pipeline is driven by clients looking at restructuring existing spend, with a bias towards ADM and infrastructure management. We are focused on winning large opportunities with new revenue streams.

We continue to see traction in our consulting and system integration space. We continue to win large transformational deals in the consulting and system integration space.

Products and platform has shown action during this quarter. We have 15 new wins, eight in products and seven in platforms. This quarter, our TCV won was 50% more than our TCV win in Q1. Today, our products and platform touches 80 clients across the globe.

We are seeing increased adoption of SaaS cloud-based software development, liberating IP and contract-level solutions over the last two quarters. We have, today, 200 engagements in the cloud space, with 4,500 experts and 35 partners.

Before I conclude, let me give you a brief update on some of the organizational changes we have done recently.

To bring in renewed focus in growth markets, we have combined Australia, China, Japan, Middle East and South East Asia into a unit with different P&Ls for each of those countries. These countries will be headed by respective country heads, who will be responsible for revenue and onsite delivery and operations for these countries. These four countries heads will report to Jith, who will report to me.

We have also created three new vertical units, utilities and resources, insurance and life sciences, and they will be headed by Stephen Pratt, Manish and Ravi. Both BITS and CSA offering heads will now report to Kakal.

We have done these changes to sharpen our focus on growth markets, consolidate our delivery operations, improve utilization and productivity, increase client velocity and improve accountability.

Before I conclude, let me touch upon the guidance. We have changed our guidance to 9% to 10%. In the beginning of the year, we had started out with 6% to 10% as the growth guidance for the year. End of first quarter, beginning of second quarter, we had stuck with 6% to 10%, which meant in constant currency terms 7.7% to 10.7%. The 9% to 10% guidance which we are giving today is 9.9% to 10.9% in constant currency terms.

We have not changed the top end of the guidance, since we remain watchful of multiple factors. Number one, Q3 and Q4 are soft quarters for us. There are holidays and furloughs during Q3. More importantly, we have started on a transformational journey, a number of internal changes, focused on cost optimization, increasing productivity and quality, increasing sales effectiveness and creating a new model of global delivery, what we call VI GDM.

These initiatives are very much in the early stages, and it is too early to derive benefits from these initiatives. These initiatives will take time to deliver benefits. Hence, we remain cautious and we have changed our guidance to 9% to 10%.

With this, let me now conclude and pass on to Rajiv, to give further details on financial highlights.

Thank you, Shibu. Good morning, everyone.

As Mr. Shibulal was saying, our revenues for the quarter grew sequentially by 3.8% in dollar terms, which on a constant currency basis is at 4.2% growth. EPS for the quarter is at $0.67. This includes a provision of $35m for visa-related matters. EPS without this provision is at $0.73, which is same as last quarter. Excluding the provision for visa-related issues, the margin for the quarter is at 23.5%, same as that of last quarter.

We saw significant volatility in currencies during this quarter, with the rupee depreciating by 16% intra-quarter and on average by 11%. We have outstanding hedges worth $1.1b as of September end.

As we have mentioned in our July earnings call, we have given an 8% compensation increase to our sales staff effective May 1, 8% increase to our offshore staff and a 3% increase to our onsite staff, effective July 1. This has impacted our margins for Q2 by approximately 300 basis points. The benefit of rupee depreciation has been offset mainly by salary hikes.

Our net margin is at 18.5% for the quarter, primarily because of a charge that we have taken for the visa-related matter. Excluding this, the margins are at 20.2% as against 21% previous quarter. The reduction is on account of lower interest income in dollar terms because of rupee appreciation and exchange loss because of extreme currency volatility.

Our cash and cash equivalents, including available-for-sale assets, is at $4.297b as against $4.054b last quarter. Our DSO is at 62 days as against 66 days in the previous quarter.

As Mr. Shibulal was saying, we have revised our guidance to 9% to 10% for the full year. Our revised October guidance restated based on last year average rate will be 9.9% to 10.9% for the full year.

With this, I open the floor for questions.

