Wipro Ltd (WIT) 2004 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you very much for standing by. Welcome to the Wipro third quarter results ended December 2004 conference call. At this time, all participant lines are on a listen-only mode. Later, there will be an opportunity for questions and answers, with instructions given at that time. [OPERATOR INSTRUCTIONS]. As a reminder, today's conference call is being recorded for replay. I would now like to turn the conference call over to our host, Mr. Sridhar Ramasubbu. Please go ahead.

  • Sridhar Ramasubbu - Investor Relation Officer

  • Good morning and welcome to the first -- third quarter results and earnings call for the quarter ended December 2004. [Japin Lan] and myself, from the IR team, take this opportunity to wish all of you a very Happy New Year. We have here the entire management team from Wipro - Azim Premji, Vivek Paul, Suresh Senapaty and Suresh Vaswani. In addition, we also have the management team from Global IT business, who are assembled here to answer specific questions related to this business [as well as geography]. Azim Premji, Chairman, and Suresh, CFO, will provide the opening remarks on U.S. GAAP results for the quarter ended December 2004.

  • Before we get on with the call, we'd like to provide the disclaimer on forward-looking statements within the meaning of the Private Securities Litigation Reforms Act, 1995. These statements are based on management's current expectations and are associated with uncertainties and risks. These uncertainties and risk factors have been explained in detail in our filings with the Securities Exchange Commission in the U.S. and we do not undertake any obligations to update forward-looking statements to reflect new events and circumstances after the date of filing thereof.

  • The call is scheduled for 1 hour. The presentation of the third quarter results will be followed with a Q&A session. The operator will walk you through the procedure for asking questions. The entire earnings call proceedings are being archived and transcripts will be made available after the call at www.wipro.com. I am online on e-mail, and if you have any specific questions which you are unable to ask, please e-mail me and we will address these questions as well at the end of the Q&A.

  • Ladies and gentlemen, over to Mr. Azim Premji, Chairman and Managing Director of Wipro.

  • Azim Premji - Chairman and Managing Director

  • Good morning to all of you. I also wish all of you a very Happy New Year.

  • Your Board of Directors, in the meeting held this morning, approved the accounts for the quarter ended December 31, 2004. Our results have been mailed to those registered with us and are also available on our website. Let me share with you some of our thoughts on our performance and prospects.

  • In our Global IT business, a key feature of our performance over the last few quarters has been our focus on revenue productivity and building a portfolio of services that build a strategically superior business model, while continuing to deliver solid results on a quarterly basis. The results of the last quarter reinforce this.

  • We continue to see broad based revenue growth. Every single key vertical grew sequentially. Our differentiated services, such as Technology Infrastructure Services and Testing Services, grew double digit sequentially. Europe geography posted fourth consecutive quarter of double-digit sequential growth. The combination of customer mix, service mix and continued operational improvement led to a 1% sequential growth in price realization for onsite as well as offshore revenues.

  • From Wipro management's perspective, annualized attrition for the quarter ending December 2004 came down to 12% in our IT Services business. These factors, coupled with proactive hedging and improved productivity, resulted in our ability to significantly mitigate the negative impacts of rupee appreciation and compensation revision on our profitability.

  • Other businesses continued to deliver robust results. Growing ahead of the market are India, Middle East and Asia-Pac IT business. Wipro Infotech recorded revenue growth of 20% over the previous year. This strong revenue growth, coupled with prudent cost management, led to profit before interest and tax growth of 45%, and a 140 basis point expansion in operating margin. Our Consumer Care and Lighting business grew revenues by 32% and PBIT by 28% on a year-on-year basis.

  • Let me take a couple of moments to talk about our strategic direction. About 13 quarters ago, we rolled out our strategy to achieve our vision of global leadership in IT services. We have made significant progress over the last couple of years, but that journey is far from over.

  • There has been a clear acceleration in the momentum towards offshoring. Bringing as it does many opportunities, this trend also calls for constant reorientation of strategy. We are taking various strategic measures to benefit from these opportunities and deliver the best value proposition for the customer and sustainable value creation for our stakeholders.

  • Looking ahead, the environment we see is 1 of strong volume growth, with prices moving in a narrow band. Rupee appreciation will pose an additional challenge in sustaining profitability. We will attempt to mitigate the pressure on profitability by providing higher value-added services, moving business offshore, improving utilization and managing costs. As the Indian economy posts healthy growth, we hope to benefit from the growth in our Wipro Infotech and Wipro Consumer Care and Lighting businesses.

  • I will request Suresh Senapaty, our CFO, to comment on financial results before we take questions.

  • Suresh Senapaty - CFO

  • Good morning to everybody. I wish you a very, very happy new year. Mr. Premji shared our view on the business environment. I will touch upon a few aspects of financial and operational significance.

