Infosys Ltd (INFY) 2014 Q4 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 the listen-only mode. 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. Thank you and over to you, sir.

Thanks, Inba. Good evening everyone and welcome to Infosys Q4 and FY14 earnings release. I am Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is Executive Chairman, Mr. N.R. Narayana Murthy; CEO and MD Mr. S.D. Shibulal; Presidents, Mr. B.G. Srinivas and Mr. Pravin Rao; CFO, Mr. Rajiv Bansal, along with other members of the senior management team.

We will start the call with some opening remarks on the performance of the Company for the recently concluded quarter, followed by outlook for the year ending March 31, 2015. 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 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 an explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov.

I'd now like to pass it on to Mr. S. D. Shibulal.

Good evening, everyone. Let me talk about our performance for FY14 and Q4. I will also provide a high level overview of what we are seeing with our clients and then talk about FY15.

Our revenue growth doubled to 11.5% in FY14 over FY13. In FY13, we grew by 5.8%; in FY14 we grew by 11.5% in reported currency terms and 12.4% in constant currency terms. In spite of revenue decline that we saw in Q4, we achieved this 11.5% growth.

Our guidance for the year was 11.5% to 12%, which we provided in January. Our revenues were at the lower end of the guidance due to the challenges that we saw in retail, CPG, and high-tech verticals and some unexpected ramp-downs and cancellations, which we saw in other business segments as well. As I said, in constant currency terms, our growth was 12.4% year-on-year.

In rupee terms, we have achieved a major milestone. Our revenues for FY14 crossed INR50,000 crores, which is a growth of 24.2% year-on-year. We have reached another milestone; our cash and cash equivalents crossed INR30,000 crores in rupee terms and $5 billion in dollars terms.

We have improved our utilization significantly year-on-year. Utilization for consolidated IT services, including trainees in FY14, were 72.3% compared to 67.0% in FY13. Excluding trainees, utilization was 76.4% in FY14, as against 70.7% in FY13.

Client additions in FY14 was at an all-time high of 238. 238 was a gross addition. Our net addition was 92. More importantly, our $1 million clients have gone up from 448 last year to 501 this year, which is more than 15% increase.

During the year, we completed a civil settlement that concluded the investigation by the US Attorney's Office and the US Department of Homeland Security relating to I-9 paperwork errors and Visa matters that were subject to the investigation. There were no criminal charges or court rulings against the Company. Further, there were no limitations on Company's eligibility for Federal contracts or access to US Visa programs as a result of the settlement. This year, we have applied for adequate number of Visas.

Coming to Q4, operating margins were 25.5%, which is an expansion of 0.5% sequentially. Our operating margins have now expanded for two consecutive quarters. Volume growth in Q4 was [0.4%], while the revenue productivity declined by 0.8% on a blended basis quarter-on-quarter. Year-on-year, our volume growth was 10.5% and our revenue productivity improved by 1.2%. During the quarter, our offshore effort mix went up by 0.5% to 70.6%. Our offshore effort mix has improved by 1.8% in the last two quarters due to our relentless focus on optimizing our operations.

In Q4, we have added 50 new clients. In Q4, we have added 11,000 employees gross, and as I said, the number of $1 million clients have crossed 500. LTM attrition increased to 18.7% in Q4 compared to 18.1% in Q3. Q4 attrition comprises of voluntary attrition of 17.5% and involuntary attrition of 1.2%. High attrition continues to remain an area of concern for us.

During Q4, we signed four large deals with TCV of $700 million. Two wins were in America, two in Europe. One deal each was in financial services, manufacturing, retail and ECS verticals. Infosys Edge, our products and platform endeavor, presently serve nearly 90 clients. They had seven wins in Q4, four in products and three in platforms. Finacle had seven wins and 11 go-lives in Q4. We continue to see positive results of our early and significant investments in emerging technologies. During the quarter, we've signed 20 deals in cloud and Big Data and 15 deals in mobility.

Coming to market overview, cost reduction remains an important area of focus for our clients across all segments. Market opportunities are driven by vendor consolidation, rationalization of operations and infrastructure modernization.

Client appetite for discretionary spending continues to be limited with higher sale cycles. This is reflected in revenues from discretionary areas declining sequentially in Q4. Overall deal pipeline has improved marginally in the last quarter. However, decision cycles have also lengthened due to business challenges. Clients are monitoring return on investments much more carefully today.

Pricing remains stable in most areas, except in large outsourcing deals and commoditized services. As I said, year-on-year, our revenue productivity has gone up by 1.2%. We have given compensatory increases of around 6% to 7% for our offshore employees and around 1% to 2% for our onsite employees effective April 1. Through the second round of compensatory increase in the last nine months, along with the motions that have been rolled out, we hope to able to reduce attrition in upcoming quarters.

Based on recent business momentum and our expectations of client spending in the upcoming quarters, we have given a guidance of 7% to 9% for FY15. Growth remains our top priority. We will do all necessary investments in our business to have a better growth trajectory.

