Wipro Ltd (WIT) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Wipro earnings call for the period ending March 31, 2008.

All participants are in a listen-only mode.

Later we'll conduct a question and answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, today's conference call will be recorded.

I would now like to turn the conference over to your host, Sridhar Ramasubbu.

Please go ahead, sir.

Thank you very much, Steve.

Rajendra, we are starting, is that okay?

Yes, go ahead.

Thanks Steve, good morning, ladies and gentlemen, and good evening to the participants across the globe.

Rajendra, [Lalish], Aravind join me from Bangalore in extending a warm welcome to all the participants for the fourth quarter results and the earnings call for the period ended May 31, 2008.

We have with us today Mr.

Azim Premji, Chairman and Managing Director, Mr.

Suresh Senapaty, CFO, who will comment on the U.S.

GAAP results for the period ended March 31, 2008.

They are joined by Girish, Suresh Vaswani, and other senior members of the Wipro management team, who will be happy to answer questions.

During the call we might make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, 1995.

These statements are based on management's current expectations and are associated with uncertainty and risk which could cause the actual results to differ materially from those expected.

These uncertainties and risk factors have been explained in detail in our filings with the Securities Exchange Commission in 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.

The call is scheduled for one hour, the presentation for the fourth quarter results will be followed by a question and answer session.

The Operator will walk you through the procedure for asking questions.

The entire conference call proceedings are being archived and transcripts will be made available at www.wipro.com.

I am available on email and through mobile as well to take any questions and same will be true of the full management team in case you are unable to ask questions for any technical reasons.

Ladies and gentlemen, over to Mr.

Azim Premji, Chairman and Managing Director of Wipro.

Good morning to all of you.

I am sure you would have seen our results posted on our website.

I would like to spend some time reflecting on the management changes and our performance for the quarter and the year ended March 31, 2008.

Following that, Suresh Senapaty, our CFO, will share financial highlights before we begin the Q&A session.

Our journey over the last few years has been one of fast-paced growth in all its dimensions.

We've expanded our global reach, added an impressive list of value added customers and built a strong Wipro team which we're extremely proud of.

I'm pleased to announce the appointment of Suresh Vaswani and Girish Paranjpe as joint Chief Executive Officers of the IT business.

We believe Wipro has tremendous potential to grow aggressively and further strengthen its leadership position in the IT space.

A joint CEO structure is the best way forward to leverage the depth of our leadership and maximize the opportunities ahead of us.

Girish and Suresh have worked closely over the last ten years in spearheading the growth of Wipro's IT business and will work together to jointly shape and drive the vision, strategy and results of the newly structured IT business.

I'm equally pleased to welcome Suresh Senapaty, Suresh Vaswani and Girish Paranjpe to the Wipro Limited Board as Executive Directors.

Their inclusion will add significant richness and breadth to the Board.

Now let me share my thoughts on performance.

Results for the year 2007, 2008 have been satisfying on several fronts.

Wipro Limited recorded revenue growth of 32% year-on-year and net profit growth of 11% year-on-year.

Our combined IT revenue for the year was $4.1b with 38% year-on-year growth.

In rupee terms the growth was 27% year-on-year.

During the year we made a strategic acquisition and invested in sales footprint, MEGA/GAMA account strategy, our 360 degrees engagement model, and large programs team.

We also started local delivery centers in Atlanta in the U.S., Troy, Michigan in the U.S., Monterey in Mexico, Cebu in the Philippines and Wroclaw in Poland.

Our acquisition of Infocrossing has positioned us strongly in total outsourcing deals.

All these initiatives yielded industry-leading growth rates for our global IT business at 38% year-on-year growth in dollar terms.

Telecom service providers, financial services, manufacturing and energy and utilities business grew ahead of organic Company average.

Our differentiated service lines, that is technology infrastructure services, testing services, BPO and package implementation services, also grew ahead of organic Company average.

We won several large deals in TIS space and also a few deals with integrated ADM and TIS offerings.

We have restructured our Consultancy business and brought various consultancy practices that were embedded in each of our service lines and competency groups under one umbrella of Wipro Consulting Services.

The objective of Wipro Consulting Services will include upstream business transformation consulting, building IT strategy for customers and helping clients build business solutions that leverage IT.

This single consulting face will have about 1,000 consultants spread across Americas, EMEA, India and A-Pac.

Our India, Middle East and Asia-Pac IT business delivered strong revenue growth of 45% year-on-year and profit growth of 34% year-on-year exiting the year with a revenue run rate of around $1b.

These growth numbers were on the back of strategic investments made in the last two years in total outsourcing.

We won five large deals during the year and are well positioned to capitalize on our experience for further momentum in this unique, specialized service line of total outsourcing.

India, Middle East and Asia-Pac IT business has leveraged the domain and solution capability of Global IT business in several of the large deals.

We are seeing huge potential in India and Middle East market with considerable investments being planned by our customers.

Our Global IT business has built excellent domain and transformational capabilities, while India, Middle East and Asia-Pac business have deep-rooted relationships with customers and very high brand recall.

We believe it is now appropriate to present our IT business on a combined basis as the business has reached critical scale.

