Wipro Ltd (WIT) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Wipro earnings 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, this conference is being recorded and I would now like to turn the conference over to Rajesh, please go ahead.

Ladies and gentlemen, a very good morning to you in America and a good day to you all in the other parts of the world. My name is Rajesh Ramaiah and I am based in Bangalore. Along with Sridhar in New Jersey and Jatin in Bangalore, we handle the Investor interface for Wipro. We thank you for your interest in Wipro. It is with great pleasure I welcome you to Wipro's teleconference to post our results for the second fiscal quarter ended September 30, 2006.

We have with us Mr. Azim Premji, Chairman and Managing Director, Mr. Suresh Senapaty, Chief Financial Officer who will comment on the results of Wipro for the quarter ended September 30, 2006. They are joined by other members of the Company's senior management, who will answer questions which you may have. The conference call will be archived and the transcripts will be available in our website wipro.com.

Before Mr. Premji starts his address, let me draw your attention to the fact that during the call we might make certain forward-looking statement within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the management's current expectations and are associated with uncertainty and risks which could cause the actual results to differ materially from those expected. These uncertainties and risk factors have been explained in detail in our filings with the Securities Exchange Commission of the U.S.A. Wipro does not undertake any obligation to update forward looking statements to reflect events or circumstances after the date of filing thereof.

Ladies and gentlemen, Mr. Azim Premji, Chairman Wipro.

Good morning to all of you. By now you would have seen results for the quarter ended September 30, 2006. While the management team will be happy to answer your queries, I would like to take some time before that to share some thoughts on our performance and prospects.

For the quarter ended September 30, 2006 Wipro Limited recorded revenue growth of 41% and net income growth of 48%. We are seeing a great momentum in all our businesses. Revenues from our global IT Services, at $589m for the quarter, were well ahead of our guidance of $577m, primarily driven by strong growth in our differentiated services and focus verticals.

Financial Solutions and Testing Services have delivered 50% year-on-year growth for the last eight quarters. In the quarter we had double digit sequential growth from Enterprise Application Services, Technology Infrastructure Services, Retail and TMTS verticals.

We added 54 new clients, of which 11 were global 500 or Fortune 1000 clients.

Our Business Process Outsourcing business delivered a strong revenue growth this quarter and yet again expanded margins. Over the last couple of quarters, our BPO business has demonstrated consistent improvements in profitability and significant customer wins reinforcing our confidence that it is moving in the right direction of delivering industry leading growth rates.

Our India, Middle East and Asia Pac IT business recorded strong year-on-year revenue growth of 28% and profit before interest and tax was 30%.

Wipro Consumer Care and Lighting business also grew well with 38% year-on-year revenue growth and 29% year-on-year profit growth.

On acquisitions we are making good progress on the integration of each of the acquired entities. The growth rate of revenues in our acquisition is significantly ahead of the Company growth rate. Acquisitions in aggregate turned around to deliver a marginal profit during the quarter as compared to a loss in the previous quarter.

Overall, we believe that the demand environment is robust and we have the right strategy in place. The investments we made during the last 12 months are beginning to deliver value. As we move into the second half of the year, we see good prospects ahead.

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

A very good morning to all of you in the United States and Europe and good evening to all of you in Asia. Let me commence by highlighting the fact that from the beginning of the year our U.S. GAAP financial statements has been translated into dollars at the noon buying rate in New York City on September 29, 2006 as verified by the Federal Reserve Bank of New York, which is $1 is equal to INR45.95. I repeat, $1 is equal to INR45.95.

Accordingly, the news of our Global IT Services segment that was $588.9m or in rupees terms, INR27.17b, appears in our earnings release as $591m based on the convenient translation. Global IT Services revenue for the quarter of $588.9m included $539.4m of IT Services and $49.5m of BPO services. The sequential revenue growth of 9.2% in Global IT Services segment was comprised of 9.3% growth in revenue of IT Services and 8.5% growth in revenue of BPO services. Sequential revenue growth of 9.3% in IT Services was primarily driven by volume growth of 7.9% and blended realization improvement of 0.9%. Revenue growth of Global IT Services segment, excluding revenues from acquisitions concluded during the quarter, was 6.9% sequentially.

On foreign exchange front, our realized rate for the quarter was INR46.12 versus the rate of INR45.43 realized for the quarter ended June 30, 2006.

As at period end, after assigning to the asset on the balance sheet, we have about $377m of hedges at the rate between INR45.10 and INR46.70.

