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Executives

Araceli Roiz - IR, Manager

Phaneesh Murthy - President & CEO

Sujit Sircar - EVP & CFO

Analysts

Joseph Foresi - Janney Montgomery Scott

Glenn Greene - Oppenheimer & Company

Brian Kinstlinger - Sidoti & Company

Amit Singh - Jefferies

Mayank Tandon - Needham & Company

Vincent Colicchio - Noble Financial

iGATE Corporation (IGTE) Q4 2012 Earnings Call January 17, 2013 8:00 AM ET

Operator

Greetings, and welcome to iGATE Corporation’s Fourth Quarter Fiscal Year 2012 Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Araceli Roiz, Head of Investor Relations for iGATE Corporation. Thank you Ms. Roiz, you may now begin.

Araceli Roiz

Thank you. Good morning and thank you for joining our call to discuss our 2012 full year and fourth quarter financial results. With me today are Phaneesh Murthy, iGATE’s President and Chief Executive Officer and Sujit Sircar, iGATE’s Chief Financial Officer. A copy of today’s press release and supplemental financial information are posted on iGATE’s Investor Relations website at www.igate.com. Today’s call is being recorded, and a copy of the transcript will be available later today on our website.

Before we begin, I would like to remind everyone that some of the statements made during today’s discussion may be forward-looking in nature and may involve some risks and uncertainties. These risks and uncertainties may cause actual results to differ materially from those set forth in the statements. Additional information concerning these risks and uncertainties can be found in the company’s recently issued press release also available on our corporate website as well as our latest 10-K. iGATE Corporation assumes no obligation to update any forward-looking statements.

I will now turn the floor over to Phaneesh.

Phaneesh Murthy

Thank you, Araceli and good morning to all of you in the US. I want to just talk a little bit about both the fourth quarter and the full year. I think from the fourth quarter perspective the highlights are that we actually did $271.6 million in revenues. We had a marginal increase or relatively flat on the revenue side. The adjusted EBITDA went up quite nicely to $71.9 million in the quarter up from $68.6 million in the third quarter of 2012.

I think the bigger story is for the quarter and for the year are slightly different though; we didn't do very well on the revenue side. Clearly, it was a difficult year for us from an integration perspective, protection perspective, all of those things and transforming the sales force perspective. So from a revenue point of view we didn't do well, but I think what went very well for us is the fact that we have increased our pipeline very dramatically, increased the pipeline in iTOPS for business outcomes very dramatically, one of few very nice large deals.

If you remember, I had spoken in the previous quarter about having one large deal in the insurance space. At that point of time I had also said that we are in play for another fairly large deal in excess of $200 million, I am pleased to report that we have been given the go ahead to do due diligence and basically work on the contract to close that particular project out. The times for all of this have obviously got significantly elongated and we are now looking at cycles for transformation deals which are 18 months, 15 months to 18 months. But I am just pleased that the deal really has finally come to some kind of a closure.

The second big story of course in the quarter is the fact that we continue to be in our winning record on among the best IT employers. We ranked number one this year on the Dataquest Survey. And the third big story actually for the quarter is really the fact that on both quarter, is the fact that we added 14 new customers which was quite strange for us in the fourth quarter; typically, seven of which were Fortune 1000 kinds of customer.

So going into the next year, you know, IT, better and stronger pipeline, stronger iTOPS kinds of deals already in the bag, revenues for which will start flowing much later. So the first deal that we won, you know, we anticipate revenues to start actually flowing from Q2 of this year and this deal if you remember was won in Q4 of last year, so that just gives you the kind of the time which is happening for various activities, you know, including contracting and transition. And we're anticipating that the deal which we just got agreement to go ahead and do the due diligence and translate into contract, we expect that the revenues from this will start contributing in Q3 for (inaudible).