We will report the combined business going forward split into services and products.

For the fiscal year Wipro Consumer Care and Lighting business had industry-leading growth rate.

Our India revenues have crossed the milestone of INR10b.

Santoor, our flagship brand, is now among the top three toilet soap brands in India by value.

Our acquisition of Unza in August '07 is showing good growth in Malaysia, Indonesia and Middle East markets.

Enchanteur, an Unza flagship premium brand, is now launched in India.

We look at fiscal 2009 with cautious optimism.

Market situation is changing rapidly which has a bearing on our immediate business dynamics.

However we remain resolute and confident of our prospects.

Considering this, we have drawn upon an aggressive plan to capitalize on the likely back-ended positive momentum for profitable volume growth.

We are bullish on India and the Middle East geographies to deliver turbo-charged growth riding on investments in these markets which we have made.

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 ladies and gentlemen in the U.S.

And good evening to all of them in the Europe and Asia.

I will touch upon areas in our performance and financials that will be of interest to you all.

Global IT services revenue for the quarter of $959.9m included $80.5m from BPO services and $63.5m from acquisitions.

This is a sequential growth of 5.5%.

The sequential growth was enabled by energy and utilities, financial services and retail growing by 19%, 7.7% and 5.8% respectively.

Infrastructure services with 30%, testing with 6.5% and BPO with 5.3% led the sequential service line growth.

Europe surged ahead with 9.2% sequential growth in the current quarter.

On the foreign exchange front our realized rate for the quarter was INR39.87 versus the rate of INR39.71 realized for the quarter ended December 31, 2007.

As at period end after assigning to the assets on balance sheet, we had about $2.97b of contracts at rates between INR39.50 to INR43.

During the quarter we added 29 new customers, [two] of which were Fortune 1000 Global 500 customers.

The number of clients more than $50m has increased to 14 in quarter four from 12 in quarter three and eight in quarter four of last year.

During the quarter we won three large deals.

Our year-on-year price realization in the IT services business went up by 0.7% in onsite and 1.5% at offshore.

We are seeing good traction in Infocrossing and have won deals of total contract value worth $38m during the quarter.

The joint go to market has a robust deal pipeline.

We expanded Infocrossing margins by [73] basis points in the current quarter.

During the quarter we had an adverse impact of 100 basis points on margins due to onsite salary increases effective January 1, 2008.

This was significantly mitigated through improvement in utilization, acquisition margins and other operational parameters.

The India, Middle East and Asia-Pac IT business has reached critical scale and more integrated with the Global IT business.

We have now integrated the two IT businesses and will report data on a combined basis in line with the industry practice.

The combined IT business will be reported as services and products.

As for our long-term talent retention plan we gave approximately 8m RSUs on April 1 to our employees.

For the quarter ending June 2008 we expect volume-led growth with stable pricing.

We will have impact on margins due to the visa cost and fresh RSU grants.

We will now be glad to take questions.

Steve, we can have the Q&A starting now.

Steve?

Hello Steve?

Ladies and gentlemen, we will now begin the question and answer session of our conference.

(OPERATOR INSTRUCTIONS).

One moment, please, for our first question.

Our first question comes from the line of Joseph Foresi of Janney Montgomery.

Please go ahead.

Hi, gentlemen.

It appears that you guys remain confident in growth in the back half of the year.

I was wondering what gives you confidence in things rebounding?

Hi, Girish here.

So at this point of time it's an assessment based on how our clients are reacting, because we had a chance to talk to many of our senior clients and what's happening to their IT budgets.

And in most cases we have the sense that the budgets have not been significantly cut, but just the spend, there is a spend caution.

And our feeling is that as the market settles down, it'll get back to business as usual and hopefully the spending will come back.

So is your assumption based on the economy recovering or is it based on what your clients are going to do?

It's based on two things.

One is that a lot of the freeze on budgets is because of two reasons.

One is because of so much turmoil in the financial markets.

It's also based on the fact that there's been a lot of change in the management teams, especially in the financial services world.

So as new teams settle in and the turmoil in the financial markets subsides we're hoping that we'll be back to business as usual in the second half.

Also, Joe, if I can supplement, if you look at the guidance that we're giving about $1,060m as compared to $1,032m of quarter four, on a combined IT services point of view, it was [hard to] sequential of about 3%, the same what we gave year before, exactly one year before for quarter one of 2007/08.

And that is about 34% year-on-year.

However, if you adjust for the acquisition it still works out to 26% year-on-year.

Okay.

It looks like the models are also naturally adjusting to what's been going on in the economy.

Are you guys seeing a cooling in the labor market?

And also I know you said that you'd expect pricing to be stable, but is the magnitude of the upside on the pricing cut down?

I think there's two questions and Pratik is going to answer the first question on the cooling down of the labor market or any possibility on that, I'll take the other question on the pricing side.

Hi, this is Pratik here.

So there are two ways of looking at that question on the labor market, one on the supply side.

We've see things leaving and our answer would be yes, because we do experience that in the segments where we are wanting to hire, whether in India or globally, our ability to do that with relative ease definitely has gone up over the last about a quarter or so.

