Intelligroup, Inc. Q3 2008 Earnings Call Transcript

Intelligroup, Inc. (ITIG)

Q3 2008 Earnings Call Transcript

October 29, 2008, 10:00 am ET

Executives

David Collins – IR, Jaffoni & Collins Inc.

Vikram Gulati – President and CEO

Alok Bajpai – CFO

Analysts

Tim Brown – Roth Capitals

John Mietta – Needham Company

James Friedman – Susquehanna

Ashish Thadhani – Gilford Securities

James Keller – VUSA

George Milos [ph] – MDH Management

Presentation

Operator

Ladies and gentlemen, thank you very much for standing by and welcome to the Intelligroup Q3 earnings results conference call. During this presentation, all participants are in listen-only mode. Afterwards, we will conduct the question-and-answer session.

(Operator instructions)

As a reminder, this conference is being recorded on Wednesday, October 29, 2008. It is my pleasure to turn the conference over to Mr. David Collins, Investor Relations from Jaffoni & Collins. Please go ahead sir.

David Collins

Thank you operator and thank you everyone for joining us for Intelligroup's 2008 third quarter conference call. In a moment, Vikram Gulati, President and CEO; and Alok Bajpai, CFO, will review the quarter and then we'll open the call to questions.

Before we get started, I'd like to remind everyone of the Safe Harbor statement included in the press release and that the precautionary statements apply to today's conference call as well. During the course of the call, the company may make forward-looking statements that reflect management's current expectations regarding future performance of events including those related to market demand for our services, strategic partnerships, and future sales.

Although management believes that the expectations reflected in such statements are reasonable, they give no assurance that such expectations will prove to be correct and you should be aware that actual results could differ materially from those that are contained in the forward-looking statements.

Forward-looking statements are subject to a number of risks and uncertainties including but not limited to the variability of quarterly operating results, continued uncertainty of the IT market, loss of one or more significant customers, reliance on large projects, concentration of revenue, ability to attract and retain professional staff, dependence on key personnel, various project associated risks including termination with short notice, substantial competition, general economic conditions, volatility in quarterly operating results caused by fluctuations in the currency markets, risks associated with intellectual property rights, risks associated with international operations, and other risks detailed from time to time in the company's filings with the SEC including the company's Form 10-K for the fiscal year ended December 31, 2007.

The company's forecasts are dynamic and subject to change. Therefore, this forecast speaks only as of the date of this conference call and webcast, October 29, 2008. The company assumes no obligation to update the information contained in today's call.

I would now like to turn the call over to Vikram Gulati, Chief Executive Officer.

Vikram Gulati

Thank you, David and good morning to everyone in the US and good evening to those of you in Asia. We're happy to have you on the call today.

Intelligroup continues to make great operational and financial strides. The effort and dedication by all our employees over the last three years is clearly moving the company in the right direction, even during these challenging economic conditions. Given that, this is just our second quarterly earnings call in quite some time, I would like to try and help those who are new to the company to understand what is it that we do.

Intelligroup is an ERP focused enterprise applications system integrator. What that means is that we help companies align and optimize their technology platforms, primarily their ERP systems with their businesses. We help them maximize their revenue and productivity as well as to better manage and control their costs.

We do this by planning, consulting, building and managing ERP solutions that address critical business functions such as supply chain management, sales and marketing, manufacturing processes, financial reporting, including AP, AR, and general ledger, human resources, inventory management, purchasing, costing, billing and activity management, and customer support among other critical functions. Our engagements are focused principally on the SAP and Oracle ERP platforms.

As many of you know, the ERP space remains one of the fastest growing areas within the IT services universe, with a market size expected to reach $25 billion by the year 2011. Driven by global rollouts, expanding usage, product upgrades, and continued need for maintaining a competitive advantage, ERP is at the core of the mid-sized companies that we target. Over 20 years of experience and 90% of our business coming from ERP driven projects, we have the in-depth knowledge and expertise in this sector.

