Infosys Ltd (INFY) 2013 Q4 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. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Sandeep Mahindroo of Infosys. Thank you and over to you, sir.

Thank you, Inba. Hello, everyone, and welcome to Infosys' Q4 '13 earnings call. I'm Sandeep from the 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 pass it on 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 would now like to pass it on to Mr. S.D. Shibulal.

Good afternoon, everyone. Actually good morning, everyone. Thank you very much for joining the call.

Our revenues in Q4 in US dollars terms grew sequentially by 1.4%, including the Lodestone acquisition. Excluding the acquisition, our revenue grew by 0.8%.

On the EPS front we did better than what we predicted. Our EPS for the quarter is $0.78 as against $0.76 last quarter. Our guidance for EPS for the year was $2.97 and we've hit $3.02. This was done irrespective of the fact that our revenue we had to recast from 8% to 10% to 5%.

Pricing has dropped by 0.7% in Q4. There continues to be quarterly movement due to changes in the business mix as well as the pricing situation. Part of our business is under pricing pressure especially the Business and IT Operations side.

Lodestone integration continues to be on track on all important dimensions like go-to-market, delivery capabilities, systems and processes, finance and HR. A joint go-to-market proposition has been established in all verticals. This quarter, I think after the integration started, we have five joint wins.

We are tracking slightly behind plans on revenues and cost targets as the focus was on the above-mentioned areas, that is integration part which took priority over pure revenue and cost until now.

Uncertainty continues in the broader economic environment. We are living in a very fragile environment. The global environment hasn't completely recovered from the downturn and the Eurozone crisis. Though the clients have finalized their budgets, we have to see if it improves the decision-making cycle, including discretionary spending.

Today technology is at the center of many of the key business decisions being made, whether in cost rationalization, productivity improvements, process improvements or future expansion plans. We believe that our suite of services, capabilities across operations, transformation and innovation will allow us to compete and perform in the long term. We are confident of navigating the short-term challenges due to uncertainty in the environment.

I will now touch upon few specific points relating to each of our business units.

In Financial Services, our clients expect their business prospects to be overall flat to down. In financial sector, the appetite for spending money was much higher 12 months ago compared to cost-conscious environment today. At the same time, we expect opportunities in the new technologies, big data, mobility, analytics, social technologies and legacy platform modernization.

Traction is seen in the [currency reconciliation] space, products and platforms and capital markets, loyalty and fraud management in card and payments, next-generation portals and payment apps in banking, digital channels like mobility and social media, and portals for improving agent and customer experience in insurance. And we are focusing on capitalizing on such opportunities.

In retail and CPG, run-the-business budgets are under pressure. However, overall technology spend is increasing in SAP, digital business intelligence and new efficiency platforms. We are a partner for many of the retailers in US and in Europe in their digital strategy.

Coming to manufacturing, the budgets are expected to be flat to down in most of the sub-segments like auto, aerospace and resources. Clients are investing in reducing complexity, lowering costs, increasing the speed of new product rollout and service transformation. We see exciting opportunities in areas like digital transformation and analytics.

Client cloud adoption is increasing in sales and HR. Our strategies include enhanced focus on transformation and capability building, leverage our capabilities in embedded systems, and helping our clients build new products.

We expect manufacturing vertical to have a slower H1 and then see a pickup in H2 as large equipment inventories get depleted in the next few months and production levels gradually pick up after that.

In energy and utilities, communication and services, spending is expected to be down in most of the sub-verticals barring oil sector, energy and mid-market utilities. Telecom sector continues to see its topline shrink. Gas companies are facing revenue pressure due to supply glut and large utilities are seeing revenue decline due to unfavorable rate-case outcomes.

However we see different drivers of spend in different segments. Telcos are spending to improve their customer experience and introducing new product lines leveraging LTE. Energy companies are seeing regulatory pressure on [ECS] and compliance which is creating opportunities for us in production optimization and data and knowledge management. Utilities are investing in smart grid and focusing on driving cost efficiencies.

We operate in multiple offerings. On discretionary spend we expect it to be higher in CY '13 over CY '12, that is calendar year '13 over calendar year '12, in RCL and manufacturing. In RCL we see demand for services around digital commerce, SAP-enabled transformation and analytics, along with strong demand for omni-channel commerce skills around digital marketing and personalization.

In manufacturing, we see deal closure rates in discretionary areas being higher than the year back. However, in energy, communication and services, decision delays are becoming more common and deals are becoming smaller with faster ROI requirements.

In FSI, which is our financial services segment, we expect discretionary spending to be higher in certain pockets through allocations -- though allocations would be small initially.

In our products, platforms and solutions area in Q4 we added 12 wins -- we had 12 wins and added another seven clients, taking the total client count to 79.

