Wipro Ltd (WIT) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the WIPRO Earnings Teleconference Call for the period ending March 31st 2003. At this time, all participants are in a listen-only mode. Later, we will have a question and answer session and I'll give you instructions at that time. Should you require assistance while you're on this call, simply press zero then star, and an operator will come onto your line to assist you. As a reminder, this conference is being recorded for digitized replay and that information will be given out at the conclusion of the call. I would now like to turn the conference over WIPRO management, Mr. Sridar Ramasubu. Please go ahead.

Morning ladies and gentlemen and good evening to our participants across the globe. This is Sridar Ramasubu, and I handle the industrial relations function for North America, along with Shankar, (Inaudible) and Bangalore. We extend a warm welcome to all the participants from US and UK and elsewhere, to WIPRO's First Quarter Results and the Earnings Call, for the period ending March 31st 2003.

We have with us today, Mr. Azim Premji, Chairman and Management Director, Mr. Suresh Senapaty, CFO who will comment on the US (inaudible) results, for the quarter ended March 31st 2003. They are joined by Vivek Paul, Vice Chairman, Suresh Vaswani President of WIPRO Infrotech, Vineet Agrawal, Consumer Care and (inaudible), another senior member of the management team, who will be happy to answer the questions you have. Before we go ahead with the call, let me draw your attention to the - that in the call, we might make certain forward-looking statements within the meaning of the Private Securities Litigation Reforms Act of 1995. These statements are based on management's current expectations and are associated with uncertainty and risk, which could cause the actual results to differ materially from those expected. These uncertainties and risk factors have been explained in detail on our filings with the SEC.

The call is scheduled for one hour. The presentation of First Quarter -- the First Quarter results, will be followed by a question and answer session. The operator will walk you through the procedure for asking questions. We do remind you that the entire earnings call proceedings are been archived, and transcripts will be available after the call, at www.WIPRO.com. Over to Bangalore ladies and gentlemen, Mr. Azim Premji, Chairman and Managing Director of WIPRO.

Good morning ladies and gentlemen. The broad of Directors, in the meeting held this morning, approved the accounts for the year-ended March 2003. Our results have been mailed to those registered with us and are also on the website. Let me share with you some of our thoughts on how we see the environment.

Customers want to see value for the price they pay. You pay value for the customers by either increasing value or decreasing price. Customers want higher value at a lower price. This is a trend that we began in 2001 and we believe this trend will only accelerate. Customer requirements need attention, by responses customers, a wider service rage and to a larger number of customers. This we will achieve by a combination organic service line expansion and acquisitions. To address a larger number of customers, we will increase our investment in sales and marketing and prudently evaluate potential acquisitions.

In calendar 2002, we complete a three acquisitions. (Inaudible) for service line expansion, global energy practice of AMX Incorporated for consultancy skill set and customer relationships, and R&D lab (inaudible). A (inaudible) in figuring these acquisitions has given us confidence to pursue this strategy further. The evaluate candidates for acquisitions are an on-going basis. The first (inaudible) used for (inaudible) acquisitions is whether such candidate strategly and culturally. If these two criteria are met, we proceed to finance evaluation.

Candidates must meet financial targets. When it comes to acquisitions, we are conscious that there will often be short term paid of margin contraction. Due to the acquisitions related cost of integration bonus and ammortization of intangibles. In our review, the short-term pay is acceptable only because of long term gain we see in potential acquisitions. Looking ahead, the global (inaudible) business is - appreciation and pricing contributing to margin pressure. On the other hand, we believe driving higher value at its services, moving business offshore, decreasing utilization and managing cost (inaudible) down sites.

Our consumer care lighting business as generated positive cash flow for decades, the consistent margins. We have invested building a retail distribution network reaching out to over one million outlets. A strategy in this business is to realize the value of distribution network, by acquiring brands. Our acquisitions of glucose retail , a glucose based energy drink, is part of this strategy. We continue to evaluate other similar brands as potential acquisitions as well. Our financial parameters for acquisitions both in the technology business and the consumer care business are similar. I will now request Suresh Senapaty our CFO to comment on the results before we start taking questions.

A very good morning to all of you in U.S. and good evening to all of you in India and in Japan. Mr. Premji shared our thinking on the business environment. I'll touch upon a few aspects of the accounting significance. As Mr. Premji said, we evaluate our condition from an economic perspective when we do that we also consider the accounting education. The difference between the two is in time horizon. When evaluating an acquisitions from an economic perspective we believe the horizon is about three to five years by contrast when evaluating an acquisition from an accounting perspective, you need to break these cost associated with an acquisition down into quarters. One-minute difference in evaluating (inaudible) acquisitions from an economic perspective verses an economic perspective results from the accounting statements of integration bonus in both India and U.S. GAAP and in U.S. GAAP amortization of intangibles.