Alok will discuss the quarter in greater detail, but in these times of economic uncertainty, I wanted to highlight Intelligroup's financial position as strong and continues to improve. We finished this quarter with almost $9 million in cash, up from $8.1 million on June 30, and our borrowings under our $10 million line of credit dropped by $2.4 million to just about $0.1 million. With an 8.4% revenue growth and improvement in both gross and operating margins on a year-on-year basis, we remain confident in our ability to deliver strong operating performance.

In terms of market focus, Intelligroup continues to target strong verticals such as high-tech, which accounted for about 19% of our revenues in this quarter. Other areas of focus include consumer products, life sciences, and discrete manufacturing, in addition to insurance, a new area for the company. These verticals together represent approximately 65% of our total revenue. Importantly, we continue to have limited exposure to both the financial services and retail verticals, two of the hardest hit area in the IT services industry. These verticals combined represent less than 3% of our total revenue.

On the new business front, Intelligroup was successful in adding 35 new clients during the quarter, of which 22 were in the US, 7 in Japan, 4 in Europe, and 2 in India. These clients addition are a testament to the growing recognition of Intelligroup as an extremely dependable and value-added partner, and the success of the sales and marketing effort we have made over the past three years.

I also want to briefly comment upon our recently announced share repurchase program, which I believe given the current price levels of our share represents an attractive investment and reflects our continuing confidence in our own financial strength. We have maintained the flexibility to invest in our current business with a strong balance sheet, profitability, and free cash presentation [ph]. This program allows us to repurchase up to $5 million worth of shares of our common stock over a period up to 18 months.

We intend to adopt a trading plan pursuant to SEC Rule NB5 to facilitate repurchases at times where we would ordinarily not be in the market due to our internal trading policies. The execution of the plan will depend upon many factors including our cash flow and liquidity and price of our shares.

In summary, we are pleased with our progress so far. However, of late, we are seeing some levels of slowdown, mainly exhibited as the year in new projects start, as well as reduction in scope of some existing projects. These have been limited to a small segment of our client base. And based on our current assessment, we don't expect any major impact on our business. We believe our results are a reflection of our strategy to focus our company on ERP based work, primarily for mid-market clients. We're also benefiting from our client-centric focus and our global delivery model, which uniquely focuses on both on site and offshore teams.

Additionally, dedicated resources in our suite of proprietary tools make Intelligroup a compelling choice for mission-critical ERP projects. We just don't know their technology; we know their business. We believe these elements differentiate our firm and provide a competitive advantage in this marketplace.

With that, I will now turn over the call to Alok who will review our financials for the quarter. Alok?

Alok Bajpai

Thank you, Vikram, and many thanks to all of you for listening today. We had strong bookings, revenues, earnings, and cash flow for the quarter. This continued the trend of strong results across each of our quarters so far this year.

First, revenues for the third quarter rose 8.4% to $41.2 million over the third quarter of 2007. This increase was the result of continued new business wins, strong recurring revenue, and increased sales to existing customers.

On a sequential basis, revenues increased 2.7% versus the last quarter. Gross profit rose to $12.9 million, generating a gross margin of 31.3%, an increase over gross profit of $11.1 million and gross margin of 29.1% in Q3 of last year. The improvement in gross margin was primarily a result of our increase in resource utilization, where we achieved an improvement of 1.5% from 70% to 71.5% year-on-year, as well as from our effort in reducing the T&E expenses, travel and entertainment expenses.

Utilization increases were achieved both in onsite and offshore personnel, and reflected our ongoing focus to derive greater efficiency from our teams. Attrition rate both in the US and in India has improved, with the US attrition rate falling from 26.5% to 19.3% and India attrition rate falling from 33.8% to 26.9% on a year-over-year basis. One positive side of a challenged economy is a bit more stickiness in terms of personnel turnover.

During the quarter, we added 61 new employees, net of employee departures. We ended the quarter with a total of approximately 2,500 employees, around 22% of which are onsite personnel.

Indicative of our management discipline, Intelligroup was able to increase its average on-site bill rate by 6% as compared with the third quarter of last year, while we also increased average offshore rate by 5% as compared with the third quarter of 2007. The management of billing rates remains a key focus of management and we are pleased by our progress in creating greater value from our strong service offerings.