Our journey in this area received strong validation this quarter. Infosys cloud ecosystem hub won the 2012 Golden Peacock award for the most innovative products and service. Our Edge suite of business platforms won NASSCOM Business Innovation Award for 2013. Forrester Research has positioned Infosys as a leader in its Enterprise Mobility Services report. OVUM, the global analyst firm recognized Flypp digital experience platform as a well-developed ecosystem of services with a large repository of apps and monetization process.

The road ahead is challenging. Environment has changed significantly recently. There are significant macroeconomic factors affecting all the economies which may have an impact on growth and pricing. The biggest challenge for us is to get growth back and for that we need to make investment in our business. Due to this volatility and dynamic nature of the factors that -- dynamic nature of the factors, it will be difficult to predict margins in the short term and therefore we have only given a revenue guidance. The revenue guidance for next year, actually the current year is 6% to 10% -- we have broadened the guidance to 6% to 10%. I believe that this is a safe guidance given all the information which we have today. We are confident of meeting the guidance at this point in time.

Now let me hand over to Rajiv Bansal to give a guidance on the financial performance.

Good morning, everyone. As Shibu said, our revenue for the quarter grew at 1.4% over last quarter. Revenues excluding Lodestone were at 0.8% on a sequential basis.

Our EPS guidance for the quarter was $0.73 based on annual guidance of $2.97, and we have achieved $0.78, taking the total yearly EPS to $3.02 as against $2.97.

Our operating margins for the quarter, including Lodestone, was 23.6% and excluding Lodestone is at 24.8%. For the year we have achieved the operating margin of 25.8%; excluding Lodestone at 26.3%, which signifies a drop of about 250 basis points, without Lodestone, over last year and 300 basis points, including Lodestone, over last year.

Our volumes grew 1.8% sequentially and 8.8% annually. This quarter we have seen a pricing drop of about 0.7% in the quarter. Our billable utilization is still at about 68.5%, including trainees, and 71.4% excluding trainees.

When we started the quarter we spoke about the gaps in our guidance which were to be filled up with planned ramp-ups in the recent wins that we had and the deals that we had in the pipeline. Some of the deals -- ramp-ups didn't happen as we had planned. And some of the deal closures which were expected during the quarter got delayed because of the delay in client decision-making. Historically the fourth quarter has been soft for us and this is also the start of the budgeting cycle for the clients and which probably resulted in them delaying budget-related decision making.

For the year our pricing has dropped by about 3%, including Lodestone and about 4% excluding Lodestone.

Our cash and cash equivalents at the end of the year is at about $4.4b. During the year the rupee has been extremely volatile against all the major currencies and we also had some impact of cross currencies during the quarter.

As Shibu said, we have given a guidance of 6% to 10% for next year on -- for the revenue. And considering that such a volatile and uncertain environment that we're in, with the revenues moving on quarter-on-quarter basis, we felt that it was better not to give an EPS guidance, considering that we need to make investments in our business in the long run. We are in the middle of execution of our Infosys 3.0 strategy which requires us to look at business strategy over a long period of time and make those necessary investments. And it was felt that we need to go ahead and make those investments; we have to get the growth, we have to make adjustments on our cost models and, considering all the volatility and uncertainty in the environment, it would be better not to give a range of EPS guidance for the year.

With that, I'll throw it open for questions.

Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions). Our first question is from Nitin Mohta of Macquarie. Please go ahead.

Thanks for the opportunity. I just wanted to understand, if I look at the low end of your guidance, the growth is going to be quite similar to what we have done in fiscal '13. How do I look at that disconnect versus the commentary on discretionary spending better in CY '13? Also if I look at the last six months, the deal wins and the new logos that we have added, I would have assumed that would give us more confidence for next year, so just your thoughts there.

So I think the first point on the discretionary spend, actually what I said was the higher discretionary spend in calendar '13 only in two areas, RCL -- that is retail and manufacturing. There are challenges in other areas. So I did not say that the discretionary spend is going to be higher in CY '13, in calendar '13, in -- all around. That is one.

Now we have seen a volatile eight quarters for various reasons, whether it is volume or whether it is revenue productivity we have seen a volatility in eight quarters. Even if you look at this year, let's say take a look at the year just past, we had given a guidance of 8% to 10%. Our volumes grew by 8.8% but our revenue only grew by 4.5% because we lost revenue productivity of 3%. So the volume landed right where we thought it would land and we had assumed a flat pricing in the beginning of the year when we gave the guidance, but the volatility in the revenue productivity created bumps. So in Q3 the volume was 1.5% up and the revenue productivity was 1.8% up. It contributed towards 4.2% growth. Whereas in Q4 the volume is up actually more than Q3, 1.8%, but we had a situation where we took revenue productivity down 0.7%.