While from an economic perspective both these are considered (inaudible) conservation as they are settled at the time of acquisition. In the accounting statement these amounts are considered as debits in the PNL for the period ranging from four to eight quarters. These are factors that we are conscious of when looking at financial results. On (inaudible) acquisitions the concentration phase will be amortized over life of the product. Life of the product will be determined with regard to (inaudible). During the year 2002, 2003 with the GE Medical Systems, a joint venture in which we hold 49% equity state we reported a loss of at least 371m about $7.8m. As highlighted previously, the medical equipment market continues to be on the volume and packing pressure but we are working with our joint venture partner to adopt our organization and market approach and bring our JV back to historical profitability. We believe that this venture will exist through fiscal 2003-2004 on a profitable trend. We'll now be glad to take questions.

Ladies and gentlemen, if you wish to ask a question please press one on your touch-tone phone, you'll hear a tone then indicate you can place Q. If you are on a speakerphone, we do ask for the sake of sound clarity that you use your or that you pick up handset when you ask your question. Our first question is coming from the line of [Ashish Kumar] from Credit Swiss First Boston please go ahead.

Thank you, good evening and my first question is in the opening remark Mr. Premji said that customers are asking for better price, higher value and the trend might accelerate. Does that mean that pricing pressure will accelerate?

No we do not think pricing pressure will accelerate, we're making a statement which says that customers are driving more value for money and they will continue to do that. The trick is what do we offer in terms of value added. The trick is what do we offer in terms of differentiated services and even if the realizations come in any pricing pressures how do we have a mix of deliverables in terms of our cost (inaudible) that we are still able to deliver acceptable operating margins.

I think-our earlier hypothesis by our, meaning most people in the market, we're of presumption that as utilization rate picks up at some point in time there will be placing stability. Unfortunately, you know that didn't happen. Now you know, most of us look at hiring parameters and think that, you know, until the company's are hiring there is volume growth that will follow. And I'm just being perhaps cynical, but is there any sort of--- is there a probability or could you tell us a scenario under which volume growth, which held up for the top year company with a sequential growth fashion might not all hold --- and we could see volume contraction.

This is Vivek. I think that as things stand right now, as we talk to customers really unanimously the feedback we hear is that they want to do more. So I think more customers want to do it and the more kind of customers that we have want to (technical difficulties) to outsource to us more. So, I think from a trend basis, I think clearly the outlook is pretty positive, in terms of volume. - - However, in the short term it comes down to nailing down the next five, ten, twelve weeks. There was an uncertainty to which project will transition when; they got work through their own issues internally, in terms of what they are doing to their employee. Because typically it's work that was done earlier from (inaudible) either another vendor or internally. And also what kind of appetite they have for making significant changes. So I think that what we are seeing is a long-term (inaudible) stability and strong interest by the short-term still relative level of uncertainty. Not uncertainty in terms of will happen, but when it will happen.

One just last question - - for Mr. Suresh Senapaty - - you know - - clearly our company have - - along with the other top tier companies have entered a slow growth - - phase. And I know you do have plans for acquisition etc. you also have a lot cash and our model is highly profitable free cash generated- - what is our dividend pay out policy, and are we going to look to increase dividends. Thank you.

When we (inaudible) the (inaudible) policies you know that has always been - - using the cash for - - you know, growth and - - whatever cash we have been generating and has been able to collected in the ADR. We have been using it for acquisition. We will continue to have - - initiatives in this area and as it was articulated in our annual report last year. At the moment we are of the view that we do not need that much of cash, and yes we will - - consider more dividend. But this one [inaudible] the approach is to conduct cash to be able to use it to use it for acquisition.

[inaudible] thank you very much.

The next question comes from the line of [Anida Dudanga] at CLSA. Please go ahead.

Hi this is [Anida Dudanga] from CLSA- - just spending some more time on the pricing issue - - just wanted to understand that there are two sources of pricing pressure. One is from the renegotiations of the existing contracts and the clients coming back for lower pricing, and second possibly due to maybe volume discounts, which have been promised, and which are start coming in now. - - Would - - we - - interesting to know from you as to, number one, we were assuming that the renegotiations phase is ending by - - say - - three to four months back. What has led to - - the renegotiations, if at all it is, and if not, then what are any other sources of pricing pressure which has come up.

- - I think that the two sources that you pointed out are really valid, which is that of the - - we are seeing customers coming back and renegotiating- - as we started this calendar year - - pretty much out of the blue, I think - - you know, as they set their new plans or whatever - - saying that okay guys we are interested in more volume. We would like to be able to get a better price. Also we are seeing that.

Could you give us an - - a renegotiations cycle I thought was ended about three, four months back, have the renegotiations people come back who have gone through one cycle of renegotiations. Have they come back further to cut more rates? Are they any situation like that?

No I think that the way that it works is that we have our contract expired various times for the year, so we do not have a single contract expiration date. We have - - you know, multiple contracts expiration dates, but what I am saying is that in this calendar quarter - - in the start of this calendar year what we had was that people who were even not up for a renewal coming back and saying well we would like to able to more volume and therefore we'd like a better rate.