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

Hi. I wonder if you could give us some color. I know you haven't given guidance on it, but if you could talk a little bit about your thoughts on margins through the back half of this year and maybe heading into next year. It seems like the business is starting to stabilize, so you may have maybe better visibility on what that profile might look like. So maybe we could start with the margins.

Hi. This is Rajiv here. If you look at the margin of the Company for the last three quarters, it is at 23.5% operating margin. We have seen a couple of good quarters in the last couple of -- in the last eight quarters we have seen some bad quarters. So I think one of the primary focuses that we have is to ensure that we invest back in the business, we get a good momentum and we see the productivity in our revenues.

Now, what we are doing is we are investing into our sales engine. We are working on the sales effectiveness. We are investing the money back into the employees. We gave a wage hike to employees, considering that employee morale is one of the issues that we need to tackle. Attrition is one thing that we need to focus on. We have increased available pay. We have changed our commission structure to increase more fixed component. We have increased available pay and the bonuses for the employees, and the provision has been made for that.

So I think what we are doing is trying to create a growth engine which will give us sustainable growth at superior margins in the future. And that's the reason anything that we are seeing more than 23.5% in the last three quarters has been put back in the business to make this investment. Some of the investments will give us returns in the medium to long term.

We still have levers to improve our margins, be it utilization; utilization is at 77.5% excluding trainees. I would like it to go up to 82%, which is the 4.5% which would give us a good upside on the margin. Our onsite effort mix is still at 30.2%. One of the initiatives that we are running is to bring it down, which will give us again further levers on the margin. So there are many levers that we have on the margin.

But I think the primary focus right now in this year has been to ensure that we invest back in the business, we create a good momentum, we have a good pipeline, we ensure that we have a very efficient delivery engine and we invest in quality and productivity in the tools, in the products, in the platforms, which will give us sustainable growth -- superior growth at superior margins.

So I think, for this year, I would say that our margins would remain in this narrow range of plus/minus 1% to what we have today. I think the exit rate of the margins for this year is very important. Some of the initiatives that we are taking on the cost optimization will start yielding benefits towards the end of this year. And I think if we are able to exit this year at good margins that will set the floor for the next year.

Got it. So, just to be clear, the margin -- or holding the margin at this 23.5%, that's due to reinvestment, not due to any kind of changes in the pricing methodology?

No. If you look at the last three quarters, the reported revenue per employee that we have reported has been almost stable. The last two quarters it was down by 0.7% and this quarter it's up by 0.6%; on a constant currency basis, it is up by 0.9%. So we are seeing a pricing environment to be stable. We are not seeing a very volatile pricing environment. So I think that is a good sign. So the margin that you're seeing is primarily because of initiatives we have taken to focus on making the investments which will give us returns in the long run.

Sure. Okay. And the last question from me. There's been an exit of a number of different managers. Maybe you could talk about client reaction to that, and any color you could provide on the visa issue. So, any color you can provide on the managers that you've seen leave the organization, the client reaction and anything you can say about the visa reserve. Thanks.

So I think we have seen exit of two or three people, not many; two or three people. This is an organization with 160,000 people with a very, very deep leadership pool. Over the last 12 years, as early as 2002, we have started investing in leadership development. We have 45 people in tier 1 leadership, 150 people in tier 2 leadership and close to 300 plus people in tier 3 leadership, which means we have large number of people in the leadership pool with very deep experience.

Our people are some of the best in the industry. It is quite natural for them to look at other opportunities. Some of them will find aspirational opportunities outside. It is part of our life. Our relationship with our -- more importantly is the fact that we have the deep leadership pool allows us to do transitions almost seamlessly. For example, Ashok Vemuri's portfolio has been taken over by Sanjay Jalona, who has been waiting for this for more than 13 years.

Now, more importantly, our client relationships are definitely multi-level. We have relationships at multiple levels with the client. So I will have a relationship with the client, Kris will have, the industry vertical head will have, the regional head will have. Because of that one person's changed, one change, and it could be because the person is taking up a new responsibility within the organization or a person is moving out of the organization. We are able to manage it almost seamless, because there are other relationships. There are multiple relation touch points with the clients. And that's exactly what we have done in the recent cases also.