So if you look at the last eight quarters it has been pretty volatile for us because of the portfolio, because of the environment. So we have taken a slightly safe approach to the guidance and broadened the guidance itself from 6% to 10%. It is true at the lower end of the guidance the growth will be only 0.5%, but at the upper end it will be [2%] quarter on quarter. Given all the information we have at this point, we are confident of meeting the guidance. Where exactly it will end we will see as we go along.

Thanks for those comments. And if I can squeeze another one, I understand it's been a tough environment to operate. And just the volatility around the business verticals or service offerings, are there some of them which are more difficult as you see it now versus three months ago, just in terms of the volatility and uncertainty? If you can point out or highlight which are the areas which are causing it to be a difficult proposition to call out the future.

I clearly see higher issues in telecom sector because I think they are starting to see topline shrinkage or they are seeing -- they continue to see topline shrinkage. So that is a sector where we have considerable revenue in one of our large verticals and volatility there will directly impact us. Financial services continues to be indecisive -- for lack of any other term -- indecisive for us and also very cost conscious because when we look at the future we have to also -- we have to look at it in two to three ways. We have to look at it from a volume-growth perspective, at the same time impact because of the revenue productivity changes. So while the decisions may have been taken, but they are very cost conscious. That has an impact on our revenue productivity. So I would consider these two sectors.

Good luck for fiscal '14.

Thank you.

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

Good evening. Shibu, I was curious about your Infrastructure Management business, or RIM business, how big a focus is that for you? How are the contracts playing out? Historically these tend to be lower margin upfront and rising margins over time. Is that what you're experiencing and is that some of the pricing pressure that you're seeing?

So let me say a few words and then I'll hand it over to Kakal. So Infrastructure will be a big focus area for us. If you look at the second half of last year, we had the Harley Davidson win, which we disclosed to the public, to which we acquired the [people] and the process app and infrastructure, both. We (technical difficulty) the developments and (inaudible) to support that deal and (technical difficulty) to the other clients.

With that maybe now I'll hand it over to Kakal to give much better color on Infrastructure.

(technical difficulty)

We're not hearing anything on our end.

Are you able to hear me now; Kakal here.

Yes, thank you.

Okay. Yes. I'm just continuing from where Shibu left. On the Infrastructure Management space we have seen considerable progress in the last one year. Earlier our positioning was only to remotely manage the infrastructure or the ring services, if it's a marginal play. Whereas now we have developed a partner ecosystem and we have been able to get the end-to-end responsibility in infrastructure management, starting from data management to asset management to remote management of the infrastructure as well. So some of the examples, I believe Nissan, BMW and few others, are a reflection of our new positioning and ability.

In terms of the revenue sharing, the margin and all that, of course when it's an ecosystem partner, ecosystem play, we have to share the revenue with a few other partners as well, but that makes us complete in terms of our offering. And the clients are looking at us for integrated sourcing which involves infrastructure management as well as application management and some cases BPO as well, which results in our ability to focus on large deals and have a long-term contract which is sticky and a multi-year kind of a thing.

In terms of Infrastructure Management, it is also possible to operate more from offshore. The onsite percentage will be lower than the other services, so hence we will be able to gain some margin and leverage that from the offshoring. Otherwise it's a competitive space. And with the end-to-end responsibility that we are taking now, we are trying to manage the growth and the margin in this infrastructure space. I hope that answers your question.

Great, thank you. My other question is around the wage assumptions for next year. You gave the wage increases later in the year in fiscal '13. Are you going to go back to a normal cycle of the April cycle or what should we assume? Thank you.

Hello? Hello. (multiple speakers).

Hi.

Yes sir, please go ahead.

Hello, can you hear us?

Yes, Mr. Shibulal.

Yes.

All right. Did you get the answer from Kakal?

I got the answer on Infrastructure Management and I was curious what the timing of any wage increases might be in the coming year.

Let me hand it over to [Tan] Moorthy, Head of HR.

So we've done compensation changes since last October for various segments of the population. We started with India; we went on to the United States to do market rate corrections. And we'll continue that process through the course of this year, both across geographies and across levels of people in the organization. We're also planning a change in the structure of the salary components to bring in much more simplicity in the way it's calculated. Thank you.

Are you planning to go back to the April cycle or are you out of that traditional cycle given what happened last year?

So, since the corrections and changes happen as we look at the data coming in from different markets at different points in time, we are not going through a specific cycle for everybody. It happens as required in the geographies and for the levels.

Great, thank you.

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

Hi. Thank you. I have two questions also. I wanted to go back to the difference between the original guidance of roughly 4% sequential growth versus the 1.4% delivered. Was the primary cause of that was it pricing or was it weakness you called out telecom and financial services because you specifically mentioned that volume growth was okay. So if you could just list, in order of priority, what were the most material reasons for the variance between the original guidance for the quarter and the results please?