So that’s one of the large deals. Overall on the macro environment, we are starting to see signals that 2013 spending will largely be in line with 2013 budget. 2013 budgets are relatively flat compared to 2012 budget, but we believe that 2012 spending was actually lower than 2012 budget. So because of this we are actually probably going to see a little bit of an uptick in spent.

The discretionary spent is largely around customer facing apps, so if you just look at that overall picture, it does augur for a slightly better year and certainly it’s difficult for us to have oversee it from a revenue perspective; it was a 1% revenue growth if you look at it from one perspective and clearly most of the effort was on internal maturity, so we now believe that when we are acquired Patni we came $1 billion strong in revenue, but really what we have become in 2012, I generally believe is $1 billion matured. In addition to those deals that we won, we are also seeing several deals in the tens of millions of dollars which are there in our pipeline; tens of millions of dollars of order book and a couple of these we actually won in the fourth quarter which will start translating into revenues in probably late Q1 or early Q2.

So overall, if I just look at the scenario, not happy scenario from a revenue perspective; great scenario from an earnings perspective, excellent scenario from iTOPS pipeline building and acceptance in the marketplace, our solutions are really, really making a difference and we can see the inflection point in our minds starting to happen a little here. So that’s kind of a little bit on the quarter and the year.

Going forward, we anticipate that since many of these deals have larger, let me call it transition/ramp-up kind, we expect relatively flat kind of Q1, but growth starting after that as these deals starts cycling in revenue into our system.

I’ll hand over the floor to Sujit to do some color on the financials and then we will be happy to take any questions.

Sujit Sircar

Thank you, Phaneesh. Good morning and good evening everyone. And thank you for joining us on this call. I’ll take this opportunity to briefly discuss with you the key highlights of our financial performance for the fourth quarter and full year ended December 31, 2012.

Our revenues for the quarter were $271.6 million, compared to $271.1 million in the previous quarter. On a sequential basis growth remained flat as the 1% increase in volume was utilized by fewer billable days in Q4. This quarter our largest customer accounted for 12.7% of total revenue and our top 10 customers accounted for approximately 14.7% of total revenue. We ended the year with an active customer list of 304.

Gross profit margin was 40.6% better than the last quarter reported gross margin of 39.8%. The improvement was due to higher utilization rates and a slight bump-up in offshore average realized rates.

SG&A for the quarter excluding D&A was $41.2 million compared to $43 million last quarter, which excludes delisting cost of $2.2 million and $1.1 million respectively. The additional spend made as part of our marketing plan we launched in Q4 will increase the SG&A in absolute term an additional $1 million to $2 million per quarter for Q1 and Q2 of 2013.

Depreciation and amortization expenses for the quarter were $9.6 million, flat as compared to the previous quarter of $10 million. D&A will continue to trend near these figures for the next few quarters on an absolute dollar basis.

For the quarter, GAAP EBITDA was $66.7 million or 24.6% while non-GAAP EBITDA which excludes stock-based compensation and delisting expenses was $71.9 million or 26.5%. This quarter saw ForEx impact of $1.9 million compared to an impact of $3.8 million in the previous quarter. ForEx losses, net of gain of $1.5 million on revaluation of delisting related assets and minority interests. Having finalized the Patni acquisition process, ForEx should reflect our P&L neutral core hedging [risk] factors.

Tax amount for the quarter was $6.6 million compared to $8.5 million in the previous quarter. The decrease was mainly due to reverse loss of (inaudible) tax liability with an aggregate low effective tax rates. For the quarter, our non-GAAP net income which I expect amortization stock-based compensation delisting costs and ForEx impact on delisting limited assets and liabilities. Net of tax was $36.3 million or $0.47 per diluted shares compared to $35.6 million or $0.46 per diluted shares in the previous quarter.

Moving on to our annual results, our reported revenue for the fiscal year ended 2012 were $1.07 billion compared to last year $1.05 billion on pro forma basis or 1.4% year-on-year increase. The reported gross margin for the year was 39.5% compared to pro forma gross margin of 37.5% last year.