Sales, general and administrative costs for the quarter were $8.8 million or 21.3% of revenues compared with $8.4 million or 22.1% of revenue for the third quarter of last year. The decrease in SG&A on the percentage basis reflects our having reached the level of overhead where we believe we will only need nominal increases to support higher levels of revenue over the next few quarters.

Operating income increased 83% to $3.9 million or 9.4% of revenue compared with $2.1 million or 5.5% of net revenue in the third quarter of last year. We view this significant improvement as underscoring the success of our efficiency and cost management initiatives.

On the foreign exchange front, our Rupee versus US dollar hedging activity, together with the foreign exchange reinstatement gain, led to a net loss of $700,000 as the Rupee continued its steep decline versus the dollar. This compared to a foreign exchange gain in the third quarter of last year amounting to about $800,000. The foreign exchange impact are reflected within the other income/expense line item on our P&L.

Our effective tax rate for the third quarter was 14.5% and our year-to-date effective tax rate was about 16%. We anticipate our full year rate to approximate to about 18%, reflecting the benefit of our India operations and our NOL which total approximately to $49 million as on date.

Despite the unfavorable impact due to the foreign exchange that I just mentioned, our third quarter net income increased to $2.7 million or $0.06 per diluted share, compared with Q3 '07 net income of $2.6 million, which was also $0.06 per diluted share.

On a sequential basis, this improvement in net income was over a net income of $1.1 million or $0.03 per diluted share in the previous quarter of this year. Free cash flow for the third quarter was $3.1 million versus $600,000 in the last quarter, making this the third consecutive quarter of positive free cash flow.

During the quarter, we had 35 new customer wins, totaling to $35 million in total contracted revenue. Year-to-date, we have 106 new customers generating over $100 million in revenue over the life of the contracts. Our current client base stands at approximately 210 clients.

In summary, we are pleased with our third quarter and year-to-date operating performance, and are very proud of our people and their tremendous ability to drive our business in a way that serves our clients and shareholders. As we move into 2009, we remain focused on closely managing our business and we believe we are prepared to respond to rapidly evolving market conditions, which we believe could provide us with new opportunities to help our clients manage and transform their businesses to be leaner, stronger and better able to compete on a global basis.

With that, let me turn the call over to Charmaine to open the call to questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Tim Brown from Roth Capital. Please go ahead. Your line is open.

Tim Brown – Roth Capital

Hi. Morning guys.

Vikram Gulati

Morning, Tim. How are you?

Tim Brown – Roth Capital

Good, good. I just want to touch on a couple of areas I guess, first, can you give a little bit more color on the macro demand environment and certainly out of SAP that things appear to be slowing down, I think first in the US and over in Europe. And I’m just curious going forward into the end of fourth quarter and 2009, can you just give us an idea of how you think that could affect the business?

Vikram Gulati

Sure, Tim. I think we did come out with some guidance or some numbers earlier – about a month ago, in terms of where they are seeing their revenues grow. And obviously, we are seeing that people are possibly rethinking in net new investments and in net new software, right? I mean, SAP purchase is like a capital expense purchase. And in these times, people would obviously question those given (inaudible) on the overall macroeconomic front. But our business is – it’s dependent on what happens on SAP, but in some ways it is also independent of what happens to SAP in the very short-term. It’s like when people are not buying some new cars, people who are in the business of keeping old cars running do well, right? So we see that impact coming through to us where we continue to have to service accounts in implementing newer modules that people had bought but not implemented, in making sure that we are maintaining the overall SAP environment as best as we can. So that business continues.

However, with continuously slowed investments in net new software promised (inaudible) Oracle over continued quarters, two, three, four quarters, then obviously that will have a trickle down effect on our own demand. But since we operate in an area where we are involved with maintaining and managing the SAP environments and doing add-on projects, we don’t see as much of an impact.