  • During the quarter we had sequential revenue growth of 7.6% in our Global IT Services business, which is comprised of a [7.6%] revenue growth in the IT Services component of that segment and 8.8% growth in the IT and other services business component of that segment. The 7.6% growth in the Services component was driven by a 7.1% growth in the volume of business, combined with a 1% increase each in our realization rate for work performed onsite at our clients' offices and work performed offshore.

  • On the ForEx front, our realized rate for the quarter was INR45.14, versus a rate of INR45.93 realized for the quarter ended September 2004. During the quarter, we had the benefit of certain hedges that were contracted at high risk. As of December 31 2004, after allocation for foreign currency assets on the balance sheet, we have outstanding hedges of about $614m, deliverable over the next 4 to 5 quarters.

  • Operating margin for our Global IT business for the quarter was 26%. Operating income for this segment includes a non-cash charge of INR151m, about U.S.$3m, towards expensing of staff compensation in the form of Restricted Stock Units. This has negatively impacted the operating margin by 1%. Excluding this charge, the operating margin for the quarter was essentially flat, as compared to the previous quarter, at 27%. This operating margin includes a 2% negative impact - gross impact 3% netted by positive impact of 1% due to [indiscernible] for the compensation dividend for our offshore teams, given during the quarter ended December 2004.

  • Also, during the quarter we also saw a significant appreciation in the rupee, which also affected our revenue and profitability adversely. However, higher price realization, operational improvement and productive hedging helped in significantly mitigating this factor and [added the drop] in operating margins.

  • For the quarter ended March 2005, we expect volume-led growth with stable price realization. Operating margins would be impacted by the sharp appreciation of the rupee. We will endeavor to contain the contraction to the extent possible to improve productivity.

  • For the convenience of the investors, the amounts in Indian rupees in our press release have been translated into United States dollars at the noon buying rate in New York City on December 31, 2004 for cable transfers in Indian rupees, as certified by the Federal Reserve Bank of New York, which is U.S.$1 equal to INR43.27. However, the realized exchange rate in our Global IT Services and Products segment for the quarter ended December 31, 2004, is equal to -- is U.S.$1 is equal to INR45.14. Consequently, the dollar revenue in our Global IT business was $352m for quarter 3, ended December '04.

  • We will be glad to take questions from you.

  • Sridhar Ramasubbu - Investor Relation Officer

  • Now let's start the questioning.

  • Operator

  • [OPERATOR INSTRUCTIONS]. Our first question will come from the line of Mayank Tandon, with Janney Montgomery Scott. Please go ahead. Your line is open.

  • Mayank Tandon - Analyst

  • Thank you. Great quarter. I had a couple of questions, especially for Suresh. Suresh, could you once again walk us through the currency impact again, above the operating line and also below the line - what the impact was in percentage terms to your profits?

  • Suresh Senapaty - CFO

  • Right. The impact of the currency difference between quarter 2 ended September to quarter ended December '04 is about 0.25% in terms of operating margin.

  • Mayank Tandon - Analyst

  • So the --

  • Suresh Senapaty - CFO

  • This is whether it is on account of the inflow by the difference in exchange rate, translation of the accounts receivable at the end of the quarter and the differential in terms of the data for the last quarter. A combination of all these changes has impacted the operating margin by 25 basis points, and this is -- and therefore everything is [adding] to operating margin and there is no -- nothing which is below the line. And it has always been the practice that whatever exchange difference had on the revenue of the Global IT business goes into the operating margin.

  • Mayank Tandon - Analyst

  • So, 0.25% impact is a negative impact, right? In total?

  • Suresh Senapaty - CFO

  • That is right.

  • Mayank Tandon - Analyst

  • Okay. Okay. And, as you talked about margins - just to get a better sense -- In terms of margins, should we expect margins to be fairly stable now, especially if the rupee stays in a pretty narrow band? Given your hedging strategies and given that you already passed through wage increases last quarter, and pricing seems to be a little bit on the up trend, are steady margins a good modeling level, at this point?

  • Suresh Senapaty - CFO

  • Our expectation is that the guidance that we've given will be more volume-driven, and we think that that amount of stability in the pricing, which means it could move in a very narrow band. And so far as the compensation increase is concerned, we had a compensation increase given between September to November of '04, and therefore some of the compensation aspects, we'll get the full impact of that in the coming quarter. So there are certain operational efficiencies and some of the exchange risk that we have. Bottom line, we think going forward in terms of this quarter, but for the exchange difference, some of -- most of these adverse factors could be mitigated.

  • Mayank Tandon - Analyst

  • Can you remind us again what the wage increase was, both onsite and offshore?

  • Suresh Senapaty - CFO

  • I will request Vivek Paul, who's our Head of HR in Wipro Technologies, to respond to this.

  • Vivek Paul - Vice Chairman and President

  • Offshore increase was in the range of 15 to 18%. Onsite we have select [indiscernible], but the increase was in the range of 3 to 6%.