With this let me request B.G. to give a color on the market.

Thank you, Shibu. I shall give you update on couple of key sectors; financial services, insurance, manufacturing, energy utilities and telco.

Quick summary. Financial services, we have added 12 new clients since last quarter. Constantly, even in manufacturing, we have added 12 new clients and in energy utilities and telco, we have added 14 new clients in the last quarter.

A quick snapshot of what we see in financial services. Last quarter, we definitely had a bit of a challenge in -- we saw some weaknesses in the business momentum over the last three months in some of our top clients, both in the US and Europe. We have seen instances of budget cuts translating to volume cuts and delays in approval of projects. At the same time, banks are looking at cutting spend, both on the run-the-business and change-the-business segment. However, we see opportunities, both in Europe, as well as in the US in areas where clients are pushing for cost cutting, which includes portfolio rationalization; legacy modernization of their infrastructure, cloud and information management are some of the overarching trends. Digital transformation, analytics, Big Data are on the focus as far as discretionary spending is concerned. Banks continue to drive strategic initiatives to provide omnichannel experience to the clients and that's an area, again, where Infosys is working closely in partnering with them.

Risk and compliance continues to be top on the agenda for our clients in areas of anti-money laundering, fraud prevention and detection, regulatory reporting and we are bringing to bear our expertise in these areas in helping clients put in systems and processes to enable them to become compliant. There are also increased interests in some of our platforms, mainly ProcureEdge, TalentEdge and BrandEdge.

As regards to insurance, we are seeing an uptake in discretionary spend with life carriers looking to invest in new products and services to drive customer intimacy. There is a predominant focus in cost optimization programs through infrastructure transformation, automation and leveraging cloud-based offerings. Clients are also investing in social platforms and mobility technologies to improve business and distribution channels. The property and casualty segments are putting an emphasis on driving revenue through agency channels, redefining their products and focusing on growing new products by cross-selling and up-selling to their existing client base.

Switching over to manufacturing, the Q4 growth was partially impacted by cost reduction and breaks in spending by some of our high-tech clients. The dynamic nature of the market has led to budget cuts in a few clients after the initial budgets were prepared at the beginning of the year. In contrast, some other specific sub-verticals in manufacturing, we have seen increased activity levels in automotive and aerospace and industrial manufacturing. The large deal pipeline in manufacturing has seen some improvement, particularly focused on IT operations. Spending, particularly in the ERP-led transformation areas, digital transformation and analytics are options -- are opportunities we are seeing with the industrial goods manufacturing. The overall business momentum in manufacturing remains broadly stable. And in specific areas, particularly in automotive, we are seeing manufacturers are planning to build 3D value chains to leverage the printing innovation that is independent of the technology stack.

Switching over to the next sector, energy and telecom, even though we have had some sequential growth in Q4 which was robust, the overall client spend is still challenged, due to revenue pressures, which is keeping the lid on both discretionary and non-discretionary spend. Telco industry has seen some recent consolidation which may impact spending, particularly in those clients. Spending in telco is focused on driving improvements towards customer experience.

On the energy side, we're seeing margin pressures leading to some cuts in budgets with specific clients. However, at the same time, we're seeing these clients invest in simplification and making sure that the ERP-led transformation is leveraging some of the optimization efforts and driving costs down. Energy and utility clients are investing in CRM, mobile workforce management and moving apps and infrastructure to the cloud. The communication service providers continue to fund innovation in digital, M2M and Connected TV. In addition, efficiencies in operations through OpEx reduction, infrastructure outsourcing and data center consolidation initiatives are becoming much more relevant. As Shibu did mention, we have signed four large deals during the quarter. The pipeline has moved up sequentially quarter-on-quarter marginally, but definitely this is a positive trend.

A quick update on Europe. A significant milestone crossed with the fiscal year ending 2014, Europe crossed [$2 billion] in revenues and 25% of our global revenues is now coming from Europe.

With that I would like to pause and hand over to Pravin Rao.

Thanks B.G. Let me talk about other business segments. Retail and CPG has seen deterioration in the last three months due to aggressive discounting by retailers during the holiday period, which has pressurized their bottom line. Additionally, their topline has been challenged due to harsh winters in US and slowing growth in emerging markets.

We saw many programs being postponed or cancelled, which impacted our quarter-four performance. As we look ahead, we see retail and CPG clients looking at cutting costs and investing in revenue generating initiatives only if there is a clear ROI.

There is a pressure on productivity and costs leading to vendor consolidation and openness to new innovative models. On the positive side, technology is mainstream in this vertical and spend is increasing in cloud, infrastructure optimization, business intelligence and digital transformation.

Life sciences clients are facing challenges from reduced product differentiation, which is putting pressure on the discretionary spend. Cost takeout is a key focus area. Clients are investing in compliance activities, infrastructure modernization, digital transformation, analytics and cloud. While the deal pipeline is good, we remain cautious due to cost-sensitive environment, which can create pressure on our existing contracts.