In many cases, net new implementations of SAP were becoming far and few in the marketplace over the last few years in any case, right? So what SAP has just come out with doesn’t seem to have an immediate impact on us but if this continues over let’s say four quarters, then obviously the trickle down impact will be there. But as of now, we are not seeing a direct correlation between what they are seeing in terms of license issues and our revenues which are most services oriented.

Tim Brown – Roth Capital

And can you give us maybe just a little bit of color on your customers’ health and willingness to buy obviously your not exposed to DFSI [ph] as much as a lot of your counterparts, but I’m curious especially at the mid-market if you’ve seeing more of hesitancies to spend and potentially more bad debts that you would have to take?

Vikram Gulati

I don't think it was a bad debt issue here but it’s a more – what you’re really seeing in the marketplace is people are like stretching our projects. What was otherwise likely to happen in three months is happening over six months because people are having to ration their spends over a longer period of time. So that’s one fundamental shift we have seen over the last month, month and a half, I would say. But beyond that, we still see a lot of demand coming through from our customers. We are still actively hiring both in the US as well as in India. We don’t see ourselves stopping that in the immediate short-term. Obviously, we need to remain very much on top of our bench on utilization to make sure that we don’t get hit by having excess capacity or more people than what we need. So that’s something that we are managing very, very sharply and taking decisions as and when required.

But both mid-market as well as the larger customers are continuing to make sure that whatever investments they had made from a license perspective are being brought online and for that, they need the solaces [ph] aspect. What’s also happening here is that as the economic conditions are panning out, people are becoming far more open to offshoring. What was otherwise not thought to be offshorable is becoming offshorable today, and we are seeing a much more demand. In fact, our offshore percentages have shifted by almost two, three percentage points over the last quarter. We are gaining on offshore as a percentage of our total revenue. So what was not earlier considered offshorable is now considered offshorable given that people have lesser money to spend.

Tim Brown – Roth Capital

Is it specific functions that they are now are offshoring more technical stuff or what's the change there?

Vikram Gulati

No. In fact, functional staff. In fact technical staff, people were always open to offshoring. Now, we are finding that people are even open to offshoring functional staff. Functional support is been offshored, even functional work during active upgrades and implementation. I’ll give you a simple example, Hitachi. Hitachi is a long-standing customer for us and we did the project for them for their Mexico Electronics Operations upgrading their SAP instance there. Almost all the projects, 95% plus of the project was done from offshore, something that would have been difficult to imagine maybe six months or a year ago.

Tim Brown – Roth Capital

Got you. Okay. And then you just touched on resource utilization and I think in the offshore industry, we’ve seen a big uptick in resource utilization as I think some of the bigger players have seen the demand start to come down, and we’re seeing a tick up as closer to 80% to high 70s. Do you guys have any goals in terms of moving that up from 71.5% to mid-to-high 70s, or what's your thoughts on that?

Vikram Gulati

Yes, that’s right. Our internal goal for offshore utilization is closer to 75%. We believe that anything higher than that could affect our capability to respond to newer business, so I think from 71.5% to about 75% is where we would take the offshore utilization to.

Tim Brown – Roth Capitals

Okay, okay. Great. I think that’s all my questions for now. I’ll jump back in the queue.

Vikram Gulati

Thank you.

Operator

Thank you for your question, Mr. Brown. (Operator instructions) And now we’ll proceed to our next question. This comes from the line of John Mietta of Needham Company. Please go ahead, your line is open.

John Mietta – Needham Company

Thank you very much. Vikram, I was wondering if you could comment on, are you seeing more activity in one segment of ERP versus another? So for example, whether it’s general ledger implementations or supply chain or CRM, is there anything of note there?

Vikram Gulati

Not really, John. I think we’ve seen – I mean, I’m not able to see a trend that says one particular segment has more acceptance today than others. I think people are investing on what’s important for their own businesses. Even very, very specific solutions like recently we did a project for Sharp Electronics where we used SOA technology, service oriented architecture, to streamline their credit card operation. I mean, on SAP platform but using SOA as a ground-up technology to do credit card normalization. So I’m not seeing a particular shift saying that it is more supply chain or more CRM or more financial happening.