  • Mayank Tandon - Analyst

  • So, speaking of onsite wages, are you seeing an uptick? Some of your global competitors have talked about a shortage of certain skill sets. So I'm just looking forward 12, 18 months out - what are you seeing in the marketplace in terms of wage increases for skill sets onsite? And does that put pressure on your margins down the road?

  • Vivek Paul - Vice Chairman and President

  • Onsite, there are different skills, but we have a large section of the people we recruit from India that are onsite assignments. We don't see much challenge in terms of their compensation increase. We select people local and those who are working in our consulting practice, given the market is looking up in terms of the compensation [indiscernible] budget trend we have seen. We have seen maybe 0.5 to 1% higher this year than the last year.

  • Mayank Tandon - Analyst

  • Okay. Just 1 final question on turnover. Can you provide a little more color on how you were able to bring turnover down so dramatically in 1 quarter? Was it a function of wage increases? And if that is the case, is it sustainable to run at 12% in the IT Services business? Thank you.

  • Vivek Paul - Vice Chairman and President

  • There are 3 aspects to this. 1 is, we had some compensation gaps, which we corrected based on the critical skills. And the compensation budget was [indiscernible] targeted towards the critical skills, it was not across the board to give increase to all people, that helped. Apart from the compensation, we had a lot of non-compensation action. We also had [indiscernible] restrict their staff in the [indiscernible]. That has certainly helped in terms of retaining people. And also, we are evolving that the demand size in the market in the last 1 quarter has been much less than the previous 2 quarters.

  • Mayank Tandon - Analyst

  • Thank you.

  • Operator

  • For the next question we'll go to the line of Julio Quinteros, with Goldman Sachs. Please go ahead.

  • Julio Quinteros - Analyst

  • Sure. Good evening, gentlemen. Good morning, Sridhar. I just wanted to understand the guidance implications for the upcoming March quarter -- the current March quarter, excuse me. Can you just make sure -- walk us through the, maybe the volume, the pricing assumptions that are in your numbers? And I just want to be clear - it sounds like you're saying that the December quarter realized revenue is actually $352m versus the $367m that you reported in the convenience translation release. So when I'm looking at, on a realized basis, $352m versus $370m, that should imply sequential growth of about 6%, is that correct?

  • Suresh Senapaty - CFO

  • $370m has to be looked at compared to $352m.

  • Azim Premji - Chairman and Managing Director

  • It will imply a growth of 5% sequentially.

  • Julio Quinteros - Analyst

  • So you're looking, in the March quarter, the sequential volume growth is for 5%?

  • Azim Premji - Chairman and Managing Director

  • We are not sticking to volume growth or pricing growth. We expect the price to go in a very narrow band.

  • Julio Quinteros - Analyst

  • Okay, so --

  • Suresh Senapaty - CFO

  • Combination of both, we would expect it to be about $370m.

  • Julio Quinteros - Analyst

  • $370m. Okay, got it. And that would be over $352m for q-over-q comparisons?

  • Suresh Senapaty - CFO

  • That's right, yes.

  • Julio Quinteros - Analyst

  • Okay, great. And then, can you talk a little bit about the BPO segment? It looks like it was a little bit lighter than the number that I was looking for. Can you just walk us through what's happening in the Spectramind division, please?

  • Raman Roy - Chairman and Managing Director

  • Hi, this is Raman. We've -- As the numbers show, we've had about a 9% growth sequential, quarter-on-quarter, and about a [48%] growth year-on-year basis. We now have 85% processes in production, we've seen a huge amount of traction from the customers. India's now improving slowly. We see a lot of opportunities sitting there. Our biggest constraint today is our ability to have enough people that can be converted into international servicing resources. But the training needs are becoming bigger, and as we train people, and given the standing of our training in the marketplace, people tend to find other opportunities because they are being offered better emoluments, etc.

  • Julio Quinteros - Analyst

  • What would be the turnover in the BPO business, compared to the total number that you reported?

  • Raman Roy - Chairman and Managing Director

  • If you look at the turnover for the quarter, we had a gross turnover rate of about 25%, which is about 11% pre-training and about 15% post-training.

  • Julio Quinteros - Analyst

  • Okay.

  • Raman Roy - Chairman and Managing Director

  • And that is a big struggle. We are also looking at -- on the base that we built for our BPO practice, we now see an opportunity to offer services to our customers better in the transaction processing area, services that would add greater value to our customers. And they also bring us better margins and better revenue and we are looking at targeting that segment of the business. That is 1 of our very major transformation initiatives of where we want to take this business.

  • Julio Quinteros - Analyst

  • So, as you go through the transformation, should we expect to see some flattening out in the business as you move from, basically, more of the voice-based to the transaction-based business? Does that require a different sales force? I guess I'm just wondering what types of investments do you need to make to get that -- to get the model transition from a voice-based to a transaction-based model?