So that was one question. The second was on the visa. See, we are engaged in decisions with the US Attorney's office and other government departments regarding a civil resolution of the government investigation into the Company's compliance INN form requirements and past use of given visas. Based on the status of these discussions, we have set aside a reserve of $35m, including legal costs. Because these discussions are ongoing, we are unable to provide additional details at this point in time.

Thank you.

Thank you.

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

Okay. Great. So it sounds like you're implying you're essentially capping your operating margin at around 23.5% in the near term, despite the big boost that you're receiving from rupee depreciation, even over the last three months. So, if it's accurate that you're essentially pegging your operating margin in that 23.5% range in the near term, what do you see is your long-term aspiration for operating margin? Recognizing that you're pursuing some pretty important cost optimization initiatives, it sounds like you're maybe having an aspiration to get margins back to a higher level, but I just wanted to probe on that some.

Absolutely. We have an aspiration to have superior margins, better than anybody else in this industry, and that has always been our aspiration and that continues to be our aspiration. See, what we are saying now is that we planned to give wage hike to our employees even when we didn't know about the rupee depreciation this quarter. We announced wage hike in the middle of June, when there was no signs of rupee depreciating the way it did.

So I think the important message is that we are making investment even if it shows up on the margins, or it results in lower margin in the current quarter or the subsequent quarter. I think the important part for us is to ensure that we create the momentum, we invest in all the right things; we invest in our employees, we invest in the sales, we invest in delivery, we invest in productivity. And if we do all the right things, definitely the growth will come back, and if the growth comes back the margin will automatically come back.

So I think my -- in all the earlier interactions that I had with the investors and analysts, I've been saying that. Don't look at margins this year on a quarter-to-quarter basis; please look at what our exit margins are going to be for this year, because that will set the floor for the next year. On our aspirations, our aspirations are to have the best margins in the industry, and that will always remain so.

Okay. Great. And then, last quarter we asked some about any new high-level strategic plans, and you guys emphasized that you're going to be more focused on winning large outsourcing deals. Can you give us a further update on any additional modifications to your strategic direction? And in particular, can you address whether you are moving towards more centralized decision-making and leadership?

So, on the large outsourcing deals, we have been focused on the large outsourcing deals over the last 18 months. If you look at the second half of last year, we won close to $1b of large outsourcing deals. Remember, these deals are multi-year deals. They give about 4% of the revenue in the first year and about 20% next year. In fact, it takes a couple of quarters for these deals to ramp up. And you have seen in the last two quarters those deals which we won last year second half delivering some revenue.

This half, the first half of this year, also we have won close to $1b of large outsourcing deals. I expect that in the next couple of quarters -- not in the next quarter, in the next couple of quarters -- these deals will deliver revenue, and that will allow us to grow.

At the same time, these deals are extremely price sensitive. They are very competitive, and sometimes very difficult to differentiate in these deals. So our focus is to execute them effectively. That is where one of the major initiatives on productivity and quality improvement come in the picture. It is about increasing productivity. It is about increasing efficiency and making sure that while these deals may be obtained at a lower than our margin -- lower than our average margin, we can achieve our average margin during the lifetime of these programs. So that is what we are trying to do in that space.

You had a second question.

Yes. I was wondering if you're doing anything organizationally to centralize decision-making and leadership, such as moving some of your senior staff back to India to have more centralized decision-making.

No, we are not. In fact, we continue to focus on different P&Ls. In fact, each of the industry verticals operate as P&Ls. We have now created a new P&L for the growth markets. So we are continuing on our journey of enabling leaders at the next level to own P&Ls and take decisions.

And are you tightening the reins on pricing, or are you still in an environment where you need discretion on pricing in order to drive the growth that you need right now?

We will always need discretion on pricing, at whatever level it is, whether it is at my level, next level. I think we will always need to balance growth and pricing. It is very, very important that we win our deals at our aspirational margins. If we don't, we make sure that we achieve our aspirational margins during the life of those deals by multiple interventions. So, whether the decision is made at my level, which it is not, or any other level, pricing will continue to be something which we need to watch out for.