While SG&A accounted for $164.3 million excluding acquisitions and severance. Depreciation and amortization expenses for the year were $43.3 million. For the year GAAP EBITDA was $253.3 million or 23.6% while non-GAAP EBITDA was $272.1 million or 25.3%.

Due to (inaudible), total ForEx loss for the year was $20.1 million while our interest expense for the year was $83.4 million. The ForEx loss includes $4.1 million on account of revaluation of delisting related assets. Full year 2012 tax amounted to $30.6 million coming to an effective tax rate of 43%.

As part of the corporate streamlining, we were able to utilize tax loss evaluation allowances of various geographies which impacted to lower ETI. The normalized effective tax rate moving forward for the following year is expected to be between 26% to 28%. For the year, non-GAAP net income was $122.4 million or $1.58 on fully diluted shares.

Now moving on to the balance sheet, for the year cash generated from operating activities was $100 million net of interest payout. CapEx was $32 million. As of December 31, 2012; cash and cash equivalent were $609 million, with most of our cash balance is residing in India it is subject to translation gain and losses.

For the year the translation losses on account of this was $20 million. Our DSO stood at 70 as against 77 last quarter and we ended with a headcount of 27,554. Now exercise to streamline our legal entity structure we have merged iGATE and Patni effective December 31, 2012 and we have filed a petition for a merger of Patni legal entities with the [higher] courts in India.

With this, I will now turn the call back to Araceli.

Araceli Roiz

Thank you, for (inaudible) for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Joseph Foresi of Janney Montgomery Scott.

Joseph Foresi - Janney Montgomery Scott

My first question and I know that you've given color on this before and the numbers aren't necessarily out there but what are your thoughts on industry growth rate this year and then how would you expect iGATE’s performance to match up with that, obviously including the large deal size?

Phaneesh Murthy

I think it's a little difficult for me to give you that color right now because we are, I will just give you a little bit of color on iGATE rather than the industry right now and what we're seeing is that we're seeing the two large deals, the extremely large deals that are we were talking about, both of which were north of $200 million. The first deal that we won will start translating into revenue from Q2 onwards.

The second deal will start translating into revenue from Q3 onwards. So that’s where you will see potentially some little jump up in revenue in addition to the other deals. In addition to that, our pipeline actually is quite comfortable now, our pipeline compared to the same period last year is 75% higher, and in terms of our pipeline, the quality of our pipeline is also being significantly improved.

So we're looking at 2013 a lot more optimistically than what happened in 2012 and remember 2012 was integration. Yes, it was in the [sense] of consolidation and (inaudible) year but we were hoping for growth. So we didn't meet our internal growth, no question about that, in 2012. Part of it was the market environment which also has improved.

So overall, I am certainly looking for some growth in 2013, difficult to provide you any color and we generally have no guidance for the loss (inaudible).

Joseph Foresi - Janney Montgomery Scott

And then just, maybe you could talk a little bit about the deal ramps. What could cause these deal ramps to be delayed further, is it just simply the macro, is it the execution, is it sign-off within the companies, as we look at these deals your level of confidence in the start times and the ability to kind of bring in that revenue and what could be …

Phaneesh Murthy

I think the deals now I think there are not that many uncertainties, the uncertainties are more if at all from our side clear on executions. So, we have to get the due diligence done on this deal, we have to get it. So basically the way the process works is that you have been given the sign-off now, if there is no change in your proposal after doing due diligence than basically you get due diligence that translates into a contract when you start off.

Unless and due diligence tried something completely crazy. Generally, these deals get translated and that’s what will happen. Could there be a month here and there? Yes. Will it be a quarter here or there? Unlikely at this stage, because until you win the deal, the estimate could vary by quarter-to-quarter etcetera, but now that you have kind of got the deal I think they do not get much tighter.