Just on the wage/salary part and what's our own view, looking ahead for this particular year.

There too it's our own belief, and I think we are not alone in this, rest of the industry players are of similar view, that we will see moderation kicking in during this fiscal.

And while for us it's still about a couple of months away before the offshore salary, that is the India salary kicks in, we believe compared to previous year which was in the range of about 12% to 13%, we anticipate this year is more likely to be in the region of about 8% to 10%.

Girish?

On the pricing side some of the contracts which came up for renewal earlier this year have gone through with decent price increases.

And at least at this point there is no indication that we have any pressure on that.

And just one final question.

It looked like, if I'm reading it correctly, that maybe work in your top client pulled back a little bit this quarter.

I was just wondering what vertical that client is, if you'd like to not identify them.

And why did this happen?

Is this associated with the economy at all?

Thank you.

We have seen very few and sporadic cases of that nature.

It is not a case where it is some kind of a trend.

We have seen certain, let's say in retail kind of a thing, we've seen one or two projects which has got cut or there has been a shelving of some of the decisions with respect to some of the projects that we are working on.

And was the first client in retail?

The top client in retail?

I think you are -- this is Suresh Vaswani here -- you're talking about the top client.

I don't think we're in a position to talk specifically on the client name.

But very broadly, to address the question, if you really look at our top ten clients, I think we've shown a better than industry -- better than our average growth insofar as the top ten clients are concerned.

This is Suresh Senapaty.

The top clients, we can't name the industry but it's a composite customer.

We didn't have a pull-back, we had a program end.

And if you see a full quarter trend it's a growth year-on-year of more than 30%.

But the fourth quarter was an aberration (inaudible) flat or slightly lower than the last quarter.

Okay, thank you.

Thank you, sir.

Our next question comes from the line of Moshe Katri of Cowen & Company.

Please go ahead.

Okay, thanks.

I know you don't provide guidance typically for the fiscal year.

But is there anything you can comment in terms of revenue growth, maybe some sort of a comment related to at least revenue growth expectations for fiscal '09?

And then what you'd expect for EBIT margins?

Thanks.

Moshe, actually like I was trying to answer the previous question, which I said that based on the guidance that we've given for quarter one which is almost similar to what we had given last year for quarter one, the growth is about 26% year-on-year.

And it is our expectation that the growth will be back-ended, which means we would expect better growth rates going forward.

And so we, as you know we don't give specific guidance.

We will have to only -- we will go quarter by quarter and communicate to you if there is any kind of a change in our thinking or how it is -- how the current assessment holds good.

And so as far as the margin is concerned I think we have done pretty well so far as '07/'08 is concerned despite the fact that we got the biggest hit in terms of foreign exchange, and also the investment that we did in the form of an acquisition.

This two together which is an unusual hit, unusual dip for the margin by about 4.2%.

But our overall margin, we are able to retain within 2.7 percentage level.

So from that perspective we have been able to do a lot of recovery.

And in the year 2008/9 our objective would be, our endeavor would be to make sure that we are able to hold the margin of '07/'08 and improve further.

Okay.

And then regarding growth expectations, should we assume some sort of a benchmark level of about 20% roughly?

Is that a good number to start with?

I said that quarter one being what it is, the year-on-year growth itself without the acquisitions is about 26%.

Because we had an acquisition done which was for the second half.

First half was not there, otherwise really $1,060m is about 34% year-on-year for quarter one itself.

And then Girish, it seems that the pricing is coming a bit better, better than what we expected, I'm talking about new clients.

And can you elaborate on that?

In terms of -- this is Suresh Vaswani here.

In terms of pricing and I think Girish already alluded to this earlier.

New contracts are coming in at between 4% to 5% higher pricing than what our current pricing is.

And contract renewals, when they come up for contract renewals we are able to get between 3% to 5% as well there.

So we are able to drive pricing up.

I just wanted to comment also on your earlier question related to the market.

Now this -- independent industry sources, and I'm really talking about [Nascon] estimates also, talk about the markets still holding up at between 25% to 30% growth rates.

So I'm not talking about Wipro's guidance, I'm talking about the market expectations in terms of an independent body.

Thank you.

Our next question comes from the line of Trip Chowdhry of Global Equities Research.

Please go ahead.

Thank you, and good execution.

Two questions, first it seems like Wipro has very diversified businesses.

I was wondering if Premji could comment if he is thinking of getting into some organic fuel since you're already in the vegetable oil business, or anything to do with clean tech or green tech.

Any thoughts on that?

So what we are doing is we have a very good base in understanding process equipment and discrete engineering.

We -- our water acquisition in Wipro infrastructure engineering was basically to make equipment which will address water purification.

Because we see it as a huge emerging opportunity in India and in the surrounding markets.

We have no plan to get into any non-connected diversification where we have to build technology or expertise or markets from scratch.

Excellent.

The second question I have is regarding the deal flow.

Are you seeing any changes in the deal sizes, like are there more small size deals coming into play versus the large size or the mix of the deals are the same this year versus last year?

This is Suresh Vaswani here again.

Speaking about deals, I think we see a healthy funnel insofar as deals are concerned.

