Wipro Ltd (WIT) 2005 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by and welcome to the Wipro earnings call for the period ending December 31, 2005. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions being given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is been recorded. And now I'd like to turn the conference over to our host from Wipro's management, Mr. Sridhar Ramasubbu. Please go ahead.

  • Sridhar Ramasubbu - IRO

  • Thanks, everyone, for joining us for Wipro's third quarter results and earnings call for the quarter ended December 2005. I take this opportunity to wish you all a very happy New Year. I'm taking this call from India and have communicated both my US as well as India mobile numbers for any exigencies. [Justin] and [Lamb] from the IR team join me in extending a warm welcome to all of you.

  • With us today, we have Mr. Azim Premji, Chairman, Mr. Suresh Senapaty, CFO, and other members of the senior management team including the [division] heads. I hope you had an opportunity to review the press release issued today morning under U.S. GAAP. Let me give you (indiscernible) 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 the financial highlights of this quarter.

  • As a reminder, when we discuss our results today in today's call, some of the issues we discuss may be forward-looking and I would like to advise you that these statements may be subject to known and unknown risk and uncertainties that could cause actual results are vary materially. Such risks or 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 audio 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 were unable to ask, please send me an e-mail and we'll address those questions as well at the end of the Q&A. So with that, let me turn over the call to Mr. Azim Premji, Chairman, Wipro.

  • Azim Premji - Chairman

  • Good morning to all of you. At the outset, let me wish you all a very happy new year and a very happy year to your families. By now, you would have seen results for the quarter ended December 31, 2005. While the management team will be happy to answer your queries, I would like to take some time before that to share our thoughts on performance and prospects.

  • What made the quarter special was the fine balance we achieved between delivering short-term results and building a long-term sustainable business. In terms of quarterly results, all our major business segments recorded robust growth rates in revenue and profits. We crossed two significant milestones this quarter. One, our IT business crossed (indiscernible) (technical difficulty) the 300 billion annual run rate, and our global IT business surpassed 50,000 landmark in employee strength.

  • Revenues in our global IT business at $473 million was ahead of our guidance of $463 million. The IT services business continued to witness broad-based growth across verticals, across geographies and across service lines. Our financial solutions and technology businesses delivered yet another quarter of double-digit sequential growth. Our differentiated services such as testing, technology infrastructure management and enterprise application services continue to grow ahead of overall growth rates.

  • We added 61 new clients organically, the highest ever customer add. Demonstrating the robustness of our business model, not only did we absorb the impact of compensation revision for our offshore team, but improved our operating margins. Our business process outsourcing business, which has been a subject of much discussion, delivered sequential revenue growth, improved operating margins, increased delivered [team style] and one [strategic assignment] from customers.

  • Over the last couple of quarters, our BPO business has demonstrated consistent improvements, reinforcing our confidence that Wipro BPO is capable of leading industry growth. Even the growth in the near-term may be noted.

  • Our India, Middle East and Asia-Pac IT business recorded year-on-year revenue growth of 19%. Improved business profitability in this segment, so the profit before interest and tax grew faster at 45%. Wipro Consumer Care and Lighting and Wipro Infrastructure engineering businesses also turned in good performance.

  • In terms of a longer-term perspective, we built a stronger platform for growth in our product engineering business and banking solutions business through the acquisition of NewLogic in Austria and mPower in U.S. and India. Our investments in account management continue to pay off. The top 10 customers in our global IT business grew ahead of the market growth rate.

  • We continue to see improvements in our customer [mining] efforts. Apart from increasing the number of million dollar customers sequentially to 210, we now have three customers with a revenue run rate in excess of $50 million. With the NewLogic acquisition and the planned facility in Romania, we are expanding our geographical footprints.

  • Looking ahead, the two questions that drive our business remained unchanged. How do we deliver superior solutions to our customers, and how do we deliver sustainable value to our stakeholders? The answers to these questions lie in devising strategies that anticipate emerging challenges and opportunities, and relentless focus on execution that convert strategies to business results by constantly improving operating productivity.

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

  • Suresh Senapaty - CFO

  • Good morning to all of you in the U.S. and good evening to all of you in India. A very, very happy new year. I will touch upon a few areas in our performance and financials that will be of interest to you all. Let me start, giving the composition of our growth.

  • During the quarter ended 31 December, we had a sequential dollar revenue growth of 9.9% in our global IT services business, which comprises a 10.6% revenue growth in the IT services and a three points [exclusion] growth in the revenues from BPO services. The 10.6% growth in services [combinant] was driven by a 12.7% growth in the volume of business offset by a little 0.1% and 3.6% decline in the realization of work performed offshore, and on site projects respectively. The decline in realization was due to the impact of low number of working days and not due to any change in pricing with the customer.

  • Additionally, revenues for the quarter include $1.3 million from the acquisition of MPower, Inc., the results of which have been -- [contributed] effective 1 December 2005. It is also of NewLogic our (indiscernible) have been consolidated effective 28 December 2005. Our headcount at the end of this quarter includes 351 and 120 employees from MPower and NewLogic acquisitions respectively.

  • On the product front, realization rates for the quarter ended 31 December was up at 44.79 rupees from 43.93 in the previous quarter. As at the previous end, we are approximately $600 million of hedges at rates between [24 25 and 45 50]. We effected an increase of 12% in compensation for our offshore team, effective November 1, 2005. The [gross] impact of the increase was 1.2% on OM for the quarter.

  • OM for the quarter was also adversely impacted by declining price realization and low [utilization] due to the gross addition of over 4500 people, although strong volume growth as a portion of offshore work and other operational improvements helped absorb these charges and improved operating margins by 60 basis points. Capital employed (indiscernible) a limited level, comprises of cash and cash equivalents of 35,492 million rupees as (indiscernible) [system] for 2005. Excluding this cash, return on capital employed for the quarter was 66%.

