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Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Wipro First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, instructions will be given at that time. [OPERATOR INSTRUCTIONS]. As a reminder, today's call is being recorded. I'd now like to turn the conference over to your host, Mr. Sridhar Ramasubbu. Please go ahead.
Sridhar Ramasubbu - IR
Thanks Cynthia, and thanks to everyone for joining us for Wipro's first quarter results and earnings call for the quarter ended June 2005. Jatin and Lan from the IR team are also with me and they send the greeting to all of you as well. With us today we have Azim Premji, Chairman and Managing Director; Suresh Senapaty, CFO; other members of Senior Management team, including the (indiscernible) under the new structure. I hope you had an opportunity to review the press release we issued today morning under US GAAP. Let me give you quickly the agenda for today's call. Azim Premji will share his perspective beginning with an overview of our results, and Suresh will take you through our results in more detail. As a reminder, when we discuss our results in today's call, some of the matters we discuss may be forward-looking, and I'd like to advise people these statements may be subject to know and unknown risks, and uncertainties that could cause actual results to vary materially. Such risks and uncertainties are discussed in detail in our filings with SEC. Wipro assumes no obligation to update the information presented during today's call.
The call is scheduled for an hour. The entire earnings call proceedings are being archived and transcripts would 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 send me a mail, and we will address your questions as well at the end of the Q&A. So, with that let me turn over the call to Mr. Azim Premji.
Azim Premji - Chairman and Managing Director
Good morning to you. By now, you would have seen results for the quarter ended June 30, 2005. the management team would be happy to answer your queries, I would like to take some time before that to share some of our thoughts on our performance and prospects.
Team Wipro delivered yet another quarter of solid performance. All our major business segments recorded robust growth rate. Revenues in our Global IT business at 398.5 million with ahead of our guidance of 395 million. The IT Services business continued to witness broad-based growth across verticals, across geographies, and across service lines. For the third time in the last four quarters, our financial solutions business delivered double-digits sequential growth. Testing services grew double-digit sequentially for the fourth consecutive quarter. Other differentiated services such as Technology, Infrastructure Services, and Enterprise Application Services grew ahead of the overall growth rate. Europe geography continues to demonstrate strong growth. One of the transitional challenges in our business process outsourcing business did impact revenues and profits growth during the quarter. We are convinced on the strategic direction and we will peruse it.
We are encouraged by the early winds in the transactional processing business, part of the transaction processes part of the business even though they are relatively small. During the quarter, we had significant wins in the IT Services business, including $1.43 million contract from Northern Gas Networks in the area of Work and Asset Management Systems. For India, Middle East and Asia-Pac business, we recorded revenue growth of 34% and earnings before interest and tax grew 46% year-on-year. Services revenue grew 52% year-on-year and contributed to 42% of the total revenues for the quarter. Our business also turned in reasonably good performance. Our product business also turned in reasonably good performance.
Our Vice Chairman, Vivek Paul, has decided to move on to play a significant role in the technology and life sciences space by becoming a partner at a leading private investment firm. Over the last six years Vivek's contribution to the success of our Global IT business has been significant, reflected in Wipro's lead position today in many areas. We wish Vivek the very best for his future.
We have announced a new organization structure. The new structure is a reflection our appreciation that the different business rhythms of our different business units require a structure that enables sustainable scalability. We believe that we have created a structure that in its diversity facilitates growth and in its convergence points minimizes duplication and ensures adequate leverage across (indiscernible). Wipro has always pioneered dual organization structure such as segregating the product-centric IT business in 1995 and verticalization in 1999 that many others have subsequently followed. We believe that this structure will be yet another first in the industry.
The new leadership team's clear priorities are enhancing customer value by domain, by business insight and by proprietary frameworks. Two, leveraging increased market synergies from our technology business for which this integration which we have done in the technology business should be a significant contributor, building in power teams and leaders and four, leading industry growth rates. We are confident that the new structure along with the initiatives on deepening up service portfolio, investing in sales and marketing, and focusing on training which enabled Wipro to achieve its vision of global leadership. I will now require Suresh Senapaty to give his comments.