We are also focusing now much more strongly in terms of creating proactively large sized deals.

As you are familiar we have also launched the total outsourcing practice which is built around infrastructure, which are again reasonably large-sized deals.

So we are seeing a fairly healthy funnel.

It's not that -- and as Mr.

Senapaty also spoke about it earlier, it's not that deals are going to necessarily to close in a hurry.

But we certainly have a healthy pipeline of deals both on the infrastructure side, on the application and BPO side.

And which is one of the reasons why we are saying that we would expect our growth to improve as we go on into quarter two, quarter three and quarter four.

Thank you very much.

Our next question comes from the line of Kanchana Vydianathan of Pacific Crest Securities.

Please go ahead.

Thank you.

I guess my question is with regards to your guidance for the June quarter of $1.06b.

I was wondering if you could help us understand what have you taken into account.

Are you taking into account that this is a conservative guidance, that if things were to deteriorate a little more, if you were to start seeing cancellations of deals, has all of that been taken into account?

Is this a conservative guidance or this is realistic at this point?

As you have seen before Wipro always comes out with realistic as to what we see at that point in time as an expectation for the quarter.

You haven't seen significant difference between what we guide versus what we deliver.

I guess -- just if you look at the economy right now, is it possible that you could run into certain cancellations in projects or project delays that could put your guidance at risk?

At this point in time the way we have seen, we have looked at what our current run rate is, what the customers are looking for, and we have a reasonable estimate with a very high probability factor for [year] ending 2008 to be able to communicate as to what we expect.

So we at this point in time feel pretty comfortable in terms of what we have given the guidance number.

And that is a realistic number.

Okay.

One question with regards to your technology businesses.

I was wondering if you could talk a little bit about what's happening in the technology business?

Because it looks like the growth in that business is still -- it's below the Company average growth rate.

Can you help us understand, is that where you're seeing the slowdown?

And is that where you're expecting a pickup in the second half?

This is Sudip Nandy from the TPE, telecom and product engineering business.

There are three distinctive paths to the business.

One is the telecom service provider business which has grown more than 50% year-on-year so that has been a very healthy growth.

It is the growth leader in the Company.

The second part is the telecom OEM business.

A lot of the telecom OEM big companies globally, they are well -- almost 18 to 24 months over past their mergers and their product rationalization and joint strategies all have been evolved.

So we have actually moved from the eight quarters before, we were seeing single digit growth in the telecom OEM sector.

We've actually reported double digit mid-teens growth in the last year in telecom OEM sector.

But that is -- the weight of that sector is fairly heavy for our technology business.

The third leg of the technology business is the embedded and computing business.

In that we've had growth which is very high, very good, 50% plus in industrial automation, in medical electronics and also in avionics as a sector.

So all in all, because of the way the [weightages] are, we have reported lower than average growth but the growth is better than last year in the telecom OEM sector.

So we are seeing slight recovery in the telecom OEM sector.

And as the weight of the telecom service provider business increases in our mix we expect it to be even better next year.

Okay.

And one final question I guess.

If I were to look at your percentage of revenue from fixed price contracts, that has significantly improved over the course of the year.

Can you help us understand, what are you doing differently in order to drive this revenue increase?

Thank you.

Girish Paranjpe here.

What we are doing to increase share of fixed price projects is two initiatives.

One is to bid for more developmental projects which can be more easily structured as fixed price projects.

And some of the increases happened because of that.

And the other is where we are in application maintenance or infrastructure maintenance kind of contracts, to run them more as managed services contracts.

And those are the two areas we've been able to increase the percentage of fixed costs.

Just to elaborate further, this is Suresh Vaswani here, some of our service lines which are driving growth lends itself to fixed price contracts.

And like Girish mentioned infrastructure services is largely fixed price managed services type of contract and that's the service line that's been growing -- has grown [3]% on a year-on-year basis this year.

Likewise our package implementation practice, package implementation and support practice tends to be largely fixed price.

Okay, it's helpful.

Thank you very much.

Thank you, ma'am.

Our next question comes from the line of Anthony Miller of Arete Research.

Please go ahead, sir.

Yes, hello again, gentlemen.

A couple of questions.

Firstly, one which led on from the discussion this morning when a question was asked about package implementation growth which went backwards a little.

And I think the comment was made that you saw a couple of project cancellations.

I wonder if you could expand on that a little, please, and tell us what sort of projects were cancelled, what sort of vertical, and why the projects were cancelled?

Frankly, there was just one project cancellation, one significant project cancellation which set back the revenues insofar as Q4 was concerned.

But there was also certain periods in terms of projects ramping up.

So project startup delays with that.

And therefore that also led to a muted quarter four.

Going forward, the way we see it, I think the funnel on the package implementation side looks good.

Some of the major deals that we won in quarter four are revolving around package implementation and package support.

And that really was the basis of our more stronger outlook insofar as the package implementation is concerned in the current year.

So quarter four we clearly see as a blip, a combination of one significant project cancellation, and second was because of some of the projects that we had won have taken time to get off the ground in terms of the customers saying that they want to start next quarter.

Yes, but can you say why that project was cancelled?

