Infosys Technologies Ltd. F4Q09 (Qtr End 3/31/09) Earnings Call With US and European Investors Transcript

Apr.17.09 | About: Infosys Limited, (INFY)

Infosys Technologies Ltd. (NASDAQ:INFY)

F4Q09 (Qtr End 3/31/09) Earnings Call Transcript

April 15, 2009 4:30 am ET

Executives

Shekar Narayanan – Senior Manager, IR

S. Gopalakrishnan – Managing Director and CEO

S. D. Shibulal – COO

V. Balakrishnan – CFO

B.G. Srinivas – SVP, Manufacturing & Head, Europe, Middle East & Africa

Hargopal Mangipudi – Associate VP and Head, Professional Services

Ashok Vemuri – SVP, Executive Council Member and Global Head, Banking and Capital Markets

Analysts

Anthony Miller – TechMarketView

Bhuvnesh Singh – Credit Suisse First Boston

Ashwin Shirvaikar – Citigroup

Rishi Maheshwari – Networth Stock Broking Ltd

Sandeep Shah – ICICI Securities

Tarun Sisodia – Anand Rathi Securities

Divya Nagarajan – JM Financial

Viju George – Edelweiss Capital

Shekhar Singh – Goldman Sachs

Vihan [ph] – Motilal Oswal Securities

Pankaj Kapoor – ABN Amro Asia Equities (India) Limited

Urmil Shah – Kim Eng Securities

Nitin Padmanabhan – Centrum Broking

Nihar Shah – Enam Holdings

Srivathsan Ramachandran – Spark Capital

Operator

Good afternoon, ladies and gentlemen. I am Sandhya, the moderator for this conference. Welcome to the Q4 and Annual Earnings Call. For the duration of the presentation, all participants lines will be in the listen only mode. After the presentation, the question-and-answer session will be conducted for participants connected to international bridge. After that, the question-and-answer session will be conducted for participants in India.

Now, I would like to hand over to Mr. Shekar Narayanan. Thank you and over to you, sir.

Shekar Narayanan

Thanks, Sandhya. Good afternoon, ladies and gentlemen. I am Shekar from the investor relations team in Bangalore. Thank you all for joining us today to discuss the financial results for the fourth quarter and year ended March 31, 2009. Joining us today in this conference room is CEO and Managing Director, Mr. Kris Gopalakrishnan, COO Mr. S.D. Shibulal, and CFO Mr. V. Balakrishnan, along with other members of the senior management.

We will start with a brief statement of the performance of the company in the quarter and year ended March 31, 2009, outlook for the quarter ending June 30, 2009 and year ending 31 March 2010. After that we will open up the discussion for questions and answers.

Before I hand over to Infosys management, I would like to remind you that anything we say which refers to our outlook for the future is a forward-looking statement and must be read in conjunction with the risk that the company faces. A full statement and explanation of these risks is available with our filings with the SEC, which can be found on www.sec.gov.

I would now pass it on to Infosys management.

S. Gopalakrishnan

Thanks Shekar. This is Kris Gopalakrishnan. Despite a challenging environment, we have met the lower end of our guidance. The challenges are actually in three fronts. One is the drop in volume. For example, in the last quarter, our volumes decline sequentially by 1.4%. A challenging pricing environment, we had pricing decline by 2.1% in constant currency terms, the second quarter pricing declined. And the third is, significant movement and volatility in currencies. And again, if you look at the last full year actually, currencies have moved quite a bit in this environment.

Now if you look at the performance of the company, of course, growth has come down. Next year, we're giving a guidance of zero to minus 3% in dollar terms. But if you look at margins, our margins have been sustained for the full-year. It has come down slightly for Q4, but it has been sustained for the full year. And in our guidance for the next year, we are saying that margin movement would be probably about 3%. And this is because one, on pricing, if you take the fourth quarter pricing and extend it to the full-year, the decline over the current year is about 5.76%. And that is factored in and the lower utilization is also factored in.

Rupee has moved quite a bit during the year. In the beginning of the year, it was 39 rupees to a dollar and now it is about 50 rupees to a dollar, and we have been able to sustain margins. The three challenges, growth, pricing and volatility in currency, with volatility in currency and in pricing, we've been able to actually do a good job. Volumes, of course, are a factor of the challenging environment in which we are. Investing, continuing to invest in the business to add new services and new solutions, investing in new markets, investing in our employees and building capability.

We will continue to recruit employees this year also. We're looking at about 18,000 new employees being added at the gross level for fiscal 2010. A majority of them, about 15,000 of them, would be from campuses where we made already offers, we want to honor those commitments. And lastly, we continue to focus on sustaining the relationships we have. Yes, the growth has come down, but we have not lost any major clients. We have not seen cancellation of projects in any manner, and we have been able to sustain across the company, across the various industries in which we're operating, maintain our relationships, et cetera.

So with this, let me hand over to my colleague, Shibulal, to give more details of the operations, and then followed by Balakrishnan, Bala, who will take you through more details on the financials.