So actually I would like to go back a little further and then start from there. So in the beginning of Q3 we had given -- we had said that when we look at H2 there are some challenges and there are some revenue gaps which we will try to address and we will try to address it during H2. In Q3 the revenue -- the volume grew by 1.5% and simultaneously the revenue productivity went up by 1.8%. So it resulted in 4.2% growth. We still had some of the gap left, right?

When we entered the quarter we will have visibility for only 95% of the business. And there is about a two and a half month period in which we need to actually bridge that gap. In Q4 what has happened is that we actually grew volume by 1.8% but we lost almost 1% of our revenue because the revenue productivity dropped by 0.7% and we took a cross-currency impact of 0.4%. If we had not done that we would have ended up somewhere around 2.8% including Lodestone, even though we should have been -- the guidance would have been around 3.4% or 3.5% including Lodestone. So we would -- there would have still been there a gap, but we would have been better off.

So the volatility of the revenue productivity impacts the revenue even when the volume grows. I am not saying the volume growth in Q4 was completely enough, but the 1.8% volume growth itself did not reflect back on the revenue totally because of two reasons; number one, the cross-currency impact of 0.4% and the revenue productivity impact of 0.7%.

So in the space from the time you gave guidance to the time you recorded results was roughly 70 days. How is it that you had such a material change in revenue productivity? And was it changing in pricing terms or -- was it just pricing or was there something else? Was there any contract that you had to incur an unusual loss in? I'm just surprised it was that big of a variance in the space of about 70 days.

There are no seminal events which led to the revenue productivity -- there is no one single event, which you're asking, there is no one single event which has led to the shift. Even in Q3 actually the revenue productivity went up by 1.8%. In fact if you look at Q1, I think the revenue productivity dropped by 3.5% or so, if I remember right. So the revenue productivity has been volatile.

See, if you look at last year, our revenue productivity went up year on year by 2.2%. This year the revenue productivity has gone down by 3%. So the revenue productivity has been stable in the past when the environment has been stable. Now the environment is not that stable.

There are two factors -- two or three factors which impact our revenue productivity. Number one is the pricing itself. The pricing in our Business and IT Operations space is -- some part of that Business and IT Operations is under pressure. So that impacts revenue productivity. So when you execute on deals where you have less than average pricing, as the time goes by they get into the system and shows up. Number two is a shift in portfolio. But there was no shift in portfolio, material shift in portfolio in Q4 so most of it would have been pricing. Occasionally you can see an impact because of overruns and things like that but there are no such events in Q4 which is material in nature.

Okay. Well, I wanted just to have one more; that was actually my first question. The second is if you could talk about margins? I think investors are surprised about the margins degradation as well and the forces that drove that sequential change in margins. And what investors should be thinking about, is this -- how should we be thinking about margins if we look at the upcoming quarter in particular? I know you don't want to guide the margins, but if you could just address what are the most material variables that are going to drive margins here in the quarter to help us understand whether the margins are going to go up, flat or down. Thank you.

So the most important factor which impacts our margins --there are two or three important factors, but the most important factor is growth because growth is a driver for margins, because growth creates utilization. Utilization creates balance between revenue and cost and that is one driver for growth. Second one is -- that is one driver for margins. Second one is revenue productivity and revenue productivity directly impacts margins because a 3% drop will result in a 2.1% impact on margin, depending on plus or minus it goes either way. So these are the two or three things. And utilization has an impact on margin.

We are definitely entering the year with a headwind on margins because of incurred costs which is going to get accounted; not accounted, that's not the right word to use. These are -- I'll give you an example. So, for example, we did compensatory increase in the middle of the year in last year. That means we've only taken costs for half year for compensation increase in the last year whereas the full-year impact will show up this year. We have given a compensation increase in US, market-correction in US, in February, which means we would only take -- incur costs for two months last year and ten months will come this year. That itself is about $140m of impact.

Then we are taking a one-time charge for next 12 quarters or so because of the Lodestone acquisition which is about $40m for the year. The Lodestone integration is in progress but remember the Lodestone is a consulting company and their margins will be in single digit. It will become normalized over a period of time when the offshore gets built to support that onsite margin or the consulting margin. And that should build over a period of time and the revenue multiple should be somewhere around three to four times.

We already have five wins in the current quarter because of Lodestone-Infosys combination. But the impact of the single-digit margin on the Lodestone revenue will show up in our margins. So there are some short-term headwinds and we are also entering the year with headwinds.

Then there are some -- two or three areas where we will see impact -- or there are two or three areas where there is potential impact. So, for example, the revenue productivity there will be a tailwind because of the sequential drop which we have seen. That is one.