In fact, recently, we are getting engaged on some pretty large HR projects as well; something that was not happening over the last six, seven, eight months. So we are seeing a fair balance, in fact, across all these streams from an ERP perspective.

John Mietta – Needham Company

Interesting. Okay. And then just in terms of new business that you’re winning, are you seeing any difference in terms of the way deals are structured whether – revenue share would be one example, so anything along those lines in terms of deal structure that may have changed in the past several months?

Vikram Gulati

I think people are expecting us to show more productivity gains, especially when it comes to year-on-year support deals. People are also expecting us to take on more fixed price projects when it comes to upgrades and implementations, so those are things that you would expect under challenging economic conditions, that people would want their IT provider to not take the risk but at least share the risk. So that’s what’s happening and obviously we have to be absolutely on the ball as far as delivering of those projects is concerned because miscues on those could result in margin hits.

John Mietta – Needham Company

Got it. Okay, thanks very much.

Vikram Gulati

Thanks.

Operator

Thank you for your question, Mr. Mietta. And we’re going to continue on. We now have a question from the line of James Friedman of Susquehanna. Please go ahead, sir. Your line is open.

James Friedman – Susquehanna

Hi, Vikram.

Vikram Gulati

Hey, James.

James Friedman – Susquehanna

I wanted to – sorry if you had mentioned this earlier. It’s in the press release but with regard to the on-site/offshore, I know that you mentioned the offshore utilization rates; but I wanted to ask is, is there an opportunity to shift more work offshore with the purpose of trying to further expand the gross margins and potentially the operating margins of the company?

Vikram Gulati

Absolutely. Absolutely, James, and that’s what I said earlier too. Not only is it something that we are trying to do proactively, it is something that the customers want us to do because with less money to spend on an overall project, with the same number of work hours to be done, they are more open to getting work done offshore which otherwise they had not thought of. So it’s not just something that we are trying to get done, it’s something that our customers also are very supportive of to get done from a total project cost perspective.

James Friedman – Susquehanna

So what is the current on-site/offshore mix?

Vikram Gulati

Alok, would you be able to give that exact number?

Alok Bajpai

Yes, we have 72% on-site in dollar value terms and 28% offshore right now.

James Friedman – Susquehanna

And, Alok, what do you see as a prospective target?

Vikram Gulati

Our internal target for the year is about 77:23 and at that point of time, we had set targets to go to 70:30. We are right now at 72:28, so we’ll get to 70:30 and then reset targets to keep moving it to offshore. I think the goal here is that the more offshore you do, the better you are off from a margin perspective as well as from a stickiness perspective.

James Friedman – Susquehanna

Okay. Just the last few questions. In terms of your peer group, what are the typical standards for on-site/offshore delivery? Define the same way that you’re defining it.

Vikram Gulati

Difficult to make a peer-to-peer comparison. Most people don’t have their ERP on-site/offshore ratios out in public domain. What they do give out is their total company on-site/offshore percentages, and that will be skewed more towards offshore just because a large percentage of what those companies do is the legacy mainframe work; legacy work, mainframe work, just ADM kind of work, which is far, far more amenable to offshoring than ERP.

ERP perhaps has been the last of the IT services sectors to actually actively offshore, so difficult to make a comparison but I think we would be – if we just look at the number of people we have, less than 22% of our people are on-site, 78% of our people are offshore, which to my mind is very, very favorable when we compare to like businesses vis-à-vis competition of their ERP segments, of their ERP practices, not as a whole but from an ERP to ERP comparison.

James Friedman – Susquehanna

Okay, that’s helpful. And then my last question is with regard to the 30 semi customers this quarter, 100 to-date this year. Are those Greenfield customers that previously had not offshored or are they customers that have contract opportunities that had previously offshored with a competitor? Where is that incremental dollar coming from?

Vikram Gulati

Both, in fact, it’s coming from both customers who are moving work from others to us or who had outsourced earlier then stopped or then taken a pause and now are offshoring with us. And it’s also driven by customers who had never offshored and are working with us either on an on-site mode or on-site/offshore mode, so it’s both

James Friedman – Susquehanna

Okay. Let me wish you a Happy Diwali, if that’s appropriate. Thank you so much.