It's for exactly the same reasons that you have been raising in terms of the sort of recession and therefore -- it was a discretionary project.

It was a project related to a new application that we were implementing for the customer.

And the customer just felt that it was discretionary and therefore pulled back on it.

Okay, and was that in banking sector in BFSI?

Sorry?

Was that in BFSI?

It was not in BFSI, it was not in BFSI.

Okay.

And just another quick one on Infocrossing.

Can you give us a flavor for how much of the growth that you're seeing in Infocrossing has come from customers who were already there prior to the acquisition and therefore how much is actually new business won under Wipro's control?

This is Zach Lonstein, I'm the CEO of Infocrossing.

And the $38m in total contract value we announced for the fourth quarter of this year is all from new customers.

We don't include renewals in announcements for total contract value.

And in fact we're seeing a ramp-up in our signings.

In the first quarter -- this is 18 days old, we already had $34m in new total contract value.

So we're seeing acceleration of momentum in our growth.

And in that new business that's been signed both last quarter and couple of weeks of this quarter, how much of that actually includes some element of either offshore service or some element of Wipro service beyond what you supply on site with Infocrossing?

This is our traditional Infocrossing infrastructure outsourcing business, business as usual.

Okay, so there's no cross-selling that's happening yet for other Wipro services?

Actually, we're working together with TIS to provide synergistic services.

We have a significant pipeline of larger accounts.

We've closed -- I misspoke, we've closed one joint deal to this point.

We have a number of much -- not extremely large, but we have a number of very large deals in the pipeline.

The outlook looks very strong.

[Under] the $38m deal that -- $38m of TCV that Zach talked about is from some of the customers of Wipro, Wipro's original customers.

While the deals may not have an integrated [piece] of what Infocrossing does and what Wipro does, but there is an amount of cross-selling synergy which has already started kicking in.

Okay, thanks very much.

Thank you.

And our next question in the queue comes from Ashish Thadhani of Gilford Securities.

Please go ahead.

Yes, good evening, very nice quarter.

Couple of questions.

Your SG&A trended up as a percentage of revenue quite noticeably.

Can you explain why and how much of this will continue into future periods?

I think there is, Ashish, we have increased some headcount in the sales team.

And also what we've -- there is a compensation increase that happened from January 1, 2008.

So that gets reflected.

And the third thing we're also trying to build is the global program which is being led by one of the senior persons under Kurien.

And there has been some headcount increase there.

And we will continue to invest in that space.

So from that perspective our sales and marketing investments will not stop.

We'll continue with it.

Okay.

And then moving to the financial services vertical, that was up very nicely quarter-on-quarter.

Can you explain what helped Wipro buck the trend here?

Was it Europe, was it some specific new client or something else?

Girish here.

I think we have the advantage of some of our European clients continuing to do well and not as badly affected by the downturn in the United States.

Also the type of business that we're doing in the United with some of our clients was less vulnerable to a sudden kind of ramp-down.

And I think that did help us in pulling through and doing quite respectably in this quarter.

Okay.

And then one final question on margins, both in the AsiaPac business as well as the Consumer Care business, those jumped up quite nicely.

Is that sustainable?

Is there anything unusual in this quarter in the profitability in those businesses?

I think, Ashish, so far as Infotech is concerned, quarter four is always the best quarter for them.

And consequently, when you have the similar SG&A and the quarter four revenue you would have seen, on a YOY basis, it wouldn't have made a big difference, but a QOQ point of view it would make a difference.

But on a Y -- yearly basis, I think all the margin, which is about 9% to 10%.

[You have got an endeavor] between products and services together.

As we have stated we will now start reporting IT services separately between the two businesses as well as IT products separately as opposed to Wipro Infotech and Wipro Technology kind of a concept.

And so far as Wipro Consumer is concerned I would request Vineet Agarwal our President of Wipro Consumer to respond to that question.

Well, on the operating margin, our operating margin is broadly the same.

If you are referring to the number which has improved from 12% to 13%, it's really -- on the decimal number it's more clearly from 12.4% to 12.7%.

However if you're referring to gross margin improvement which has happened from last year to this year, it's really because of Unza acquisition where Unza has a lot of premium products so the gross margin tends to be higher.

But the cost of sales is also higher in those premium products, and therefore the operating margin is broadly in line with the Wipro Consumer Care and Lighting business.

So net-net there is no major change from what you've seen earlier.

Just to clarify, [it's not] the cost of goods but sales promotion which is below the gross margin line.

Right, great.

Thank you very much.

Very helpful.

Our next question in queue comes from the line of Abhi Gami of Banc of America.

Please go ahead.

Right, thank you.

With growth a little bit slower earlier in the year, do you have the luxury of spreading out the pace of your hiring through the year a little bit more efficiently or do you need to build the bench earlier in the year as you typically may do?

Was the question on hiring?

Right.

I'm looking for some thoughts around timing of your hiring during the year.

Can you wait a little bit longer to bring people on and stretch your bench a bit more, or will you maintain historical rates around your utilization?

So, just on the hiring front we addressed that question in the morning call as well.

The bulk of our hiring will be focused on the fresher hiring.