During the quarter, we took non cash charge of Restricted Stock Units and the expected wages wage hike in September for some of our employees, which impacted our margins by approximately 100 basis points. The improvement in our employee mix offset a significant portion of the margin dilution due to wage hikes and RSU charge. We had an improvement in the margin for our BPO business by 230 basis points sequentially driven by higher productivity and improved utilization.

Our on site mix increased by 1.5% on account of acquisition revenue and initial ramp up for some of the large projects commenced during the quarter. For the quarter ending December 2006, we expect volume led growth with price realizations being impacted by lower billing days.

In line with our plans, we will offset offshore wage hikes for employees not covered in quarter two. The combined impact of these wage hikes for quarter three of '06/'07 will be around 200 basis points. We'll endeavor to offset a significant portion of the impact to factors like improved utilization and employee mix, better profitability on acquisitions, leverage on SG&A and expect the margin to be in a narrow range, excluding the impact of exchange rate fluctuation.

We will be glad to take questions now. Do we have an Operator?

Yes, would you like to take questions?

Yes, please.

Thank you. [OPERATOR INSTRUCTIONS]. We do have a question from the line of Moshe Katri with SG Cohen.

Yes, thanks. Suresh, can you repeat some of the factors that benefited your impacted margins? I'm curious in terms of the -- what currency, whether there was an impact from currency, the dilution from acquisitions, pricing and then wage hikes. Maybe you can kind of give us a feel in terms of the impact or the benefit in terms of the basis points for the quarter.

Right. If you look at the quarter one, margins were 24.2%, this is for the IT Services as well as BPO combined and we ended the current quarter, that is quarter two, at 24.5%. So just to give you a rough outline of what is minuses are what is pluses there, we has additional salary increase of about 1%, we had a utilization costs which impacted about 0.6% and we had a dilution on account of acquisitions of about 0.6%.

Net debt it was about 2.3% net minus so the pluses are there. The positive improvement of about 0.8%, these are expenses of 0.4% but expansion in BPO has contributed to about 0.5% of the quarter two level. Market realizations about 0.2% and the other 0.2% which comes through a total positive impact of 2.5%, so net debt there is a margin expansion but it was a realistic one under U.S. GAAP from 24.2 to 24.5%.

Understood. And, can you also comment, maybe Mr. Premji can do that, comment on the sequential increases and turnover rates during the past few quarters? I think last -- for this quarter I think you are at 18%, which is relatively high. What are we doing to bring down those levels?

Yes, we have a big move on U.S. GAAP and we are going to respond to that.

Yes, hi, this is Pratik here. The attrition rate is 17.5% which has been rounded off to 18%. In the previous quarter it was at 17.1%, so we have not seen any noticeable change from what we experienced in the last quarter. As Suresh shared with you all, we had our voluntary grants kicking in, in previous quarter and we also had the salary increase on part of employees which was effective from September, which covered almost two-thirds of our employees. The balance are going to get covered in November. We have already seen the early signs of decline from the time we affected some of these changes and we are hoping with all these actions which we are taking we should be able to see a southward trend from this quarter onwards in attrition.

If you look at your average wages or average comp are you comparable to the -- some of your other peers? Are you 100% comparable, are you 70% are you -- are we still catching -- are you still kind of playing catch-up at this point?

It depends on who you have in mind but people won't be at the benchmark again, so we are quite comfortable.

Actually Pratik, we have given up from September, we are, the one which are local [inaudible] from start of November we will match very well November 1.

Okay, thanks.

Thank you. We do have a question from the line of Trip Chowdhry with Global Equities Research. Please go ahead.

Thank you. Again, congratulations on very good acquisition -- very good execution here. Two questions, the first is on the acquisition front. You have made some, I would say, some small sized acquisitions. Do you think the acquisition size may increase moving forward?

Yes, like previous one Trip, we have talked about acquisition strategy in terms of a single [quote] and that does reflect any kind of the size except that we have to have a minimum size because otherwise we want to acquire it. From that perspective it so happens that probably opportunities that we look at and therefore the targets that we've found are of a smaller nature, size. But given the successful acquisitions that we have done and the kind of experience we have gained, particularly in the last nine months, it gives us the confidence that we can go now for larger size and size is not a constraint for us. It is the strategic value which is important for us and the portfolio is a considerable and financial strength we would have and size will not hold us back.