Number two is that we need to make investment, but we are -- growth is our biggest driver that means we have fuel growth, which means that any investment which is quest for growth we need make. We also need to make investment in some of the new areas.

We have -- we are going through visa application process. And the visa approval will not be 100% of our applications because of over-subscription. We do not know the results of that yet, so that may also have an impact (inaudible) on us. So the resultant uncertainty it is also which we are seeing that is the reason we decided not to give the guidance for the time being.

Okay, good luck, gentlemen. Thank you.

Thank you.

Thank you. Our next question is from Manik Taneja of Emkay Global. Please go ahead.

Hi, sir. Thank you for giving your qualitative comments with regards to verticals. I wanted to check, [you have said] manufacturing has been a vertical that's grown significantly ahead of company average for the last three quarters, the last three years. Do you envisage a similar scenario for FY '14 and also similar coming for other verticals?

So let me start with manufacturing and engineering. So I think what we have done in the last one year is to obviously refocus some of our energies into areas where we think we will have the fastest and best return. We have grown our European business which was lagging on the back of some very large deals; one of course is in the public space which is BMW. And there is a large deal Harley in the US as well. So we are focused on large deals.

We think when we look at the budgets, I'll keep this short because my other colleagues are also here who can talk about their sectors, if we look at the budget it's tending to be flat to slightly lower than last year. But we think that given our presence and continuing expanding presence on Continental Europe we will see some traction in Germany especially. And we will continue to be quite dominant in the high-tech sector.

There are certain sectors that are completely under tapped for us like resources chemical business or industrial manufacturing, which again back -- on the back of certain defined strategies we have been able to break through. So we expect to continue to be -- to continue to grow and be a fairly large contributor to the guidance that we have given. B.G.

B.G. Srinivas with a quick view on the financial services sector. As we look ahead entering the quarter one of this fiscal year we are definitely entering with a decent pipeline in terms of both existing ongoing business as well as both outsourcing leads and some interest our clients have shown in transformation opportunities. So, compared to where we stood at this time last year we are more confident in terms of the growth rate. The sector itself, banking capital markets as well as insurance is still going through challenging times in terms of their growth rates.

There is definitely opportunities in cost optimization in insurance within the client organization. There is a bit of discretionary spend on two areas; one is the regulatory and compliance, the other area is on the region transformation multi-channel analytics and [right] platforming as the clients call them in terms of re-commissioning legacy and optimizing applications on a newer platform, re-architecting what they have today.

So these are the opportunities which we see. And while the market will continue to pose challenges in terms of growth rates, but we are relatively well positioned to tap into current opportunities as I outlined.

Sure. And, B.G., another question for you with regards to Europe. Last quarter commentary from you guys was that you are seeing a lot of maintenance spending opening up for Indian IT companies. This still continues that way?

Europe in a macro environment, yes, there are definitely challenges. But in terms of specific business opportunities across sectors financial services, manufacturing, retail PPC, energy utilities we are still seeing opportunities. We have now more than 200 clients within Europe. We continue to invest in the big markets Germany, France and the UK. We have also seen a significant uplift with the acquisition of Lodestone particularly in Germany and Switzerland across manufacturing, CPG and life sciences.

So given the investments we have made and given the existing client sets where we are mining]opportunities and also focused on certain key clients which we have acquired we are reasonably confident of increasing our market share within Europe.

Also to remember is the fact that Europe continues to be fragmented in nature of its offering, the maturity [code] within each of these countries varies. But we are tailoring our specific go to market initiatives within each of these countries. And we do believe that that is starting to pay dividends. Also, the fact that most of this business, at least in the Continental Europe, is consulting led we definitely have a lead in terms of the investment and the capability we have there.

So that's where we stand. And again given the current situation, the pipeline also while across sectors vary we do have a reasonably good pipeline at this point in time.

And if I can chip in with one more question. This question was for Rajiv. Just wanted to get a sense on the margin decline that one has seen in the [513] almost close to a [300 bps] decline in margins. If you could break that up in terms of impact from pricing, in terms of pricing -- in terms of utilization, in terms of impact from Lodestone on a full-year basis.

I think if you look at a year on year basis primarily it is pricing. Pricing actually goes from a drop of about 400 basis points and that impacts the margin by roughly about 280 basis points. And our margins excluding Lodestone have dropped about [250] basis points this time revenue productivity and then the pricing.

Other than that we also had impact of cross currency. I think during the year if I look at the cross currency impact, it was roughly about $60m year on year. So but all that we have been able to manage with all the cost management that we have done during the year. I think it's primarily pricing which has driven the margins down.

And what could be the (background noise) utilization for us in terms of margins?