- - and in the last quarter conference call you had indicated that possibility some sources of worry were the in-sourcing by some of the company's in India who has set up their own centers or who have their own centers. What have been the trends been in that area. Have their been a bigger cause of worry?

Actually the worry there has shifted from being volume worry to price worry. If I look at the last quarter, we actually had a worse performance on pricing on the - - technology side of the business and on the IT side of the business. So, what we found was that in those instances where customers were really (inaudible) up their own internal development - - India development centers. For us to participate in their growth plan - - we had to cough up a little bit more.

My last question is again to Mr. Senapaty, - - there is a one item and (inaudible) advances figure which is basically advances recoverable in cash or kind - that - number has doubled in the year- - more or less than doubled. Could you indicate - - what is that number exactly? It's scheduled ten loans and advances, advances recoverable in cash and kind.

[inaudible] Indian GAAP or U.S. GAAP you are referring to?

Indian GAAP

Yeah, you'll have both the same (inaudible) because of the increase in the account that is (inaudible) Onsite growth that you've got and we also cover that the investment also that covered the in terms of the money that we would have with (inaudible)

Actually, this is just one part of that schedule, maybe I can take it later but it was basically considered good, which is other than the (inaudible) and all other deposits. It's gone up from 949 to 1726 million rupees.

Are you comparing last year figures to current year figures?

Yes.

Last year figures do not include figures for (inaudible) which was not a part of (inaudible) since July of 2002. There is a certain amount of (inaudible) debt, which is part of it. The second factor is (inaudible). Due to the amount of volume that has increased Onsite.

Okay, thank you.

And our next question comes from the line of Ed Kaso with Wachovia Securities. Please go ahead.

Thank you for taking my call, I had a few questions. I was wondering if you could comment on the pace of new business given the war in Iraq and the SARS virus.

We have not seen any significant impact on business on either of those. In the morning call, we had shared the data that we had 40 visits schedule from customers and prospects from March 15th to a couple days ago. Of those 40 visits, 18 were cancelled but what that also means is that the 22 did go ahead and do the visit as they saw a splendid oasis between SARS on the left and Iraq on the right. So I think that we saw some impact on travel but not a shutdown. In terms of the impact itself, to we extend, it's a couple of week disruption; it doesn't really make any difference because sales cycles are typically six months long and customers can just re-schedule a trip without necessitating a impact on the business. However, you know --- we live in a world of imponderables. I mean if the SARS thing become epidemic then we have to worry about it on multiple levels.

Have you, of the ones that did cancel, the 18 that canceled, had any of them called back now to reset.

No, not yet. This is literally between March 15th to two or three days ago. So I think if they cancelled is unlikely to re-schedule until we see more stability. I think the Iraq uncertainty is done, then we wait another week or so to see if the SARS thing doesn't spread outside more than it as.

Okay. Can you help me, I read in some of the news articles that guidance had been lowered or maybe it was lowered relative to the analyst's expectations. Can you help me with what you did with the forward guidance?

Yeah. The forward guidance was for the quarter and what we said is that, our technology services business we'll have a guidance of $172m for the quarter and our business specified sourcing business will have a guidance of $16m for the quarter.

Okay. And you hadn't had numbers out previously?

We did not have numbers out previously.

Okay.

For the last quarter, we had guided 162, we did 167 and on the business profit side, we guided 12 and we did 14.

Our next question comes from the line of Mr. Drudik at UBS Warburg. Please go ahead.

Yeah. Hi. My question is got do on the margin side, EBITDA margin side. If you could explain the difference of the margin decline this quarter and highlight what kind of a outlook do we expect for the next quarter margins as well, on the IT services side?

Is that from the U.S. GAAP perspective (inaudible).

From the Indian GAAP perspective.

We had discussed that in the morning, but just to mention that the ---you know-it had an impact in terms of the merger that we had --- the acquisition we had in terms of the utility division of (inaudible) and which had impacted about 1.1% in the SG&A because it included some of the retention bonuses that sort of (inaudible). And about 1%, we had an impact of rupee dollar appreciation and we had some improvement in the utilization and that has been reduction in the billing rate and a combination of all this, there has been a reduction of overall 3.9% non-operating margin between quarter four and quarter three of the last ended year. Now, going forward if you see all this factors well if you would perhaps continue to appreciate (inaudible) the next two to three quarters. Billing rate in terms of committed reductions that will also have a slow (inaudible) in terms of the current and the next quarter. There could be growth in terms of improvement in the utilization. We continue to invest on the selling expenses. So far, as the bonuses are concerned for that --- it would not be as much. So there is a mix bag of some good guys and some bad guys and overall we would say in the short term, that it (indiscernible) non-operating margin.

I see, thanks a lot.

Our next question comes from the line of Mosha Katrini of SG Cowan's. Please go ahead.