S. D. Shibulal

This is Shibulal. I will give you some color on the business. We have done a survey of our clients, the top 135 clients, who account for 83% of our revenue on an LTM basis. Following are the results. As of about four weeks back, only 61% had finalized their budgets. Even in those cases where budgets were finalized, the impression we got is that the budgets are not etched in stone. The budgets would move up or down based on the economic situation in the coming year.

We're already into the – for most of these clients, we are already into the middle of their first quarter. That is when the survey was done. A large majority indicated that IT spend is down. In fact, 89% of those surveyed indicated that the IT spend will be down, and 69% indicated that IT spending will be down in low single digits. Off shore impact is slightly different. 22% say that there will be marginal increase in off shores. 5% say that there'll be double-digit increases in their offshore spend. So offshore impact is slightly different.

The recovery is also expected in a very protracted manner. 57% of the surveyed people told us that that the recovery will be beyond March 2010. So the services which have seen traction according to the survey are application maintenance and enterprise solutions. That make sense because what is cut is the discretionary spend, which is mostly the development work. The lights-on work continue to be done and continue to be outsourced and offshored.

Enterprise solution work is mostly strategic work, which is multi year programs, which they are running. While there has been short-term challenges, they are unwilling to let go of their strategic initiatives, and that means they continue to spend on consulting, or at least that seems to be a priority area for them to continue, which is consulting and enterprise solutions.

We have, as Kris said, we have added 4000 plus, about close to 5000 people gross this year. And total addition for the year is 28,000. For the last few years, 2007, 2008, 2009, we have given compensation increase on site and offshore, in fact, many a times, over the industry average. 3% to 7%, an area between 3% to 7% on site, and 11% to 15% offshore, that seems to be the range.

Normally our salary increase is in April. Given the global economic environment, we feel it is prudent not to have a salary hike this year. So we will not be having salary hike or promotions in April. We will review this as the year unfolds. Variable compensation continues to be there and we have paid out good variable compensation in the previous years and we plan to pay out variable compensation based on the financial results in the coming year.

With that, let me hand over to Bala for the financial highlights.

V. Balakrishnan

Good afternoon, everybody. We just completed a great quarter. Our operating margin for the fourth quarter was 29.5% as compared to 31.9%. So we have seen a decline of 2.3%. We had a benefit because of the currency. Rupee was average was 50.24 for the quarter as compared to 49.42 last quarter. That gave a positive impact on the margin of around 50 basis points.

The revenue productivity has been down by 3% on a reported basis, that had an impact of around 1.5% on the margin. The SG&A costs went up by 0.8%, and the depreciation went up by 0.6%. So overall, we had a 300 basis point impact on operating margin. The non-operating income look good because we had lesser foreign currency losses in the quarter. As compared to 219 crores of losses we have seen in the third quarter, we have seen only 15 crores loss in the fourth quarter. The (inaudible) remained almost same. So at the net income level, our net margin was 28.6% as compared to 28.4%.

If you look at the yearly number, almost all the currencies moved drastically during the year, because rupee, on an end-to-end basis, moved by around 26% for the full-year. If you look at other global currencies, that is the Australian dollar or the UK pound or the euro, all of the moved by around 20% to 30%. So we have never seen this kind of extreme volatility in the currency and the movement of 30% from bottom to top, we were able to maintain the operating margin for the full-year, and we had improved on the operating margin when compared to fiscal 2008, because we allowed some of the benefit from foreign currency to flow into the margins. In fact operating margin went up by 2% in fiscal 2009 when compared to fiscal 2008.

We have given our guidance with this background. If you remember, at the beginning of the year, in fiscal 2009, we said that the dollar revenues could grow by somewhere between 19% to 21%. At the end of year, it closed at 12% growth. There is a difference of 7% to 9%. Of that, 3% is because of the currency movement, the global currencies; 1% is because of the pricing; and the balance is because of the volume growth. We had given a guidance for next year with overall revenue decline of somewhere between 3% to 7% for the full year. On a constant currency basis, it could be a decline of 4% at the lower end and almost flat revenues at the upper end.

We believe the operating margins for next year could come down by around 300 basis points because we're assuming the pricing to remain at the same level what we saw in Q4 of fiscal 2009 for the full year of next year. That means there is an inherent pricing erosion of 6% assumed in the guidance that could impact the margin by around 3%. The rupee average rate for the full-year of fiscal 2009 was 46.50. Next year, we're assuming 50.72, which is the close rate for March. So that could give a positive benefit of around 4.5%. Then the utilization impact and the increased investment in sales and marketing could contribute around 5% negatively to the margins.

So net-net operating margins next year could come down by around 300 basis points. At the net income level, it could come down by 200 basis points. The effective tax rate will not increase dramatically next year because the yield on cash and cash equivalents could come down next year. In fiscal 2009, our average yield was 9.6%. It could come down to maybe around 7% in fiscal 2010 because the interest rates in the economy has come down drastically. So you could have the tax rate remain somewhere between 16% to 16.5%, and overall at the net margin level, we could see a reduction of 200 basis points.