  • With a view to provide investors the performance of the organic business as distinct from acquisitions, we have effective quarter ended December started showing the procurements of our [direct] business as a separate sub segment. This is in line with our (indiscernible) quality to show physical acquisitions as a separate sub segment for a period of two to four quarters.

  • For the quarter ended March, 2006, we expect volume-led growth to broadly stable price realization. The guidance for the quarter is based on organic revenue of approximately 500 million and revenue from acquisitions of approximately $10 million.

  • Operating margins of the organic business for the next quarter will be impacted by the full impact of increase in compensation for the offshore team and a proposed compensation [division] for the on site team effective 1 January 2006. However, we hope to substantially mitigate these two operational levers and expect the organic operating margin move in and out of range. We're putting margins for our acquisitions [well] in the near-term to be less than that of the global IT segment. We expect the acquisitions to deliver profitability in line with this segment's profitability over a few quarters.

  • Also I want to clarify at this stage that all our press releases and this [segment that we will leave] also have numbers which are given in dollars with typically odd (indiscernible) translations, which means all of the (indiscernible) numbers have been converted by $2 based on the closing rate on 31 December 2005. Since the closing date on 31 December 2005 between rupees and U.S. dollar was lower than the average, the dollar numbers are a little overstated as compared to an average rate realization. So because you will all find multiple numbers when we talk about (indiscernible) in the press releases and the segment report, we thought we would clarify this point to and hope it does satisfy.

  • We'll now be glad to take questions.

  • Operator

  • (OPERATOR INSTRUCTIONS). Mayank Tandon, Janney Montgomery Scott.

  • Mayank Tandon - Analyst

  • A very good quarter. I wanted to just first ask you about some comments that your competitors have made regarding maintaining a larger bench over time to have flexibility to [service] larger deal opportunities. How do you think about that? Should we expect any [additional] (technical difficulty) in the utilization rate as we move forward as you go after these larger opportunities?

  • Sudip Banerjee - President, Enterprise Solutions

  • This is Sudip Banerjee. If you look at our bench, we have on last few quarters always stated that we would like to keep sufficient people available for the opportunities which come in. And so our utilization is -- and our bench numbers have that fine line drawn between them. In each quarter, we look at it and then decide how much we will be requiring on the bench for the business that is to come. So at this point in time, we are comfortable with the number that we have, and we have planned adequately for any of the business that is expected in the fourth quarter.

  • Mayank Tandon - Analyst

  • Okay. And as you go after these larger deals, also, using a shift in your service mix to more higher end offerings? Does that create more lumpiness in your revenue stream? If so, how you deal with that?

  • Girish Paranjpe - President, Finance Solutions

  • Girish Paranjpe here. We have been fairly well represented in our revenues by various service lines that we have. And to that extent, we don't foresee any major skewing happening as a result of any particular deal. I think people who have had a different mix in their service lines may be expecting something along those lines.

  • Sridhar Ramasubbu - IRO

  • What happens is in Wipro, why we do a lot of recruitment from the campus; we also have [quite] a strong engine to be able to hire on a lateral basis. So whenever there are [requirements], particularly the cycle time to be able to do a lateral hiring is much, much lower than that of campus. And hence we are [only] able to [deliver] that, to be able to expand (indiscernible) when we need hiring count in a shorter time.

  • Azim Premji - Chairman

  • The point to make here, this is Azim Premji, is that our utilization going forward will improve. And that will in no way effect our requirement of [people] (indiscernible).

  • Mayank Tandon - Analyst

  • And the improvement will come from -- is that just a function of more productivity or the change in mix?

  • Sudip Banerjee - President, Enterprise Solutions

  • No, as we had a very large inflow of campus people in the last two quarters of the calendar year 2005. And it was a little beyond our capacity to absorb them in terms of actual jobs, so a lot of the extra (indiscernible) you're seeing in utilization was [finally] contributed by campus recruits.

  • Girish Paranjpe - President, Finance Solutions

  • In terms of the training requirement for the campus, is a little longer than when you do half or a lateral hiring. And that is why bench tends to be (indiscernible) in terms of [draw], which then picks up in the following quarter.

  • Mayank Tandon - Analyst

  • Sure.

  • Girish Paranjpe - President, Finance Solutions

  • And also the campus hirings are in quarter two and quarter three of the fiscal year ending March.

  • Mayank Tandon - Analyst

  • And finally, if you could just provide some more color around the margin impact next quarter -- you mentioned about the impact from the full impact of wage hikes also, so maybe cost related to the acquisitions. If you could provide some more color on that, that would be very helpful for our models. Thank you.

  • Suresh Senapaty - CFO

  • Sure. Like we said, we have given a compensation increase effective 1 November. Consequently, last quarter had the impact for -- only for two quarters -- two months, whereas the current quarter will have the full three months. And similarly, we're going to give a compensation increase effective 1 January to our on site employees, though they are much smaller percentage than what it was in the offshore.

  • [Both this] -- plus we're also seeing (indiscernible) the rupee/dollar is concerned a little bit of softening of the exchange for the current quarter as compared to the last quarter. Given these three downsides, I think the other lever that we're wanting to look at is offshore mix. We're looking at utilization improvement. And we [thought] these will continue to be in any other cost management area. I think there are multiples such -- it is -- we are looking at it to be able to sort of make sure that on an organic operating margin, we should be moving in and out of range.

  • Mayank Tandon - Analyst

  • One final question. In terms of currency impact on the operating margins, if you exclude the forex loss related to the depreciation, what was the impact quarter over quarter? That is December quarter over the September quarter, any impact on margins if you back out the heads-related item?

  • Suresh Senapaty - CFO

  • Actually if you look at the exchange, we don't have any significant difference between quarter two and quarter three on account of exchange change.

  • Mayank Tandon - Analyst

  • Okay, thank you.

  • Suresh Senapaty - CFO

  • Because we [generally] have a hedging policy which is -- with a view to be able to reduce its volatility, and that is -- helps us in ensuring that.

  • Operator

  • Julio Quinteros, Goldman Sachs.