Very good. On the BPO front, you executed very, very well. I was wondering if anybody in the BPO division can give some insight in like how does your BPO division, I think it's the [spectro mine] division basically, compare with such like IBM? Like both BPO units seems to be executing very well but I'm trying to get a sense like what are the key drivers then and what are the key reasons the margin expansion occurred?

Okay, this is T.K. Kurien, let me answer that. On the BPO front there are two things that we did. One, if you go back five quarters ago, when our margin was running at around 9%, we clearly have -- our top line was primarily quite separate and we were basically selling registered customers. So if people wanted content solutions we were selling content solutions and if they wanted email solutions we were selling them email solutions.

Over the past year we made a transition as far as the top line is concerned. We have moved the mix more into transaction processing, so today we work with the inter packet services area, we work in the back office area. And also what we have done is that we are selling integrated end-to-end solutions back to customers and when you sell integrated solutions back to customers then what happens is obviously what you see is that the part of the customer to unbundle the sales and negotiate price goes up considerably and that helps us in terms of getting better realization. That's from the top line.

On the operational front, primarily it's been driven by a couple of factors. Number one, it's higher utilization and you can see that in the numbers and, second, is the fact that we have kept our cost structures, excepting SG&A, pretty much under control.

Very good.

That's really what has driven it.

I'm sorry what I was wondering is, with the upcoming release of Microsoft Vista, it is my understanding like you have worked very closely with Microsoft in a way to also help them develop Vista, the driver development and other stuff. I was wondering, at the very macro big picture, do you see your business to face -- to have some tail wind because of some migration that may occur on Vista from current systems or some infrastructure management business may see some pick up because of this platform change that may be occurring within, say, the next six to eight months?

Well, let me pass that question on to Ramesh Emani who can answer that.

Let me just restate the question in order to make I have understood it clearly. You are talking about the Vista migration opportunities, right?

Yes.

Right, okay. So Vista migration opportunities can come from two aspects. One is from a desktop migration which we typically run through our PA practice, our IT infrastructure practice. We have done a similar thing when Microsoft has launched their XP program and they have launched their Exchange in 2000. We have done these kind of practices before and we'll be able to replicate the same once again.

The second factor of Vista migration comes to the application software and for our specialized software so that they will run well in the Vista area. We are already one of the satisfied Vista migration partners of Microsoft. If you go to Microsoft website you will find Wipro as one of the operating partners. We are working with various software providers in terms of how we can support their packages to Vista and to ensure that they will work. So we are working carefully with our testing practice and with our holding practice so that we can slide this full opportunity. I hope I understood this.

Yes, it was very good. Again, congratulations on a phenomenal execution.

Thank you, Trip.

Thank you. We have a question from the line of Joseph Foresi with Janney Montgomery Scott. Please go ahead.

Hi, gentlemen, and again congratulations on some excellent execution here. I was just wondering if I could first get some clarity on some numbers here. I think it was a $6m gain in operational -- in other gain, underneath operational expenses. Can you just maybe break that down for me? Is that a hedge or where is that $6m coming from?

[inaudible] here. This program is working to promote the receivables on certain projects and since they cannot be different they are the enforcement of certain new projects they cannot be taken on a top line as a GAAP. Similarly they do not relate to one particular set-up costs relating to another. [But they still represent] is a part of processing.

Okay. Just sort of switching gears, I know you guys explained on your earlier call sort of what you are seeing in the pricing environment. Maybe you could just give us your own thoughts on why pricing is going up and how that processes is being accepted by the clients?

Hi, Girish, here. I want to answer this in two parts. One is how do we see these kind of bill rates go up and how is it reflected in the realization and these two things are slightly different. The bill rates are --that we have with our clients have become a revision upwards both for existing clients where we've been able to do some negotiated upwards. It will be a modest one, but we've been able to do back on a case to case basis as contacts are due fall renewal. Also new clients are compensated by the rates than what have been in the present rates.

Now, all of [participants] are automatically here configured into the realizational report in our financials and the reason why it doesn't get declared there automatically is because the bill rates that we agree with our clients are by skill, by experience, by sometimes even by geography and the mix as it translates into reality can be slightly different and that's why you may not see a one-to-one comparison between our bill rates and more towards our realization deals. But, having said that, the overall environment is positive from our clients side about how we model price increases, as far as they can see. As long as we can demonstrate to them that we are not just going for price increase without any doing any corresponding proactively gains for them.