In the resource and utilities vertical, even though there is high confidence amongst clients, they continue to demonstrate caution and scrutiny while making spending decisions. Cost savings and improving operational efficiencies are key priorities for our clients. There is a focus on emerging technologies and standardization. In the global markets units, comprising of Australia, China, Japan, Southeast Asia and Middle East, dynamics vary across markets.

In Australia, there is focus on cost reduction through infrastructure consolidation, along with investments in risks, compliance and client-facing initiatives. In China, clients are investing in ERP and analytics. In Japan, demand is being driven by the need to simplify IT and drive revenue generating spending.

In the services sector, the new age information services companies are spending in analytics and mobility-based solutions, while the traditional publishing segment remains cost focused. Professional services market is also cost focused. Travel and leisure sector has seen a mild improvement.

Our early focus on cloud, Big Data and mobility is helping us to showcase our capabilities to more and more clients. Across advanced technologies, we see sustained business momentum with 20 new deals signed for cloud and Big Data offerings and 15 new deals signed for Infosys mobility offerings.

I will now pass on to Rajiv to talk about financial highlights.

Thank you, Pravin. Good evening everyone. Our fourth quarter revenues were $2.092 billion, as against $2.1 billion the previous quarter. Our gross margins for the quarter improved by 90 basis points to 37%. Operating margins for the quarter improved by 50 basis points to 25.5%. During the quarter, the average USD-INR rupee appreciated by 0.7% from INR62.03 in Q3 to INR61.62 in Q4, which negatively impacted our margins by 0.2%.

Other income for the quarter was $139 million, as against $117 million in the previous quarter. This included a ForEx gain of $30 million in Q4, as against a ForEx gain of $20 million in Q3. Yield on other income was at 9.45% during the quarter. We have outstanding hedges of $1.058 billion as of March 31, 2014.

Effective tax rate for the quarter was at 27.6%. Net profit for the quarter was at $487 million, as against $463 million last quarter. Net margins expanded to 23.3% compared to 22% in the previous quarter. EPS for the quarter was $0.85, as against $0.81 in the previous quarter.

Our cash flow from operations continues to be strong at $593 million, which is very healthy 122% of Q4 net profit. Our cash and cash equivalent, including available for sale assets and certificate for deposits crossed $5 billion and stood at $5.048 billion. Collections were good, DSO improved from 65 days last quarter to 62 days this quarter.

For FY14, revenues were at $8.249 billion, as against $7.398 billion last year, which is a growth of 11.5%. Our gross margins for the year were at 35.8% compared to 37.3% previous year. Operating margins at 24%, as against 25.8% in the previous year. The operating margins for the year were impacted by $35 million of visa-related matters charge that we took in the second quarter. The effective tax rate for the year was at 27.6%.

EPS for the year was at $3.06 compared to $3.02 last year, which is a growth of 1.3%. We've increased the dividend payout ratio from up to 30% of post-tax profits to up to 40%, effective FY14 to enhance returns to our shareholders. This is reflected in the final dividend for FY14, which has been proposed by the Board at INR43, which translates to approximately $0.72 at a USD-INR exchange rate of 60. The INR payout ratio will negatively impact our FY15 EPS by about $0.025 due to lower non-operating income.

Looking -- we have given a guidance of 7% to 9% in dollar terms for FY15. The increase in salaries, promotions that we have rolled out for employees effective April 1 and investment in new reserves will impact our Q1 operating margins by 250 basis points to 300 basis points. We remain focused on accelerating our growth next year. We will continue to make all possible investments which are required to achieve that. Considering that, I expect FY15 operating margins to be in line with FY14 operating margins.

Thank you. With that, I'll open the floor for questions.

(Operator Instructions) Moshe Katri, Cowen.

Hey, thanks, and good evening. The first question is for Mr. Murthy, if he is on the call. The Company has been running at very high attrition rates during the past few years and it seems that it's beginning to impact your ability to staff projects and that goes back to your comments regarding a skill mismatch. Maybe you can give us some color on what management is doing to try to bring down attrition rates at least in the near term and maybe you can give an update on that. Thanks.

So, Mr. Murthy is not here. He had to leave for attending to some urgent matter. This is Shibu. So our attrition is 18.7% for Q4, which is slightly on the higher side. Out of 18.7%, 1.2% is involuntary attrition, so it is 17.5%. Even that is definitely higher than our comfort level. If you look at the last 12 months, we have done a number of things. We have given two rounds of compensation increase; 6% to 8% and 6% to 7%. We have restructured the variable compensation. That was one of the big demands from our employees. We have given promotions. We have given large number of promotions. We have given a commitment to our employees that we will focus on promoting people inside, rather than bringing people from outside. We have invested in training and academy programs, which will allow our people to move up. We have implemented a tech stream, which will allow technology people to move up without moving into management. We have implemented a fast-track program, which will allow high performers to keep moving up.