  • Julio Quinteros - Analyst

  • Suresh, maybe it might be just a little bit helpful if you could maybe decompose the components that you discussed in terms of the operating and margin improvement. You talked about utilization. You talked about the impact of wage hikes as a negative. Can you give us maybe some basis point impact -- from a basis point perspective, can you give us a sense on what the impact was?

  • Suresh Senapaty - CFO

  • Right. If you look at the U.S. GAAP, we had a [bit up] -- 23.8% quarter two and it switched to 24.5% in quarter three. So look at some of the down [side] has been our rate reduction, like we said; while the coupon rate with the customer has not changed, it's because of the number of working days. It did reflect as a rate [addition] reduction which is about 1.3%, plus we had the impact of the offshore compensation increase. We had an impact of 1.2%. And overall utilization (indiscernible) explain because of the hiring about 0.7%.

  • So the benefit we have been able to get to [utilize] that or in fact offset much more is that on site mix change, which means the more we do offshore [it] enhances operating margin. Similarly, in quarter three, we did not have any visa fees, etc., which were there in the previous quarters.

  • We have also improve the [bulge], which means the mix of people we have in our offshore team or in our overall team, where you have lesser experience versus this high-level experience, changes the compensation structure, cost structure per person. And we have been able to improve over a period of time from 35% to 42% for the people who are less than three years' experience. That has helped gain some margin.

  • Similarly, cost management initiatives, whether it's telecom or depreciation, we got some advantages. Some rationalization on the G&A side we got some 30 basis points. Another big factor was we saw a 360 basis point expansion in the operating margin for our BPO business. That also on an overall Wipro technology and global IT business level did advantage us about 30 basis points. Apart from that, there are another 30 basis points on account of other miscellaneous things, in terms of some exchange accounting within the U.S. and the India GAAP. (indiscernible) Revenue recognition stuff. And that is how we got an expansion of about 60 basis points.

  • Julio Quinteros - Analyst

  • That's great. Maybe if we can go back to be BPO business real quickly. Can you talk about the composition of the BPO business? Obviously you are winning new work. Is the type of work that you are winning changing? Meaning are you moving away from a voice-based call center work to a transaction-based work?

  • Azim Premji - Chairman

  • Let me get (indiscernible) Kurien, our Chief Executive of Wipro BPO to take that question.

  • T.K. Kurien - CEO of BPO

  • Let me answer the question in just one second. The answer is clearly yes. All the six deals that we have won this quarter have been exactly that space, in the transaction processing space. And most of them have been in the back-office area. Basically financial accounts and procurement of the two sweet spots.

  • Julio Quinteros - Analyst

  • What is the mix? Where does the voice versus non-voice mix currently stand?

  • T.K. Kurien - CEO of BPO

  • The way we have kind of -- we have change that a little bit -- the way we look at it, because what we find is when we take over back-office work too, we have a certain [Y] component. So when you take over a process, we take over some element of Y that comes along with a process.

  • To give you an example, if you [take] over the procure to pay process, what will end up happening is that you will probably take all the suppliers. And it's very difficult to decompose that component from the overall process. But that -- so we changed a little bit in the way we look at it. But overall as we stand, it is probably -- we're pretty much in line with what we had given as some kind of an indicator a couple of quarters ago, of bringing our wide component down to 60%. We're pretty much [on] the spot right now.

  • Julio Quinteros - Analyst

  • Okay. And maybe back to Suresh. Suresh, can you give us a sense on what the -- I think you said what the exact acquisition contribution was that you expected in the fourth quarter. Can you repeat that please?

  • Suresh Senapaty - CFO

  • Yes. About the guidance of about (indiscernible) $10 million that we have given for the current quarter, we expect about $10 million to come from two acquisitions we announced. Last quarter, we had -- in fact we have recorded $1.3 million in our $473 million that is the acquisition revenue, because it was -- one of the acquisitions was [considered] effective 1 December. So you'll have three months' [contribution] this quarter.

  • And similarly, NewLogic will have its full-quarter impact from January onward in the current quarter. We expect that revenue to be about $10 million against last quarter, up about $1.3 million.

  • Julio Quinteros - Analyst

  • Okay. And what about the organic -- what would be the sequential growth rate for those acquisitions as you go forward? Any sense on how fast those are expected to grow on a Q over Q basis?

  • Suresh Senapaty - CFO

  • We would expect a decent growth, at least in line with the Company if not higher. But at least we [have to] -- it would allow us about 90 to 180 days in terms of complete integration before the growth engine gets double charged.

  • Julio Quinteros - Analyst

  • Okay great. And finally for me, as we go back and look at the announcement with the MPower acquisition, there is also some expectation that there would be some revenues coming on-line from MasterCard. Can you give us a sense on how you expect those revenues to ramp up? Is this included in the 10 million that you are referring to? Or would that be incremental?

  • Suresh Senapaty - CFO

  • No, that is also -- when we talked about an MPower acquisition, yes, the customer -- there is one large customer. And from that perspective, the revenue of 10 million includes revenue that is going to come from that customer.

  • Operator

  • Louis Miscioscia, Lehman Brothers.

  • Louis Miscioscia - Analyst

  • Thank you. I was hoping maybe if you could go into a little bit more detail, as it seems that you all and some of the other top Indian players are bidding --

  • Azim Premji - Chairman

  • Can you speak up a little bit? (multiple speakers) We're unable to hear you.

  • Louis Miscioscia - Analyst

  • Hopefully this is a little bit better. My question is as you all start to bid on some bigger projects and when TPI actually highlighted that in their recent call, how is that going to change any of the dynamics in your margin structure? Do you have to take on some of these bigger deals at lower margins for let's say the first 12 to 18 months? Or do they come in at the same margin structure? And then maybe if you could -- is it possible to give us a comment on General Motors?