The guidance is a statement of fact based on what we see at this point in time. Tomorrow, if things change drastically, probably we can come and update. But this is what we are seeing today and our guidance is based on that. Account receivable days is 57 days; it was 56 days last quarter. In a tough environment like this, we were able to collect all the receivables and keep it current. 50% of our receivables is less than 30 days and the quality of the receivables is extremely good. We have $2.2 billion of cash at the end of the year and we announced a dividend which is close to 27.6% payout.

I think overall, the year has been good. We were able to manage extreme volatility in the currency. We were able to show good numbers in spite of the environment. And going forward, we have given a guidance which is realistic based on what we are seeing at the marketplace at this point of time.

With this I conclude. We can now open the floor for questions.

Question-and-Answer Session

Operator

Thank you very much, sir. At this moment, I would like to hand over the proceedings to international moderator to conduct the Q&A for participants connected to international bridge. After this, we will have a question and answer session for participants at India bridge. Thank you. Now over to you, Lucy.

Operator

Thank you, Sandhya. We will now begin the Q&A session for participants connected to the international bridge. (Operator instructions). Mr. Miller from TechMarketView in the U.K., please go ahead.

Anthony Miller – TechMarketView

Yes. Hi, gentlemen. My questions, not surprisingly, are more around Europe and the U.K. Firstly, can you give us an idea of what the growth of the European business was in constant currency for the quarter and the year, and let us know whether you are seeing any difference in demand trends or service line trends in Europe versus the States. And then secondly, I wonder if you could just talk a little bit about some of the comments you made, firstly, that you sold Finacle into a U.K. financial services institution, which sounds like you're replacing incumbent systems and I will be interested to learn more about that? And finally you talked about new engagement models in particular, SaaS, or Software As A Service, and I wonder if you could just elaborate a little on what your SaaS offering is, please? Thanks a lot.

S. Gopalakrishnan

Okay. There are three questions, I will ask B.G. Srinivas, who handles Europe to talk about Europe, Hargopal on Finacle, and then I will come back and talk about the new business models.

Anthony Miller – TechMarketView

Thank you.

B.G. Srinivas

Hello. Yes, in constant currency terms, Europe represents 25% of the overall revenue, and in foreign currency, it is 24.3. Overall, Europe, for the full-year, the continent or the Mainland Europe grew by 26%. However, this was offset by the slowdown or decline in the U.K. business, primarily in the financial services and telecom in U.K. So that is the first part of your question.

Second part, in terms of the service offerings, again in Europe, we have an extremely diversified service mix today, including business consulting, packaging implementation, which represents 35% of the business in Europe. BPO, 50% of BPO's business comes from Europe, and other services including systems integration, infrastructure management services also have a significant presence. However, on the new engagement models which you mentioned, today we are having more dialogues, more pursuits. Our clients are much more open to discuss these new engagement models which includes ticket-based pricing for support, which include in specific cases platform-based offerings. The SaaS based offering which you referred to in your question, however, the big wins have happened in the US in the last year.

Anthony Miller – TechMarketView

Okay. Thank you. And Finacle?

Hargopal Mangipudi

This is on Finacle. We have a new win in this quarter from U.K. This is a home country deal. I can't share the details of the customer, but it is a full functional, one of the top-tier banks, home country deal in U.K. This will be implemented in the next 2.5 years. And this is a very significant win against our strategic competitors, all the global players who were present in a global tender.

Anthony Miller – TechMarketView

And did you do – sorry. If I could ask, which software vendor would you replace in that Finacle win?

Hargopal Mangipudi

Well, it is a combination of in-house as well as a multitude of softwares. They had multiple systems which are replaced, being replaced.

S. Gopalakrishnan

The last question, Infosys has multiple options and multiple choices when it comes to business models. In the infrastructure management, we do pricing based on number of devices, nodes, elements we manage. In maintenance, we do ticket-based pricing. Software As A Service, platform based BPO. We do have some IP and solutions which we license. So there are multiple options which we now provide to our clients. And this is a growing part of our business. It is small today but a growing part of our business and this is offered in all geographies. For example, in India, we are doing something on the IP TV side again with a revenue share model. So, there are multiple models which we are using in different solutions in different geographies. Next question?

Anthony Miller – TechMarketView

Thank you.

Operator

Next we have Mr. Bhuvnesh Singh from Credit Suisse in Singapore. Please go ahead, sir.

Bhuvnesh Singh – Credit Suisse First Boston

Hi, sir. Thanks for giving me a chance to ask a question. There are two questions which I have. The first thing, when you look over the past three months, where exactly the comfort is coming that we should be able to deliver the volume and revenue growth which we have talked about for the full-year? Are we seeing any pick up in project timing or are we seeing any sort of change in customer behavior because the overall environment still remains pretty negative? The second question is that when exactly do you see a turn in revenue growth? When exactly do you see that revenue growth will turn positive to be exact? That is all. Thanks a lot.