And just sort of maybe switching gears here, obviously you did a larger percentage of onside work this quarter. Can we expect -- is that, should we, for modeling purposes, do we expect that to continue next quarter or should we see maybe a switch more to the offshore work or is that ramp up on a new project?

Well, it's Sudip here. Let me just go back to the previous point that you were making. I think three or four things are driving the case for an increase. One is the superior execution that we have demonstrated over the last few months and that is giving us the confidence to be able to go back and ask our customers for giving us an increase in the existing contracts.

The second is that there is a shortage that we are seeing all around in the market place for key talent, particularly at the specialized service areas whether it is the Enterprise Application space or the Infrastructure Management space or the Data Routing space etc.

The third which is driving the case for the relatively better pricing, is the fact that in the local markets the costs of such talent is increasing even faster. So from the customers' point of view it's still a) that we have the skills b) the increase is still modest compared to what they would have to pay in the local market and c) they are seeing that there is a significant improvement in the execution by people working out of here in this offshore/onsite model and that's why they are willing to have this conversation with us and that is why over the course of the previous quarter very well we've been able to come up with the renewals which were due. In the majority of the cases we've been able to get modest increases.

I think you asked a second question about onsite/offshore ratio and whether we should expect the onside ratio to continue to climb. And our view is that there will not be any significant increase. The reason why we have higher onshore this time is because of the acquisitions that we made which you are necessarily to do with more people in the service markets.

The way we work out is that onsite/offshore increase as a mix I think we can we can avail to you like the [robotical] driver. But when you look at the mix of growth in the sense that Wipro's old practices have a higher run time intensity and that grows faster, it definitely takes overall onsite up. But if you ask us each practice is vertical whether the offshore/onsite has improved, yes, it has improved in favor of offshore but when you look at the mix of business, in accumulative terms, it has gone up.

Great, thanks for both those explanations. Just one last question and I don't know if you guys have the numbers available but I was curious if you could give me a rough idea of what the attrition rates are at the middle management level and maybe some rough idea of what the average salary currently is at that level.

No, we have not shared the attrition regulatory level but like Pratik explained just before two questions in terms of our overall approach to attrition and how we have dealt with it and how we are feeling because of the comp increase we gave in September and what we are planning to give in November when it would have a significant impact versus what we achieved last quarter.

And just to, without sharing the greater point, we are fairly comfortable in terms of what attritions we have seen in the middle management level.

Great. Thank you guys and nice execution this quarter.

Thank you.

Thank you. We also have a question from the line of Bryan Keane with Prudential. Please go ahead.

Yes, hi. I think you guys gave some numbers but I just couldn't get it. For the amount of acquisitions, how much revenue did acquisitions contribute in the quarter?

It was about.

It was around $30m.

In Rupees terms it is INR1324m.

And it was 13, one three in U.S. or it's 30?

Three zero.

Three zero.

It's an odd number but the actual number for the earlier segment was INR1324m for the quarter.

Right. And did all the acquisitions that you guys have made over the last six to 12 months, are all those closed or are there still a few out there that there are closed or need to close? Because I guess I'm thinking about next quarter, how much new acquisition revenue goes in there?

Well, so far, it is whatever announcements we have done in the IT segment, because all have been consummated by September 28 and it has been reflected in the quarter two results. Therefore for the June quarter and consequently the guidance that we are giving, which is $633m, which is about 7.5% sequential, will be on an apples to apples comparison for quarter two versus quarter three. And if we were to announce any more acquisition it will be an add on.

Right and if the -- if you just looked I guess sequentially, the growth was almost 10.7% in the IT Services space now with that guidance it’s around 7% sequentially. Is that mostly the difference there is the difference in acquisitions, the ramp up obviously now that you have mostly acquisitions in the numbers that you'll see a little bit of a drop there or is there also some seasonality why there's a slight down tick from that, that almost 11 number to seven?

Well, there are two things there, one was last quarter the dollar sequential growth was 9.3%. This quarter there is an impact of the lower number of working days and that has been factored into the guidance as we have said.

Well you see that in the last quarter we had given a guidance of about 10% and this quarter the 7.5% with a fully apples to apples comparison of the mix and acquisition, completed in quarter two. For the last quarter we had some of the acquisitions we got contributed during the quarter which are not reflected in the quarter one revenue.

Okay, great, and then just a last question on people, can you talk to us a little bit on the hiring environment. We're hearing kind of mixed things coming out of India about recruitment for freshers. Can you talk about what Wipro's doing and what you see going forward for hiring?