  • Azim Premji - Chairman

  • You know, (indiscernible) look at larger deals, always you take a position of saying it was in the lifecycle of that project was the kind of money you make. Is it possible that in the past few months it could be a low margin and thereafter it picks up depending upon the nature of the deal? Because maybe the offshore [didn't start taking place more and more directly] or whatever [they do] talk about. So why -- whatever we have done so far, we have been held not (technical difficulty) into low margins, but by -- we cannot rule out that similar [subsidies] could [happen].

  • Louis Miscioscia - Analyst

  • Okay. Could you give me a comment on any update with GM?

  • Sudip Banerjee - President, Enterprise Solutions

  • Sudip Banerjee. As we mentioned earlier, the General Motors continues to be one of our significant customers. And at this point in time, we remain one of the bidders for the 2006 outsourcing contract. No decision has been taken as yet, and [as the minute] a decision is available from the customer side we'll be happy to share the details with you.

  • Louis Miscioscia - Analyst

  • On the same topic of getting involved in bigger deals, could you maybe mention how the pipeline has changed for you all with bigger wins coming out over the last 12 months, compared to where you are now? Maybe even the size of the pipeline of where you were 12 months ago?

  • T.K. Kurien - CEO of BPO

  • Your question was how has the pipeline changed because of the larger deals? Is that the question?

  • Louis Miscioscia - Analyst

  • Yes.

  • T.K. Kurien - CEO of BPO

  • Well, we have a pipeline today which consists of many of our existing customers who are giving us additional work. Many of our new customers who are in a traditional space and they are giving us work which is in the same range as what we used to get earlier. And certain new opportunities which have come up because there are some large outsourcing contracts [on the anvil].

  • So our overall pipeline now consists of a healthy mix of all these three segments, and that is a change from the earlier situation where most of our pipeline was based on customers who we were already doing business with and very little of the other two types of customers. Having said that, we have added in this quarter 61 new customers. So therefore, the pipeline for the coming quarters would also be -- reflect the business that we expect from these (indiscernible) customers who have just got added on.

  • Azim Premji - Chairman

  • And just to supplement that, we are addressing these large accounts not only through the larger deals we talked about in terms of application development, but we have a practice which is called total outsourcing which generally has a fairly large component of infrastructure customer services. That is, you know we have launched for (indiscernible) quarters we have a fairly decent [funnel] on which we are working on.

  • Louis Miscioscia - Analyst

  • Okay. Thank you.

  • Azim Premji - Chairman

  • But note -- (indiscernible) [always] larger deals have a (indiscernible) cycle time and they are very [binary] in nature.

  • Suresh Senapaty - CFO

  • The difference is that the (indiscernible) expansion that you have, the [final] -- the (indiscernible) is that we're seeing fraction in various other service lines (indiscernible) [extended] it is not just [stadium] or R&D but (indiscernible) [this] time. It's a big difference we're seeing in the last few quarters.

  • Operator

  • Trip Chowdhry, FTN Midwest Securities.

  • Trip Chowdhry - Analyst

  • Congratulations on a very good execution here. A question from (indiscernible). I was wondering this mPower acquisition seems to be very strategic in nature. I was wondering if you can walk us through the long-term benefits and how do you see this acquisition adding value to Wipro over the next, say, two to three years?

  • Azim Premji - Chairman

  • I certainly can. We are forming an approach where primarily we're looking at acquisitions which are in a deal size at the current level which we have done, or a deal size is slightly more than the current level which we have done. We look at them from the point of view of certain target areas where we are having some needs to grow inorganically and be able to offer services which are more unique and differentiated in that space.

  • The second area is that we are looking at areas which fill up our gaps in offerings and make us a more complete provider of desired services to our customer base. Areas in which we are able to improve our domain competence, like we have been able to do both with the VLSI acquisition which we did of NewLogic as well as the MPower acquisition which we have done, and which we did previously of AMS and previously of NerveWire.

  • Trip Chowdhry - Analyst

  • The second question I have was regarding (multiple speakers) --

  • Azim Premji - Chairman

  • The third area is also -- the fourth area is also that we are looking at some companies, particularly in the technology space, that bring us a strong portfolio of intellectual property because we think this can be a strong driver for a degree of nonlinearity in our prospective growth rate.

  • We are now looking also at acquisitions in the European market, because it is helping us get a footprint in a market particularly outside of UK and outside of Scandinavia and the Benelux countries, the countries like Germany and countries like France where we don't have a strong domestic presence at this point of time. And the organic presence of building a presence is taking significant amount of cycle time. (multiple speakers).

  • Suresh Senapaty - CFO

  • Suresh Senapaty, I just wanted to add on to what Mr. Premji said. From our perspective here, we're trying to build deep domain expertise in the payment area and acquisition of mPower is I think a great step in that direction, because it clearly bulks us up in that particular area. We have done some organic hiring and built some in-house expertise anyways, but this acquisition actually increases our footprint, deepens our domain knowledge, also gives us access to our very strong client base which we hope to leverage on a longer-term basis.

  • Trip Chowdhry - Analyst

  • Okay. Also I think in the month of February, there is a major IT conference happening in India which is NASCOM-sponsored, and I believe the President of India is also going to address the IT community. I was wondering, are you guys thinking this may be the event that the Indian government may announce incentive packages to the IT industry or any policy changes you anticipate coming out of this conference? What are your general thoughts about what the President may say?

  • Azim Premji - Chairman

  • How many more incentive policies do you want for the software industry?

  • Trip Chowdhry - Analyst

  • The more the merrier.

  • Azim Premji - Chairman

  • (multiple speakers) replace FTP now with SEZ including (indiscernible) SEZs. That's as generous a policy as you can expect to get. And I don't think there are any other policies which are of any significance which are negative to the industry.

  • Trip Chowdhry - Analyst

  • Okay. And lastly, I was thinking --

  • Azim Premji - Chairman

  • I don't think you should expect that. That's not part of the agenda of expectation of NASCOM either.

  • Trip Chowdhry - Analyst

  • Perfect, that clarifies it. And also lastly, in terms of verticals, are you seeing any increased activity in certain vertical segments, in say U.S. versus a certain vertical, say a year back? Are you seeing any shift in the activity levels among various verticals?