Joseph Foresi - Janney Montgomery Scott

Got it. Okay, and then last question from me, just on the model itself how should we be thinking about the margin profile for next year and other income. I know that the other income kind of moves around with FX, so you can give us your thoughts with or without the FX of the other income side?

Phaneesh Murthy

Let me try and provide a little bit of color on the way I am looking at margins. These deals large deals, iTOPS deals typically what happening is that year one is zero margin potentially may be marginally negative margin too but really they are zero margin deals in the first year.

And then from the second year, they start ramping up in margin as we put the systems in place and so on. And in the latter years obviously the margin subject is very much higher to give you an average gross margin in our acceptable range. Now, so you will find I think three things, Q2 margins will be somewhat deflated because of three reasons, the first one is salary increases which we typically do in April, the second one is as the deal comes on you are adding a chunk of revenue but at no margin. And the third one is we anticipate again like last year there to be a bubble of visa cost only in the quarter.

So, these three will kind of contribute to deflating the margins a little. Under normal circumstances, we would have picked up because of the efficiencies and all we would have pick up the margins through the rest of the year and gone back to our 40-25 kind of a model.

In this case, however, what will happen is that in Q3 we will start getting the other deal on and therefore being margin gains and efficiency through the year which normally we think may not be as evident in this year. So we are actually expecting marginally lower gross margin and EBITDA percentage.

Also on the G&A side, we rolled out our corporate brand campaign last quarter. We got very, very positive news. So, we intend to continue and we got positive news and although it is a brand campaign we started getting the leads from it. And I think that's been a very positive thing there, people attend to relate very quickly, if you are talking about outcomes and if you are talking about iTOPS and stuffs like that. People are starting to relate to you very quickly and we are hoping that will start stepping into our sales cycle and will help shorten the sales cycle.

So, we intend to continue to do that for the corporate brand campaign and something, also in Q1, we conducted the first ever professional golf trial tournament for CEOs only. So we had 22 registrants. We did the iGATE CEO Cup Tournament recently and it was a very successful tournament. It went off great and everybody had a lot of fun, everybody was a little under pressure because there was a lot of money for charity and given the fact that all of them have promised to come back for next year and we think we can make next year’s event a little larger and bigger and so on. So I think if you look at our spend on marketing in the markets will continue to go up a little and therefore over the next year or so I am anticipating that our gross margin will be a little lower than now and our EBITDA will be a little lower than now. Hopefully that gives you some color.

Joseph Foresi - Janney Montgomery Scott

Yeah it does. And just any color on the other income would be helpful too; I mean, I know that's a hard number to kind of come up with, but you have any snap that I guess we can just try and model it?

Sujit Sircar

Sure. Whatever the cash balances are there between 75% to 80% of that cash remains in India and that gives you anything between 8% to 8.5% of return; currently the return has gone down; it used to be 9%. So I think in terms of the modeling, two things, one is on that cash generation and cash balance 75% to 80% you should be able to get 8.5%. That’s one. Second is that we intent sometimes in this year maybe Q2, in Q2 or Q3 will be, we intend to pay off around $300 million of our debt which is a bank loan which we have taken, which is a short term bank loan, so in that case you know that amount will come down, but in that case it will also be on that $300 million we’ll be able to say 3.2% of interest which we have.

Operator

Our next question comes from the line of Glenn Greene of Oppenheimer & Company. Please proceed with your question.

Glenn Greene - Oppenheimer & Company

Thank you. A couple of questions kind of following on the last, but maybe you could drill down a little bit on what you are seeing in the US. Obviously that's a key market for you. You've had some changes from a sales management perspective. Its obviously early, but give us a little sense for sales prospecting activities in the US and also be curious if the US financial services performance in the quarter some of your peers have had apparently had some issues this quarter related to that sort of sub-vertical?