  • Raman Roy - Chairman and Managing Director

  • There will be investments in the product development aspect of that. There would be a reviewing of the sales force. More importantly, voice -- as of today, all the business that we have, we have about 15% of our business that is already non-voice. So we have taken the basic steps to execute this strategy. I think in terms of the revenue you are only part of the question. Our impact on revenue --

  • The biggest challenge is to be able to get the people and to be able to retain the people, that will have a bigger impact on the revenue. With 15% of the employees today already doing non-voice work, we will be among the larger players even today out of India performing non-voice transaction processing services, which range from key aspects for our financial services customers of underwriting, down to doing accounting, where for some of our customers we do all aspects of accounting right down to preparing their quarterly results.

  • Julio Quinteros - Analyst

  • Right, right. Okay. And just 1 last question for Suresh. I just wanted to make sure I had the currency assumption that you're making for the March quarter. What's the rupee rate that we're looking at for the March quarter, our guidance, 370?

  • Suresh Senapaty - CFO

  • I don't think we can ascertain that at this point in time, but it will not be a dissimilar rate as what we have got in the last quarter. It will be slightly lower, as it looks today, because in the end of the day we will see what the rates are on March 31, and to the exchange of the [indiscernible] which are not covered. And there are [indiscernible] still there, but it could be a number higher than the impact that we've felt in the last quarter.

  • Julio Quinteros - Analyst

  • So you expect -- more appreciation is what you're saying, probably?

  • Suresh Senapaty - CFO

  • That's right.

  • Julio Quinteros - Analyst

  • Okay, great. Thank you very much.

  • Raman Roy - Chairman and Managing Director

  • [indiscernible] Raman Roy. Transition is not from voice to transaction processing, but in addition to voice, a better mix of the transaction processing as compared to what it is now.

  • Julio Quinteros - Analyst

  • Great. Thank you very much, guys.

  • Operator

  • The next question will come from the line of Lou Miscioscia with Lehman Brothers. Please go ahead. Your line is open.

  • Lou Miscioscia - Analyst

  • Okay, great, thank you. I was wondering if you could talk about Europe a little bit. It looks like Europe did grow very nicely on a quarter-to-quarter and year-over-year basis. Would you expect that to continue, or are there any dynamics there that might affect that? I guess as you look at the calendar '05.

  • Unidentified company representative

  • I think this is many quarters in a row now that we've had Europe do very nicely for us. 4 quarters in a row. And so I think we're seeing continued traction there, we continue to penetrate more in terms of wider geographical coverage. So the answer is we're not expecting any slowdown in the momentum there.

  • Lou Miscioscia - Analyst

  • Okay. And I guess you're not running into some of the typical obstacles that companies can run into in Europe, in the sense of that they don't want to outsource, or that maybe the laws are restricting things?

  • Unidentified company representative

  • [indiscernible] we certainly -- it's a little bit trickier and we've had a few employees, for example, that we've transitioned from our customers to us. Not many, just a few. But going through the local regulations etc., it is business of a different nature. But we're still so small that, frankly, the opportunity's still pretty good.

  • Lou Miscioscia - Analyst

  • Okay. When you look to a couple of the other companies that are increasing their ADR flow, I was just wondering if there's any plans for you all to possibly do the same?

  • Azim Premji - Chairman and Managing Director

  • At this point in time, there is no decision with respect to negotiating on any kind of ADRs for [indiscernible].

  • Lou Miscioscia - Analyst

  • Is it up for debate, or do you expect that to be the decision for the next 6 to 12 months?

  • Azim Premji - Chairman and Managing Director

  • [In this matter] we have a complete open mind on that and we will take a decision [indiscernible], yes.

  • Lou Miscioscia - Analyst

  • Okay. My final question, I guess. When you look at business in the U.S. for calendar '05, any changes that you see as you look out on the whole year, in the sense of anything going to cause any problems? Obviously it seems that obviously the trend has been pretty spectacular across the board. I'm just wondering what you might be concerned about or if anything's shifting on you.

  • Rich Garnick - Chief Executive Officer - Americas

  • Hi Lou, it's Rich Garnick. Right now, I don't think we see any significant shift. I think we'll continue to see this foundation of good economic parameters around our value proposition, which continues to resonate in the marketplace. Our broadening of our service offering continues to be validated with new wins, both with customers and recognition by leading analysts in areas, for example, like our Infrastructure Services businesses are recognized by leading analysts like AMR and Gartner and others. We believe we're now defined as a leader in that sector, where infrastructure, for example, is moving offshore globally, which is a new paradigm to some degree. In our Package Implementation business, similarly, we're doing more end-to-end projects globally. It has the potential for continued growth.

  • So long term, our outlook's very positive, based on the economic value propositions, and I don't personally see any tremendous roadblocks in the marketplace today.