S. Gopalakrishnan

Thanks, Bhuvnesh. To the first question, you see, the comfort is coming from the data we have. We have, as Shibulal mentioned, talked to 135 odd clients. This represents 83% of our revenues. This has happened in the last four weeks. The confidence comes from our ability to – how we have performed in the last six months when the environment was challenging, all the factors I talked about, decline in growth, challenges in pricing, volatility in currencies, all these factors were definitely there in the last six months.

And the results are there to see in terms of – yes, growth has dropped, but our ability to maintain margins in spite of pricing and in spite of currency movements. And the comfort is also coming from our ability to retain clients and retain relationships with these kinds. We had very few clients – well, almost none, go away, and we had very few cancellations of projects and this like that. By and large what has happened is when projects close, typically new projects replace those projects, and that momentum in business, the velocity of the business has come down, and that is reflected in the growth.

Our clients have shared the data in terms of budgets and things like that. We have some visibility into that. And lastly, we have added 37 clients in this quarter, similar numbers from the last quarter. So client additions are still very strong. Clients are confident of their relationship with Infosys. It is just that the ramp ups have not been as much as previous quarters. And when recovery happens, we hope that these ramp ups will come back.

And to the second part of your question, when will recovery happen, our own survey says that recovery probably would happen in early part of mid of 2010. That is what our clients are saying. Having said that, there are some data points which say that, at least in financial services, there may be recovery starting to happen. We have to wait and see whether it is going to be true recovery or whether it is going to be sustained, are there challenges that will come up in other segments like manufacturing et cetera. we need to wait and see.

When we give guidance, it is based on data and facts we know and with confidence saying that we can meet that guidance. When situation changes, as Bala already has indicated, of course, we will have to come back to it. It could also be positive. If recovery really starts earlier, it could be positive also. That's where we are today.

Bhuvnesh Singh – Credit Suisse First Boston

Just two clarifications which I have got here, see, first of all, your guidance implies that after the June quarter, which would be 4% to 5% down, next three quarters you should have between 2% to 3% quarter on quarter revenue growth. So the second part of the question was both pertaining to when you start seeing a quarter on quarter growth from Infosys perspective? Should we start seeing a pickup from September, or would it be more like December and March are seeing 4% to 5% growth? So that is one.

And second, you see like – again you know if you look at the last three months, are you seeing any sort of positive signs of let us say March versus January, is March more positive versus January that you should have comfort that going forward some improvement could happen? Thanks.

S. Gopalakrishnan

Yes. So to the first part, we are not projecting any 4% growth. What we have registered is what is there in the guidance and that is what we see today. So that is the guidance which we have given and we have shared that with you. Then to the second part of the question, between December and mid January and April, we are not seeing any change. That is why we are saying that the first quarter will be down, so that is reflected in our guidance again. Even though the environmental factors and some of the analysts are saying that maybe there is a recovery starting, but we have not factored that in and we have actually said that the first quarter will be a challenging quarter for us.

Bhuvnesh Singh – Credit Suisse First Boston

Thanks a lot.

Operator

Next we have Mr. Ashwin Shirvaikar from Citigroup in the US. Please go ahead, sir.

Ashwin Shirvaikar – Citigroup

Hi. Thank you for taking my questions. As you look at giving you guidance range, are you assuming the pricing continues to deteriorate, or do you feel that most clients negotiations on price are behind you at this point?

S. Gopalakrishnan

No. As explained earlier, we had taken the pricing we have seen for the fourth quarter for the next full year guidance. Because pricing is an unknown, we believe the pricing to some extent stabilize, but if environment continues to be challenging, there could be some impact. But what we assumed in the guidance is that pricing will remain at the same level as what we saw in the fourth quarter for the next full year.

Ashwin Shirvaikar – Citigroup

Okay, thanks.

Operator

I would like to hand over the proceedings back to Sandhya.

Operator

Thank you very much, Lucy. We will now begin the Q&A interactive session for India participants. (Operator instructions).

S. Gopalakrishnan

Operator, is the bridge cut in any way? Are there people still on the call?

Operator

Sure, sir. We do have questions lined up, can we just go ahead?

S. Gopalakrishnan

Yes, please.

Operator

Yes. We have a question from Mr. Rishi Maheshwari from Enam EMC. Please go ahead, sir.

Rishi Maheshwari – Networth Stock Broking Ltd

Hi. Good afternoon to the management. My question is obviously on the views of your cash conservation policy that is on the back of the observation that the dividend was almost ten rupees lesser this year than the last year. So while I understand that it is imperative to conserve cash in these challenging times, but I also want to understand what is the benchmark amount of cash that you will be most comfortable at? And given that you will achieve that position, would you be looking forward to reward shareholders in better forms of higher dividend because we have actually reduced the dividend (inaudible)?