Phaneesh Murthy

So we made a change; we've made a number of changes Glenn in the sales team, both at the North American head of sales there and at the, and at one layer below that and we continue to make changes even at the two layers below that. We have gotten a lot more focused, lot more rigor in the account management activities and stuff like that. So I think we are more than half way in our sales effort transformation, probably about 60% plus of the way in the sales transformation. In the banking financial services we had actually, remember our banking financial services the way is large partly US and partly Canada too. And we didn't have any challenges in that sector, actually it grew both quarter-on-quarter and of course year-on-year. It did grow for us as a unit.

Glenn Greene - Oppenheimer & Company

Okay, maybe Europe was obviously sort of a bit of a problem or I think I wish your commentary throughout the year was you know, pretty negative related to Europe activity. Have you seen any change or signs of life there?

Phaneesh Murthy

Yes. So I think multiple things happening in Europe. This large financial services deal that talking about, you know, is a global deal, but a lot of that stuff is actually in Europe. So we are starting to see activity, I mean in the sense that obviously, and all these global companies that have leadership across both the sides of the pond and based of comments that we are hearing, we are starting to see a little more openness. In addition to that, our European pipeline right now is actually quite strong and quite robust and we expect just based on what we are seeing in 2013, winning those deals, we are expecting 2014 Europe to be a much larger percentage of our total revenues than it is today.

Glenn Greene - Oppenheimer & Company

Alright and finally you had made a comment that you thought the market environment was better now than lets say it have been in the last two, three quarters and like. What’s making you say that, or do you saying out here that, suggesting the market environment is better?

Phaneesh Murthy

The broader sense Glenn that this year spending will be in line with budget rather than under budget and so therefore, from our perspective, the market is looking a little better than it had looked in the last two or three quarters.

Glenn Greene - Oppenheimer & Company

This is now suggests that….

Phaneesh Murthy

And remember, there are some positives, right, I mean we averted the fiscal cliff and you know, so if you look at much of the uncertainties in the macro situation have come down, I am not saying everybody is optimistic and spending that kind of money, but at least it certainly looks like they will be spending on pace with the budget and there is a lot of discretionary spending which is happening in the customer area and we are very well positioned for some of that discretionary spend.

Operator

Thank you. Your next question comes from the line of Brian Kinstlinger of Sidoti & Company. Please proceed with your question.

Brian Kinstlinger - Sidoti & Company

Great, thanks. The first question is a follow-up from Joe’s, I think Sujit you mentioned paying down $300 million of debt in the second quarter, is that refinance, is that using the cash in your balance sheet is that equity, how do you plan on doing that and was it accurate, did you say 20% to 25% of your cash is in the US?

Sujit Sircar

No, 20% to 25% that’s not right; we have just paid up our $35 million with cash as mush lower there in US. The key is that yes, the $330 million which we are talking about is about the bank loan and it’s not refinancing, it’s coming out of our cash itself.

Brian Kinstlinger - Sidoti & Company

And so will that be repatriated the cash in India that’s what you’re going to do?

Sujit Sircar

See, we have to – we intend to do it and we are generating enough cash as you see, we have generated more than $100 million cash there, so we intend to pay a lot of that loan which we want to do it. So our intention is to pay $300 million partly from our cash generation and partly from repatriating or paying the money off; because it’s a bank loan and it’s taken from an Asian bank and it’s not taken at the US level, it’s taken below US level.

Brian Kinstlinger - Sidoti & Company

Okay. And then Phaneesh may be talk about what makes the deals, these large deals have relatively no margin in the first year or is it you have to staff ahead of the work, I mean why is it and then what drives the leveraging in year two?

Phaneesh Murthy

The reason I think while the reason why they have no margins or slightly negative margins in year one, is because there is a large transition effort; typically we don't realize all of the value for the transition effort, one. And two, as you know brand in our model, we build significant chunks of technology components early to try and make sure that we can automate most of the stuff so that we can start getting much higher margins downstream.

Brian Kinstlinger - Sidoti & Company

Got it. Okay.

Phaneesh Murthy

So basically, year two, year three we will get good leverage on the margins.