Okay. Thanks, guys.

Thank you.

Thank you. Our next question is from Edward Caso of Wells Fargo. Please go ahead.

Good evening. Congratulations on the strong and broad-based revenue growth. I was curious to dig in a little bit more on the impact of the larger transactions that you've been chasing of late, just what percentage revenue contribution they may be offering.

And also, you talked about price realization being roughly flat, but that benefits from an improving utilization. So I was curious what the apples-to-apples pricing component of realization was.

So, on the large deals, as I said, if we win about $1b of large deals this year it will give approximately 20%; that is, $200m next year. We need to continue to win. I actually said it multiple times during the day that we have not won enough. For a company of our size, with $8b of revenue, we need to win a lot more large deals, and that is what we are focused on.

We have a pretty good pipeline, but these deals are highly competitive and also price sensitive. The winning mostly happens based on the strength of the solution. So everything we have done, be it in business and IT operations, consulting and system integration, ability to build multi-tower deals, senior people being involved in creating solutions, all of that is contributing towards these wins.

Regarding the pricing, it is apple-to-apple because the pricing which -- the revenue realization which we talk about is billed revenue realization. It is not gross revenue realization. It is billed revenue realization. So there is no impact of utilization on the revenue realization which we talked about. The revenue productivity per billed employee went up by 0.6% in reported currency terms and 0.9% in constant currency terms.

Just to answer your question on utilization improvement, yes, we did see 2.4% improvement in utilization in the quarter, which does give us a benefit on the margin. But as I said, we had a gain of 250 basis points because of rupee depreciation during the quarter. Our wage impact was 300 basis points, so that the margin should have come down by 50 basis points. Some of that was offset by improvement in revenue productivity and utilization.

Can you talk a little bit about the Indian market? We are continuing to hear that that domestic market has gotten quiet for everybody, or maybe so price sensitive that the service providers are being more reluctant to pursue it.

Let me request Raghu to respond to that question.

Hi. The Indian market of course is price sensitive, but there is a lot of opportunity over here because India as a country, the entire subcontinent is underinvested in IT. The challenge for all of us service providers is to find new ways of delivering services like cloud, mobility, etc.

Two or three things that come to mind; one is the last-mile connectivity is the biggest problem. We are executing some exciting projects here. Of course, being an election year, there is a little bit of quiet in the central government or the -- the central government spending. The states, of course, continue to spend and the private sector continues to spend. It's an exciting market, but has its own challenges in terms of the way people buy and the price sensitivity.

Great. Thank you.

Thank you. Our next question is from Dave Koning of Baird. Please go ahead.

Yes. Hi, guys. Great job. I just wanted to start out, Q1 and Q2 sequential growth were quite good, and it looked a lot like the average of the last five years. When you put together all the last five years together, it looked a lot like the average of that, but the way that you're guiding the Q3 and Q4 would kind of imply the worst quarters of the last five years. And it doesn't feel like the environment is back where we were three years ago or so, when -- or four years ago, when things were really slow. It feels more like things are at least decent. So I'm just wondering why we are looking at growth going forward that's more like the worst of the last five years.

So, if you look at the last five quarters, every quarter -- not almost, every quarter we have grown. But if you look at the last eight quarters, you can clearly see that we have faced some volatility. Even in the last five quarters, where we have grown every quarter, there has been difference in growth rates. So we remain cautious, number one.

Number two, Q3 and Q4 are traditionally weak quarters for us. It is nothing to do with the environment. Traditionally, Q3 and Q4 are comparatively weak quarters for us. In the last quarter, last year was slightly different. But if you look at the last many years, you will see that Q3 and Q4 are traditionally weak quarters.

And there are a number of reasons. Number one, Q3 has more holidays, furloughs. It is at the end of the year; the budgets are coming to an end. So if there is no budget flesh, then the spending will taper off. And Q1 is a quarter in which new budgets come online. We have to win those budgets and then start delivering to those.