This strategy will continue to be two prong. That we'll continue to hire from the engineering schools, which comprise roughly about 50% of our total hiring effort and we'll continue to look for good talent to come in from the experienced talent pool, what we refer to as the lateral hiring.

The one thing which we have done consciously this year is that we have shifted to a more even spread of rookie joining into the Company instead of all of them coming in at one point, at one time of the year and that we have been able to make that transition fairly comfortably.

What we are also doing in addition is that we are experimenting with non engineering talent pool as well. So these are the Bachelor of Science graduates and this year, just to help you understand, we would be taking in between 1,700 to 2,000 people in our Software business. Taking them through intensive training program and get them ready to be deployed on our assignments within the organization.

So we are quite comfortable. The way we look at it there are opportunities for bringing in the right kind of talent and with the investment which we have made in our training capability we think we should be able to manage this equation.

What percentage of new hirers are freshers now?

It's roughly 50%.

Okay, thank you very much.

We also have a question from the line of Alan Hellawell at Lehman Brothers. Please go ahead.

Yes, thank you very much. This question I guess would be probably focused at Mr. Emani. I hope you're doing well. I was just hoping to get some insights about the discussions we've had about possible softness in spending from your telecoms equipment customers given the precedent of the Lycatel combination and the cooperation between Nokia and Siemens and what not. Have you started to see that and, if so, when and -- given your experience, when would you expect some kind of a recovery in spending there?

So I think from the time we met, I think we met about a month back.

Yes.

I don't think things have really changed much. One change is the Alcatel [inaudible] module has got the regulatory approval and Nokia/Siemens today really is proceeding as per their earlier plans.

Right.

So I do not, at this stage, there is no big change. We think we should start seeing some results maybe in Q4, but I cannot say anything as of now.

Okay, well thank you very much.

And that is [really] in the guidance that we have given for quarter three.

Understood, I appreciate that, thank you.

We have a question from the line of Julio Quinteros with Goldman Sachs. Please go ahead.

Sure, hey guys. Can you just walk us through the changes as you kind of look at the large client versus smaller clients? Just talk a little bit about the penetration that you're seeing amongst your top clients, whether that's new service line expansion or is it just growth of the same kind of work? I just want to get a sense for whether you guys are actually succeeding on penetrating with your new services. Thanks.

Hi, Girish, here. I think we are seeing significant traction on with our existing clients on selling new service lines. And the fact that we have long had a [service] some of the newer service lines when we moved into [inaudible] management as well as business process outsourcing, our ability to cross sell new service lines is really the key to our account work.

Okay, and then, on your top client, I just want to confirm, is that the same client from last quarter or has that changed this quarter?

Top client there has been no change.

Top client.

Top client there has been no change. Top line no change.

Okay, great, thanks.

We have a question from the line of Abi Gami from Banc of America.

Good morning, a couple of questions. First, your BPO headcount was down sequentially again although you got good productivity to get the revenue gain, can you talk about the mix of the employee base within BPO? How many are still doing call center-related work versus non call center-related work and what are your headcount goals for that business for year end?

Okay. On the headcount itself I think that's kind -- Ramesh touched upon a little earlier in the conversations that I had. Number one is the mix of business we're kind of clearly gaining ground. So what's happening is that as we churn out some of the businesses that are low value added, low margin products, and we bring in new skill sets, the overall [economics] do not change. But, having said that, as we go across the next couple of quarters we see some change happening as far as headcount is concerned. We see headcount going down.

In terms of the total -- in terms of the number of people who are doing voice and non voice business, we have stopped measuring it in that form. So typically what we do is we look at integrated services and what we call [deprec adds], simple register detail. As far as the integrated services are concerned, integrated services today are around 21% of our revenue and you could be writing your own numbers in terms of the headcount deployed because clearly integrated services give you higher realization.

Okay, great, another question. The wage hike you're going to be putting through this quarter, is that primarily onsite wage hikes? Were any of the two-thirds of the people who received a wage hike in the December quarter?

This will only be offshore. [inaudible] offshore the hike. Two-thirds that we already [inaudible] September [inaudible] November 1.

When will the onsite hikes go through?

We expect [inaudible] will reduce in the fourth quarter.