No, utilization if you look at including trainees has kind of remained flat year on year. So utilization did not really have a large impact on operating margin this financial year though our utilization was low, but including trainees utilization (inaudible) in the last year also.

Yes, thank you.

Thanks.

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

Thank you. There are so many factors here that are -- you've mentioned that are impacting the margins today, and perhaps if we step back. This industry has always been able to operate at a higher level than its global peers. And your model is evolving and I suspect others in the industry will as well. And that evolution feels like it's larger or migrating at least directionally towards the global players like an IBM or Accenture that obviously operates with a different margin structure.

Can you just help us understand how we should view your model over time vis-a-vis what you're doing with the business, where the industry stands so we can just get a better idea of how this plays out? Not necessarily in fiscal '14 but over a longer period of time.

So there is no doubt that our business has evolved because certainly our business has a lot more decreases than in our -- especially in the case of Infosys. Because if you look at the average industry, average IT industry from India you may not see it because the NASSCOM average is somewhere between 17% to 18% to my knowledge whereas our consulting interest in immigration revenue is something like 32%, so which means that our dependency on discretionary spending is definitely high.

There are some cost pressures in the Business and IT Operations space. So our strategy is actually to balance growth both in the -- we have to grow both sides because we know growth is all around. But at the same time if we can grow our consulting and system integration space where there is better pricing power that will help us increase our revenue productivity.

Now regarding the margin it is also important to understand that we are in a year of low growth. Growth has been the driver for our margin all these years. Growth creates some scale, growth creates utilization, growth creates onsite, offshore rates, all kinds of things. So the wind and in -- so year-over-year growth we grow by 4.5%. On top of that we had a year where the revenue productivity came down by 3% partially mix, partially pricing change, so both.

So I am -- I will not consider this -- I know -- I will not consider this as a cyclical trend for IT because I know that the in short term I have some more headwinds to face. I gave the list of things which we are entering the year with and uncertain things which I have in my hand because of the plan -- lack of clarity on visa applications and things like that.

But if the growth picks up, if the growth picks up our margins should benefit. So in my mind there is -- while there are short term challenges long term there is still potential for margin improvement. But for that, growth has to pick up for us. And that is exactly what we are trying to do. So that is why we have taken this very, in my mind, very drastic decision to actually not give the margin guidance, make the investments then focus on growth and then we believe that once the growth picks up we will have a better margin capability.

Right, so thanks for that, Shibu. I think that (technical difficulty) it makes perfect sense which is (technical difficulty). I guess what I'm trying to understand though is that when your global peers are growing at a much slower rate than you and getting margin expansion, and it's -- obviously there are changes that you must undertake with your model that are costing the margin (technical difficulty). But as you evolve the model do you envision the mix changing (technical difficulty) structure, the industry changing that may in fact also change the margin structure of the business or do you feel that you can sustain these relatively high margins once you've reached equilibrium?

Well, I am going to -- Rajiv is going to answer that and then maybe I'll come back.

No, it's very clear that our -- the traditional business or the services business is going to see more and more pricing pressure in the coming years. And that is where we started on our journey Infosys 3.0 where we put our expectation of having one-third of our revenue coming from products, platform and solutions, which will help us keeping the pricing premium and getting higher margins.

So those are long-term goals. And that is the reason why we started on the journey. But maybe in the future I think if the growth comes back it helps us manage the payment model much better. Today, because the growth is [HRP] and it is very unpredictable it is very difficult to plan and get the benefit of the payment model that we have.

So I think in the near term the margins would be under pressure depending on how the growth stands over the next couple of quarters. But I think in the long run if we are able to execute our strategy well, I think we should be able to keep the margins at -- much higher than the industry average.

I see. And just when you were talking about pricing pressure you said business operations is where you are seeing it most. Is it isolated there or you -- are you actually seeing it in other sectors as well?

No, the pricing pressure -- see, today there is a growth issue there is -- discretionary spend has kind of disappeared from the market and the discretionary spend is where we get the pricing premium.

So on the [content] business there is pricing pressure. I think across the board we are seeing all the usual -- the clients are also under pressure and clients really want to cut down their costs, they want the maximum service typically, they want -- they have to keep their shop running. So the pricing is going to be under pressure in that in the business of IT operations.

But I think as we see the discretionary spend pick up, I think the business mix would take care of the kind of pricing pressure that we've seen in the business IT operations.

Okay, I see. And just one last question, obviously you've got a very, very healthy balance sheet and cash position. Are you thinking more broadly about capital allocation and how you may return more of that to shareholders or are you happy with where you are right now?

No. See we do debate this. There's a question which (inaudible) talk to the Board on our cash strategy and why do we need $4b on our balance sheet in cash and cash equivalents. The fact is that we are in the implementation phase of our business strategy and our aspiration is to have one-third of our revenues coming from PTS.