So those are the external factors. But more importantly, there are internal factors. While we have seen growth in Q3 and Q1 and Q2, we have started these new initiatives. We have started a number of new initiatives inside. We have started initiatives on cost management, on sales force effectiveness, increasing productivity and quality, and increasing our offshore through VI GDM. All of these are in nascent stages. It will take a few quarters before the benefits will start flowing in.

Because of these factors and because of the fact that we have seen volatility in the last eight quarters, we are entering soft quarters, the internal changes are yet to yield material benefits, we have to remain cautious.

We have given the guidance. We have changed our guidance to 9% to 10%, which is 9.9% to 10.9% in constant currency terms. As we have said in the past, our guidance is a statement of fact as we see it today. We have looked at our pipeline, we have looked at our wins, we have looked at our clients, we have looked at our clients' furloughs during the quarter, we have looked at all of those, and we feel that this is the right guidance at this point in time. We are cautious.

Great. Thank you. And secondly, just when you look forward at M&A opportunities, Lodestone was a nice add late last year and helped this year, are there other things you look to do, just given your big cash balance? It seems like a lot of your competitors are making acquisitions too.

So, we have just announced a 400% dividend, INR20 per share. We've always given cash back to investors as and when we felt that it is better utilized in our investors' hands and we are not using it. We have aspirations to do acquisitions, something in the products and platforms space, something in -- probably in the life sciences space, something in public service, but these are critical investments for us.

Last year, we have done the Lodestone acquisition. The integration is with Venturi is complete. We are going to market with them and we are starting to see some benefits. We have to make the right decision when it comes to acquisition. So we are looking for opportunities. At the same time, they are very, very strategic and to be done with a lot of thought, and that is what we are trying to do.

Great. Okay. And finally, just the tax rate, just to make sure we are clear on this, year to date you had about 26.5% tax rate. Is that pretty stable probably the rest of the year? I guess that's a lot like last year as well.

Our tax rate has been between 26% and 27%. Effective tax rate has been in that range. And it will continue to be in that range, I think, in this financial year and probably in the next financial year too.

Okay. Great. Thanks so much.

Thank you.

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

Thanks. Sorry, nice quarter. Looking into Europe, which was pretty solid during the quarter, can we dive a bit more into what we are seeing in terms of growth out of the UK versus Continental Europe, and then which regions in Continental Europe are showing the most promise? Thanks.

So let me request B.G. to respond to that.

Hello. Yes. With respect to Europe, again, in the macro we have definitely seen a fair degree of stabilization. We have seen, even in the last quarter, all indicators turning to be slightly positive, including the economic sentiment indicator.

If you look at what has had an impact on our clients across sectors, the deal activity analyzed in terms of sectors, we see retail, energy utilities, telco and financial services pick up in UK, which is the most mature market in Europe.

Particularly in the continent, the German market is opening up for sure. We have participated in several large deal opportunities, two in manufacturing and one in retail, which we have won in the last two quarters. So this is a market where we have invested significantly in building our local presence in nearshore centers as well as our acquisition of Lodestone, which has a significant presence in Germany, has helped us both participate and win opportunities in Germany.

Switzerland and Benelux region has always been more mature, though they are small markets. We have good traction in financial services and manufacturing in these two geographies, as well as in life sciences.

Beyond this, we see in the last six months Nordics also opening up, though Nordics is a fragmented market. But there again, energy, financial services, manufacturing are sectors where we are seeing deal activity, and we are increasing our presence in Nordics to capture these opportunities as well.

France is a market, while it's large, it's still slow at this point in time. However, we also have certain opportunities which will mature for the fiscal year that's '14, and we are actively pursuing them. But amongst the constant markets, Germany, Nordics, Benelux and Switzerland are the markets which are opening much more than France.

Okay. And then, is it possible to get sequential growth rates in Europe by the UK and then by Continental Europe? And then, is it also possible to get the sequential growth out of Europe excluding Lodestone? Thanks.

Today, if you look at the overall revenue share, UK has about 48% to 58%; varies on a quarterly basis. So about roughly close to 50% of the market come -- is from UK. Rest is distributed across the continent. However, we do not share the country specific numbers at this point in time; it's not in the public domain.