Suresh Senapaty - CFO
Very, good morning to all of you ladies and gentlemen, and good evening to all of you in India and other parts of Asia. Before we take on questions, I thought I will touch up on areas in our performance and financial that would be of interest to you all. Let me start with giving the composition of our growth. During the quarter ended 30, June 2005, we had sequentially revenue growth of 6.4% in our Global IT Services business. We comprised of 6.7% revenue growth in the IT Services and 3.6% in the BPO Services. The 6.7% growth in the Services component was driven by a 6.1% in volume of business and an increase of 2.2% in realization of work performed offshore, and 1.4% increase in price realization for onside projects. The increase in offshore included an element of incentive received from customers based on project performance. We contributed to around 1.2%. This is yet another tangible demonstration of our superior execution capability. Foreign exchange realization rate for the quarter was rupees 43.38 versus rupees 44.44 in the previous quarter, a drop of 2.4%. This steep decline was primarily due to changes in foreign exchange gains and losses. In the quarter ended March 2005, we had a foreign exchange gain of 180 million rupees, which is about $4.1 million and in the quarter ended June 2005, we had a foreign exchange loss of 142 million, which is $3.3 million of loss. This straining of 322 million rupees, which is about $7.4 million was primarily on account of application of pounds against the Indian Rupee and higher gains on mark-to-market on premium in the previous quarter as compared to the quarter ending June.
Operating margins for our Global IT business for the quarter was impacted by currency appreciation, higher investment in sales and marketing in line our plan and increase in visa fees. The sharp increase in revenue and profits in the Indian IT business during the quarter was primarily due to the impact of EITF 00-21, which requires a portion of revenue to be recognized only on inflation. In the quarter ended 30 June, 2005 we had a lower deferment of revenue relating to inflation as compared to inflation as compared to the corresponding quarter in the previous year.
Our guidance of approximately $422 million for the quarter in mid-September represents sequential growth of about 6%, primarily led by volumes. We expect substantial portion of the growth to be from the IT Services. We will be glad to take questions from you. Sridhar, we can go to Q&A.
Operator
[OPERATOR INSTRUCTIONS]. Ashish Thadani, Gilford Securities.
Ashish Thadani - Analyst
Could you just touch upon or break up the margin drop in the core segment and also provide us with some color as to what one should expect on the SG&A front in coming quarters?
Suresh Senapaty - CFO
Ashish, in the -- like we had stated in the last earnings call, we had inducted in the sales and marketing and it is about 50 basis points, we had increased in that call. And similarly there was foreign exchange impact, so far as the Indian GAAP was concerned, by both 50 basis points, and so far the US GAAP is concerned by an additional 130 basis points, which is about 180 basis points in total because the mark-to-market on the premium of the roll over contact that we have -- under the US GAAP we are required to do a mark-to-market every quarter. So, we had in the quarter ending March, booked a profit as a result of which -- because of the premium having dropped, the mark-to-market that has been the reversal of that in the quarter ending June. Consequently, now as of June 30, you have the exchange rate at which they are lying on the Indian and US GAAP at similar numbers. They did contributed for the performance but they changed difference between one quarter to the other. And the third was the additional Visa fees, as you know, there was $2,000 extra levy of the Visa charges and we had to get into booking for new Visas to be able to make sure that we have adequate available Visas for picking up business opportunities going forward. So, that is an additional charge of about 30 basis points. So, that is how the overall delta with respect to the operating margin has arose. So far as your question with respect to going forward on the sales and marketing is concerned, over the last two quarters we had added about 40 people -- more than 40 people in the field, and therefore related expenditure on that. We think for at least the current and the next quarter to seek some consolidation on some of those investments before investing much more disproportionate to revenue growth.
Ashish Thadani - Analyst
And that's very, very helpful. In terms of your September quarter guidance, what have you factored in for the BPO segment, would it be higher or lower than the overall 6% outlook? And also, if you could again touch upon why the headcount might have fallen as much as it did on a sequential basis in that segment?