  • Lou Miscioscia - Analyst

  • Okay, great. Good luck on calendar '05.

  • Rich Garnick - Chief Executive Officer - Americas

  • Thanks, Lou.

  • Operator

  • The next question will come from the line of Jonathan Dubroff, with SG Cowen. Please go ahead.

  • Jonathan Dubroff - Analyst

  • Hey. On the line here for Moshe Katri, he couldn't be here. Just wanted to pose a couple of questions. Just if you could talk, maybe, a little bit about the other income line item on the income statement. It seemed a little bit higher than we were expecting. If you might be able to just break it out for us and discuss it a bit.

  • Suresh Senapaty - CFO

  • [Indiscernible] there was a dollar-denominated backing credit that we had in the quarter ending December, and in that we had some exchange gains [indiscernible] in the quarter, and in September we had an exchange loss. So therefore the [indiscernible] was a little bit higher. But it was limited to backing credit loan [indiscernible] for such and such a project.

  • Jonathan Dubroff - Analyst

  • Okay. And then just 1 other housekeeping question. In terms of customer size distribution, if you might be able to give a breakdown of that - greater than 20m, 10m to 20m, 5m to 10m and so on.

  • Suresh Senapaty - CFO

  • We have -- more than 20m, we have about 17, which is the same as last quarter. 10m to 20m, we have about 20, which is 1 higher than last quarter. 5m to 10m, we have 34, which is higher than last quarter of 29. 3m to 5m, we have brought it down from 22 to 17, which means 3m to 5m moves up to 5m to 10m. 3m to 1m, moved up from 70 to 75. In total, $1m accounts have gone up from 157 to 163, which is about -- that's 6 more.

  • Jonathan Dubroff - Analyst

  • Right, thanks a lot.

  • Suresh Senapaty - CFO

  • Thank you.

  • Operator

  • The next question will come from the line of Trip Chowdhry with MidWest Research. Please go ahead.

  • Trip Chowdhry - Analyst

  • Congratulations for a fabulous execution. 2 questions, actually, I would say 3 here, actually directed to Azim. Most of the Indian companies that we have seen so far have shown very impressive volume growth. And I was wondering what is your sense - is that volume growth sustainable? And what could disrupt that volume growth?

  • Azim Premji - Chairman and Managing Director

  • I think that if you look at the growth prospects, they fundamentally remain unchanged, and in percentage terms this is not -- this is a good year if it wasn't our fastest-growing year. So the reality is that the fundamental dynamics for the business are pretty good. So if you translate that revenue dynamic into people dynamic the only question [incrementally] comes up is, is there an issue with regard to availability of people? I'll ask [indiscernible] in a moment to talk to you about what our numbers show in terms of number of graduating engineers and as a result the available [indiscernible]. Based on our expectations, we don't see creating a shortage of any sort.

  • So I think as long the sector dynamic continues in terms of revenue, I think we can find the people to be able to deliver on that revenue. What could go wrong? I mean, this is business, you know a lot of things could go wrong. You could have a severe downturn in the U.S., we could start cutting back again. You could have new visa regulations that come up, you could have -- I don't know, I'm sure there's a billion things that also can come true. [Indiscernible], perhaps you could talk a little bit about the people [indiscernible].

  • Unidentified company representative

  • Hi, this is [indiscernible]. In terms of people, when you look at it from a broad basis in the Indian market, we have something like 300,000 engineers passing out every year, out of which roughly 100,000 are in the IT business category. So if you take from a [indiscernible] side of the thing, I think there's a good supply from the [indiscernible] schools of talent coming in and been there for the last couple of -- 2, 3 years in these kind of numbers. So there's been a lot of talent coming into the industry from this [indiscernible].

  • But even in terms of availability of experience profile, except for certain niches, the Company may continue to see good availability of skills and to see our own growth, which has been in terms of 50% experienced profile and 50% from the campuses. And we didn't see any difficulty in getting these people. That's the numbers we have in [indiscernible]. So we don't see yet supply being a concerning thing, in terms of growing our business.

  • Trip Chowdhry - Analyst

  • Regarding Spectramind and BPO, I was wondering -- It seems to me that that business -- I sense it like the management is a little bit less enthused about it. It seems to be a little bit problems of retaining the people and looking at your pedigree, it seems to me this is not the most probably core competency. Are you thinking about divesting it or spinning it off or running it at something, in a different shape and form, so that we can see some return on that acquisition?

  • Azim Premji - Chairman and Managing Director

  • Well, I don't know where you get that impression. We are actually excited about the growth that we've had on this business. We see a robust opportunity, and more importantly our customers see this as an important add-on to the fulfillment that they need. We have seen more and more customers coming wanting end-to-end, defining their needs based on - this is the input, there's the output, you choose how you will do it. You choose the platforms, you choose how it will be integrated.