V. Balakrishnan

We have already rewarded the shareholders. If you look at the last few years, we had almost come out with a special dividend every two years. Look, when you run a business, we require a certain amount of cash to give us comfort in the business. We always said that at any point of time we should have net one year's of excess cash. We are still short. So we have some more way to go before we give any higher dividend. Having said that, cash is strategic for us. And at this time, we would have enough cash in the system, so that it'll give a lot of comfort doing a business. We are looking at acquisitions. We are focusing on certain acquisitions. But I don't know whether it will happen or not but if you have cash it would be helpful to do those strategies acquisition which will accelerate growth. So I think we have to do a balance between cash required in the business to give us comfort and the returns, and at some point of time, if we believe it will affect the returns, we will look at paying more to the shareholders.

Rishi Maheshwari – Networth Stock Broking Ltd

Thank you. I just want to understand the same thing, Bala, in terms of the figure, if within the management you have figured out on a constant, on a basis wherein this will be the cash that you would be the most comfortable with…?

V. Balakrishnan

If you assume around $4.5 billion of revenue, and if you calculate next one year's expense, it could be around 3 billion, 3.2 billion. You have 2.2, so we have one more billion to go.

Rishi Maheshwari – Networth Stock Broking Ltd

All right. That answers my question. Thank you.

Operator

Thank you very much, sir. Next in line we have Mr. Sandeep Shah from ICICI Securities. Over to you, sir.

Sandeep Shah – ICICI Securities

Yes. Just looking at the first quarter guidance, as you were saying that the pricing is assumed to be flattish at the fourth quarter level, so one should assume that we are looking for 4% to 5% volume decline and how this will look like across verticals?

S. Gopalakrishnan

See, from fourth quarter level, if we assume the pricing to be the same, average pricing this year versus average pricing last year, there is a decline of 5.7%, 6%. So that is factored into the guidance. And it is composite of volume and pricing in that sense.

Sandeep Shah – ICICI Securities

Sir, what I'm talking about is for the first quarter guidance because the revenue decline we have guided is 3.7% to 5.4%. So that largely indicates a volume decline?

V. Balakrishnan

Well, it would be a combination of both. We don't want to break it up between price and volumes, but overall we had taken the fourth quarter pricing for the next four quarters, and it could be a combination of both.

Sandeep Shah – ICICI Securities

Okay, okay. And then the basic reason for EPS, will be a decline of 15.6% factored for the first quarter? Can you – is it largely due to utilization or here also you have taken some bit of a hit because of the pricing decline?

S. Gopalakrishnan

Well, it is mainly because of the utilization coming down as well also the pricing. And there could be some benefit because of the rupee, but it is more than offset by this. And we're also putting more money into the sales and marketing because we're hiring more people. These are times where we have to invest for the future.

Sandeep Shah – ICICI Securities

Okay, thanks.

Operator

Thank you very much, sir. Next in line we have Mr. Tarun Sisodia from Anand Rathi Securities. Over to you, sir.

Tarun Sisodia – Anand Rathi Securities

Hi. I just wanted some questions to be addressed. One is on the guidance part. You are saying that the margins are likely to go down substantially by roughly about 300 basis points. Taking this fourth quarter as the guidance benchmark, why do you see the margins really going down considering that you have already taken 50 points on the average rupee dollar rate?

V. Balakrishnan

No, we explained that. I mean it is a combination of both the utilization coming down and also the pricing because we're assuming the pricing to continue at the same level. And number two, look at that this way, in fiscal 2008, our margin was X, and in fiscal 2009 it went up by 200 basis points. We had substantial benefit because of the rupee which we have not reinvested in the business. This we are putting back money into sales and marketing to make sure that we are not hurt in the environment. So the margin impact is mainly due to increased investment in sales and marketing, to some extent utilization coming down and also the pricing.

Tarun Sisodia – Anand Rathi Securities

But if I understand correctly, you're taking the quarter for pricing as the guidance which will remain constant throughout the next financial year in your guidance, is that right?

V. Balakrishnan

Yes.

Tarun Sisodia – Anand Rathi Securities

So in that case the margin should not get impacted. Whatever was achieved in the fourth quarter should get really get reflected in the balance of the year, isn't that right?

V. Balakrishnan

No. See, the pricing itself will have an impact of around 200 basis points to 250 basis points. Then the utilization could come down because you are seeing a sequential decline in revenues of between 4% to 5%. The additional impact because of utilization coming down could impact your margin and there is an increasing investment in sales and marketing. That is why operating margin could come down by 300 basis points. On a net income level, it could be 200 basis points because you will have higher non-operating. This year in fiscal 2009, the non-operating income came down because of foreign currency losses. In the guidance, we don't assume that. So the non-operating could be higher, tax rate remaining stable, at the net level, it could be around 200 basis point impact.

Tarun Sisodia – Anand Rathi Securities

Okay, fine. Thank you.

Operator

Thank you very much, sir. Next in line we have Ms. Divya Nagarajan from JM Financial. Over to you, ma'am.