Suresh Senapaty - CFO
As we said that the 6 -- about 6% approximate growth that we are talking about, most of it will come primarily from the IT Services like the growth we saw last quarter in the BPO was about 3.6%, and in the previous quarter it was a little lower. Going forward also we would expect flattish to very marginal increases because of the transition plan that we are looking on. I'll request Mr. Kurien who heads our BPO business to throw some light on what are the kinds of initiatives we are taking there.
TK Kurien - CEO Wipro BPO Business & President of Wipro Healthscience
I think the question really was in the headcount. Let me start with the headcount number. If you look at headcount reduction, typically what we have done is that we have really been working on our headcount under training. Last quarter we had approximately about 4,500 people who were under training. And what we did was, we are going through a reconfiguration as far as our business is concerned (indiscernible) match up with the skill set which we need on an ongoing basis. We have managed to, whatever attrition has taken place we have not backfilled that. To that extend, the headcount has dropped, the overall headcount has dropped. The good news is that the topline like what Senapaty said has remained -- has grown by about 3.6%. So, really even with a 2,000 drop, we've managed to kind of keep headcount -- I mean the topline, growing EBIT marginally.
Operator
Mayank Tandon, Janney Montgomery.
Mayank Tandon - Analyst
I have a few questions. One, if you could comment on the tax rate, it dropped this quarter. What should be build in as you look out over the rest of fiscal 2006?
Suresh Senapaty - CFO
Yes, in this quarter we had a tax write back of about 150 million rupees primarily because of a disposal in the tribunal, a case quoting with the parts failure, and that had muted the effective tax rate by about 3 percentage points. So, going forward, we will not be able to get the full benefit of that.
Mayank Tandon - Analyst
So, does the tax rate reverse back to the levels maybe that we saw at the end of last fiscal year?
Suresh Senapaty - CFO
That's right.
Mayank Tandon - Analyst
Mid-to-high teens?
Suresh Senapaty - CFO
Yes. We've noted a range movement.
Mayank Tandon - Analyst
And just in terms of wage hikes, I just want to make sure that the wage hikes will once again be passed through during the December quarter, and should we expect the wage hikes to be pretty much in line with industry levels, low-single digit on site and the mid-teens offshore?
Suresh Senapaty - CFO
I request Mr. Pratik, who heads our HR to respond to that question.
Pratik Kumar - Corporate VP, Human Resources
Yes. The wage hike, as and when it takes place, which is still couple of months away, would be more or less in line with where we see the industry moving, and as we get closer to the time frame when we decide, we will be able to establish a more clear benchmark on where we want to position the salaries.
Mayank Tandon - Analyst
Okay and then as we look forward on the demand side if one of you could comment on maybe the maturity level with some of your top accounts, clearly they are not growing as fast as some of the smaller businesses. Just want to get some perspective on -- have these accounts hit a maturity level that is now going to be hard for you to grow or is it more of a Wipro specific issue to offer more services to penetrate these accounts further?
Pratik Kumar - Corporate VP, Human Resources
Let me request Sudip Banerjee, who heads our Enterprise Solution Business and Girish Paranjpe, who heads our Financial Solution Business (indiscernible).
Operator
Mr. Tandon does that answer your question.
Mayank Tandon - Analyst
I didn't hear the response.
Operator
Mr. Ramasubbu, we're not hearing anything from your line, if you are still connected. Please check your mute key. And ladies and gentleman please standby. We have lost connection with our host and we will be re-connecting him shortly. [OPERATOR INSTRUCTIONS].
Girish Paranjpe - President, Finance Solutions
The question, which was asked to us about growing the top ten accounts and the headspace we have there. Yes, we certainly think that there is plenty of headspace in each of our top ten accounts. We find that all these top ten accounts that we have are spending much more on their IT outsourcing and their overall IT services trend is also increasing slowly. So our share in each of those accounts has not reached by any means a saturation point. So, we do think there is lot more that we can grow in our existing accounts. Interesting to point out here that other than the top ten accounts in the next 40 of the 50 accounts that we have, the top 50, we have grown sequentially this quarter by 18%.