  • Azim Premji - Chairman

  • I think it would be useful for us to give some response in terms of how in some of the horizontal services -- we're building a stronger traction. And I would request Suresh Vaswani to cover that quickly.

  • In terms of verticals, you are seeing the fastest vertical growth rate taking place in our financial solutions business as well as in our TMTS business. Our technology and the travel area of our business. And also in our health-care business, our health-care business still is reasonably small so that large growth there is in terms of [multiplier] of little less significance.

  • We have also seen that we have increased growth rates in our product engineering services and our telecom service provider space, where we have had for two quarters running more than double-digit growth. And there is enough wind there to keep up attractive growth rates going forward. And let me just have Suresh talk a little bit about our horizontals.

  • Suresh Vaswani - President, TIS & Interops

  • Suresh Vaswani here. Speak about our differentiated IT practice and which are basically our testing services, our technology infrastructure services as well as our package solution services. We have done extremely well in these services this quarter. We had growth sequentially in testing services of 20%, in infrastructure services of 16%, and in package services of 10%.

  • We have made investments and we continue to make investments in terms of differentiating ourselves in delivering more customer value in each one of these practices. This is an example. In testing services, our solutions office focuses on building frameworks, point solutions, and two is to drive testing productivity with customers and reduce the time to market and basically deliver higher quality software.

  • In infrastructure services, recently last quarter we launched our Next Generation managed services, which is all about delivering infrastructure services to customers' business requirements, and against IT [SLAs]. And in enterprise application solutions, we are investing strongly in the solutioning area as well as in the application outsourcing area.

  • Forester has rated us last quarter as being the lead system integrator -- lead Indian global player in terms of leadership in global SAP rollouts. So these are practices which we are focusing on strongly and we're building good traction.

  • Trip Chowdhry - Analyst

  • Thank you. Congratulations on a very fabulous execution.

  • Operator

  • [Asheesh Sidani], [Guilford Securities].

  • Asheesh Sidani - Analyst

  • Good evening. Nice quarter. A majority of your payors implement their annual offshore salary revision in the April timeframe. Is there a reason why Wipro favors a different cycle?

  • Azim Premji - Chairman

  • Some of them as historical legacy in terms of how -- [when you started the cycle] and it continues on that basis. So not necessarily that everybody has follow one particular cycle.

  • Asheesh Sidani - Analyst

  • Would you --

  • Suresh Senapaty - CFO

  • We also like to differentiate.

  • Asheesh Sidani - Analyst

  • But this doesn't have any impact on your recruitment programs, does it?

  • Azim Premji - Chairman

  • No. (multiple speakers)

  • Asheesh Sidani - Analyst

  • Is there any plan to perhaps revisit the timing, or nothing at this time?

  • Azim Premji - Chairman

  • (multiple speakers) dynamic, in the sense that nothing can be said for sure that it will never change, but it's a constant process and we keep revisiting all the time. For example, [most] of November is when we gave the compensation increase. The year before we gave it on the cost of (indiscernible). So that is a continuous process where we keep changing the (indiscernible) or the postponement depending upon what the most market conditions are. So what is important is not the cycle that anybody else follows, but what is important is depending upon our requirement, what is required good for us to be positioning ourselves in the market.

  • Asheesh Sidani - Analyst

  • Right. And question on your India and Asia-Pac business. It appears that revenue might have declined quarter on quarter, which was not the case last year. Is there any explanation that we should be aware of?

  • Azim Premji - Chairman

  • If you look at the revenues overall, there has been a growth [of over] 17%. And if you look at the service part of the revenue, it has grown about 27% YOY. And because the services component (indiscernible) is about 58% because that is much more differentiating service that we offer to the customer. We typically use products as a Trojan horse to be able to get more and more service, and more and more high-level of share of the wallet in the customers. And that is always growing and that delivers betters margin. That delivers bigger ROI. So there's a constant focused to be able to grow that service business, which we have been doing.

  • Unidentified Company Representative

  • This is [Lang]. Just to supplement, what did happen last year, typically quarter three is a relatively weak quarter. Quarter two is a big spike (indiscernible) in the IT business, does spike in the quarter two of the fiscal. Last year, however, in the third fiscal quarter, there were a few very large telecom deals that we won that [we did not specifically plan]. But otherwise, as a trend, you will find the quarter two and quarter four of the fiscal are spike quarters for Indian IT businesses.

  • Asheesh Sidani - Analyst

  • Okay. Very helpful. Finally, can you (multiple speakers)

  • Azim Premji - Chairman

  • (multiple speakers) We have a very solid growth path there.

  • Asheesh Sidani - Analyst

  • Good. Can you cite any situations where Wipro might not have won a contract, but nevertheless deflated pricing for the competition? Specifically the type and size of work and any kind of price drop involved would be useful.

  • Azim Premji - Chairman

  • Which part of the -- are you talking [of] global IT business, Indian IT business? Which part of the business are you talking about?

  • Asheesh Sidani - Analyst

  • Global IT.

  • Azim Premji - Chairman

  • (multiple speakers) The objective is not to get the order but primarily reduce the price to the competition?

  • Asheesh Sidani - Analyst

  • Not necessarily. No. Just that if that is the outcome, some anecdotal evidence of that would be helpful -- where it might be occurring in the global IT business.

  • T.K. Kurien - CEO of BPO

  • (multiple speakers) The very fact that you are finding the large multinational scaling up very strongly on India and similar low-cost locations, resourcing bases is a verification of the fact that they are finding that without having those advantages they cannot compete.

  • So I think the anecdotal evidence is -- the way that they're scaling up. Or they're certainly scaling up, I should say. I don't think we need to give any isolated examples of what role we have played in trying to accelerate the process. I think we just believe that we have a very strong global delivery model, which has been inherent to our strategy and many of the multinationals now trying to mimic us on that strategy.

  • Asheesh Sidani - Analyst

  • Thank you very much, good luck.