Good morning. I just wanted to focus more on gross margin trends from U.S. GAAP perspective. Can you give us some feel about the trends and gross margins for this quarter, what impacted gross margin and then if possible can you also talk about --- give us a feel also on trends for gross margin for the next quarter? And then finally, also I guess we need to talk a little about the competitive landscape, how significant of an impact if any the U.S. base vendors are having on your business so far? Thanks

Maybe Mosha I can start out with the discussion of the mass element which is the impact of the U.S. base guys, while ---you know, and then maybe Senapaty answer the questions on the gross margins.

Sure.

If you look on the U.S. base companies, we really don't see them in more than maybe 2% to 3% of the incidences in which compete. And they primarily compete at large clients, were they are looking at a big, kind of a offshore outsourcing vendor and there they have been very aggressive on pricing. I think I can say today that we really haven't lost a deal to them. So if they're growing their India development centers my sense is that and doing it in a way that --- you know-either we haven't seen (inaudible) but in at least the customers that we are competing on, the ones we see them in are a very limited - you know large accounts, they have a (indiscernible) relationship. Customers looking for a large offshore, kind of a big bank approach, we'd see them their.

(inaudible) gross margin were U.S. GAAP is concerned, that it was last quarter, that is December 2002 quarter, we had a gross margin of about (technical difficulties) 41.8%, in terms of (inaudible) business. And this quarter, that is ending March 2003, we're 40.9% that means there is a reduction - decline up .8 percentage point. And as discussed earlier it is an impact of the (inaudible) appreciation (inaudible) obtaining the actual mix. We see the (inaudible) went up with this opposition of the AMX that got convert and also in terms of --- there have been improvement in the (inaudible) rate the combination of this refractor that has been a little decline in the gross margin by 0.8%.

So on a relative business your gross margin has held up pretty well in an environment where everybody is kind of complaining about pricing and delivery rate pressure, am I correct.

Yes.

Thank you.

Our next question comes from the line of [Girish Hai] at FSKI Security.

Yeah, Hi, (inaudible) call you had said that you --- stock and growth is most important but I just want to understand your commitment to maintaining margins because we've seen earnings declining or being flattish with the (inaudible) of three. What is your commitment to maintaining margins from here on?

As I said earlier you know, it's our responsibility to try and walk that line between volume and pricing and as a result focusing not necessarily on percentage as much as on dollar growth. And I think that at this moment in time that's the approach we're taking. So we're looking at, for example if you have the opportunity to make another acquisition that can allow us to get all the benefits we've talked about in terms of integration, both in terms of the volume, the (inaudible) play the strategic value as well as being able to get more revenue in at higher price point even if it's margin diluted we'd rather do it than not do it. So I think that's the kind of the approach we're talking. But ultimately it's dollars we take to the bank and we have to drive profitability, growth and dollars.

Okay --- the --- I think the competition for me --- you know --- some kind of investment phase of business the --- this (inaudible) and marketing spending. I was wondering how long will this investment phase continue when you see the spending on sales and marketing stabilize in net?

I will say that if you look at the next year we're looking at a investment in accounting mangers and some more brand building. I would say that we're probably going to see a little bit more investment next year but not necessarily in terms of the field head count edition that we saw in terms of (inaudible) people, so we need to rule change and probably not as much as they did last but we will continue to invest on the sales and marketing side.

Our next question comes from the line of [Maloge Singlar] at JP Morgan. Please go ahead.

(inaudible) sir and (inaudible) a few moment. My question relate to the (inaudible) pointed out some time back to or go into effects in absolute (inaudible) dollar. Now if you look at the absolute amount of profit growth in FY '03 over FY '02. I think it's on 5% even if I exclude the (inaudible) medical systems, business and discount unite outpatient over (inaudible), and so are you comfortable with this kind of a growth? Do you want it to be higher? What will your comfortable level of growth (inaudible) management would like to have on our profits?

Well you know --- I mean on the --- you know the (inaudible) without necessarily given a profit guidance without intending to. I think that when we continue see this we will not like to have growth of 5% we would like to have it more than that.

Okay.

In case you leave I don't want to date because --- but you know for some --- whatever the reason you decided not to give profit guidance so I don't want to back myself into it. It is hard enough to do it than not do it.

Sure sir, sure sir I completely understand. Well I'm just trying to understand maybe not for next year if I was to ask you if you want to look at less than five year (inaudible). What will the kind of profit growth (inaudible) that (inaudible) would like to have? Of course it has been a number of things as to how the U.S have only (inaudible) or some of the thing happens but what is the kind of comfortable level management would like to have.

Well you know maybe what I could do is that to take a look at the (inaudible) buy and sale that you know was 5% of the earnings growth that we had expected or plan for and the answer is absolutely not. I think that we had expected and anticipated a better price --- a better price and a better exchange rate. In terms of you know, going forward one of the big (inaudible) that you said we have I haven't seen a five year outlook on (inaudible) so its difficult for me to answer that question. (Inaudible) For example if I look at margins on a percentage basis for the last quarter and then look at the three big bad guys that drove margins down, we had exchange rate at 1.1%, pricing at 1.5%, and the unusual would be Will, from the acquisition at about 1.6%. So I will advise those are the three bad guys-- I know that from a five year outlook, I think that (inaudible) outlooks we don't know, and pricing -- I mean I presume that we're not going have a fall 5% every year, otherwise we'd all be in a lot of trouble.