So we done numerous things. In fact, this year, we have rolled out the compensational increase, the promotions across the organization by March 31. So we are hoping that all of this will have an impact and attrition will start coming down.

So based on the exit interviews that you are having with people that are leaving, what are they telling you in terms of the main reason for them exiting Infosys, while your peers are actually able to maintain much better attrition rates?

One thing also I want to add before I hand over to Tan, we need to keep in mind that this is a industry with high demand for people and the industry is growing. We have therein some of the best people in our side. We invest heavily into training. Our people, just after our training, itself will be a good catch than any other organization. That's number one. Number two, one of the concerns of the employees would be growth. So growth is something our employees look forward to.

Now to answer your question specifically, let me request Tan Moorthy.

Sure. Thank you. So -- and Shibu addressed a few of those. So let me just give you little more details on where is this attrition happening and what we are hearing from the people. The majority of the people that leave us are in the one-to-four-year experience range. And so, this is -- clearly like Shibu said, training plus -- the six months training, combined with the one year experience here makes them very attractive. That's one aspect. But the other reasons that we are getting from the exit interviews are typically two or three types. One is where there is a desire to continue higher education they're going and clearly these are people that have high aspirations that we've recruited from institutions who have gone through and done well in our training. They are now looking to enhance their qualification through Masters Degree program. That's one set of people.

The second set are -- and these are mostly at the three to five year is where we see this is reason that I am talking about now, which is people who are now settling down, getting married and they are finding that their spouses are working in a different location and therefore they would like to relocate. And if we do not have an office in that location then they become a candidate for leaving the organization. That's the second.

The third is career opportunity and career progression and that's equally important as well. And some of what we have done now, primarily in terms of providing [free skilling] capabilities for people to fulfill and it demands that we have internally, rather than looking outside. So an approach of providing our people the first opportunity to take up a new role or a new kind of an engagement before we open it up for hiring is something that we're doing to address that population of people who have a desire and an ambition to grow fast. And, of course, things like the fast track program that we just announced will help, but these are the top three reasons that we are seeing from the exit interviews. Thank you.

Just a follow-up. You're talking about weak demand in US healthcare and US hi-tech and you talk about a declining appetite for discretionary spending. Is that something that's been kind of occurring throughout the quarter that it got worse towards the end of the quarter? I think a lot of investors are kind of confused about that given the commentary intra-quarter at Infosys. Do things get worse as you approach March or it's been kind of consistently weak across the quarter?

So, there was a certain amount of shift in certain sectors after we completed our Board meeting and investor calls in the beginning of last quarter. We finished -- and actually during the month of February and March, we saw a gradual degradation. So, first, for example, the CPG industry, while the holiday sales was good, they had discounted heavily and that has led to impact on margins and further impact on discretionary spend. That showed up. Hi-tech industry started declaring results, which were not up to the mark and -- due to decline in PC sales, as well as decline in capital spend. So, it happened over a period of time, but for us to assess the impact, you can't assess the impact on a daily basis. It takes time for us to assess the impact. It shows up over a period of time and during the quarter we had seen the impact.

Thank you.

Joseph Foresi, Janney Montgomery Scott.

Hi. I just wanted to build on that question. I mean, do you expect 2014 to be better than 2013? And can you reconcile your commentary regarding discretionary spending and pricing and budget cuts versus what appears to be a better economic demand backdrop? Is that a temporary thing?

So, one is remember that our business is a momentum business. That means our growth is quarter-on-quarter. The impact of Q3 and Q4 will show up in the next year, because if Q4 was -- if we had grown Q4 theoretically, this is just a theoretical thing, by let's say 2% or 3%, that 3% would immediately get added to the next year growth. It's a very simple math. So, the impact of Q3 and Q4 will show up in next year. We had low growth in Q3 and Q4 and that does impact our next year growth. That is one part.

The second part is, when we gave the commentary in March, I had said that many of the things which I had talked about, we expect to continue into the beginning of the next financial year, which is the first half of this financial year. So we expect some of the impacts to continue, but more importantly, the Q3, Q4 impact will show up next year.

Okay. If we -- so what is the outlook for some of the areas of weakness, like retail, high-tech? Do you expect those areas to grow in 2014? And if you were to exclude those specific areas of weakness, how do you look at overall growth for next year, is it going to be better than it was in 2013 for the other verticals?

So I have Sandeep here who will give you color on the retail side; and the manufacturing side, Sanjay is not here. Is he here? No. B.G. will take that thing. But please remember, you know, I needed to reemphasize it again. Irrespective of the market, the impact of a low growth Q3, Q4 is setting us up for a lower base to start with. Right? So the climb is extremely steep if you want to -- to achieve a certain growth. So let us assume that we are trying to achieve -- let's say we -- imagine achieving 12% or 13%, the climb will be very, very steep. So impact of that will be there next year. Our deal pipeline is marginally better now than what it was before, marginally better than what it was before. Now, let me hand it over to Sandeep for his part and then B.G. for his part.