Okay. And then, if you exclude Lodestone, sequential growth in Europe?

See, the Lodestone integration is a very tight integration. It is not like -- it may look like a subsidiary, but it's not a subsidiary from an integration perspective. What we have done in Europe, we have moved our consulting folks into Lodestone, so they are not working in Lodestone. So, by taking out Lodestone, you will actually take out a lot of other revenue, old revenue which we had. So we will not be able to give you -- segregate the growth. What is the growth in --?

Europe has seen a 5.2% growth quarter on quarter, this quarter, but there has been some currency -- cross currency benefits on Europe. If you exclude that, it is in line with the Company growth this quarter.

Thank you.

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

Hi. I have a couple as well too. The first one is if you could just talk about, at a minimum directionally, your contracted backlog today at this time versus last year and/or pipeline on a dollar-value basis today versus last year. And are you seeing any difference in that pipeline and backlog in terms of yield or duration of how that will unfold into revenue?

So, the pipeline I would consider similar to what we had last year. We have a pretty -- I wouldn't say strong but robust pipeline for large outsourcing deals. We have added a number of clients, so the client additions have been pretty strong. That also is a reflection of our pipeline. We have added 67 new clients out of the 37 net additions.

We have won large outsourcing deals, five of them, adding up to $450m. So our pipeline today is quite similar to what we had last year at this time, and it includes also large outsourcing deals as well as transformational deals.

So you're suggesting that the dollar amount of that pipeline is roughly flat with what it was last year?

It is -- that's approximately the same. I wouldn't say it is materially different.

Okay. And are you expecting a different yield of that pipeline; in other words, how that pipeline may transition to revenue?

Our yield has gone up, because if you look at our large outsourcing deal wins over the last few quarters it has gone up. Compared with what it was two years back, it has gone up. Transformational deals, the yield has not changed but the velocity has come down, because of all the discretionary spend tightening as the velocity has come down.

Okay. Then, the second question from me is on your calls you've mentioned what your utilization rate is. It's up for both including trainees and excluding trainees. It's been up sequentially for about six straight quarters, seven straight quarters. Would you anticipate that continuing to go up as we -- for the next couple of quarters? And is there any targets that you're thinking about for your utilization levels?

So, these are two different numbers. Including trainees will go up and down, right? Because I can get in -- I can get 5,000 people to join tomorrow morning; my utilization will drop, including trainees. So that is not a -- that's not a number to look at from a long-term perspective because there are seasonalities, just simple seasonalities in that number. Whenever a large number of people join the Mysore campus, our utilization including trainees will come down. So I really don't track it in that sense. I track the utilization excluding trainees.

Now, the excluding trainee utilization is 77.5%. With our scale, we should be able to achieve somewhere between 80% to 82%. So there is still headroom to improve utilization.

Okay. Fair enough. And then the final one from me is you've provided some guidance for the top line, and I was just wondering if you'd care to make any comments on how you think free -- your cash flow was up about 11% for the year in the first two quarters. Would you anticipate that your growth of cash flow would follow the current trend or mirror the growth that you're anticipating in revenues?

I think this quarter we have done exceedingly well to collect our receivables. Our days of sales outstanding has fallen from 66 days to 62 days. We have collected almost about $2.12b this quarter alone. So I think that also shows the quality of revenues and our focus on collections.

And I think we'll have to -- I will not predict the cash flows going forward, because it depends on a lot of factors in terms of billings and the collections and investments. But I would say that we are a very focused company in terms of having a very, very healthy cash flow. And we track cash flows as a percentage of operating profit and the net profit and use it as a measure to -- as a parameter to measure our performance.

Okay. That's it from me, guys. Thanks very much.

Thank you.

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

Thank you. I was wondering if we could go back to some of the momentum that you have in the large contract market and some of your commentary about that these are cost competitive deals but you're focused on cost optimization on these contracts to realize a target margin. Can you help us better understand how these contracts are structured and what the profitability of these contracts look over their life cycle?