Okay, great. Finally, you mentioned earlier that you are increasing the experimenting with Bachelor of Science hiring. Can you talk about what differences there might be in their training? Whether the duration or type of training? And do you have any early data on their take-up rate? Are they -- are you hiring them in or do you retain them at a similar level to other employees? Are they -- are you rejecting them at a faster pace? What's happening there so far? Thank you.

Let me just try and capture your question. It's about the BSc science graduates and how we take them through our own training program? So we have a very well utilized program. We call it the Wipro Academy for Software Excellence. And through this program we bring in bright Bachelor of Science graduates. We put them on a program which has a tie up with one of the leading engineering schools in the country. This program actually runs for the duration of four years. At the end of the fourth year if it's clear they program successfully they get a Master's in Software Engineering.

The interesting thing about this program is that the entire fee is getting reimbursed by the Company. We also pay a scholarship to these BSc science graduates who are coming in. They attend classrooms, classroom sessions on Fridays and Saturdays and the remaining part of the week they are working in our in-house projects and as well some personal projects every week. Post completion of the program they have tried to be absorbed in the Company full time. And because of the investment which we have made, there is an obligation for them to stay on in the organization for another additional 15 months.

By the way, this program has now been running in Wipro for the last 10 years. It's been found to work extremely well. The feedback which we get from customers as well as from our leaders and managers internally is very, very positive which has given us the confidence to deliver the program. While we were taking in numbers like 400, 500 every year, this year we are actually bringing it up to 2,000 numbers. And just in terms of the kinds of projects whereon we can actually deploy them, we find that we can actually deploy them with the kind of training they go through pretty much in the -- all kinds of projects which maybe would employ otherwise our engineering population. Cost-wise it's a huge advantage as well.

Thank you.

We have a question from the line of Rama Rao with RR Capital Management. Please go ahead.

Good morning, gentlemen, very good growth. If you have to break down this revenue new growth in terms of the geographical region, like North America, Europe and Japan and Asia, how does it break down?

We have had a very good growth on Japan the last quarter, from sequential [inaudible] perspective. But otherwise the growth in the US and Europe have been fairly decent in a similar scale.

You won't be able to quantify the growth in different regions?

Yes, the U.S. was about 8.9% sequentially and Europe was about 10.5%. Japan was about 22.7%.

Very good. And how does the net profit margin in these different geographical regions compare with themselves?

We [inaudible] that way because [inaudible] we have [inaudible] geography. So from that perspective we address one customer. We put him in the North America as well as Europe as well as Japan, and hence the way we look at it is the customer approach as opposed to geography approach.

Alright. Then the last question, if I can ask you the bigger picture question, how do you see the global economy and in particular U.S. economies unfolding in the near future and its impact on your growth on a growing quarter basis?

Very true. You get variety of performance available with U.S. economy I don't pretend to be an expert. There are fairly a mixed bag in terms of businesses and a lot of [competitors] in terms of the growth slow-down in South Africa. Net net if we take away the [inaudible] in the [inaudible] housing area and therefore that happen in the detail, but not so much in the financial services and many other technology and so on and so forth. How -- so I think that we can confirm we really do not get impacted on whether the US economy does well or does not do well.

We do get impacted favorably because if the economy does well then IT spend goes up, and when the IT spend goes up they need more software and they get it at the right place from a selling perspective. We will provide that and the skill set.

When the economy doesn’t do well, the IT projects eventually closes and the Company seems to have higher deployment of IT because the customers are taking more and more reduced services, employees are seeking more and more IT deployment because less number of people have to do that particular work. And therefore the hiring [inaudible] and they are looking for higher [bankrupts] as well and that is where an Indian IT company will benefit of [inaudible].

So generally an Indian IT company that benefits that from that situation is excluding [inaudible] where someone wants [inaudible] does happen, but otherwise [inaudible] help them. And we again, going forward, also we will not get impacted adversely.

Thank you.

We have a question from the line of Ashish Thadhani with Gilford Securities.

Yes, good evening, great quarter.

Thank you.

One or two questions. Is there any overriding reason why your outlook is somewhat subdued in comparison to let's say an impetus which has guided towards more than 40% growth in the next quarter? I think yours translates to about 30% year-on-year, maybe a little less on an organic basis?

Ashish, look at the sequential growth we’re guiding of 7.5%. And the guidance we've seen so far tends to be much, much better, including our own guidance in the last quarter and the previous two quarters. But you also get the guidance of 7.5% that we have given is a little different than the last quarter because there are no new acquisitions that have been going on. All the acquisitions that we have done have been completely reflected in the quarter and also in quarter three. If we make any new announcement it will be an add-on. Also you have the factor for the billing days being lower in quarter three compared to quarter two.