Yeah, good morning. This is Sandeep Dadlani, Head of Retail, CPG and Logistics. So if you look at what's happened in January and February, we had bad earnings season for many retailers that they had come off a tough holiday season that they had been promoting and discounting heavily. They ran into some severe bad weather in America definitely, and in select parts of the other -- other parts of the word. They had earnings growth slow down or growth slowdown in some emerging markets areas as well. And, overall, some of the retailers also went through some serious credit card security breaches, which really diverted their core investments and initiatives and attention to other places. What that resulted in was postponements, project cancellations, many projects that we won did not ramp up as we expected. But if you look at the latest commerce department numbers that were declared, I guess, yesterday in the US, you saw March having record sales. There was a lot of pent-up demand through January and February. So the sun has come out, as they say, and it is likely that retail will recover the way things are going. If that happens and if the deals that have been postponed -- the projects that have been postponed start ramping up, then we certainly will not expect a repeat of this kind of a quarter in the retail sector, retail, CPG sector. That's for retail and CPG. I'll pass on to B.G. Srinivas for giving commentary on the manufacturing sector.

Thanks, Sandeep. In the manufacturing sector, while last quarter we definitely had challenges in the high-tech, where typically in the high-tech sector, we expect to see ramp-ups the minute the budgets are cast and that was a surprise in few of our top clients that did not happen and hence the quarter was soft. However, if you look at the other sectors within manufacturing, automotive, aerospace, industrial goods, there has been increased deal activity and we are participating in several large dealings as such. So overall, the net impact of the weakness in the high-tech will obviously have an overarching impact for the manufacturing, but it is going to be offset with deal activities in other sub-verticals within manufacturing. And hence there is some recovery in terms of the growth rates for the full year. While we can't take away the impact which happened in Q4 for the full year, we hope to see more about what clients will do, because their budgets are being cut in the high-tech sector and hence there will be initiatives, which will be more towards cost optimization and we're having dialogues with what we can do as a company to help our clients take out cost, simplifying their landscape and in that context decisions have made, in Q2 and Q3 we should see deal momentum picking up in high-tech as well.

Okay. And then just a last one from me. Are you seeing any cannibalization of your revenue in systems integration by the movement to the cloud? If so, how should we think about that as we progress throughout the year and any other structural changes in the demand backdrop that you could point out? Thanks.

We are not seeing any secular trend in demand cannibalization. Number one, it is way too early, because the number of platforms available on the cloud is not many. Number two, we work on both sides of the cloud. On one side of the cloud, we do what we call [fore] the cloud. That is about enabling our clients. It liberates cloud mobility, social, those kinds of phenomena and that is what we call fore the cloud and we are doing pretty well in that space. Pravin can give you color on that.

On the other side, we do what we call on the cloud and that will be the platform business which we do. We have booked $700 million of revenue in platform -- not revenue, in TCV terms $700 million. We have about seven platforms in the market. I do understand this question that eventually people will start moving from either custom apps or implemented packages into a cloud-based environment, then you will see cannibalization, but we are way too early in that cycle and what we are saying is truly, truly marginal.

This is Pravin here. Just to add to what Shibu said, today while we are seeing fair amount of opportunities around cloud that [cat sizes] are still small and I think it will be a while before they mature or start cannibalizing. Now, some of the things we are seeing today are -- we are seeing emergence of hybrid cloud for the enterprise. At the same time, from application side we are seeing applications being bundled with infra components and moved to cloud. And in some cases, applications are consumed as a service, such as SFDC. So we're also seeing end-user computing devices also moving to [BRIOD] devices of different kinds. So in essence, we are seeing fragmental ecosystem and that presents an opportunity for us and they have been very proactively trying to leverage such opportunities. For instance, with one of the clients where we were running our BPO services, we have proactively gone to the client and -- on the procurement side, we have proactively gone to the client and said we can -- this was on an Ariba platform. So, we said, we will [innovate] the Ariba contract, we will move the application to Amazon Web services and then we will take over the entire stack, we will run BPO on top of it and offer a transaction-based pricing.

So, we do see such kind of opportunities, but these are far and few in-between. We have built capabilities. We are proactively going after clients, but over a period of time I think this offering will mature and we may see some amount of cannibalization, but it's some distance away.

Thank you.

Edward Caso, Wells Fargo.

Hi. Good evening. Things seem to be going pretty well in Europe. I was wondering if you could expand on that. Is it the United Kingdom, is it the Continent, where in the Continent and sort of what verticals are embracing sort of new players? What are you seeing in Europe? Thank you.

Let me request B.G. to answer the question on Europe.

Yeah. If you look at last year, we've had a good growth in Europe, overall 17%. And for the first time, we have crossed the $2 billion revenue mark in Europe, which is a significant milestone. Last quarter, the revenue percentage from Europe was 25%. We have added 17 new clients in Europe in the last quarter. By and large, if you look at the activities in Europe, specific to the countries where we have significant presence is UK, Germany, Switzerland, Benelux and Nordics. France continues to be a little slow, while we are definitely seeing some early signs of deal activity picking up in France as well. Giving a specific to verticals; in UK, we see activities in financial services, telecom, energy utilities and retail.