Brian Kinstlinger - Sidoti & Company

And when you mentioned some quarters that you now started those dealing large deals, how long will it take till you are at the peak or whatever you call it run rate that is continuation recurring generally, I mean is it going to take a couple of quarters to ramp to that level or is it happen right away?

Phaneesh Murthy

It will happen fairly quickly, yeah. It will happen fairly quickly; I mean all of the transition, non billable stuff, all that is happening right now, so once it starts it will happen relatively quickly.

Brian Kinstlinger - Sidoti & Company

Great, and then can you also talk about pricing, I think that (inaudible) talked about better price realization; are you seeing rates go up, are you seeing better realization because of more iTOPS maybe go over that trend if you could?

Phaneesh Murthy

I mean I do believe that we have also experienced better realization, but Brian it’s a little counterintuitive to me in the market place, because 2012 was the first time where I actually found that a lot of the big deals were takeaway business, when I say take away business, it meant some other offshore player was doing it and we took it away. Normally, most of our deals are structured in such a way or typically have been in such a way that the business comes from a customer or where the customer was doing the work or potentially let's say an onsite vendor is doing the work and so you get a little bit of the business case done through authorization. You know in a model where you've got a large chunk of the business, if 2012 was an aberration year that's fine, if 2012 was not an aberration year then what ends up happening is that if there is more takeaway business then this intuitively you would expect price realizations to come down a little.

Brian Kinstlinger - Sidoti & Company

Right because you've placed a little bit lower and it went to takeaway deal, is that right?

Phaneesh Murthy

Yeah, that's right, you know when something comes up for renewal that's yeah exactly.

Brian Kinstlinger - Sidoti & Company

Right, okay. And then I guess on the, you mentioned a lot of reasons revenue will get stronger, you've had a couple of rationalizations of customers, a couple of other events, what are some of the headwinds you think that offset revenue growth, is there anything that worries you heading into this year?

Phaneesh Murthy

No, no, I think certainly we do see some overall I mean, highlight that the macro environment has improved; I don't know if it’s exactly hunky-dory. That's clearly one thing which is worrying. We have rationalized customers; we've also lost one or two customers as we reported in the last quarter. We certainly hope we don't lose anymore customers. So I think those are the kinds of headwinds but otherwise you know from an execution perspective we are doing relatively well. So I don't see any risks there.

Brian Kinstlinger - Sidoti & Company

Last one for Sujit maybe two things to breakdown, first is delisting expense, I missed that and then second, can you breakdown the line items, the major ones at least and other expense?

Sujit Sircar

The second question, break up on?

Brian Kinstlinger - Sidoti & Company

Other expense breakdown what interest expense was? What other income was from the other major components?

Sujit Sircar

Sure, in Q4 the delisting restructuring expenses was $2.2 million and in Q3 was $1.1 million and the other income and the exchange gain and loss was respectively $4.8 million and $1.9 million losses on exchange loss. And for Q3, it was $8.8 million of other income and exchange loss was $3.8 million.

Brian Kinstlinger - Sidoti & Company

And the delisting expenses, is that in SG&A?

Sujit Sircar

That is in SG&A, that's right.

Brian Kinstlinger - Sidoti & Company

And is there anymore cost in the first quarter?

Sujit Sircar

There will be little cost but you know at this time (inaudible) had a majority out of $2.2 million majority of the chunk was termination which already has happened.

Operator

Our next question comes from the line of Jason Kupferberg of Jefferies. Please proceed with your question.

Amit Singh - Jefferies

Hi, this is Amit Singh for Jason Kupferberg. Just coming back to the revenue growth in 2003 again, your performance of course on the margin side has been great and then but the revenue side has lagged a little bit to these amount to your peers and I believe previously you had said a large portion of it is because of I guess to put it that way company specific issues.

Now you are saying the North America sales transformation is halfway done, assuming that finishes soon enough just trying to get a sense of what other factors or company specific factors could be preventing you from growing just as fast as your peers?