  • Operator

  • [Nick Dillon], HSBC.

  • Nick Dillon - Analyst

  • I just wanted to ask a question. How much further can you get your mix shift to move towards offshore services to protect the margin? And I guess the genesis of the question is that if I look at the acquisitions you have bought that are potentially at lower margins that consolidate next quarter, and the wage hikes that are coming through, I'm just wondering, can we -- is it possible for us to keep flat margins or are we going to have to look for lower margins as we go forward?

  • Azim Premji - Chairman

  • If you look at our offshore on site mix, we have shown improvement over the past few quarters where it -- if your question is is there [scope] for us to improve it further, of course there is -- doubt exists [for] -- because that has been in the past very well done, even better than what we're currently doing.

  • But it is always the case that whenever you're in the new practices, whenever you're getting the new customers, it tends to start with a high-level of on site business. And typically when the [growths] are good, even if you're driving more and more offshore business, there'll be more new on site business. So [there's good] news that you are getting new businesses, getting new good traction, etc. The second point was with respect to --? What was your second question?

  • Nick Dillon - Analyst

  • Just in terms of (indiscernible), just kind of work out how -- if it was possible that we could see margins flat going forward given the acquisitions that consolidate and the wage hikes, because if I'm correct, roughly 30% of your cost of sales is in on-site wages which just went up 3 to 5%, so that looks like about 100 basis points hit roughly on margins going forward. And I am just trying to work out how -- rather than that come immediately through the EBIT line, how we can see EBIT sustained in [earnings stream] that mix shift offshore was the easiest lever.

  • Azim Premji - Chairman

  • Your question was with respect to the acquisition. Now, if you look at the acquisition we have already started giving separate numbers for that -- those acquisitions at least for two to four quarters. We're seeing that $1.3 million that we have shown having come in already last quarter. It has in the margin which is -- and been superior to the organic margins that we have.

  • And in the current quarter, we painted a NewLogic -- one will have perhaps will be marginal loss, and then thereafter we think the margin will inch up. Whereas the -- another acquisition which we did end of -- [the second and last quarter] really continued to have the [best] operating profit. So net net, our objective is to be confident on the acquisition and show the separate profitability for a finite time.

  • Nick Dillon - Analyst

  • Okay. So net net acquisitions margin, there's no impact roughly. And I guess just in terms of the wage hikes that you have given, we should expect that you can sustain your margins in part due to the mix shift offshore, but ultimately we should expect margins to decline a bit as we move through the next year?

  • Azim Premji - Chairman

  • As far as acquisitions are concerned, (indiscernible) margin dilutive in a medium to long-term. It could be for a shorter term because you have also the acquisition process, you go through intangible accounting [for], and it takes two quarters for it to be nullified in terms of the synergy benefit that one gets out of those acquisitions. So consequently, they could be -- they will be in the shorter term margin dilutive.

  • The one that we consolidated last quarter was not, but does not mean all the deals will be of the nature. Because [it means that we did that] -- we'll do it completely offshore-centric and it has a (indiscernible) unique feature and the result of which it was not margin dilutive.

  • Nick Dillon - Analyst

  • Sorry, I might have misled you -- (multiple speakers).

  • Azim Premji - Chairman

  • As far as the (multiple speakers) on site compensation increase is concerned, yes, (multiple speakers) it [involved 30%] of our revenue. The compensation increases would be between 3 to 5%. And the impact of that will be adverse, but we -- like we stated, there will be other levers in terms of improvement and utilization, change in the mix and other [productive] improvements that we could achieve to be able to mitigate significant component. And therefore we think that overall, our operating margins will be in a narrow range.

  • Nick Dillon - Analyst

  • So you expect operating margins to actually remain about flat?

  • Azim Premji - Chairman

  • In the organic segment, because the organic one would be shown separately and --

  • Nick Dillon - Analyst

  • They're separately disclosed. That is perfect. Okay. Thank you.

  • Azim Premji - Chairman

  • But I would also request that our investors, in addition to looking at percentage operating margins, also look at profit gross quarter to quarter and profit gross year to year, because that is also an important parameter in terms of how we are growing and how we're performing.

  • Nick Dillon - Analyst

  • Yes. Thank you.

  • Operator

  • [Moshe Katri], S.G. Cowen.

  • Moshe Katri - Analyst

  • Thanks. Good quarter guys. My first question is for Mr. Premji. You have -- there's been a couple of initiatives internally kind of reorganizing the structure -- maybe I think what you've also done, you have kind of flattened the pyramid in terms of -- on the management side of the business. And you have done this I would say pretty efficiently during the past three to six months. Can you talk about some of the results that you have been seeing since you implemented those changes? And then, what does it actually mean to the amount of time that you are spending on the management side of the business as well?

  • Azim Premji - Chairman

  • To answer your last question first, my workload has [not] increased in the past six months, so one has been able to reallocate priorities to focus on where the leverage to the stakeholder to the maximum vis-a-vis my time. So that seems to have worked out well.

  • I think in terms of what has changed or what has improved, I think you have to make that judgment based on the results which we have delivered -- results which we delivered in Q2, results which we delivered Q3 and guidance which we have given for Q4 financial year. I think we are in a higher growth mindset as a Company, and I think we are investing more for the future. And we have certainly become more aggressive in acquisitions in terms of using them as major strategy cleavers for future growth, in very summary terms.

  • Moshe Katri - Analyst

  • And then in that respect, talking about investments, the question is for Suresh, during the past few quarters, you have been investing in kind of restructuring Spectramind and the BPO business in general. Are we done in that -- is the investment phase kind of complete at this point? And has there been any impact on profitability from that restructuring this quarter as well? And is there any way to kind specify or maybe quantify? Thanks.

  • Azim Premji - Chairman

  • Let me request Kurian to answer that question. He is our chief executive our BPO business.