Vikram Gulati

Thank you so much. Thank you.

Operator

Thank you, Mr. Friedman, for your question. Moving on, we now have a follow-up from the line of Tim Brown of Roth Capitals. Please go ahead, your line is open.

Tim Brown – Roth Capitals

Hi. Just a couple of follow-up questions.

Vikram Gulati

Sure, Tim.

Tim Brown – Roth Capitals

Just on a couple of other areas of the business, I guess one is could you just comment on testing? I know that’s been growing quite rapidly. I was curious where that was this quarter.

Vikram Gulati

Yes, it’s growing pretty well. In fact, that business – we don’t give segment value details but we are on plan, in fact ahead of plan on our testing business. The practice has grown to almost 100 people now, which didn’t exist a year back. We have aligned ourselves very, very well with both HP for the HP Mercury line of products as well as with SAP.

Our sales teams are working jointly. In fact, we put out a joint brochure with HP, where Intelligroup and HP were co-mentioned on the brochure. It was primarily targeted to testing in an upgrade scenario, so the logic of that offering was upgrade with Intelligroup’s Uptimizer, upgrade the SAP with Intelligroup’s Uptimizer; and while you’re upgrading, make sure that you are using HP Mercury for testing out the upgraded environment. Great concept and very well-executed by both teams, so we are seeing a lot of traction on the testing side.

Tim Brown – Roth Capitals

How long has that alliance been active? About a quarter?

Vikram Gulati

About six months now. Yes, we put it in place in the late spring/late summer – actually late spring, and it’s getting momentum as we speak.

Tim Brown – Roth Capitals

Okay.

Vikram Gulati

And the other lines Tim here is SAP itself, on their TAO product, on their Testing, Activation and Optimization product, which again we are working jointly with them on projects.

Tim Brown – Roth Capitals

Okay. And then you said you have 33 or 35 new customers. I think last quarter, you gave us a dollar figure of new business. I was wondering if you that dollar figure.

Vikram Gulati

Alok, would you have it?

Alok Bajpai

Yes. As I mentioned, I think in this quarter, we have booked just about $3 million, but we have a totally contracted revenue coming from them of about $35 million.

Tim Brown – Roth Capitals

$25 million?

Alok Bajpai

$35 million.

Tim Brown – Roth Capitals

$35 million from the 35 customers?

Alok Bajpai

Yes, that’s correct.

Tim Brown – Roth Capitals

Okay, okay. And then –

Vikram Gulati

In this quarter, $3 million came from those customers; so $3 million is the book revenue in this quarter.

Tim Brown – Roth Capitals

Okay.

Alok Bajpai

Yes, the contracted revenue totals on these customers would be $35 million and year-to-date for the whole year, as I mentioned 106 customers, total contracted value approximately $100 million.

Tim Brown – Roth Capitals

Okay. And then just a quick question on the tax rate. You said 18% is the target for ’08. What’s the target for ’09?

Vikram Gulati

Alok?

Alok Bajpai

I think it would remain because we still have some of the STPI benefits that we had in our Bangalore office in India. Also our annual, which are totaling to about $49 million, will definitely take us through the next few years, so we will not have effective tax rate anything higher than 17% to 18% even for the next year.

Tim Brown – Roth Capitals

Okay. And then on the foreign exchange. Did you get a benefit in the margins from the foreign exchange rate this quarter?

Vikram Gulati

Alok?

Alok Bajpai

Yes, definitely. That’s a fact. We actually have –

Tim Brown – Roth Capitals

And I don’t know if you can quantify that.

Alok Bajpai

Yes, I will definitely do that. We have an operating gain of almost $1.1 million, which came through in the savings in the COR, the Cost of Revenue Resources and also the manpower costs in the SG&A; so that’s almost about 2% of our additional gross margin that we got through the operational gain. So what we lost on the hedging was only about $700,000; so basically, because of this depreciation of Rupee, we still had a net gain of about $400,000 in this quarter.