The next question comes from Mark Regenbogen at the Ohio Teachers Retirement go ahead.

Yes, I wanted to follow-up on related question in Q&A, where you were just talking about the fact that the. U.S. base players aren't really showing up too much in the bids that you're competing on. I wanted to then talk about --the India only players, what type of pricing pressures are they putting on you folks? If you've excluded the bigger three to yourselves, emphasis on TCS, how much are these other players causing you headaches, as far as them driving down prices? And what happens to these players in 18 months as things settle down? Do you see consolidation in those players or how do (technical difficulties) you think it will develop, please?

First off all I'll just like to clarify on not seeing the U.S. based players. I was talking about the offshore work; we do see them when we do things like packaging implementation, large (inaudible) implementation or a large SAP implementation. Or if we're doing a system integration (inaudible) system project integration that's going to roll off, so I think that in those kinds of places we do see them. But the specific area, you know, that I was answering at that time was relating to the offshore projects, and I want to make sure that mis-communicate on that.

But coming back to the - coming back to your question about (technical difficulties) the Indian competitors, I think that the - if you exclude the big guys, we're really not seeing much competition from the midfield guys. As things are happening what we're seeing is that customers are treating every contract as being a big contract and as a result the whole selection process is dropping, the midfield guys are out in most instances. So the result in one or two cases we've actually seen the situation where we've had one of the midfield guys, but primarily it's almost always a, you know, automatic entry into the finals for maybe a WIPRO and PTS and an Infosist (ph.), and pick one more, you know, problems infrastructure and depending on which industry you're in, and then it becomes a sort of take off to which -- primarily two of those four will get into final race.

The next question comes from the line of Nandida Parker from Parma Capital, please go ahead.

Hi this is question is for Rummond, Rummond about a year ago you had said that your biggest fear in the BDO business is that people will start behaving like it is already a commodity business, and I think that fear seems to have played out, in terms of two things, one is pricing and the other is attrition and poaching. Could you address that issue in terms of how you're handling both of each? And what's your sense of being on with it?

(Technical Difficulties) It feels that the results of (inaudible) the last quarter. We've showed a margin of 26% on about $30m and that indicates that we have been able to hold out on some of the pricing aspects, but yes you're right our fears of people doing business at -- considerations other than purely commercial, that is what we're seeing in the market place. Attrition and poaching for some of these players, you go and get business at prices that perhaps from our estimation do not necessarily make those kind of margins and then you would have to demonstrate competency and capability, a lot of which resides in people other than processes, technology and systems. And then you try to poach and bring in some of the people there by increasing your own cost and perhaps the cost pays for the industry. These are concerns, how are we tackling it from the perspective of the (inaudible) of mine, we try not enter into deals that are not commercially viable.

And we've upfront and honest with customers or with potential customers, to say at these kind rates you may be getting quotes from others, but for us it is not commercially viable. We cannot comment on the business of others, but for us it does not make sense. On poaching we're trying to work various other ways to see - to make a long term carrier for our employees and what we are already seeing is that -- a decrease in the attrition rate, if you look at the attachments that you see as a part of our press release, you see a decline in the attrition rate. And again from the perspective now being a part of the WIPRO world for the last nine months, there is the fraction of the brand; there are growth opportunities now for our people not only in the prospect mine, but in the larger world of WIPRO.

Right thanks so much, so are these margins sustainable?

In our opinion, what we've said before is that log-term, the margin will come down to somewhere between 18 and 22-23% from the - - (inaudible) industry. Though we are very, very surprised that some of the published results that we're seeing, we try to understand that a little better. From my own perspective we think somewhere in the region of 20% if the long-term is sustainable.

This is the net margin?

That is the net margin.

The next question comes from the line of [Girish Hai]. Please go ahead.

Yes, in the current environment where we're seeing a bit of discontinuity in volume growth, I'm just trying to understand what's your pricing strategy. Are you seeing some of your peers - -larger peers, dropping prices dramatically and how are you countering it?

I assume you mean on the global IT services state, and indeed what we're seeing is that once you have consultants in there and once you have a very rigorous formal purchasing process, you know, all of our pimping and differentiating begins to tend to fade away. And even if there are only four competitors, just the fact that two will make it means that it's a very pretty aggressive competition. So I would say that we do see our pricing pressure in terms of, you know, people competing (technical difficulties) - - and you know, being willing to go up to a certain point. I think that in some sense the pricing that we've seen over the last quarter and the quarter before that already reflects some of that, but you know, it's a competitive game out there.