Mayank Tandon - Analyst
Anything just on that note, within your top accounts, are you seeing more vendors now bidding for work, is it more for preferred vendor, what type relationship or is there more of a market share issue now with some of these larger deals, accounts?
Azim Premji - Chairman and Managing Director
In most of our large customers there is already a multi-vendor scenario, but that has been the situation for a while now. So, in addition to kind of contest for market share, there is also increasing the size of the par, because I don't think any of our customers have reached a stage where they are not increasing the outsourcing or offshoring of their IT spend. So, there is headroom for everybody to grow without having to fight for market share.
Mayank Tandon - Analyst
Okay, and then when I look at your customer size distribution, the number of accounts in the $10 to $20 million range, and the $5 to $10 million range, well is that just a customer specific issue or customer specific issues or is there a trend there?
Azim Premji - Chairman and Managing Director
There is an increase in the number of customers, it is more than $20 million. But, other than that in the less than 20 million, it's more of quarterly variations than any trend. Overall, the number of customers with than 1 million has gone up significantly.
Mayank Tandon - Analyst
Okay, finally just going back to questions asked earlier, on the margins issue, some of the positive levers would be obviously the offshore on site mix, and potential pricing up trend. Do those factor in your expectations as you move through the year even despite the wage hikes, or we could see margins actually trend up from this quarter's levels, excluding currency of course?
Azim Premji - Chairman and Managing Director
We don't give forward forecast on margins. We will address this issue when we come to the calls of end of quarter two.
Mayank Tandon - Analyst
Okay, thank you.
Operator
[OPERATOR INSTRUCTIONS]. Mosha Katrini, SG Cowan's.
Mosha Katrini - Analyst
Thanks. It's actually Mosha Katrini. Congratulations on the solid quarter. I'm trying to, going back to the margin question, we are trying to isolate the margin or even the EPS impacts of the ongoing restructuring, and may be charges that you have taken during the quarter for your BPO operation. I think it will be really helpful if there is any way for you to isolate, and I said that impact, and try to get the normalized operating margins for the Company as a whole, as well as for Global IT Services x BPO, and then you are talking about in this quarter, and then in your view what could be the recurring impact for the next quarter or two, as you continue to restructure the BPO operation?
Suresh Senapaty - CFO
No, we have not separately shared the BPO operating margins at specific terms, but all I'd say is that so far as the operations are concerned, we had a medium profitability in the last quarter, and even in the previous quarter. A lot of steps, initiatives are being taken to solve, that is headcount reduction of about 2,000 in the BPO services. We are transitioning that business in terms of building the -- subsequently in the current quarter, we would see a significant improvement in the profitability, and it will be even better in quarter three -- specifically our declared number on the BPO side.
Mosha Katrini - Analyst
We are not looking for you to disclose the profitability of your BPO operation. The only thing that I'm looking for, and this is if you can disclose it, the margin impact just from the restructuring, so there is a difference. We're not looking for the disclosure for the profitability of the BPO business, we are looking for disclosure over the impact that actually took place because of the restructuring?
Suresh Senapaty - CFO
Yes, we appreciate that, but you know, at the end of the day it's about 11% of our revenue coming from the BPO, where we have been prospering in terms of what our revenues are. And, like we've stated, we would like the operating margin of the BPO business in the range of 18 to 24%. We have delivered that quarter-after-quarter, including for the last financial year. The last quarter wasn't in that range, very soon -- but soon we will be back into that region. I think he knows that the margins in the last quarter were significantly below the 18% and accounts for some of the fall in our margins.
Sridhar Ramasubbu - IR
Sir, can you ask the participants to mute their cell phones or web phones or handsets, because they are getting some feedback here?
Operator
And the line is disconnected, and with that I would like to turn it back over to you Mr. Ramasubbu.
Sridhar Ramasubbu - IR
I didn't understand.
Operator
I would like to turn the conference back over to you.
Sridhar Ramasubbu - IR
Yes, now we have done. Let us go ahead with the next question.
Operator
And we have no further questions. Please continue.
Sridhar Ramasubbu - IR
Yes, can you make announcement for more questions. There are at least five analysts who are on the line.