Phaneesh Murthy

I don't think there are any other Amit. We did really the just our transformation. Remember we have this challenge to transform from a more timing material [stocking] oriented that kind of reports to a more outcome based, transaction based, from more decrease service line, IT, simple sales to more complex transformation kind of deals, from moving from the IT or CIO to the business head or COO.

So that’s kind of the transformation which I am talking about and that’s an internal thing and I actually believe that we now have a robust pipeline. I am actually delighted, absolutely delighted that there are deals which are tens of millions of dollars that we're winning in order value, where I don’t even know who the customer is, I have never met him. I don’t even know where the customer is and to me that is really a sign of very fantastic maturity.

Amit Singh - Jefferies

I remember last time, the last quarter you mentioned your pipeline was greater than $3 billion. Where does it stand right now and how much of it is committed at this moment and also if you can give us like how much visibility at this point you have in 2013 revenues?

Phaneesh Murthy

I think pipeline is or instead pipeline committed is the pipeline, the pipeline today stands at roughly $3.5 billion. So that’s a fairly strong pipeline. Obviously, that is across different probability ranges. Having said that, if you look at the large deals that we're in, I mean there are north of $200 million. So they come off pipeline and we keep rid of [commission] the pipeline with something else. The visibility I think for this year has actually become quite high with the recent wins. And we are feeling a lot more secure and comfortable about the year thanks to that win.

Operator

Thank you. Our next question comes from the line of (inaudible) of Wells Fargo. Please proceed with your question.

Unidentified Analyst

I just wanted to go back to the margin question earlier when you talked about gross margins and EBITDA margins being down a little bit next year, should we be thinking about you backing away from the 40% gross margin and 25% adjusted EBITDA margins or is it really just a one year thing due to the ramp up of the large deals?

Phaneesh Murthy

I think the intent is to stay around those levels on a regular basis. I do believe that based on the sizes of those deals, it will have a temporary bliss in margins. We are also competing in many more interesting deals and we will have to see how this whole thing plays out but we are not backing away from our broader long-term goal of 40% and 25% we are not. But we do believe that this year there will be a hit because of the couple of large deals which are coming on at roughly the same time.

Unidentified Analyst

And then just can you give us the iTOPS as a percentage of revenue right now and then what it will go to once you get those large deals ramped up fully?

Phaneesh Murthy

The way we are looking at this is that we anticipate that iTOPS is going to go from mid-single digits to probably low-double digits in this year on a run rate basis, yeah.

Unidentified Analyst

What is the longer-term kind of goal for the iTOPS revenue?

Phaneesh Murthy

I want it to get it up to 30%. iTOPS business to 30% of our revenues and we have indicated that is probably happen by about 2017 but let see, its looking quite the market acceptance, I am feeling good about the market acceptance right now.

Unidentified Analyst

And then just on the sales forces changes you said you are about halfway done, when do you expect to be fully done and fully in place under the new sales force?

Phaneesh Murthy

I think there will be two pieces to this. So the first one is that, we will have done most of the changes that we need to do in the next three months or four months and after it will be regular process of cycling out the bottom performance that's the normal process which keeps happening about anybody talking about it. But I think bulk of the work will be done in the next three months or four months, I think we will be all true with that.

Unidentified Analyst

Thanks, and then just last.

Phaneesh Murthy

Sorry, we already done two layers, it’s the third layer that now we are starting to optimize, yeah go ahead.

Unidentified Analyst

Okay, thank you and then just the last one. You are just under 80% now for utilization, were you comfortable taking that to or do you think you are tapped out here or close to being tapped out?

Phaneesh Murthy

Yeah, I mean utilization is not a lever that we can use anymore, I mean utilization I always said will be roughly around the 77% to 80%, 82% max and I don't, and now that we are starting to plan for growth, I anticipate that we will start hiring for a little, so you know year where you don't grow you can optimize on utilization when you start growing obviously you have to start planning for growth and hiring a little ahead of the curve. So I would say that utilization is no longer a lever for our margins.