Alright, but to adjust --

All that is significantly better guidance than what we did last time.

But on a year-on-year basis which would iron out all of these -- the acquisitions to some extent as well as the seasonality, we're looking for roughly about 30% or slightly less, right?

Ashish [inaudible] quarter-on-quarter once more and partly y-o-y as well. Also if you look at last time we had a very, very good quarter three. From that perspective the y-o-y in terms of actual [inaudible] guidance is not reflected.

Correct, because I think last year, if I'm not mistaken, you had 13% quarter-on-quarter growth going into the --

Correct.

Okay. So maybe that explains it. Also the magnitude of wage hikes. Could you throw some light on that? What the year-on-year number might be?

In terms of what we can offer to September and we particularly [inaudible] what we will do on November 1, which is about -- around 12% for our offshore.

And on site, is there a number?

Onsite we shall to be able to make it a number next time when we talk, basically January because it is due for revision where we will come to look over it by the end of this quarter.

Okay, terrific. And final question. Could you put the current SEC debate into context? Specifically, do you envision any scenario that could impact the sector unfavorably?

I think one or two statements have come out apart from what has been there in the Acts and the guidelines by imagining yourself [inaudible]. And the progress has been generally good. I think it is quite good amount of [inaudible] of investigation on some of the regulatory models, that the kind of restrictions that are there can be a little more relaxed whereby there will be [inaudible] and the conditions can be much more smoother. But otherwise we think these comments is fairly continuing to support industry led question. I did last week and [inaudible] which is also seem to be getting more and more favorable support. And in fact if that were to happen, that law [inaudible] and in fact [inaudible].

When might that happen? The latter mentioned? The SPPI extension, one way or the other?

An indication we can get is [inaudible] minister [inaudible].

Terrific. Good luck, thank you.

Thank you.

We have a question from the line of Anthony Miller. Please go ahead.

Yes, hello again, gentlemen. My questions are around BPO. Three things, just for a bit of clarification, please. Firstly, how come the number of customers goes up but the number of processes goes down? Secondly, your headcount went down but the occupied seats went up --

Can you speak a little louder, please? [inaudible].

Is that better? Can you hear the phone? Good, okay. Sorry, the first question was how come the number of customers went up, yet the number of processes went down. Second, how come your headcount, BPO headcount went down, but the occupied seats went up and the available seats went down?

And finally, just on the margin, which would obviously jump quite considerably, nearly 24%, can I just reconfirm what you said on the earlier call that you are expecting BPO margins generally between 18 and 22%, therefore we might expect the margin now to come down to that level?

Okay, let me just speak here -- let me answer that question, all the questions asked in the order that you asked them. Firstly, why have the number of processes come down while the fact the customers come down. And the reason is very simple, there has actually been only one process has come down. The reason is very simple. Increasingly what we are trying to do is we're looking for standardization between processes. It's the only way you can get a deal. And that's what we are doing in our business. So that's the first answer.

Basically, it's shared service, basically?

Exactly.

Okay.

Okay, the fact is, the only way that this can ever be scaled because if you can't you really have to pick your spots and play them hard. On the second question, in terms of why has headcount come down, again, I can answer that in the previous -- I gave an answer to the previous question to last, because what we are doing is mix is changing and because of that headcount has got to come down -- has come down last quarter. We expect to see a bump up, increase in headcount in the next couple of quarters going forward.

Yes, my question was actually how come the occupied seats went up even though the headcount went down?

Okay. The occupied seats went up primarily because what we do is that we allocate seat by process. So once a seat is allocated by process, automatically what would happen is that depending upon -- so if you think that we have 100 real processes with 300 people that come in, we would allocate 300 seats for the profits. The new provision of seats, we can have only a 100 people actually occupying the seats.

[inaudible].

Yes. That's right [inaudible].

Okay, right.

Okay. Any other questions?

Yes, the third question was just on the margin. Is it the case of the margins will now drop back to that 18 to 22% range?

What we have always guided till now is that our margins remain in a band of between 20 and 22%. And we are going to stick with that guidance.

[inaudible] 18% [inaudible], but we should say that we stay in that range and there is a hope that we will be around those numbers.

Yes.

Like we said that quarter two, quarter three, we expect our overall margins to be in a narrow range and consequently [inaudible] also follow in that package.