  • So we see that as a key aspect. As I mentioned earlier, the appetite of the business, or appetite of the business that can be brought, is far higher than the talent availability in that robust manner. We had 40,300 plus people as of December 31. We wish we had another 4,000, 3,000, because there is enough business that our customers want us to fulfill for them. So to move forward - sorry.

  • Trip Chowdhry - Analyst

  • I said thanks for clarifying it, I may have mistook it.

  • Azim Premji - Chairman and Managing Director

  • If you knew it, last quarter we had about 9% sequential growth in dollar terms, net 1,400 people added on. And so going forward all we're saying is we're going to tighten the [indiscernible] a little more, to be able to make sure that we get the right kind of people. And [indiscernible] is another, attrition management. If we want to get into our customers a tradition much better in terms in trying to have a better mix in favor of transaction processing.

  • So there is absolutely no question that there is excitement within the Group and the management team. But we have to grow that business and find -- and get into more and more integrated with our IT service offerings.

  • Trip Chowdhry - Analyst

  • Last question is on testing business. Seems like there was double-digit growth on it, and I also got some sense that Mercury Interactive is the partner in that space. Is that a exclusive partnership you have with Mercury, or are you also going with other testing vendors, like Segway or IBM Rational? And what kind of customers are outsourcing the testing to you?

  • Azim Premji - Chairman and Managing Director

  • So the relationship we have with Mercury is a strategic relationship but it is not exclusive. We have multiple relationships with multiple testing tool companies. So it's Mercury, it's Compuair, it is TestQuest, it's National. So we -- And we have competencies on multiple tool providers.

  • In terms of customers, we have a very broad base of customers, which are on the technology side, on the embedded product engineering side. And for the last 1 or 2 years we've been quite aggressively expanding our testing service into the enterprise and financial side as well. So we have a very broad base of customers spanning all our [indiscernible].

  • Trip Chowdhry - Analyst

  • Excellent. Thank you and congratulations on a fabulous execution and a good quarter.

  • Azim Premji - Chairman and Managing Director

  • Thank you Trip.

  • Operator

  • Your next question will come from the line of [Ashir Stadani]. Please go ahead.

  • Ashir Stadani - Analyst

  • Yes. Good evening, nice quarter. My question has to do with price realizations. It appears that Wipro is showing greater upward movement than some of its competition. Which service lines are contributing the most in this -- towards this metric?

  • Rich Garnick - Chief Executive Officer - Americas

  • Yes, this is Rich again. On price realization we're seeing improvements primarily in some of our value-added services, where we are getting better yields. Such as infrastructure services which we talked about at sequentially more than double-digit growth, quarter-to-quarter, and some our other service lines that continue to see strength.

  • So we're able to manage the business mix to strike that realization. We have yet to see prices firm up to the point where we can go back to customers in a head-to-head position, and raise prices substantially in the marketplace. And we don't see that happening in the near future. We see that prices in a narrow band moving forward.

  • Ashir Stadani - Analyst

  • But in terms of relative yield you mention infrastructure services, any other lines?

  • Rich Garnick - Chief Executive Officer - Americas

  • Yes, packaging implementation, controlling services where we have our onsite teams in these and many activities. It doesn't drive a lot of revenue directly but it is a thin edge of the wedge to get in [deep] for our customers at the high end, and then pull through the implementation. In some of the situations we've been able to get realizations.

  • Ashir Stadani - Analyst

  • Excellent. Thank you. And I have one more question for Azim Premji on the subject of options expensing. Do you have an estimate of the impact on fiscal '06 EPS, either in dollar or percentage terms?

  • Azim Premji - Chairman and Managing Director

  • We'll share that with you as we come through the quarters, Ashir.

  • Ashir Stadani - Analyst

  • Okay. A nice quarter.

  • Azim Premji - Chairman and Managing Director

  • Thank you.

  • Operator

  • We'll next go to the line of Bhuvnesh Singh with CSFB. Please go ahead, your line is open.

  • Bhuvnesh Singh - Analyst

  • Hi sir. Congratulations on good results. I had one regarding the volume. While you're talking about a very strong environment, our volume growth remains stuck around 7%, quarter-on-quarter. So is this what we have achieved a sustainable volume growth rate but that we are not able to grow far more than this, because of our own supply constraints? Or what exactly is the reason?

  • Azim Premji - Chairman and Managing Director

  • Well, for your first question, 7% quarter-on-quarter volume growth is not something terribly unhappy with. I think that's a pretty good growth rate but if you look at what is limiting it, fundamentally on the market side. The only market factor we can point to is on the embedded and product engineering side, where we've seen the slowdown could be semiconductor and computing space. And as a result, we've seen some industries out there, none of them bad.

  • One I've seen on the people side any limitations in terms of being able to hire and get the best talent. So maybe it's market-fed in terms of what our overall growth rate is.