Operator
[OPERATOR INSTRUCTIONS] Simon Wolf (ph), J. Goldman & Company
Simon Wolf - Analyst
How are you doing guys? Great quarter. I just wanted to ask you guys if you are seeing any more competition from the MNCs in entering into India, now that they are making a big push, or you are still seeing the same competitive group of companies?
Girish Paranjpe - President, Finance Solutions
I think we have the same set of competitors that we have faced in the last couple of years, right, I am not seeing any major trend of new people coming in. AP, you may want to add.
Azim Premji - Chairman and Managing Director
They are pretty much the same, Sudip, again that the competition that we have, the global top gear fronts, and a couple of Indian firms who are obvious here. So, that's pretty much the select list, which gets into every large IT these days, and we haven't seen any difference from new players coming in to these top tier -- top state in the last stages of any major deals that we have been pursuing in the last one year.
Simon Wolf - Analyst
You mean Accenture has made a lot of noise about expanding their operations in India. They are making a stronger push. Are you seeing them more often now or that hasn't really changed?
Suresh Senapaty - CFO
We have been seeing them consistently for the last 18 to 24 months and that trend just continues. So, there's no separate trend on with Accenture.
Operator
Mayank Tandon, Janney Montgomery
Mayank Tandon - Analyst
I know you don't give any specific guidance on the sub-segments, but just going back to the question on the BPO side, at least in terms of timeline when are we looking for the trend to reverse? I know you are still going through the restructuring efforts. Are we talking about a quarter or two or is it more into fiscal '07. Just as a time frame in terms of when we could see the revenue trend moving to a different direction?
Suresh Senapaty - CFO
I think a quarter or two would be -- a two quarters would be a fairly decent estimate.
Mayank Tandon - Analyst
And what are some of the initiatives you are putting into effect to make that transition to a transaction related focus? What does it involve beside obviously on the hiring front?
Suresh Senapaty - CFO
Couple of things. First is that, we have just restructured our sales force in the front, and it really begins with this -- begins with the way we actually felt to please the customers. So, right now what we are doing is that we have -- in the past we have felt specific components like the call center. Now, what we do is that we go ahead and we are looking and trying at assuming the customer's business problem. So, really what it means is that we are looking at a process view and working downwards with the solution that integrate Consulting, IT, and BPO together. Fundamentally, that's the way we are going forward. So, as the first step what we have done is that we have integrated the sales force in the front. So, now our sales force sells both BPO as well as IT. Second thing that we are doing now, pretty much that you can see, which is -- which you can see in last quarter's results to some extent is driving productivity and efficiency on our voice business because we still believe the wide business had some theme in it and we believe that if you really drive productivity in that business it can be profitable.
Mayank Tandon - Analyst
And then just further on the BPO side now, when you look at some of the products out there are you essentially cross selling to existing IT services accounts or are these mostly new relationships? And generally what we hear in the market is that the decision makers are different what do you see as you sell BPO out to your clients?
Suresh Senapaty - CFO
There are two components and are very critical when you have any meager BPO sales, one is credibility, the other one is the stakeholder. Now, being an IT customers gives us the first, which is credibility. So, it gives us the calling guard. Obviously, what we have to do is go and sell to the other stakeholders. And so, to answer your question in a pretty short form, the answer is yes, we are going after a existing customer base more than new customers.
Mayank Tandon - Analyst
Can you give us maybe some color on what the revenue contribution is from the new clients versus existing accounts within BPO?
Suresh Senapaty - CFO
Cannot do that specifically, we have never done that in the past so, I can't be distinct to that.
Mayank Tandon - Analyst
Finally competition on the BPO side, mostly the small Indian firms or is it more the multinational firms Accenture, the Affiliated Computer Services or a combination of both?
Suresh Senapaty - CFO
No, when we use to sell -- when we could sell call center deals a couple of years of ago or even lately, in most cases what we found was, it has even hit up against the big Indian guys or the medium-sized Indian guys, we never used to really compete the smaller guys. As we get into some rational processing what we are finding is that the mix of competition is changing considerably. And that's why if you look at it most of our sales in some form of shape involves our consulting on to. So, we hit up more and more against the ACS to the world, the IBM to the world, and the Accenture to the world.