So, these contracts are multi-year contracts. There will be some productivity gains guaranteed. There may or may not be, but there are -- more often than not, there are productivity gains guaranteed within the contract. Some of them will be managed services contracts, which means that the productivity is hidden behind the contract. And there are stringent SLLS in these contracts. These are large outsourcing contracts. We are not talking about into the -- we are not talking about hardware takeovers; we are talking about services.

They are price sensitive. They are highly competitive. And they generally come below our average margins when we win them. That is why we have to focus on these large outsourcing contracts, improve their margins through multiple levers. Number one is productivity improvements. Number two is tools and automation. Number three is adjusting the onsite/offshore ratio. Number four is making sure that the right sets of people are on these programs, with the right structure of the pyramid.

So there are multiple levers which we have which we can use over the period of the contract to make it closer to our average -- more than closer; equal to our average margins, and that is what we do. But when you are in a ramp-up phase, with all of these contracts, you have to get to steady state to start doing some of these improvements. When you start up a number of them simultaneously, you may see a short-term impact on the margins.

So, in a typical contract, these three- to five-year kind of deals, is it the first year or two where you're below your target and then as you get into year, say, three or so you hit your target, or is it a different trajectory?

That's what it is, similar to what you said.

Okay. And then second, Shibu, as you look at the change in your business mix, the change in the pricing structure of some of the more mature segments of the industry, can you help us better understand how you're thinking about the onsite/offshore mix and any plans that you may have to increase your onsite hiring? And this is totally independent of the Immigration Bill, but really more focused on business mix and where you see the market going.

So there are two -- actually two distinct answers to this. Number one, we are focused on reducing our onsite effort. Our onsite effort is comparatively higher now compared with our past. I have seen our onsite percentage as low as somewhere between 27% to 28% in the past, and today we are at 32%. Quarter on quarter, it has come down by 0.8%, so we have come down to 31.2%.

Reducing onsite is a good way for us to provide better value to the clients, to create scale for ourselves, because we can scale much faster offshore, and then clients are also very interested in reducing onsite and doing more work offshore. The Immigration Bill is definitely a driving force in this thought process; there is no doubt. But irrespective of the Bill, it makes sense for us to implement more methodologies, more technologies which can reduce our onsite effort.

Now, recruitment onsite, that's a completely different aspect. Whichever way we look, we will have people onsite. We will have effort onsite. Now, today we use local recruits and activities. We are looking forward to recruiting more and more local, and even some colleges locally, to create local talent. As we do more and more transformational programs, as we do more and more mission critical programs for our clients, it makes perfect sense to have local talent in the countries in which we operate.

So is one way to offset, for example, the impact of more local hiring for those types of projects by increasing -- you offset that with increasing off-site mix, if you will, in the core business?

That is true, because our different businesses will operate with different onsite/offshore ratio. BPO operates at 10%. Infrastructure will probably operate at 20%. Consulting and system integration will operate at 40%. At the end of the day, it is about lowering; it is about managing the portfolio and lowering the mix.

I see. Okay. Thanks for that. And then just one last question. I think this may have come up a little bit earlier, but I think we are all looking at this massive move in currency and just wondering how do you manage if the rupee regains some momentum and normalizes at a much higher level of volatility to the dollar. How do we think about your ability to navigate through that, if in fact you have the rupee returning to more historic levels versus the dollar?

So, we have operated when rupee was INR46 dollar/rupee. We have operated at INR46 to a dollar. Now we are operating at INR61. It was INR66. We have operated in this volatile environment for a very long period of time. As long as the rupee is not drastically volatile during the end of the contracts -- if the rupee moves drastically at the end of the contracts or the last months of the contracts, it is very difficult for us to do anything about it. But if it's a gradual shift, we will be able to manage and that's what we have done in the past.

I see. Okay. Thank you very much.

Thank you.

Thank you. As there are no further questions from the participants, I now hand the conference back to Mr. Sandeep Mahindroo for closing comments.

Thanks, everyone, for joining us on this call and spending time with us. We look forward to talking to you again in future. Thanks and have a good day. Bye.

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