And do you know have any - - a threshold price, beyond which you would not go and get a contract? Internally do you have any kind of target?

Well certainly we do, and I think that the challenge really is trying to differentiate between what the customer says is their volume and what we think is the way that that volume is going to (inaudible). Because - - situations where customers have come in and not that they were misleading us deliberately, but come in and said, you know, they expect to have those VA - - 600 FDE kind of a deal, within a year or two years, and then once we get started it goes so slow that it looks like 600 FDE was either reach in three years or they're going to have to change something significantly. So I think that we're finding is those kinds of deals out there, where you have to make a call more on the basis of what will I think is the real realistic (inaudible) up versus what customers are holding out. Because the - - you know, many of the customers the kinds of volumes they're talking about are pretty high.

Next we go to AB & Amrow to the line of Sir Sarrad Singh, please go ahead.

Yeah, fist this is a small section on what kind of pricing you're looking at or you're top ten clients. Just to give an idea, what would be your average price of these tops ten clients compared with overall average?

I don't have that data off the top of my head, but I - - I'm having everybody in the room shake their heads, so I guess we don't give that data out.

Okay, just to give some idea of where would we think 10% lower than your average or significant or no idea?

At this point I don't give you a number off the top of my head, I think that if you gave the line a call later maybe we can you an idea on that.

Okay, thanks.

And next we go to the line of Emit- - Ahmeet Corana, XDFFN, please go ahead.

Yeah, hi. Just a clarification Azim make, you mentioned a Rupee is a - - a (inaudible) appreciating is of course a concern. Now you're interaction with the clients, are we finding a receptivity on the part of clients to build the number, (inaudible) deal structure as well as pre-appreciation is kind of, a bold (inaudible) rate? (Inaudible) Are those kind of deals built out of the market place?

No, not right now, I think that, you know, if we had started doing this conversation when the world was tilting in our favor, we might today be in that position. But as things stand right now, in a tough environment where most of our customers are hurting, if we go to them and say "our costs went up because of exchange rate, we would like to raise our prices", they are not being very receptive to that at all. In terms of new customers, you know, I mean, again as I said, you know if you had a TTI or a XYZ led - - consulting led this thing, chances are the flaw will work very much against you. So at this moment in time there's not a single customer in which we are - - I would say, you know, engaged on a - - with a positive outlook that we would be able to get that exchange rate benefit flow through. We would rather just focus on seeing if we can get price and then negotiate some sort of a price increase over three years.

Okay, final question Vivek. I will discuss (inaudible) because of clients getting back towards renegotiations and competition are well including. Is it not (inaudible) industry section has already shifted and now the issue is more on defending margins rather than trying to increase them? Has that (inaudible) not already happened?

I guess, you know, I'm trying to figure out - - I mean that's the characterization I'm trying to say away from, a general characterization as much to say, if I was to flip it around and say what would drive margins up and, you know, let's assume that, you know, we continue to face the pressure of the appreciating rupee. I mean to me there's only two things that can drive margins up; one is pricing and the second is operating efficiency. Let me take the second one first.

I think that we have a little bit of headspace in terms of utilization, that can help, I think that maybe we could do a little better in terms of, you know, more G&A or cut back a little bit on our sales and marketing etc. but that won't move the needle that much, so really what it comes down to is, you know, yeah you can maybe offset comp entries as well as utilization, so net what you end up with is trying to figure out how you neutralize pricing. And, you know, how you use pricing to neutralize a rising rupee, which means you have to get pricing to stop going up.

So the margin going up comes back to the pricing going up, kind of an ultimate. And if you look at pricing going up, I mean the way I look at is, there is a couple of three things that can help pricing. One is if our mix begins to move away from application management to application build. You know when we build a new application or a new system for someone there is much more pressure on time to market than there is on cost. One the other hand when we do application management with the customer saying I've got a certain cost stream I want to move to India to get the cost savings, clearly pricing is paramount in their minds because that's the fundamental reason why they are doing this.

That again leads to fact that if you are going to expect more application build business to drive up your pricing, you have to wait for some semblance of an upturn because the application build business is all discussionary. And there is just not a lot of discussion spend going on in today's environment. So that's one area and that links to the upturn, which you know, who knows when that's going to come?

The second area is that we have had limited success since we are only a 100 days into it (technical difficulty) and being able to cross sell into accounts that we've got as a result of acquisition of the EMS, energy and utility consulting business and to be able to that a pretty healthy price premium to where we were before already or where we are elsewhere.

So if we are able to move, you know to get that going with a significant upscale and maybe as we go through the next year or two years and be able to build more acquisitions and be able to drive that, I think that's the second element of improvements in realization that we can look at.

The third element is when we end up being in a situation where with our customers this growth phase is now behind them and they go into steady state. At that point we have the ability to go back and say well since I am not getting incremental revenue I'd like to be able to get more pricing. The good news the bad news depending on which way you look at it because that is the trade off, is I think that that's at least a year away because most of the customers we're talking to have an intention raise their volumes not flatten them. So that's kind of where we are right now. Long answers but I try to be comprehensive.