Divya Nagarajan – JM Financial

Hi. Just had a couple of questions. Bala, you spoke about the depreciation having spiked up this quarter, I believe this trend is likely to continue?

V. Balakrishnan

No. Depreciation is a function of when you any operationalize some of the centers. There were some few capitalization happened in the first quarter, that is why it was high. It will get normalized now.

Divya Nagarajan – JM Financial

Right. And you also spoke about tax rates of 18.5%. I understand that four large facilities are coming out of 10A, 10B benefits this year, shouldn't the tax rates be ideally going up this year?

V. Balakrishnan

It should go up. But if you look at the last year, the non-operating income, the yield was around 9.6%. So to the extent that we had a higher tax payout, that is what is reflected in the 16%. So next year, the yield is coming down. It could come down to maybe around 6.5%, 7%. So to the extent your tax payout could be less. And number two, some of our incremental growth, you see that it has gone up. It is close to around 9% of revenue. So overall, net-net, the effective tax rate could be somewhere between 16% and 16.5%.

Divya Nagarajan – JM Financial

Right. Shibu, I had one last question. You spoke about 5% of your customers talking about double-digit increases in your offshore spending, could you give us a sense on the other 95%, what is the sense there, how many are saying flat and how many are saying a decline?

S. D. Shibulal

So, this is regarding the survey, as part of the survey which we did, which covered 83% of our revenues. 22% said that they will be increasing offshore spend. 5% said there will be more than 10% increase in their offshore spend. The remaining have said that there will be a decrease in offshore spending. That will be 69%.

Divya Nagarajan – JM Financial

Is this – the remaining have said there is a decrease in offshore spending, are their budgets also down proportionately or…

S. D. Shibulal

Actually the budgets are down for 89% whereas the spend is down for only 69% which is a positive sign because the offshore spend is not really tracking the budgets down.

Divya Nagarajan – JM Financial

Right. Thanks and all the best for you.

S. D. Shibulal

Thank you.

Operator

Thank you very much ma'am. Next in line we have Mr. Viju George from Edelweiss. Over to you, sir.

Viju George – Edelweiss Capital

Yes, hi. Thanks for taking my question. I just wanted to get a sense of the variable payout strategies in FY10. Given to understand that about seven percentage of revenues are in variables, what is the management's thought with regard to variable payout assuming that you (inaudible) guidance band?

S. Gopalakrishnan

Our variable philosophy is based upon revenue target that we have internally and the profit margin target. And the guidance level or at the budget level, we put into the budget a certain amount of variable compensation which is linked to profits. That part of the variable compensation linked to revenue is also put in the budget. Depending upon the achievement against the budget, we pay the variable compensation. For example, in fiscal 2009, we paid about 85%. Fiscal 2008, we paid 96%, and the previous year 95%. For next year, we already put in the budget the numbers that you see, a certain level, and if we exceed that people get more. If we don't achieve the numbers that we gave people, people get less. So by this means, we make sure that the pains and gains of growth or de-growth is shared by all stakeholders within the corporation.

Viju George – Edelweiss Capital

Okay. If I can take it forward a little bit, is there any assumptions of holdback that are building in your margin deconstruction for FY10 because from the numbers that Bala gave us earlier, you talked about pricing, you talked about sales and marketing utilization, that doesn't seem to have come up. So I am just wondering if there is any assumptions around that that you can spell out for us? Thanks.

S. Gopalakrishnan

We have. I can't give you the number, but we have built in an X-percentage of variable compensation in the guidance. If we achieve less than the guidance, the variable compensation will come down. If we achieve more than the guidance in profits and revenues, variable compensation could go up. So it is variable.

Viju George – Edelweiss Capital

Okay. This is just a reiteration for an earlier comment. I believe you had said that March was not necessarily a lot better than January when you started out the quarter, is that fair?

S. Gopalakrishnan

Yes. So when you look at the survey we did, it still shows that our clients believe that their business will be challenged. They are in a mode of cutting costs and significant number of them, Shibulal has already given you the percentages, are seeing their budgets go down to up to may be even 10% or beyond.

Viju George – Edelweiss Capital

That is all from my side. Thank you.

Operator

Thank you very much sir. Next in line we have Shekhar Singh from Goldman Sachs. Over to you, sir.

Shekhar Singh – Goldman Sachs

Hi sir. Just wondering as per your past surveys, similar to the one which you were referring to, has any of the previous years, did we get a data point saying that majority of your clients will be cutting down on the offshore spend, or is this a ….

S. D. Shibulal

Yes. There has never been an year in which this has happened. In fact, Mohan was talking about in one of the interviews, what we are seeing is an absolutely unique event. And so we have never seen this kind of downturn in the budgets in the past.

Shekhar Singh – Goldman Sachs

Okay. Secondly, sir, like if you take into account the billing rate which has got reflected in reported numbers, the billing rate cut for the current quarter, and if we take into account the 2%, 2.5% cut which Mr. Bala mentioned, will be in reported numbers in Q1, what percentage of the total – will this represent the actual billing rate cut which has been offered? And these two put together, what percentage of that will it represent?