  • T.K. Kurien - CEO of BPO

  • Let me answer that question in two forms. One is on the operations side, I get the restructuring is kind of done more or less from a structure perspective. We still have a little bit of operational efficiency we can pull out, which we are working on. Like always, there's opportunity in everything that we see on the operation side. I think the major investment now would come on the front end because we have to accelerate growth ahead of competition. And that's going to be the focus the next couple of quarters.

  • Moshe Katri - Analyst

  • So you have a couple of quarters to go, and at this point it's not operating at -- where it is in terms of productivity, right?

  • T.K. Kurien - CEO of BPO

  • I'm sorry?

  • Moshe Katri - Analyst

  • Productivity wise, it is not -- it is still not at the level where you want it to be?

  • T.K. Kurien - CEO of BPO

  • Absolutely not.

  • Azim Premji - Chairman

  • No part of our business is at a level of productivity where we want it eventually to be in terms of its potential. That is the shot on that. BPO maybe a little more extreme example, but that applies right across the Company.

  • Moshe Katri - Analyst

  • Great. Thank you very much, nice quarter.

  • Operator

  • (OPERATOR INSTRUCTIONS). Julio Quinteros, Goldman Sachs.

  • Julio Quinteros - Analyst

  • This question is actually a follow-up to Suresh. When you were making comments about the composition of the pipeline, it sounded like you said that there were some changes. Can you just review those changes? And more important, I guess, I want to make sure that you didn't say that all of your -- that the work or the compensation was changing towards bigger accounts. Maybe you can rehash those comments, please?

  • Suresh Vaswani - President, TIS & Interops

  • The comments were made by somebody else, but let me try to recap them.

  • Julio Quinteros - Analyst

  • No I am sorry. I meant -- Banerjee was actually the guy who made the comments.

  • Suresh Vaswani - President, TIS & Interops

  • Exactly. So why don't I ask him to repeat them?

  • Sudip Banerjee - President, Enterprise Solutions

  • So what I said was that there are three segments of our customer profile that we have now, as opposed to what we used to have in the past. And (indiscernible) now that earlier the [maximum] pipeline -- most of the pipeline used to be from our existing client base. And I said the two additional features of today's pipeline are a number of large deals which have come into the market where we are the leaders in most of those instances.

  • And also, a large number of additional new customers whom we acquired in the recent past. As we reported in the last quarter, (indiscernible) acquired 65 new customers. And the customer acquisition phase is the starting point. And then for the next few quarters after that is the time when you actually ramp up that customer, so your pipeline is generated from the customers we recently acquired. So that is the real difference in the composition. So there's three separate components of the composition of the pipeline.

  • Julio Quinteros - Analyst

  • Okay. Perfect. And one thing I want to just clarify, as far as organic quarter over quarter revenue growth is concerned, coming out of December and into March, I think you are suggesting 8% total, 6% is organic, 2% is acquisition related. Is that correct?

  • Azim Premji - Chairman

  • That's right.

  • Julio Quinteros - Analyst

  • Okay. How does that compare versus December? Just want to make sure I have the exact numbers correct.

  • Azim Premji - Chairman

  • December quarter, the acquisition revenue was $1.3 million.

  • Julio Quinteros - Analyst

  • So immaterial relative --

  • Suresh Senapaty - CFO

  • (multiple speakers) December quarter comparable growth rate was 9.9%. [Comparable] will be 6%.

  • Julio Quinteros - Analyst

  • I guess that's my -- I guess that is sort of the question I'm trying to hone in on is, you're coming off of a very good quarter as far as organic growth is concerned. The trends all seem to point in the right direction as far as volume, headcount, and the stability of the industry. Yet they guidance is obviously a little bit lower versus what you just put together on an organic basis. Why the hesitance to give guidance that might be a little higher relative to the current performance? I don't mean to put you guys on the spot.

  • Azim Premji - Chairman

  • That's a very (indiscernible) [choice] question in terms of -- to answer. If we have a good quarter and (indiscernible) after [expecting] much more of the [following] quarter.

  • Julio Quinteros - Analyst

  • We're always going to expect more.

  • Azim Premji - Chairman

  • Yes. I think we have given a guidance which we think is reasonable. Our quest is always to see whether we can do better than the guidance.

  • Julio Quinteros - Analyst

  • Understood.

  • Azim Premji - Chairman

  • I don't think you should take that for granted in terms of your model. In terms of having a reasonable approach, use this in terms of your model. We'll keep working to see how we can improve on that.

  • Julio Quinteros - Analyst

  • And final, just related to that, is there something in the nature of the work that you guys do on the testing and R&D side, and telecom service provider side that might lend itself to having a little more volatility and less visibility? I think it's what we have seen in the past versus kind of the traditional ops maintenance and development work.

  • Azim Premji - Chairman

  • Let [Lushman] Rao, who is our Chief Operating Officer, address the question of volatility in our telecom business, because telecom business is a significant part of our core engineering services. I think it's about 55 or 60%. Approximately that much.

  • A.L. Rao - COO

  • In our (indiscernible) [has way] -- worked in the telecom and on telecom business segments. While (technical difficulty) [directed] the entire business into one [product] engineering solutions [business]. We had of course things enter the market three years back. [Quite varied] the (indiscernible) well [in terms of equipment] vendors in the last couple of years. Most of that restructuring (indiscernible) [recharging] of their products. We have been able to get a good chunk of that [new] (indiscernible). But at that point of time, we were not able to grow our services part of business.

  • It is also -- [and if you see] while our equipment side of the business in telecom has got matured. We have gotten increasingly good traction in the (indiscernible) [server] space. So why am I telling these things that in the telecom technology (indiscernible)? But because of the wide portfolio of competencies and services we offer in telecom, whatever [still guides] the average [effect] and then still grow.

  • At one point in time, our wires business has [grown]. At another point in time, our broadband business has grown. And the last one year, the major growth came from our wireless competence and [mobile tech]. Today, our growth is coming, again, surprisingly from the optical space [we got a good bid]. As [it is] in the [telephone] space, particularly in the broadband solutions, IP [able] services, as there has been no third generation work that is going on, whether it is the [sort of new] no obligations or with respect to data or IP, [ROS or IP].