Mayank Tandon - Analyst
Okay, that helps thank you.
Operator
[OPERATOR INSTRUCTIONS]. Louis Miscioscia, Lehman. Please go ahead.
Louis Miscioscia - Analyst
With the comments I guess after (indiscernible) the reports of quarter that you're going to start to focus more in application development and application maintenance basically the offshoring business really I think they are going to be focusing on India. Could you first help us to size the market, and when you look out there, how would you define hopefully in dollar terms with the US and Europe the total available market and than how much is already being penetrated by obviously mostly the big players over in India?
Sridhar Ramasubbu - IR
Louis, can you speak up a little bit. We're not able to hear you well. Can you repeat the question please?
Louis Miscioscia - Analyst
Sure, my question was asking you all if you could size the application maintenance and the application development total available market for -- do you think it a 20 billion, 50 billion, 100 billion, 200 billion market place? And than I will have a follow up.
R. Lan - Manager - Treasury
Lou, this is Lan here. Broadly of the global market as defined by the IDC of about approximately $558 billion, what Indian industry classified as custom application development and the activities we do under that approximately translates to are between 7.5% and 8% or the market, which would mean that you have a market of approximately $45 billion as the adjustable market is on those classification.
Louis Miscioscia - Analyst
So, right now you just finding about $45 billion and I guess about 10% or $10 billion is already outsourced. Okay, then with that I guess two questions, where do you think the market would mature as you think that are 50% is the appropriate level and maybe if you could comment on -- I guess Accenture obviously in their last calls saying that they look to get more aggressive in this space. Do you think that it's going to take them 6 to 12 months to gain more attraction or more or like that 12 to 24?
R. Lan - Manager - Treasury
Lou, before that one just better point and then I request Mr. Sudip Banerjee to comment on the quantitive. Last year Indian exports was approximately $17.2 billion of it $3.6 billion was the BPO Services. The balance custom maps and development and maintenance gone has for approximately 55% of India's exports. So, we really are not yet at that $10 billion with the overall scheme of things. Mr. Banerjee?
Sudip Banerjee - President, Enterprise Solutions Division
Just to add on to what Ram (ph) said, that is only one part of the work that we do. So, application development and maintenance would consist today roughly about between 50 and 55% of the revenues of most leading Indian IT services companies. The balance comes form other service lines like infrastructure management, testing and distinct from the development portion, BPO services, R&D services, Product Development services, and IT Consulting services, which is a stand-alone consulting again distinct from what we do in the development piece. And finally package implementation. So, all those are addressable markets. So, the total addressable market that we have is not 45 billion, but much larger.
Louis Miscioscia - Analyst
And then any comment on if Accenture -- how long do you think it will take for Accenture to ramp up to a higher level as a direct -- obviously there are already a direct competitor, but add further comments, are they going to change the way they go to market and try to literally win more business, more directly where -- before it was much more indirect?
Suresh Senapaty - CFO
You will have to ask Accenture that question. Unfortunately none of us have the answer to this one.
Louis Miscioscia - Analyst
Okay, but you haven't seen any changes on their part yet?
Azim Premji - Chairman and Managing Director
This is Premji. Let us go on the basis that the competencies of various players in this field are always evolving. And our job as leadership at Wipro Limited is to be always one step ahead in the global delivery model. So, what we are doing is, we are investing an enormous amount in upgrading our entire quality processes to integrate Lean manufacturing into it. And I think, within the course of this year we'll be launching a new Wipro quality wave, which has integrated Six Sigma, which has integrated SEI CMM, and which has integrated Lean, which we think would give us a competitive edge over all global competition.
Operator
And Mr. Ramasubbu, I'd like to turn the conference back over to you.
Sridhar Ramasubbu - IR
Thank you very much for your participation and if you have further questions please do fell free to contact me on my cell or I mean, India cell, and once again thank you very much and the transcript will be available on our website and archived, the digital replay will also be available. Thank you.
Operator
That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.