In the Continent, Germany and Switzerland, there's significant activities in the manufacturing sector and life sciences. Nordics is definitely opening up. We have opened a few accounts in Sweden, Norway and in Finland. Benelux, while the market is small, again, in financial services and telco, we have business expanding in our existing client base. We have seen significant growth in Switzerland and Germany and I must also say that the Lodestone acquisition, which we did the previous year, is contributing to enhanced competitiveness and capability, which is adding to new account openings, as well as expansion of our services footprint in the Continent. Overall, the [CSI] revenues from Europe is significantly higher as compared to rest of Infosys. It is closer to 42%, primarily led with SAP, which is again a dominant -- which has a dominant presence in the Continent Europe.

Shibu mentioned commoditized services seeing price pressure. Could you describe what you see as the commoditized services and what level of price pressure are you seeing? Thank you.

Given the context of what our clients are going through challenges on managing the profitability, given that the topline growth is under pressure, in today's context, the cost saving targets our clients have is not in the order of 10% to 20%. It's in the order of 30% to 50%. And in that context, if you're looking at traditional services, which is business IT operations, any new opportunity, any new deal construct is demanding at least a 30% to 40% savings and in that context, the only way those kind of savings is possible in changing the operating model; changing the operating model from traditional time and material to either outcome-based on transaction-based pricing, one. Number two, it also takes extreme level of automation and offshoring to drive that kind of a cost and it has to be operated in a managed services mode and that's where we are seeing some of our clients open to new operating models. We are actually proactively proposing, given our existing client businesses, to switch over to new operating models, thereby our ability to deliver that kind of a saving is possible and hence our ability to compete also is improving. We are seeing a higher degree of conversion in the large deals we are participating, because of the initiatives we have taken on these -- particularly these two aspects; that's extreme automation, reducing significantly the effort required to deliver, and number two, also increasing the offshore content of the effort in our solution.

So, is that a revenue impact you're describing or is that also a margin impact?

There is definitely a revenue impact, because the clients are looking for -- to deliver more with less, number one. Number two, there is margin pressure, but at the same time, when I talked about effort reduction, then there is -- that will be offset. The margin pressure is not directly translating to the total cost, because we are able to reduce the effort and thereby manage the margin better at the portfolio level.

Last quick one, tax rate guidance for FY15, please?

Yeah. If you look at our tax for the next year, would be almost similar to what we have seen in the current year. We don't expect much of a movement. It could move 15 basis points here and there, but tax rate would typically be in the same range. This year, if you look at our tax rate, effective tax rate has been about 27.6% and it could be around 27% to 28% next year too.

Great. Thank you very much.

Glenn Greene, Oppenheimer.

Thank you. Just a couple of questions. Wanted to follow up on the pricing discussion you just had. Wanted to get a sense, you've been price aggressive on the large deals for a while with the intent, I think, to improve your win rate, improve the TCV from sort of the $500 million quarterly rate to $700 million this quarter. Perhaps some are closer to $1 billion per quarter. Has your pricing aggression changed in the last three to six months? And related to the TCV, is there a TCV quarterly that we can kind of equate to Infosys getting back to sort of industry growth rates from a topline perspective?

See, there are two aspects to it. On Infosys' ability to compete in the large deals, definitely there has been a significant improvement in our ability to compete, because of the measures we have taken in the [solutioning] of the deals as such; that is for sure. But the TCV does not necessarily directly convert to revenue in the same year of the deal which closes. Every quarter, as we add to the deal pipeline and we convert, typically we see about 7% to 8% of revenues accruing in that year. Remember, there's also a period of transitioning of services which happens in the early part of the delivery of the solution. And hence we see in the subsequent year, typically we have seen an average of 20% of revenue realized from the TCV, if it is typically a five-year deal. That is how we would have a lead indicator of the potential revenues depending on the quantum of TCV signed, assuming that each of these deals are in the range of three to five years.

Okay. And then different direction, maybe for Rajiv, sort of thinking of FY15 margins, I know you sort of suggested they would be directionally in line with FY14. But maybe you could help us think through the margin levers to kind of offset the wage inflation and investments that you're continuing to do with more specifics on the potential for utilization increases, given sort of a volume growth parameters you've outlined, also the improvement, what more potential is there on the on-site, offshore efforts mix and then should we think about any cost save improvement that sort of factors into the margins this year?

Yeah. So if you look at the margins over the last seven to eight quarters, in first quarter of FY13, our margins were 27% plus, and we ended FY13 at about 23.5%, which was a drop, in spite of the rupee depreciating by a big number. And this year, if you look at, we started the year with 22.5% operating margin, we ended the year at 25.5%. So we are on the right trajectory. We are showing margin improvement in spite of giving wage hike, promotions, increasing the variable component of employees, increasing the availability of our employees. So we are making investments into our businesses.