  • So there has been some amount of [term] in different domains of the telecom business. But of all our -- because we address almost every single segment in the telecom domain, we are able to consistently attain our growth objective.

  • Julio Quinteros - Analyst

  • Okay. Thank you very much, guys.

  • Operator

  • [Anthony Miller], [Arit Research].

  • Anthony Miller - Analyst

  • Thanks again, gentlemen. I would just like to understand a little bit about possible constraints on the supply-side in your business. Firstly, in terms of what skills are currently in short supply and what actions you are taking to overcome those, what the implication is for example on what you're having to pay for those skills? And secondly, taking a slightly longer-term view, whether you have any sense of whether there's going to be a tightening of supply on graduate recruits, say in the next sort of recruitment cycle. Thanks.

  • Girish Paranjpe - President, Finance Solutions

  • This is Girish Paranjpe. Let me attempt to answer your questions. The bulk of the constraint on the supply-side is in terms of experienced people somewhere in the range of 6 to 10 years' experience. And that is the kind of experience profile that almost everybody is looking for. And it's only the more successful companies that have a higher brand value in the employer market. They're able to get the right sort of people.

  • But if you ask me is there a concern today at the entry-level in terms of the engineering graduates coming out of school? I don't see that as a constraint. Even in terms of the quality of recruits that we get, again being among the top employers gives us a chance to get the best candidates. Plus all the investment that we made in the last several years in terms of training people and orienting them to work into our model helps us to mold people that we hire.

  • So even going -- looking forward, let's say, to the hiring season of 2006 or 2007, at least we are comfortable we will get access to the best talent that we can get.

  • Anthony Miller - Analyst

  • And do you think that will be at similar starting salaries to the current year?

  • Girish Paranjpe - President, Finance Solutions

  • There is some inflation increase that is bound to happen, but I don't think it will be anything that will certainly impact our business model.

  • Anthony Miller - Analyst

  • Thanks very much.

  • Azim Premji - Chairman

  • Any others report from the queue?

  • Operator

  • We have two more people in queue.

  • Azim Premji - Chairman

  • We'll take those two questions -- the last two questions of [these people] and then we'll close the call. We'll take the other two [questions].

  • Operator

  • Mayank Tandon, Janney Montgomery Scott.

  • Mayank Tandon - Analyst

  • Thank you. I just wanted to follow up quickly. Suresh, you had talked about the pricing. If you could just provide some more color on that in terms of was the pricing decline purely a function of mix? Or also, I believe you said there were fewer billing days which may have impacted the number, too.

  • Suresh Senapaty - CFO

  • That is right. It is clearly because of the number of days overseas, number of working days being lower overseas that has impacted in [sales].

  • Azim Premji - Chairman

  • On a [secular] basis, there's no drop in prices.

  • Mayank Tandon - Analyst

  • And how many days in the quarter versus last quarter in terms of on site and offshore?

  • Suresh Senapaty - CFO

  • Offshore pricing has generally been flat. And so as far as on-site is concerned, the reduction is primarily reported because of the number of working days being lower.

  • Mayank Tandon - Analyst

  • Okay. And do you have the number of days that are fewer in this quarter versus last quarter?

  • Suresh Senapaty - CFO

  • Yes, it is about 1.1 day per month, which was in Q3, [will] be the reduced number compared to quarter two.

  • Mayank Tandon - Analyst

  • Okay. And finally, just -- I wanted to get your take on pricing trends going forward. Some of your competition has talked about 3 to 4% increases on newer deals. Are you seeing that too in the marketplace? And when does that begin to actually help your P&L down the road?

  • Suresh Senapaty - CFO

  • Yes, actually we discussed that in the morning session. But just to recap, we said that generally we have been doing well so far as [adequately priced] products are concerned. Some of the price increases that we have got in the last six months and some of the (technical difficulty) (indiscernible) practices have been fairly decent and encouraging. The new customers are coming at a better rate, plus the change in the mix. So we think it's more like the pricing [improves] going forward (indiscernible) [doing] more stable with a little bit of positive [buying].

  • Mayank Tandon - Analyst

  • Thank you. Congratulations again.

  • Operator

  • Our final question comes from Trip Chowdhry, FTN Midwest Securities.

  • Trip Chowdhry - Analyst

  • Thank you. A quick question. Your testing business was very, very strong year-over-year basis. I was wondering if you can provide some color in terms of the split in testing. Is it [a custom] application testing which is growing? Or is it packaged software implementation testing which is growing? Or [maybe] you may have expanded yourself into maybe security testing? Any color on that would be really helpful. Thank you again.

  • Suresh Vaswani - President, TIS & Interops

  • This is Suresh Vaswani here. I think there's a growth right across all our domains insofar as testing is concerned. Traditionally, we been very strong on the engineering side, on the product engineering side, but over the last one or two years we have been focusing extremely strongly on the enterprise side of testing as well. So we're beginning to see extremely strong growth rates on our enterprise side of the business insofar as testing is concerned.

  • On testing, just give you a little bit of a backdrop, we have invested strongly. We've invested strongly in terms of building frameworks and point solutions as a part of our solutions office, and that gives us a very strong differentiator in the marketplace.

  • Trip Chowdhry - Analyst

  • Thank you.

  • Azim Premji - Chairman

  • Okay [that will] conclude the call. I will use our closing comments. Hello?

  • Operator

  • We have no one else in queue.

  • Azim Premji - Chairman

  • Okay, thank you. Thank you very much for your participation. The IR team (indiscernible) will be available off-line to answer any further questions you may have. The digital replay will be made available from 12 noon [today] at the dial-in numbers communicated in our press release (indiscernible). Thank you and good luck.

  • Operator

  • Thank you. Ladies and gentlemen, this conference will be available for replay after 9 AM Pacific time today through February 1st at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 813698. International participants may dial 320-365-3844. (Repeats Numbers.) That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.