These are the engineering graduates whom we would be hiring from campuses across -- and also a sizeable section which would be comprising of non-engineers.

These are basically Bachelor of Science.

In terms of numbers we have made close to 14,000 offers with respect to engineering graduates.

And we would be bringing on board another [3,500] who would be Bachelor of Science graduates.

So this in, just in terms of looking ahead where we are locked in with our hiring number with respect to freshers as well as the laterals are concerned, we would be tying in lateral hiring more closer to our demand requirements, and specific requirement needs as demand builds up.

On our utilization, we think we have had a good year this year.

Our net utilization is running almost at 74%.

If you exclude trainees, it's running at about 78%.

We still think we have headspace to pull it up further by about another couple of points.

So we would be doing both.

We will be very selective in where we hire.

And we will continue to press the pedal on utilization front and hopefully we should be able to pull up there too.

Okay, thank you.

Also another question, also with things slowing down a little bit this year, do you have room to slow your capital expenditures from the pace of fiscal '08 or should we expect to see that grow in line with the growth of the business?

You know when you talk about the capital expenditure, primarily it's three things.

A, it's the land, B is the building and C is typically the machinery that we deploy.

So typically what happens is when you pick up a site to build up, you buy the land ahead of time because you create the facility for future too.

And you can never lose money on that.

Similarly when you build a building, again it accounts for the cost escalation that we're seeing, so we don't see much of an issue there but typically it tends to be spent and the utilization may happen much later.

But so far as the other, more expensive equipment deployment are concerned, it would be clearly with 60 days to 90 days time lag that the investments happen.

And therefore clearly it is pretty linear to the deployment of people that happens.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS).

And we've got a question in the queue from the line of Mark Marostica of Piper Jaffray.

Good evening.

It's actually Mark Zgutowicz for Marostica.

I just have a couple separate questions.

First just a follow up to an earlier question on Package Implementations, you mentioned a couple large wins.

I'm just curious, if you can comment on the verticals, where you saw those wins?

And then secondly which sector did you see the cancellation?

Can't be too specific but both the wins and the cancellations so to speak, most of the wins were from the enterprise sector, so not from BFSI, but in the enterprise sector.

Okay.

And again, sorry, and the cancellation?

Yes.

We have spoken about a few large wins this quarter.

And those large wins are from the enterprise sector in package implementation and so on.

And the cancellation that we alluded to earlier also was from the enterprise sector.

Okay great.

And then separately on the fixed price side of the equation, I'm curious, first of all can you remind me what the revenue concentration was there in FY'07?

Can you repeat the question?

Yes.

Fixed price contracts as a percent of revenue in FY'07?

22%.

In terms of quarter it was about 29%.

About 22%?

[That is] for the year, yes.

Okay.

[29%] for quarter four.

Okay.

And then can you comment on incremental margins that you saw in '08 relative to T&M.

And then where do you expect to see the levels there, the concentration of revenues in FY'09?

You're talking about the profitability in the fixed price compared to the [land] and material is that your question?

Sure, sure.

That's correct.

I think we can do much better than what we've been doing.

And our endeavor will be to seek improvement in that area because while 60%, 70% of the projects do well and we get much better than what we would have planned for, there are a few spoilsports in that.

As a result net-net we don't get the full leverage of that.

And our constant endeavor is to make sure that we have all the quality processes in place including the customer expectation management, the credit request management etc., etc.

to be able to get better at that space.

So, from that perspective, we are concentrated.

We have done better in the 2007, '08 as compared to 2006, '07.

And our expectation is '08, '09 we will do even better.

Okay.

And as a percent of revenues in '09, where do you expect to see fixed price?

Well on an average it was about 22% so far as '07-'08 is concerned.

And we would expect it to go -- up to 35% is what we should be willing to go for.

Okay, great.

Thank you.

Our next question in queue comes from the line of Julio Quinteros of Goldman Sachs.

Please go ahead.

Real quickly, Suresh can you just give us what the annual RSU impact is supposed to be for the model?

See the RSU impact for quarter one would be about 50 basis points.

I can't give you for the whole year because it also means I would have to give you the revenue (inaudible).

I'm sorry.

I'm just trying to understand the RSU impact is not just a one quarter issue, but rather it would keep flowing through for the rest of the fiscal year?

That's correct.

But since we do a straight line accounting, typically what we take in the first quarter will more or less remain the same, but the percentage will drop as the revenue goes up.

Okay.

So it's not just one time.

It's actually something we have to account for, for the whole year as we think about it.

Correct.

That is correct.

Okay.

Got it.

Except that we will get some of the earlier ones reduced and this one started.

Of course, okay.

And then secondly, your utilization levels are nearly at 80% when you exclude the trainees, but it sounds like you're saying that you guys would like to run it even higher.

It seems like anywhere above 80% that the needle would be running pretty hot.

Is that the right strategy to be taking the utilization up to -- it sounds like probably above 80% for you guys?

Hi, Girish here.

We have -- I mean it's an aspirational number and it is because we've been able to implement some processes which really allow us to make a lot of people fungible.

So in a traditional model I agree with you it would be almost be dangerous to run such high utilization levels.