Now what I said for the next year is that given that we have given a guidance of 7% to 9% and the growth being the most important thing for us, we need to accelerate our growth, we have to ensure that we don't miss any opportunity in the marketplace to accelerate our growth, we would have to continue to make investments. Our attrition is still at 18.7%. So we have to make investments in our employees. Considering all the investment needs that we have, I feel that the margins in FY15 would be in line with FY14. The margins levers that I have, definitely utilization is still at about 76%. I would like the margin -- the utilization to be about 80%, 82%. So that is one lever that you have. But at the same time, you would want to ensure that you have all the kind of people, all the people on your -- available with you to capitalize on any opportunity which comes in the marketplace. As you know, it takes about four to six months to hire people and train them and keep them ready. So you cannot just do just in time hiring, if there is an opportunity in the marketplace.

So we have given a guidance of 7% to 9%. Based on a 7% to 9% guidance, I would expect the operating margins to be around -- in line with what we have seen in FY14 full year. However, we have to invest into the business in terms of capitalizing on any additional opportunity which comes in the marketplace, investing in the sales engine, investing in employees, investing in new technologies and that's the reason I feel that in spite of utilization being one of the levers available for margin, I would be more comfortable with about 24%, in that range for the next year.

Okay, thank you.

Keith Bachman, BMO.

Hi, thank you. I want to start with a question also on growth. For the past year and change, Infosys has been growing slower than the industry average and certainly slower than peer group leaders of TCS and Cognizant, and it looks like in Q4, we'll know more tomorrow, but the growth gap has widened. Why does that growth gap persist and how do you think about that as you look out over the next few quarters? You've said that growth is one of the most, if not the most important metric, but doesn't look like you're coming to growth that's closer to the industry. So if you could just please discuss that. And then I have a follow-up, please.

So, as I said, our growth is a momentum-based growth. That means quarter-on-quarter we have to grow. And one quarter actually will set the tone for the next quarter. What has happened is multi-fold. Number one, if you look at year-on-year, we have doubled our growth rate. Our growth rate last year was 5.8%. This year we grew 12.4% in constant currency terms. That means we have literally doubled our growth rate. We have also bridged the gap. Last year we had a gap of approximately 10% to the industry average. This year that will be about 2.5% or 3%. So we have literally bridged the gap.

Now, next year when we look at the growth, unfortunately, we had an issue in Q4, which we talked about and that has led to a slightly negative growth in Q4. But that is not the problem. The bigger problem is that it has set us on a lower base.

So our growth trajectory, the slope is much higher for next year. That is the reason we have given a 7% to 9% growth. Even to achieve a 9% growth, we have to grow quarter-on-quarter -- what is it Rajiv? No, no, next four quarters? [3%]?

I think it's 2% to 3%.

Yes, for the first quarter, but other quarters there is steep growth, which we need to do. And that is happening because the Q4 was a weaker quarter for us. As I said, we are completely focused on growth. We have winning larger and larger deals. We are investing in the market. We have increased our number of $1 million clients. So, we are completely focused on growth, but it will take some time. We have bridged -- this year we bridged our gap. Unfortunately, we had an issue in Q4. We have given a guidance. We are fully prepared to take advantage of any growth opportunities which will come our way. So that is where we are.

But also, when you compare us with the industry, I think it is very important to realize that our profile is very different. You can just -- if you just look at the numbers, the Indian industry average of consulting and system integration best of my knowledge is 19%. We are at 34%. If you take out our 34%, the industry average will further fall, which means our dependency on the discretionary spend is double that of the industry. When you have such a large dependency on discretionary spend, the volatility is going to be higher. If you look at some of peers who have a much larger dependency on consulting system integration work, who are not Indian peers, you can see this.

So, our profile is different. We are trying to counter that by winning more and more large deals in our operational space. It will take time.

Okay. Yeah, fair enough. And that was actually going to be my follow-up question and I want to pursue that if I could. In terms of your headcount mix, your onsite effort and billable hours actually declined or is growing slower, depending on how you look at it, but you're effort -- person months actually declined onsite and as I think about how you're looking at 2015, particularly against the consulting business, I would think that that would be more onsite work. So how are you thinking about your headcount growth over the next 12 months, particularly some of those larger deals that you and others are chasing, I would think require more local presence to win and execute against those deals? How are you thinking about investing on onsite versus offshore as you look at the next 12 months? What do you think you need to do?

So, I think we look at it as a portfolio. There are certain service lines where we can optimize our onsite mix heavily going forward. So, for example, BPO runs at probably 1% or 2%. Infrastructure runs at probably 20%. This is a portfolio. So, what we are doing is to try and look at areas where we can optimize. Reduce onsite as much as possible. This is good for the client, good for us. It reduces the total cost of ownership. It makes us more competitive in the market, it reduces the -- it gives value to the clients. Win-win for everyone. And that is one thing we are looking at. We are looking at, of course, automation and things like that to improve our productivity.