Okay, thanks a lot.

Our next question comes from the line of [Rahjoul Druve] from Smith Barney. Please go ahead.

Yeah hi. You know Mr. Premji actually mentioned in --- early in the call that there is short-term pain for long-term gains when it comes to acquisitions. Can you put --- can you just give us some idea in terms of where this whole EMS deal is? I mean I have heard the term Sudip mentioning in the morning that they have a lot of clients, which have come up, because of this acquisition. And how much work is already stared shifting Offshore? When do you really see this benefiting in terms of great revenues coming in, etc?

Rahjoul this is Azim. We have got, as I mentioned in the morning, a number of clients that--- with whom we are now engaged. Now these are all clients, which is started billing in the last end of six to eight weeks. The first part as always is the (technical difficulty) very (inaudible) more of a (inaudible) fighting nature is related what might be long term --- longer term Offshore contracts which will come down the line.

So I guess we will be seeing benefits of this after some more time. And the good news is that the conversation that we are currently having or the (inaudible) we are doing with all these new client edition are significantly higher level of expertise. And that promises to bring in work which will be not only of a high volume but will be more sustainable with more elements of higher content of we should be able to realize the benefits of all this as we go forward.

Right, so I mean at what stage are you in this full cycle? Maybe it's a nine --- a three-quarter cycle or a four-quarter cycle? Will we really start getting the benefits? Where would you see ----?

Well I would guess two to three-quarters.

Okay. My second question was on the exchange rate. You've seen the average exchange rate decline by 2.5% sequentially this quarter. As in topline growth was around --- dollar terms was around 8.5 and rupee terms were around six point something. So just a deep (inaudible) what are the reasons for that?

Well last quarter we had the advantage of (inaudible) being much better compared to rupee and we had lost out only on dollar. But this quarter, that is the quarter ending March, we are down hard on all different---, all currencies. So I think that is the reason why it was higher than the earlier quarter.

Thanks. One last ---

You also get the impact of the translation.

Sorry?

Because you also sort of get the adverse impact of the translation. You know money that lies in the form of advanced of the tax withdraw, that is also to be mark to market kind of thing.

Vivek actually mentioned earlier that, that there is a threshold rising that you have in terms of ----a level below which you will not go. Where do you see current pricing with or without pressure?

It's difficult to answer that question, I'm still struggling because as I said it's really linked to volume. So you know, somebody comes in and says that, you know, there is a opportunity for us to take over a full application suite, pricing is very different from someone who says that I've got a particular one application, or I would like to do a pilot, or, can we start with this familiarity study, etc? That's you know --- really I mean --- literally at this time we are talking with customers who will be Geneva from estimates of, you know, small projects to people who say well I think I can be at a 100 or $50m in four quarters.

Right and you internally have a model where in anything about thus level would, might be this pricing?

That's right.

And you would not want to break that threshold ever?

That's right. I think that if you look at the --- if you look at what's going on in the pricing front, I mean not like every customer is coming at you. It is that the customer is ---- I think I said in the morning as well, the customers that ---looking at being able to give you incremental volumes are primarily the ones that are coming at you asking for better pricing.

Sure, and actually one more question I'll go after that. You mentioned earlier that, you know sales in marketing the investments have been good you'll continue to do that, on an absolute basis of course, there will be an increase. But do you think there is a percentage of sales they could be dropping off, I mean (technical difficulty) I mean you are not adding head count, as you said earlier. Do you think they will follow the percentage although trajectory of growth would be slightly lower than the revenue trajectory?

Actually I've said that we'd be adding head count of a different nature. So I don't want to --- I hope I didn't miscommunicate that. Because I'm saying that we won't hire, you know, few sales people but we would hire people for more of an account manager kind of a profile. So we will be adding heads along that line. But in terms of sales and marketing and with percentage of sales, I am not sure I could give you those specific values, except to say that we plan to continue to invest in the (inaudible) and in the opportunity that we have, you as we stand right now. I am sorry you asked me for a specific answer quest --- I am giving you a big answer, but that's the best I---.

Right. This Offshore ratio, I mean you know that has been some term that some companies are actually see in, are you seeing --- I mean of course you've had most of the growth coming in this quarter Onsite. Are you seeing any signs of that happening? Will you mentioned that one the bad being on of the positive margins going forward. So are you seeing any signs of that happening?

Well I think that the driver for the Onsite growth is of (technical difficulty)

We lost contacts with India. We are going to try to call them back right now. Please continue to hold, while we reach India again.

Thanks Tim.

Please continue to hold. Okay we have re-established contact with him; he will be in the conference momentarily. Okay we have re-established contact with India and if you wanted to address yourself to that last question, go ahead.