But because we see the advantages of fungibility and because of the improvement we've had this year, and the scope we see of further improvement, we believe that there's some more room there.

Can you just explain what you mean by the advantages of fungibility?

The advantages of fungibility are really around being able to use people across business units, across service lines much more instead of allowing them to be siloed within individual business units.

Understood.

And then secondly on the hiring pace for the last two quarters, I know you had a big hiring quarter about three quarters ago.

But are you guys building enough bench for the expected acceleration into the back half of the year at this point?

Yes, this is Pratik here.

So we do think that our hiring engine is geared to be able to bring people on board, especially the experienced side, in a reasonably short period of time.

As far as the freshers are concerned, they go through 12 weeks of orientation and we keep training them in batches.

And therefore we can time it well when they should be coming out of the training programs and when they get deployed on to projects.

So that, we do not anticipate that to be an issue, certainly not in this fiscal.

And can you just remind us what your current mix is of new hires, laterals versus campus?

The coming year we would be looking at a mix of 70%, 30% which is an improvement from this year's 50%, 50%.

So 70% freshers.

Freshers.

Got it, from 50%, 50% this year.

Okay.

And then just lastly on the Infocrossing margin lift, you guys are now running at around, I think it was around 9% or so on margins.

Where do you expect that to go from here in the next quarter or two?

And then what's the risk of margin downside assuming that things slow down?

In other words, how much fixed cost risk is there in this business at this point?

This is Zach Lonstein again, the CEO of Infocrossing.

Just a last comment, I've been involved in a number of acquisitions.

And the process of integration invariably leads to a temporary reduction in margins as the integration process is carried out.

However, also inevitably, the margins return to their previous levels and begin to exceed their previous levels.

And we're now seeing that happen.

So for the year we're expecting gross margins to significantly increase to around 32%.

And for the fourth quarter in fact it will, of course, reach its highest point.

The same is true for the EBIT margins.

We expect them to significantly increase, reaching its highest levels in the fourth quarter; and since we're a recurring revenue business that gives you good insight into what should be going forward for the following year.

So we don't see a lot of risk from the margin point of view.

We expect an upside.

And the EBIT margin that you're trajecting to, I'm sorry, what was that number?

We're expecting an overall EBIT margin for the year of around 13%.

But for the fourth quarter it's still a higher number.

Got it.

Okay.

And then -- okay.

I'm sorry, Suresh, what was the reversal on the R&D about?

It looked like the R&D for the quarter was a negative item as opposed to usually being an expense.

I'm glad you asked that question because in the morning I had not answered that.

And I forgot to sort of cover that.

You know again with the new logic that we have, we have got R&D work that we do as part of -- in that entity clearly in (inaudible).

And because there are R&D activities, there are certain incentives we get from the government.

And typically in the fourth quarter that incentive accrues.

And it is that particularly, even Q4 of last year also we got it, also quarter four of '08 also we'll get it.

Okay.

So typically you get the accrual in the fourth quarter but, as we go through into the next fiscal year, it would go back to its normal expense, as an expense item?

That's right.

I mean, at least about 70% of that write-back was relating to the grant that we got from the government.

Okay, got it.

Okay great.

Thanks.

Our next question comes from the line of Ed Caso of Wachovia.

Please go ahead.

Right thank you.

Ed Caso, Wachovia.

My question is around the hiring and retention.

Are you seeing -- I'm trying to get a sense for what's, a little deeper on what's going on in the market.

Are you seeing the multinationals like Accenture and IBM, and are you seeing the captives sort of slowing their aggressiveness in the market?

That would be my first question.

Hi.

Girish here.

There's no unusual activity that we see from any of our competitors on the recruitment market.

So we will have to wait and see another couple of quarters, but as of now there doesn't seem to be anything unusual.

What about competition?

Since India's growing 8%, are you starting to be challenged by professionals wanting to go and work in other industries either directly or having sort of an upward pull on wages?

Not yet because I think there is sufficient talent pool which is still directed towards the IT industry.

And there are opportunities which the IT industry offers which other industries which are more domestically oriented don't offer.

So while there are sporadic cases of people going to domestic industry, this is not as yet a trend.

So would it be fair to assume that the rest of India Inc.

would put more pressure on your BPO business as opposed to your IT business?

You're right.

So Kurien can add to that whether the BPO business is more vulnerable to competition from domestic businesses.

I think the answer's clearly yes.

But what we've seen is that we've seen two trends happening.

While there has been a movement over, I would say, six months ago into domestic industry, that has slowed down last quarter.

And given the fact that the industry locally also is cooling down a little bit, we don't see that being a trend going forward, that is people moving into other industries.

But we still expect to see about 10% to -- 10%, 10% to 20% of the population that moves out of our business, who attrite out of our business, moving into local domestic business.

Great.

And turnover, any sense -- is there any sense that the turnover may be coming down a little bit because people see less opportunity?

I know all the tier ones have been trying to be more cynical about hiring laterals who have resumes where they move every few months.

Girish here.

So yes, we continue to see some clean up that needs to be done of incorrectness in resumes especially on lateral hiring.

We thought we had completely cleaned out, but seems to be that it's a more endemic thing.