  • Bhuvnesh Singh - Analyst

  • Should I then take it as being that for [indiscernible] demand which see is [sticking] around 7% to 8% volume growth, not higher than that?

  • Azim Premji - Chairman and Managing Director

  • I think that we have given a guidance for the future that is available to you, and we want to give in to the results of the [past].

  • Bhuvnesh Singh - Analyst

  • My [indiscernible] to reveal that but I just want the fact some of your peers they're growing at 10% plus, and they have managed to grow there for past couple of quarters. By [indiscernible] growth it has been shown in three quarters. I'm just unable to grasp the difference, why it is here.

  • Azim Premji - Chairman and Managing Director

  • Different businesses have different growth [rates]. I'm not sure we considered one thing is exactly the same as the other.

  • Bhuvnesh Singh - Analyst

  • Okay, and thanks for that. And just one last verification. Can you give us some idea of about ForEx [cover], at what rate is it at?

  • Azim Premji - Chairman and Managing Director

  • Yes, the product covers are about $614m as of December 31. There are 4 apart from what has been assigned to the foreign currency assets on the balance sheet, and that cover is in excess of IN44m.

  • Bhuvnesh Singh - Analyst

  • Thanks, thanks a lot.

  • Operator

  • The next question will come from the line of Edward Paso of Prokovias(ph) Securities. Please go ahead.

  • Edward Paso - Analyst

  • Hi, it's Ed Paso. Thank you for taking my call. I was wondering if you could discuss as far as generating new business, how much of it is coming from your existing client base, and how much is coming from new clients? And what the implications are for your expansion of your sales organization? And could you do that a little bit by geography too?

  • Rich Garnick - Chief Executive Officer - Americas

  • Hi, it's Rich Garnick. First of, we get a significant amount of our business from our existing customer base, that's been a historic trend for many years. We have gotten over 95% of our business from our existing customer base and we continue to grow that. Our focus is to mine our customers by expanding our service offering, and deepening our penetration and creating a strategic value proposition for our clients.

  • Our new customer business obviously represented around 5% of revenue growth. We could see that in new customers. With regards to the [UFCI] booking which I'll speak about and expansion of our selling organization to grow our business, we could see the focus on the strategic engagements with clients on a selective basis.

  • We will be investing in their selling [organization] as appropriate going forward. To continually evaluate that on a month-to-month, quarter-to-quarter basis, and we believe that we see a growth in clients that allow us to meet our strategic objectives. You want to talk about Europe, Azim, you want to cover it?

  • Azim Premji - Chairman and Managing Director

  • Yes. I think as far as Europe is concerned we continue to invest in that region, and I think that in the coming year we will also need to invest more. I think we're seeing good growth opportunities in Germany. We want to put more feet on the street there. So I think as the business rises we will make investments and more sales.

  • In terms of percentage revenues from new accounts as -- I don't think we split that out by geography. We've only given that on an aggregate [by division] basis.

  • Edward Paso - Analyst

  • Could you talk a little bit about smaller tier 2 and 3 players, and also about start-up companies? Are you losing people to the smaller firms? Are they becoming a source of employees? And are you losing employees to go and set up their own start-up shops?

  • Azim Premji - Chairman and Managing Director

  • Yes. We keep tracking where the people are going to. We find that the people are going to the number of [ICPs] started by multinational companies, in terms of development centers in India - India development centers. And we don't find people going to start up smaller companies like we used to see in 1999/2000. That we don't -- we do not see that pattern.

  • Edward Paso - Analyst

  • Just final last question. Could you talk a little bit about the political environment? Has it gotten quiet compared to its old supportive ways? Is there any chance here, as we come up on annual budgets, that there may be some issues possibly on the tax side or the support of enterprise zones?

  • Azim Premji - Chairman and Managing Director

  • Yes. I think, and if you look at the current government in terms of the people at the helm, our guys who are the possible [force] of reforms in India, they have played a significant role. The confidence that they give us is very good in terms of opening up the economy more and more. Supporting infrastructures, supporting exports. So we are eagerly looking out to the forthcoming budget which we think will be positive, growth orientated.

  • And from a taxation standpoint, we do not expect anything that will happen which will be a deviation to the current promise that is embedded in the tax statute.

  • Edward Paso - Analyst

  • Thank you. Congratulations on a good quarter.

  • Azim Premji - Chairman and Managing Director

  • Thank you very much.

  • Operator

  • The next question we'll go to the line of Anthony Miller from with Arete Research. Please go ahead.

  • Anthony Miller - Analyst

  • Yes, thanks gentlemen. I would just like to expand on my understanding of the opportunity you see in Europe. You just mentioned that you see a good growth opportunity in Germany. Can you let me know which other countries in Europe you do see the opportunity, both for IT services and BPO? And could you also let us know, please, who you are meeting in competition in the different countries in Europe, outside of course of your direct peers in India?