V. Balakrishnan

Actually, in our billing rates, I don't understand your question completely. Our billing rates came down last quarter by 1.4% and this quarter by 2.1% in constant currency terms. So, the next your guidance, we have taken the Q4 pricing as the base. And there's an expectation that that we will be able to hold that pricing. We're hoping that we will be able to hold the pricing. It is very – in my mind, it is very commendable that the pricing has only come down by 1.4 and 2.1% in constant currency in such a tough situation.

Shekhar Singh – Goldman Sachs

Sir, the question was basically like, it seems for Q1 of FY10, you are building an almost like 200 basis points to 250 basis points drop in pricing. Now should I take that pricing along with the drop in pricing which you have already seen in Q4, will that represent the entire pricing cut which you have offered your clients?

S. Gopalakrishnan

No. Look, some of the clients had met on pricing. We had some discussion and have come to some conclusions. It doesn't mean that they cannot come back. They may come back. But what you are saying is when you take the reported numbers for Q4 which is showing a 3% decline in pricing for the first quarter to continue for the next quarter, it will have some impact on the margins. Number two, the utilization could also drop, because we're assuming a decline in the revenues in the first quarter by something around 4% to 5%. So utilization will come down, that will also have some impact on the margins. Most of our clients had come for the renegotiations, but this is a moving environment, because if clients are under pressure, they could come back, but we are comfortable because most of them have already done it.

Shekhar Singh – Goldman Sachs

Okay. Thanks a lot, sir.

Operator

Thank you very much, sir. Next in line we have Mr. Vihan [ph] from Motilal Oswal. Over to you, sir.

Vihan – Motilal Oswal Securities

Hi. I had a couple of questions actually. If you can take the IT services build for some months, there has been no offshoring in the current quarter. So do we see increasing difficulty in offshoring henceforth?

S. Gopalakrishnan

No. In fact, there is no increase, but it just means that offshoring is at the same percentage level as before, that is all it means. There is no increased difficulty in offshoring.

V. Balakrishnan

Typically, in any year, the budgets would get finalized in January. So there'll be some increased spending in the January to March quarter, more towards April to June. This year, the budgets were moving numbers, and most of them finalized their budgets somewhere closer to the end of March. That is why the impact of the volume growth, the volume growth has come down by 1.4% because of that. So, it doesn't mean that offshoring has come to an end. In tough times like this, offshoring has to increase. Clients will focus on that but have to towards the budget, finalize on spending.

Vihan – Motilal Oswal Securities

Okay. And lastly, our addition in the current quarter has been higher than the guided addition. We had guided around 27,000 on gross additions for the whole year. We have ended up by more than 28,200 odd. What do you think has contributed to this excess gross additions in the current quarter?

S. Gopalakrishnan

See, in the campuses, when we make offers, we assume certain conversions. That conversion percentage has gone up to 83% now – 80%, gone up to 80%. So that is partly the reason why we have more number of people than we thought we would have. And of course, we are continuing to recruit, that is the major [ph] point.

Vihan – Motilal Oswal Securities

Okay. That is it from my side, thanks.

Operator

Thank you very much, sir. Next in line we have Mr. Pankaj Kapoor from ABN Amro. Over to you, sir.

Pankaj Kapoor – ABN Amro Asia Equities (India) Limited

Yes, hi sir. Thanks. Just want to understand on the guidance front again, trying to reconcile the first quarter de-growth that you have spoken on a full year number as well. When you just look back on that, we were talking about significant drop in the first quarter, close to about 5%, and to achieve the full-year guidance then what you're hinting at is a CQGR of roughly around 3%. So just trying to understand in the first quarter what has really gone into these numbers, are we looking at any client specific issues in terms of a particular set of clients in a vertical or on an overall basis you seeing some immediate decline in volumes? Or is it a factor of overall budget not being close but you expect a recovery to happen after the first quarter?

V. Balakrishnan

It is more towards the later because as I said earlier, as clients finalize their budgets in January, there could be increased spending in the April to June because they will firm up the number and start spending. But now, only 60% of the clients have finally their budgets even at the end of March. So their spending pattern in the next quarter could come down because they don't have visibility. That is what is assumed in the guidance. Probably (inaudible) the rest of them will finalize their budget, probably the spending could increase.

Pankaj Kapoor – ABN Amro Asia Equities (India) Limited

okay. And just one more clarification, on your top line where we see a sequential pickup of about close to 5% in constant currency terms, any clarity over there in terms of immediate loss of business happening over there, or is it more to do with the regular decline that we have been saying in the last few quarters?

S. Gopalakrishnan

You see volumes have been coming down, 1.4% last quarter, so volumes have been coming down. And till the recovery takes hold, we want to be cautious. That is the only thing which we have factored in.

Pankaj Kapoor – ABN Amro Asia Equities (India) Limited

Okay, thank you.

Operator

Thank you very much, sir. Next in line we have Mr. Urmil Shah from Kim Eng Securities. Over to you, sir.