So we continue to see 2% or 3% of the attrition really attributable to that kind of problem.

But other than that, I think the attrition rate continues to be in a range.

There is a hypothesis that, as the year progresses, the attrition rate should fall.

And maybe it will happen, but we've not yet seen anything like that.

Thank you.

Our next question comes from the line of Devang Kothari of JP Morgan Securities.

Please go ahead -- or JMP Securities.

Please go ahead.

Yes, Devang Kothari from JMP Securities.

Just a quick question on your campus hiring strategy.

Given the change in mix that you're looking, from a freshers' perspective, how do you accomplish that?

Are you going to more tier two schools?

Or how can you have such an increase in freshers coming in?

Yes, Girish here.

Actually what happens in India is that you have to make these campus offers almost a year in advance.

So the people who are joining us now have actually been identified and offered to 12 months ago.

And when we did that exercise 12 months ago, we did go to a fairly large number of campuses and were -- and we were more aggressive in courting candidates.

So based on our activity done last year, we have a fairly strong pipeline, almost 14,000 people, to whom we have made offers for joining this year.

And we will wait and see how many of them do join our organization.

But there is no reason to believe that a significant majority will not accept our offers.

Okay, great.

Thank you very much.

Can we have the last question now?

We'll close the question, answer session.

Is there any questions on the line?

We have two questions left and they're both follow ups.

Suresh do you want to take the questions, or we'll take it offline?

Yes, yes.

No, let us take these two questions.

Okay.

Let's take the two questions and then close the Q&A after that.

Okay.

The next question is a follow up from Moshe Katri from Cowen & Company.

Okay, thanks.

Thanks for the follow up.

Some of your competitors indicated that the nature of the work that's required by their clients in this environment is changing.

Can you comment on that?

Are you seeing the same thing?

And then there's also a lot of talk about the fact that corporations with captive centers are actually in the process of looking to sell some of these properties out of India.

And maybe you can talk about that as well.

Thanks.

Moshe, Girish here.

So on the second question, clearly there are some captives which are on the block.

Some of it is genuine reasons of some disenchantment about the overhead of running a captive.

The other is their own reasons to monetize what they think they have created value in, in the form of the captive.

So there are a couple of things on the block.

And I think some of the -- as the year goes, maybe there'll be some more.

And our last question --

And then also a comment on the changing -- or the changes in the nature of the work?

Especially in large relationships the nature of work does move away from more traditional, technical type of work to be more complex work involving more business analysts, more architects, more large, complex project type of work.

So as our relationship kind of matures with clients, the nature of people we need to execute contracts changes.

There's no doubt about it.

And the last question in queue at this time is a follow up from Julio Quinteros of Goldman Sachs.

Please go ahead.

Sorry.

Yes, thanks guys.

Last question, it's just really a semantics question.

When you guys talk about cancellations, can you just define what you mean by that and how a cancellation is different than say potentially a deferral, a delay or a push out?

This is Suresh Vaswani here.

You know, very simply a project cancellation is a project, let's say, which is about to start or which has made some headway and then the customer decides to say that he does not want to continue with the project.

So typically when such a thing happens, of course we can also claim for some amount of damages based on the sort of contract that we've signed with the customer.

So that's a project cancellation, completely stopping the project.

While a project deferral is a customer just requesting that, instead of starting the project in Q1 we will start the project in Q2.

Okay.

The project is still live and will continue eventually.

Got it.

And so, as we look at the business right now, it sounds pretty clear that, on the cancellations front, you guys are not -- there's a couple of anecdotal evidence, kind of comments that you made that there were a few.

But what about on the deferrals, delays and push outs, how pervasive is that through the enterprise right now?

Cancellations were very, very few.

So --

Right.

So irrespective of the economy, I don't think there have been too many cancellations that we've had.

Understood.

There have been some -- there have been more than one, so to speak, project deferrals.

And that is what sort of is a worrying trend in context of -- and that's the impact of the slowdown in the economy.

And that is the reason we talk about trying to be cautious despite the fact that we have given a guidance which is (inaudible).

Okay, great.

One last comment I would like to make is -- so there's a lot of talk on economy slowdown etc.

It is also an opportunity for players like us who do certainly have a transformation advantage and a cost transformation advantage for customers.

So while yes, there would be some project cancellations and some project deferrals, I think we would also be able to convert some of the slowdown, so to speak, into an opportunity in terms of writing innovative solutions which are cost-transformational for our customers.

I agree.

I think all of our research suggests that that would be the case that over some period of time -- the risk I think really is that from the time that stuff gets cut, delayed or pushed out until the time that that actually begins to ramp up, is that a one-quarter phenomena, a two-quarter phenomena?

That's the part that I think we're trying to understand is how much risk is there from the time that something actually goes down until the time that something actually comes back online.

I understand.

But we certainly believe, and that's what we're speaking about, a more back-ended growth this year.

So we're expecting some upswings.

Got it.

Great.

Thank you guys.

Thank you Julio.

Thank you very much everybody for participation.

The IR team is available for any offline queries or clarifications.

Thank you very much and Steve you can give the final replay numbers.

Thank you sir.

Okay.

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