Now we also understand that the one-third target would not be met only through organic means, because that would take (inaudible) because our public uses also are growing. So we have to look at acquisitions in that space in a big way, and as you know that space is where the multiples are pretty high. So I think that during the administration of the strategy the cash is more strategic to us today than it has ever been before.

We also said that we are very aggressively looking at right targets; we are looking at a lot of companies right now as we speak. So we believe in the next 12 to 18 months this cash is very, very strategic for us to accelerate our journey on our PPS platform.

Thank you very much and good luck.

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

Hi. My first question is just on the large deal front. I think you had mentioned that there were some delays in getting those ramped. Could you talk a little bit about what those delays where, what caused them?

And why did -- also on the execution front and the Lodestone front it came in I think a little bit below what you were expecting. Maybe you could talk about why that was smaller than you expected as well.

So actually if you look at it so we had a pretty strong win streak, we have closed about $950m plus of TCV in large deals and transformational deals. The large deals which we won in Q2/Q3 went into execution more in Q4 and that investment that is reflected in our onsite effort percentage going up, and the effort growth in Q4.

What happened was that the offshore has not picked up and that is delayed than what we thought. And some of it is client decision making and some of it is the way it happened over the period of time. So -- and the deals that closed in the onsite and the (inaudible) have started. The offshore is yet to pick up in many outcomes, let me answer to that.

And the second one about Lodestone. Lodestone, we are a public company and they are in a privately-owned company. The accounting policies are extremely stringent for us and we follow very stringent accounting policies. So I think when we consolidated with our accounting policies were applied to them which delayed the recognition of some of the revenue. And we were much more focused on integration rather than on -- during the integration process, we focused very much on the integration and [join] these rather than on the revenue impact of that also impacting by a couple of million dollars.

Okay. So do you expect now, as we look at next year do you expect that the large deals, the ramp time of those will resume? Do you expect, I know you used the word delayed with Lodestone, do you expect that revenue to pick up as well? Are we through that or is there some client specific stuff going on because the pipeline seems to be continuing to increase but the execution remains relatively volatile, just trying to reconcile that.

There are no client specific issues in Q4 or in Q3, there are no client specific issues. The execution we are expecting to pick up and that we have factored it in, but we need to be in a lot more deals going forward and that is what we are focused on.

The pace of ramp up may be slower in this volatile environment. And I can't say that the pace of ramp up which we have seen, which is slower than usual, will materially change in the short term. That means we have to win a lot more deals to create that growth in that because we are focused on.

The Lodestone, now we have moved them into -- fully into our accounting policy so I don't expect that to be -- and we are putting in new processes in place which are very much in line with our own processes. So that we don't have any revenue -- we will use our own revenue recognition policies to recognize the revenue and we will have the processes to support it. So I don't expect that to be there.

The joint venture already happened, so I think we have five joint ventures over the last four or five months after the integration started. I expect that momentum to continue.

Okay. One last one from me just on the margin front, you had talked in the past about keeping margins in a tight band, I think about 100 basis points. And I know you didn't give any guidance on earnings. Should we disregard that commentary of the past and just sort of that margin band?

And then as you look at those margins going forward can you give us some idea of what you're thinking about internally for an investment schedule and how that would impact the margins as you look at it from a seasonality standpoint, etc. Again, we are just looking for color and I wanted to see if that previous margin guidance would hold at all.

No, I -- at this point I will not [hold up] business volume guidance because we are entering a year which is slightly different than what we have done in the past in many years. We have a headwind because of the lack of growth in the previous year, plus the commitment which we have made. So we have $140m headwind because of the compensation gains we have made which is going to be newly accounted in the coming year. It is the impact of compensations which we have made mid-way in FY '13 which will show up in FY '14.

There is a $40m charge which we are taking for Lodestone from an acquisition perspective because we only paid out $200m, the remaining is being charged under the P&L.

We have an impact because of the Lodestone revenue being in the consulting margin band. Consulting revenues usually come within a single-digit margin. And it will take time for the offshore component to get built because they know the -- build up of the offshore component is one is -- something like one is to three or one is to four and that will take some time, so there is an impact because of that.

Now these are known things, and there are a few unknown factors also. Number one is the investment which we need to make. Because growth is extremely important for us we want to invest and we will invest in the growth. And we will not compromise on investment so that the growth will continue to pick up, number one.

Number two there is an uncertainty on visa applications. We applied for a certain number of visas, but we know that there is a serious over-subscription for visas which means that we will only get a percentage of the visas which we applied somewhere between 50% to 60% which will lead us to recruit onsite offers of contract, so that will have an impact as well as there is a tailwind from the -- our people, the revenue productivity drop.