Operator

Thank you. Our next question comes from the line of Mayank Tandon of Needham & Company. Please proceed with your question.

Mayank Tandon - Needham & Company

Phaneesh, I was just talking with some of your peers, it seems to be there is some pent up demand on the regulatory side given that the work had stalled pre-elections both in healthcare and financial services. I wanted to get your perspective on any potential opportunities for you on that front and then also related to that, is there any scope for captive buyouts again some of your peers have talked about opportunities across the verticals to scale up their BPO operations, do you see that as an opportunity as well?

Phaneesh Murthy

So one is on the regulatory side, I think yes you are absolutely right we do see some opportunities and we are continuing to do some work. I don't know necessarily Mayank if it’s an opportunity to break into new accounts. It’s an opportunity to expand your revenues in an existing account in that area because typically it comes to the person who is doing it unless we are offering in that sphere or something like that.

On the captive buyouts, yes we are also in the midst of looking at a field of captives, there's one in which we are in, we are looking at a lot more closely than others but they are small. I mean, the larger ones I'm not sure will get spun off primarily because in the banking financial services space I do believe that some of the work driven by compliance may have to be done in a captive rather than by third-party. I think I've articulated this a couple of times that a chunk of the work that is done from an operational side, not from a technology side may have to be done with “company employees” rather than a third-party and because of that I'm not 100% sure that any of the BFS capitals will come out fully.

Mayank Tandon - Needham & Company

Sure, that's helpful and then on a different topic, Sujit could you just give us some perspective in terms of the potential refinancing and pay down of $70 million high yield debt, the timing on that and what’s the potential for that is?

Phaneesh Murthy

That will be our April 2014 event, we have seen the way the bonds are there and the way our financial or balance sheet strength is there, we should be in a position to refinance that in 2014. But its nothing like 2013 event but 2014 surely there would be a refinancing and partial repayment of the taxes. Its an (inaudible) so basically we have the option in April 2014 to do some interesting structuring like Sujit said partial pay down and then refinancing that at a much lower cost.

Operator

Our final question comes from the line of Vincent Colicchio of Noble Financial. Please proceed with your question.

Vincent Colicchio - Noble Financial

Yes, Phaneesh if I remember correctly, iTOPS was important to winning you the large deals. So my question is, what are you seeing from the competition? Are they catching up in some of the areas where you have offerings in the iTOPS side?

Phaneesh Murthy

I don't think they are doing much in the area because we've got a very interesting iTOPS play. We have picked very specific solutions and built good IP built multi-tenant models and are really converting it into industry utilities. I think once you get the first few customers in that space it becomes very difficult for somebody else to play in exactly that space.

Are we seeing the market for iTOPS and outcomes anywhere getting more broadly accepted, I think the answer is yes. It's very interesting. When we ran our campaign, our ad campaign, those are lot of editorial pickup on that ad campaign, particularly in India and all of the other companies actually commented on it.

So it's really started opening up dialog and other companies said, yeah, we're also doing this. Some companies said this is aspirational for us; we're looking at it as our next version. And so on and so forth. But everybody commented in some way or the other and it's clear that people are thinking about it. Some people are started working towards it but may not be in the solutions that we have and that’s the good news.

Vincent Colicchio - Noble Financial

And just some housekeeping, Sujit. I miss the capital spending and cash from operations in the quarter. Do you have that?

Sujit Sircar

We spent $31 million on CapEx this year and we had $100 million of cash from operation in the second quarter.

Operator

Thank you. I would like to turn the floor back over to management at this time for any closing comments.

Araceli Roiz

Thank you, Jesse. Once again, I want to thank all the participants for joining us on this call. Please feel free to e-mail me and (inaudible) call back shortly. Please go ahead, conclude the call, Jesse.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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