Okay, thank you very much.

Thank you.

Thank you. We have a follow-up question from Moshe Katri, please go ahead.

Thanks. Just to clarify, you did have an impact from the dilution from some of the acquisitions that you've made recently. When do you think that impact goes away? How long will that take, do you think?

We believe we are seeing definitely Indian GAAP we have a global loss in quarter one for only acquisitions if you add up the EBIT that was generated. [inaudible] we have two [inaudible] percentage possible. We expect in the coming quarter one of those large two companies to be breaking even and perhaps the next quarter the other one also we have break even. So eventually we are expecting the profit margins to go up quarter after quarter and over a period six quarters or so we expect them to normalize in terms of what we have expected them to generate, including the synergies.

In terms of M&A pipeline, I think someone asked a question here, should we still expect a potential dilutive impact of future acquisitions? Is this something that you guys focus on? Is this -- are you willing to take dilution from future acquisitions as well? Should we expect that to happen?

Because we get the acquisition [inaudible] in quarter two was about 1.3% on the Indian GAAP and this is more 1.6% on the U.S. GAAP. This is already an investment based in our "5%" operating margin. Eventually in four quarters we have seen movement this which in this dilution we come down and that will use up [inaudible] something more. So overall we think that the operating margins or around [5%] is something we should be able to maintain during [inaudible].

Thanks.

We have a question from the line of Sandra Notardonato with Baird.

Thank you for taking my question. I was wondering if you have a sense of what percentage of your business that comes from multiyear contracts of renews in 2006? And what that number's going to look like in 2007?

Looking at the forecast typically our customers for the past five years, six years, 10 years is continuing. Why do we want that? We are not being structured as one year contracts. They are market [based] agreements that we have and an ongoing business being the decision and requirement of the government is coming in to do this. So structure, they're not structured as one year contracts, but they are in this form.

And yes, over the past, about one or two years we have started getting $1m larger contracts as we have also seen in the last quarter 2. But as a percentage of total value it will still be a small Company. Next two years, three years will it change significantly? I would say there will be some [inaudible] that we expect but we do not make a significant change in the overall mix of revenue in terms of the structure as to how much is on an ongoing business or how much is a three years, five years contract.

Okay, and then my follow-up question is on a separate topic. Do you have by any chance what the acceptance rate is for freshers in terms of offers that have been officially made to them? And then how many of those actually show up for work?

Yes, our offer to acceptance, our total joining ratio, joining currently are 80%.

80%. And then how many of that 80% actually comes in?

The data which is provided to you is offer to joining.

I understand that, but I'm wondering if after a fresher has accepted a position, is there a percentage of the people that have accepted that actually do not show up for work?

I know that he has not given previous data. He is saying [unofficially] that we offer 80 joiners work.

Alright, great, thank you.

Thank you.

And it does not change over the last two years.

We have a question from Daniel Zou with Lucite Research. Please go ahead. Your line is open, Mr. Zou.

Okay, can you hear me now?

Yes, we can hear you.

Okay. Earlier you guys were talking about your BPO services and the margin has been increasing steadily, actually very fast. Speaking of IT services, I was looking at the gross margin from five quarters ago and I see the gross margin has been slowly drifting down. Do you expect the current trend to continue? And what are your expectations over the next quarter for the gross margin for IT services?

Like I said, we have said that so far probably margins will be [inaudible] to be in the narrow range of what we achieved in quarter two.

Okay, so next quarter you would be expecting still around higher 33%? Is that correct?

[inaudible] in the US GAAP we have posted 24.5% and yet corresponding gross margin [inaudible] interlink.

Okay, thank you.

Thank you.

We have no other questions at this time. Please continue.

Thank you, ladies and gentlemen, for participating in the call. Should we have missed anything during the call, the audio replay of this call will be available after two hours from now, and we will also be putting up a transcript of this call very shortly. And of course should you need any clarification the Investor Relations team will be delighted to help you. We look forward to talking to you again next quarter, and have a nice day. I would also like to make a comment that due to a family bereavement [Shriva] is in India, and will be back in the U.S. next week, so you could contact him probably early next week.

Thank you, ladies and gentlemen, this conference will be available for replay after 12.45 p.m. today through November 1, 2006 at midnight. [OPERATOR INSTRUCTIONS]. That does conclude our conference for today. Thank you for your participation and for using ATNT Executive Teleconference. You may now disconnect.