So we are looking at it as a portfolio. At the same time, we understand that consulting is a 100% onsite business. We are not going to offshore Lodestone. It will continue to be an onsite-centric business. So at the end of the day, this is the portfolio. Some will run 100% onsite. Some will run 5% offshore -- sorry onsite and that is a portfolio we are trying to build.

Okay. Alright, I'll just ask one last one related to that. Do you have a target for attrition that you're shooting for by year-end?

No, we have no target for attrition which we are shooting for. In fact, attrition is not a target at all. So our objective is to try and reduce attrition as much as possible, as is under involuntary attrition. But one needs to remember that the talent demand in this industry is extremely high, number one. Number two, we have the best trained talent. Because if you look at our Mysore campus, you can understand, we are the only one who has a capacity to train 14,000 people residential for six to eight months. So demand is extremely high. We have the best trained talent. You're bound to have attrition, because the cost of acquisition for -- of that talent is much lower than the investment in creating that talent. So that is what we are faced with. And we will continue to have -- we will continue to try and -- actually we are trying to better our talent. And we are trying to train them more. That's what we are doing. So that means, our talent will continue to be in demand. We are doing everything else to make sure that attrition goes down.

Okay.

David Grossman, Stifel.

Hi, thank you. Most of my questions have been answered here, but I just have two. Shibu, you've given some good color on the loss of momentum in the March quarter. That said, you did see a reduction in clients over $100 million in revenue despite the quarter's wins. So perhaps you could help us understand that dynamic and how much of that represents a growth headwind and as a percentage of revenue, in particular, how much of a headwind is that to growth next year?

So I wouldn't think that there is any secular trend in those matters, because these are all marginal things, right, if the $100 million client becomes [$99.98 million]. One of our clients moved out from $100 million to [$98.11 million]. Just simply a mathematical thing. So I don't think we should worry too much about those factors. We have not lost a single client. Our $100 million continues to be in that boundary only, plus or minus $2 million or $3 million and that is over a full quarter period. So if the client had taken a -- one project that come to an end in some quarter in the last four -- last year, you will see these kinds of shifts. But the more important thing to remember is we have added 92 new clients during the year and increased our $1 million clients by 15% from 448 to 501. That is what we need to think about.

Yeah. I guess what I was asking, Shibu, was whether in fact the loss of momentum within certain large clients is creating a particular revenue headwind for FY15?

Yes, it is. Yes, it is.

And could you help us understand the magnitude of that headwind?

That is very difficult to segregate, because it is all factored into the guidance as well as our performance. The larger clients we have are in high-tech and in retail and in these places. When there is a headwind there, it impacts multiple clients and that will impact our growth momentum.

I see. Okay. And then just second question is really, I guess more of a strategic question. I think I have a high level understanding of the issues impacting growth. But I guess where I'm less clear is what this business looks like when the transformation is further down the road and in particular, are you going to be the low cost producer, are you going to have a bias to higher-end services and products? So in other words, when the multi-year transformation effort is well down the road, how does this business model look and how is it differentiated from your peers?

So we are trying to create a balance, let's be very clear. Strategically, when we look at the future, for us to be relevant in the marketplace, we have to operate in all of them, all three areas. We cannot make any choices. We cannot make a choice that we will be the low cost provider, neither can we make a choice that we will only do the high-end work. Either way, if you make -- set a choice, the other space will be left alone and the competition will occupy that space and then they will eat you into the -- then they will come into the other areas, where you are -- you are there. More importantly, as a strategic partner to our clients, we cannot make any such choices.

So when the transformation is complete, further down, sometime in the future, what we are trying to achieve is a balanced portfolio where we will be a partner for our clients who will drive efficiency and productivity in their operations continuously, giving us maybe 30% to 40% of our revenue. Another 35% -- 35% or 40% of revenue coming from the consulting, system integration work, which also includes some of the advanced technology work which we do and having a strong presence in the product and platform space, because the clients will go there.

So basically what we're trying to do is to create a balanced portfolio based on the balance the client is trying to build. If you look at clients today, majority of them tell us that they are spending 60% of their revenue in [lights-on] work. And that is what is reflected in our revenue. Clients are trying to push it down to 40% and then take that extra money and invest into either transformation or innovation. So we are trying to align our strategic relationship with our clients' priorities. And when I look at it, this is a forward-looking statement, but when I look at it way down the future, our revenues will reflect our clients' spend patterns, which is operations, transformation and innovation and somewhere between one-third, one-third, one-third is what we have said, but otherwise it is somewhere between 40%, 40%, 20%, similar numbers.

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

Thanks everyone for joining us on this call. We look forward to talking to you again.

Thank you. Ladies and gentlemen, on behalf of Infosys that concludes this conference. Thank you for joining us and you may now disconnect your lines.