Tim Brown – Roth Capitals

Okay. And then the way you’ve hedged, I mean, should we expect that number to go up, assuming the Rupee stays relatively stable at this point in the future quarters in 2009?

Alok Bajpai

The hedging contracts keep expiring, some of them quarter-over-quarter. We are not getting into new contracts now, looking at the way this has been so volatile; so as we go along the quarter, the hedging impact should hopefully come down in terms of the negative impact that we have. Now, the Rupee has already now reached the 50 mark. We closed the last quarter actually at about 47.45. So again, in the next quarter, if it remains at about 50 level, we will have some more hit coming in our derivative losses. But as I just mentioned, it’s a gain as well. I mean on the operating side, we gain by this depreciation.

Tim Brown – Roth Capitals

So I guess in 2009, how much are you hedged in 2009?

Alok Bajpai

Over the whole year, not only 2009, we had some of the contracts which actually ran for a total period of three years. So, only one year has gone by, so we still have something running into 2010 as well. We would have approximately another $29 million contract with that open as on date.

Tim Brown – Roth Capitals

Okay.

Alok Bajpai

Which is hardly 20% of our annual revenues.

Tim Brown – Roth Capitals

Right. So now, you effectively have more exposure? Right now, at this point, it’s a good exposure, right?

Alok Bajpai

Yes, we don’t want to increase the exposure on the hedging as of now, looking at the volatility that we have.

Tim Brown – Roth Capitals

Okay, I think that’s all my questions. Thanks again.

Vikram Gulati

Thanks, Tim.

Alok Bajpai

Thank you.

Operator

Thank you for your question, Mr. Brown. Continuing on, we now have a question from the line of Ashish Thadhani of Gilford Securities. Please go ahead.

Ashish Thadhani – Gilford Securities

Yes, good morning. I was wondering if you could draw a comparison between Intelligroup's and an outfit like Axon Group in terms of market positioning, service capabilities and overall profile?

Vikram Gulati

Sure, Ashish. Familiar with Axon to some extent and then at the highest level, I would just say that Axon’s far more Europe-based. They’ve had some acquisitions in the US, but have been heavily Europe-focused, number one. Number two, they seem to be far more on-site focused. I think – I’m not sure if they have any credible offshore operation at all. So those I would say are the two different points, the daily operate – the way they operate, number one. Number two is both of us are in various similar spaces to that with that extent. They are focused around ERP; we are focused around ERP; and to that extent, we are very similar; so I hope that helps Ashish.

Ashish Thadhani – Gilford Securities

Yes. And do you see them a lot in the marketplace?

Vikram Gulati

Not really. We see them – in the US, we encounter them in just a very small narrow segment of Aerospace and Defense. That’s the segment that they have some unique strength and we see them just in that one segment. We have not seen them active in other segments.

Ashish Thadhani – Gilford Securities

Okay, very helpful. Thank you.

Vikram Gulati

But in any case, they are far stronger in Europe. We are far stronger in the US, but we don’t see them in US is perhaps a function of that as well.

Ashish Thadhani – Gilford Securities

Sure, understood. Thank you.

Vikram Gulati

Thanks, Ashish.

Operator

And thank you for your questions. (Operator instructions) Our next question comes from the line of James Keller of VUSA. Please go ahead, your line is open.

James Keller – VUSA

Hi, good morning.

Vikram Gulati

Hey, James.

James Keller – VUSA

Could you please update us on what the status is of your Edison office and efforts to reduce lease space?

Vikram Gulati

Alok, go ahead.

Alok Bajpai

Yes. Good news that we have already moved out of the Edison office, so we are in Princeton now. Our lease expired in the first week of September, so we are off from that old office. So as we mentioned in the last conference call as well, we would be saving about $750,000 per annum on the rental cost alone.

James Keller – VUSA

Okay. And so that's to show up – I guess it started to show up in one month of Q3?

Alok Bajpai

That’s correct. It was about – we have three weeks of savings in Q3, and we will have a full quarter of saving in Q4.

James Keller – VUSA

And that new office can sustain growth for how long?