  • Azim Premji - Chairman and Managing Director

  • Yes, in the IT services based in Germany, for example, the sectors which are doing well. Sorry, I didn't introduce myself - it's Azim Premji here. The sectors that are really doing well are again broad-based manufacturing companies opening up there. We're also seeing a lot of traction in the Netherlands, again led by manufacturing companies, and also companies in the energy and nuclear space.

  • We're seeing competition from some local European companies but, in most of the deals that we contest, the major competition continues to be the global, top tier firms, and not so much as the local firms, except in a few specific cases like Benelux region or in Germany.

  • Anthony Miller - Analyst

  • I see, and could you also just give us any insight? You mentioned you need to make more investment in Europe, and you're singling out Germany again. Are you actively looking for acquisitions in Germany or other comparable Europe country markets?

  • Azim Premji - Chairman and Managing Director

  • I think that, as far as acquisitions are concerned, it's very difficult to comment on that. All I can say is that we have looked at, and continual to look at, an acquisition pipeline that includes Europeans. But, frankly, it's not at the top list just given the higher degree of difficulty in integrating it, given the language and culture differences that are perhaps greater than, let's say, something in the United States. Having said that, we're open to everything.

  • Anthony Miller - Analyst

  • Okay. In the UK obviously you wouldn't have those problems. So are you saying that would be a more likely prospect?

  • Azim Premji - Chairman and Managing Director

  • I have to always remind myself that the UK is part of Europe, you're right.

  • Anthony Miller - Analyst

  • Okay gentlemen, thank you very much.

  • Operator

  • [OPERATOR INSTRUCTIONS]. We'll next go to the line of Richard Davis with Richard Davis and Company. Please go ahead.

  • Richard Davis - Analyst

  • Good morning gentlemen, and congratulations on a very fine quarter. In the past you've indicated areas of your value-added services that you're emphasizing in terms of personnel. I'm wondering if package implementation is one of the ones you're still stressing? And is there any change in your outlook of business due to the merger of Oracle and PeopleSoft?

  • Rich Garnick - Chief Executive Officer - Americas

  • Hi Richard, it's Rich Garnick. Regarding package implementation, we're not backing away from that business. It's actually one of our stronger businesses. It's grown this year over 40%, year-on-year growth. We continue to see great opportunities. As I mentioned, we've seen validation in the marketplace. Recently we were recognized by AMR report as a world leader in complex and implementation of packages such as SAP.

  • We've implemented pan-European, pan-Asian implementation where we've delivered projects on time and under budget. We continue to differentiate ourselves in the eyes of the marketplace. Specifically to the business environment, we expect to see continued growth on an annualized basis. The business is more project orientated than our traditional annuity business, and application development [are made] into where you get a smoother revenue line.

  • We see ramp-ups quarter-to-quarter due to those project implementation start and finish -- and closures. With regard to Oracle and PeopleSoft, we see that as an opportunity. Any time there is change in the marketplace which potentially creates customer situations where they want to look at alternatives, and migrations from one platform to the other, that becomes a tremendous opportunity for our business.

  • We have strong practices, both in Oracle and PeopleSoft, and we see that independently we'll continue to grow. And as the marketplace see a convergence, we see opportunities to take advantage of that.

  • Richard Davis - Analyst

  • Thank you for that. The other question is, you had a very creative package in terms of [statistic] processes and -- of retail businesses. I think one of your European clients employed it. I'm fascinated by it because it predicts the number of cashiers one needs when one exits the store, and that sort of thing, and therefore the sense is to reduce the time in line. Have other retailers shown interest in this area?

  • Vivek Paul - Vice Chairman and President

  • Yes, Vivek Paul again. There has been a great interest from retailers, not only in the UK but also in continental Europe, and we are doing a lot of work in the retail space around the implementation. And that is building growth in that sector, particularly from European retailers.

  • Richard Davis - Analyst

  • Thank you very much.

  • Operator

  • We'll next to go a follow-up question from the line of Julio Quinteros with Goldman Sachs. Please go ahead.

  • Julio Quinteros - Analyst

  • Actually my questions have been answered. Thank you very much.

  • Operator

  • And there are no further questions in queue at this time. Please continue.

  • Azim Premji - Chairman and Managing Director

  • We will close the -- we will give another 20 seconds and see if there are any questions, otherwise we will close the Q&A session.

  • Operator

  • [OPERATOR INSTRUCTIONS].

  • Azim Premji - Chairman and Managing Director

  • Okay, let's close the Q&A session.

  • Operator

  • All right. Please continue with your closing comments.

  • Azim Premji - Chairman and Managing Director

  • Thank you very much for your participation, and if you have further actual questions please do call me. And the entire earnings call is archived and we have provided the numbers, the toll-free numbers, for accessing the same. Thank you very much.

  • Operator

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