So there are a known set of factors which I clearly quantified, there are unknown factors which are in the evolution mode, and that is the reason. Because of the uncertainty, we decided we will not give, and we want to make the investment. So because of the uncertainty and because of those factors we will not give a guidance on the margin at this point.

Shibu, this is Steve Pratt, I just had on Lodestone we are very picky about acquisitions, but the early -- I guess my early diagnosis of Lodestone is that it's a really great company. The people there are terrific. Ronnie and his global leadership team I think are very good with clients. And I think there is -- the integration is going very well. We've actually moved some of the people from consulting in the UK into Lodestone, and it's a very seamless integration. So I am very bullish on the prospect of that going forward.

But it will take a while for them to get used to our model. And of course as Shibu said they are a lower margin initially standalone, but the long term intent is for them to drive higher margin work and flow through.

I just wanted -- because you've added I just want to clarify there is absolutely no doubt in our minds regarding the quality of the acquisition or the quality of the revenue.

When we implement, we have very stringent accounting practices and revenue recognition practices. They were not a public company before and they are now a part of a public corporation. We are implementing our stringent accounting practices and revenue recognition practices. That delays the recognition of some amount of revenue. And that could be because of lack of documentation which is not important to us but it is important to -- it was not important to them but it's important to us. Otherwise there is absolutely nothing there which will -- which is of any material nature.

Okay, thank you.

Thank you. Our next question is from Sandip Agarwal of Edelweiss Securities. Please go ahead.

Yes, hi. It's Sandip here. One or two quick questions, first on the -- if you see the vertical side almost all the verticals are looking slightly weak maybe. Although you have given some bit of optimism on the manufacturing and retail but overall it is the 60% to 70% of the vertical outlook which has been provided as [maybe muted].

Secondly, as you rightly said that one is to three or one is to four is the follow on in the offshore side from a consultancy business which is yet to come. But if our strategy is to continue acquiring small companies are necessary to build up the PPS model and the consultancy model, then obviously this kind of operation may continue for a longer term than it being in short term. So if you can address these two issues it would be great.

And thirdly on the utilization front, I understand that there is now not very aggressive offer letter which have been issued, but at the same time even at the current level absorbing what joinees we will get will it be okay to assume that there is a sharp up-move in utilization in this year and next year?

So it is true that when we acquire it will have some impact to our margins temporarily, and then we are going towards normalizing the margin and it will take time. In the case of consulting that is even more true because the back end has to be built, that one is to three or one is to four model has to account.

(Technical difficulty).

Excuse me, sir, Mr. Shibulal, we are unable to hear you. Mr. Shibulal?

We are unable to hear Mr. Shibulal.

Participants, please stay connected we'll get in touch with the management right away.

But I should tell you this, the last (technical difficulty) we did one of these project in Australia. Today we get 5% of our revenue from Australia and one is to three one is to four happened over a period of time. Hello?

Excuse me, Mr. Shibulal, we lost your voice, we couldn't hear you. If you could please repeat.

So which part?

We have not heard you -- any of your answers.

Oh really.

Yes.

You haven't heard any (multiple speakers). Let me start again. So on the one is to three or one is to four, yes, it is true it will take time and there will be short-term margin impact. And any acquisitions we [fill in] the data and there aren't that many companies with our margin structure. So any acquisition which we do will be margin dilutive short term because they evidently can't do, there aren't that many corporations with our margin structure or smaller companies with our margin structure.

I was also saying that we have done one of these before which was [expressly] with Australia, and today we get 5% of our revenue and from Australia and we have built on the one is to three or one is to four model. And the margins are definitely -- above average which means it has been accretive to us.

Are we still on the line?

Yes, yes.

Okay. Now on the recruitment trend we are also doing recruitment but we are honoring all the offers which we gave. We do add another 10,000 people in this organization. The utilization has been stopped. When the growth picks up our utilization will improve much faster.

And, sir, on the vertical side, the question was 60%, 70% of your verticals are looking as of now a bit flat and negative budget so what -- how should we see that demand environment coming now?

So then we gave the 6% to 10% guidance we have factored in also these things, the demand environment is weak and the economy you can see is worsening in Europe and everywhere else (inaudible) is also mixed. It is not like we are getting a consistency around the demand environment. Some days it looks good some days it looks bad. And there are cascading effects of any events.

So we have to focus on the newer areas where we are seeing demand that is mobility, cloud, our analytics, social commerce, consumer [activity] those kind of -- that is where we are making the investments. We are making investments in the growth areas which are either through intellectual property or through capability we are making investment in the growth areas.

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

Thanks, everyone, and thanks for insightful questions. We look forward to talking to you again, and have a good day. Bye.

Thank you.

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