Vikram Gulati

The new office is something that we think – in any case, we are not using these offices for our consulting resources. It’s primarily a sales business development kind of office; so the foreseeable future, we see ourselves pretty, pretty solidly set with our new offices.

James Keller – VUSA

Very good. Thank you.

Operator

Thanks for your question. Now, our final question comes from the line of George Milos [ph] from MDH Management. Please go ahead, your line is open.

George Milos – MDH Management

Thank you. Good morning, Vikram and Alok. Two quick questions. The depreciation and amortization line was quite low this quarter. I was trying to understand why. And then also, on the share repurchase, do you think you might be able to repurchase some shares from your two VC or private equity holders, or do you intend to that from the open markets?

Vikram Gulati

Alok, can you go ahead with both?

Alok Bajpai

Yes, Vikram, I'll do that. Thank you, George. To the first question, yes, there has been a reversal of almost $340,000 from the amortization. That was because of the amortization that we were doing for a small acquisition that we did in UK in the last quarter of the last year. So there was a particular purchase price allocation that we did based on estimated revenues coming from that business; and after a year, we were supposed to revalue those assumptions. So end of the quarter, we revalued the assumption and we recalculated the amortization based on the new value of the intangibles and the balances going to the goodwill. So since the intangible value has come down, the amortization was supposed to come down for the whole year; so there was a reversal of amortization and that’s why the amortization has dropped in this quarter. If I exclude that one-time reversal, then the amortization and depreciation will remain at about $650,000 per quarter, going forward.

To the second question, yes, we will have a plan in place and we will be obviously restricted to the amount of repurchases we can do based on our trading volumes, and we will also be allowed to do some block trades, one trade a week; and depending on our cash flow and depending on the price that we get, we will be open and flexible to do these purchases from wherever we can get from, as long as they are in line with our target price and the liquidity that we will have.

Vikram Gulati

Well, the intent here, George, I should be very specific, the intent is not to purchase back from our strategic investors; that’s not the intent.

George Milos – MDH Management

Okay, so it’s really – the intent is really to purchase them from the open markets.

Alok Bajpai

Yes, absolutely, because our current investors are very much vested and supportive of this whole thing; so it’s not to dilute them in any which way.

George Milos – MDH Management

Okay, great.

Vikram Gulati

Yes. I mean, they would not be selling, so I don’t think we would get that opportunity anyways.

George Milos – MDH Management

Right. Very good. And then maybe a quick follow-up on some of the new clients that you closed this quarter. You had quite a few in Japan. You have a particular sales effort there. Can you maybe talk a little bit about that?

Vikram Gulati

Sure. Japan has always been pretty active, and what we have been able to do is put this whole upgrade program into high gear in Japan. The type of business that we do in Japan is primarily around upgrade assessments and code remediation around SAP upgrades, and that has been doing rather well of late. So you do see a reflection of that in a number of new clients we have won in Japan.

George Milos – MDH Management

Great. Thank you very much.

Operator

And thank you for your questions, sir. And Mr. Gulati, that appears to be the final question at this time. I’ll return the presentation back to you to continue or for your concluding remarks, sir. Thank you, sir.

Vikram Gulati

Thank you, thank you. Let me just recap quickly that we are pleased with the performance in the third quarter. We have the continued momentum in our business but are keeping a very close eye on our clients, industry sectors, and both challenges and opportunities that are presented with the global economic and financial market troubles. Our ERP oriented services are right at the heart of our clients’ business, and our on-site and offshore teams bring both a business and technology perspective to each vertical in client engagement. We believe this expertise in service orientation will allow us to keep building on our track record of delivering a measurable ROI to our clients even in challenging times.

I thank you all for joining us today and look forward to keeping you informed on our progress. In the interim, should you have any questions, just schedule a meeting or a conference call, we encourage you to contact Norberto Aja or David Collins of our IR from Jaffoni & Collins. They can be reached at 212-835-8500 or via email at [e-mail]. Thank you. Thanks again.

Operator

Thank you, Mr. Gulati. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again. Have a fantastic day.

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