Sure, you know I just finished a very articulate explanation but I guess I will start again. Basically if you look at, you know, if you look at the things that are driving the higher onsite ratio, it really is the package implementation business, which tends to be more onsite. And also the infrastructure services business, which particularly as we start a project, tends to be more onsite. So I would say that it really is the selective (inaudible) that I would call more project starts than, you know, on the infrastructure services side, than anything that's sustaining.

If there are any further questions now is the time to press one. Okay we have no one that is queuing up so it appears there are no further questions. Please (inaudible) that there was one more. We go to the line of [Rahjoul Druve] from Smith Barney.

Sorry, my earlier question was not totally answered. What I was basically looking at is -- are you seeing -- I mean, what do you explain to me is why the onsite ratio was highest. Are you seeing any signs of that coming back because - actually in the morning call you mentioned that application maintenance or application management is increasing as the share of overall business, which would be very off shore centric. While -- what do you just said as packaging limitation and infrastructure sourcing is driving the onsite ratio. So, I mean I'm just trying to get a direction of when would off shore - or when would the ratio to off shore have (inaudible)?

Sorry if I didn't answer you question fully. But yes we do expect that that onsite ratio would drop in the sense that, you know, in terms of being more off shore centric. It's somewhat unusual in that infrastructure services.

Sure, thank you very much.

The next question comes from the line of [Girish Hai] (ph.), please go ahead.

The rate you mentioned that the (inaudible) the global service providers the competing with you for some of the large contracts. I'm just trying to understand the win rate in those contracts. Do you see the global providers walking away with most of the larger contracts? Or do you think the Indian ones are holding there own?

It's tough to say because, you know, none of the deals that we really had have had direct competition; we've had a closure on (inaudible). So I think that the win rate is a little early to talk about. You know, the - I'm thinking of the big deals and they're all still talking.

Okay and just one last question on hiring of local people in the respective geography that you work in, considering the controversy regarding (inaudible). What's your view on that do you see more hiring of locals happening going forward? And what do you think will the implication in cost structure?

I think that hiring that we are doing right now is primarily through the acquisition front. So we really haven't hired organically a lot of people on the development side, except in Japan where we've built a 25-person onsite team that act as a sort of program management interface. I think that we clearly would probably expect some mixed model but not in the immediate term. I think in the immediate term the people we hire will continue to be of the consulting variety and even organically or inorganically. So I don't see that as being a significant driver in either direction.

Thank you.

Our last question belong (technical difficulty)

The last question operator.

Our last question is coming from Scott Heritage with Seryhouse (ph.) Capital, please go ahead.

Oh yes thank you. I had a few questions actually, earlier in the call you mentioned the reasons for the margin pressure rupee appreciation and then also pricing pressure. But then later you said that the decline in the gross margins from the December quarter to the March quarter was rupee appreciation and the change in the off shore are onsite mix. Can you just clarify that?

Yeah--- what he said was that the big reasons like (inaudible). But there was another factor like the other one but they kind of utilization increase offset the amount of pricing pressure in certain things like that. So, what we mentioned was a big three factors, which contributed to that decline in the margin.

Okay I understand. Can you comment on any wage pressure that you are seeing right now?

Well I think that's - what we are seeing is wage pressure for the project managers for the sort of mid tier and the rain-maker types if you will. Not much pressure at all in terms of the entry level or just at a programmer level. So we are seeing a sort of a mid-tier, kind of managerial level, having wage pressure. And below where really the masses sit, really not as much at all.

Okay and then can you give us a sense for what the margin differential is between onsite and offshore?

Typically on onsite projects we have gross margins of approximately around 22, 35% and off shore is about 55% - 50 to 55%.

Okay, alright great. And just in - (multiple speaker)

In terms of, yeah just one clarification though. In terms - while the percentages are different, in terms of dollar per nine month it's relatively the same.

Okay, alright. And then my last question was you know I know you mentioned earlier what you thought that margins were longer-term. What do you think they are from and operating margin standpoint?

Actually I don't think I've said any thing about long-term net margins.

Okay, alright. I thought there was a comment that long-term net margins you can hold around 20% and you are just commenting on, you know, industry margins as well. So I'm just curious as to where you think operating margins for the industry are going?

I think that was a discussion we had in the context of the business profit outsourcing business. And you know, not on the IP services side of the business.

Okay.

Do you want to comment (inaudible) on the operating margins?

Yeah I think what (inaudible) was saying 30% when he was talking about operating margins.

Okay.

Because there are no taxes and since (inaudible). It's PBIG profit before interest and taxes (multiple speaker) not EBITDA that he was talking about.

Okay.

And that was on the business classified sourcing.

Okay --.

And for the last quarter in the March they posted a 26% average.

Okay, alright thank you.

Thank you.

And there are no further questions at this time, please continue.

One of the expecting --.

And do you have any closing comment before we sign off?

Yes thank you very much. We have for your convenience digitized replay starting at 12:45 p.m. And if you have any further questions please free to call me at 408-242-6285 thank you.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&Ts executive teleconference. You may now disconnect.

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