Urmil Shah – Kim Eng Securities

Hi, sir. Thanks for taking my question. My question is linked to the last one is as regards the top line and the European business, when do we expect the bottom to be reached?

S. Gopalakrishnan

See, in the survey we have done with the clients, they are indicating that they expect better business environment for them towards early part of 2010, mid of 2010, somewhere in the first half of 2010. So that is the data that we're getting from our clients. And when you look at some of the analyst reports, there are reports which say, at least some reports which say that maybe in the financial services, the recovery has already started. So we have to wait and see. These are the two data points we have right now about when the recovery will happen.

Urmil Shah – Kim Eng Securities

Okay, thank you.

Operator

Thank you very much, sir. Next in line we have Mr. Nitin Padmanabhan from Centrum Broking. Over to you, sir.

Nitin Padmanabhan – Centrum Broking

Yes. This is with regard to Australia. I think we have seen the down tick there, can you quantify how much is from constant currency and how much is an actual down tick there?

V. Balakrishnan

It should be in terms of 1%.

Nitin Padmanabhan – Centrum Broking

1%, okay. So I think earlier there were concerns about a certain kind of de-growth from certain clients and I think that is more or less true, so we should start seeing growth there if currency remains where it is?

V. Balakrishnan

Yes. In constant currency terms, we are positive on Australia at this point. Of course, we don't know anything about Australian dollars, how it will move, et cetera.

Nitin Padmanabhan – Centrum Broking

Right. Then just another question in terms of the guidance, see keeping the rupee at 50.72, and I think earlier we had also spoken about you know some sort of a leverage available with D&A, wherein we could leverage at least 1% for margins, and you know I think you should keep pricing constant, I think the biggest hit will be on utilization. But net-net, where – you know have we actually put in, factored in countermeasures that we would do in terms of no salary hikes or cut in G&A and things like that without the guidance or it is inclusive of all that?

S. Gopalakrishnan

The guidance assumes all that. We have already announced saying that in April we are not increasing salaries, no promotions. So the compensation increase is not there which normally you would see. The number of visas applied for has also come down and we expect to apply for maybe 500 this year because of the lower growth in the business. So some of the expenses would be down. All these have been factored into our guidance.

Nitin Padmanabhan – Centrum Broking

Okay, right. Then with regard to pricing, I think is that all clients have already finished the first round of negotiations and pricing cut is almost over unless they come back again for it?

S. Gopalakrishnan

Well, we can't predict it. But we believe that most of the pricing negotiations are behind us at this point. If you take the current – if we take the pricing of Q4 and take the average pricing for FY09 versus FY10, we have already factored in that pricing will decline by about 5.7% to 6%. This is factored into our guidance, and that is one of the reasons why the margin is down.

Nitin Padmanabhan – Centrum Broking

Thank you.

Operator

Thank you very much, sir. Next in line we have Ms. Manisha Gupta from MF Global. Over to you, ma'am. Ms. Manisha, you can go ahead with your question. As there is no response, we will move on for the next question. Next in line, we have Mr. Nihar Shah from Enam Holdings. Over to you, sir.

Nihar Shah – Enam Holdings

Thank you. I have basically three questions. We have seen huge declines in the BFSI segment down almost 9% QonQ which following the Q3 growth of 4.1% in constant currency comes as a little bit of a surprise, could you just talk us through what is happening in the BFSI segment?

Ashok Vemuri

Hi, this is Ashok. So, in the BFSI segment, in the past quarters, the impact of what was happening in their business, the translation of that to technology spend most muted or there was essentially a phased lag. It all came together in the month of January and so Q4 actually bore the burden of all the changes and impacts that have taken place. Clearly, having said that, it is also important to point out that there have been significant number of account openings actually, 12 of the accounts of the 37 new added this quarter, are in Q4 actually, were from the BFSI sector. We continue to see opportunities in existing accounts as well as in new accounts and we are continuing to seen an expansion or actually translation of some of the conversations that we were having into these. Obviously the velocity of that is still much more muted than it was in the past, but there is a lot more conversion that is happening in the BFSI space now.

Nihar Shah – Enam Holdings

Okay, thank you. My second question is on the enterprise solutions space, obviously it is a strategic sort of criteria for clients in the enterprise solutions, just wanted to understand, is it mainly at this point in time continuation of the previous clients work or have there been any new contracts or new client wins in this space?

S. Gopalakrishnan

There have been new clients wins in enterprise solutions also. We have won even some large transmission projects in Europe and the US in the enterprise solutions space. We are very positive about consulting and enterprise solutions. That is one of the segments where we have seen good opportunities at this point.

Nihar Shah – Enam Holdings

Okay. And the third question was just the number of people currently in the BPO segment, the BPO piece?

S. Gopalakrishnan

The number of people in BPO is 17,400. We have added 150 net employees this particular quarter.

Nihar Shah – Enam Holdings

Okay, thank you. That was it from my side.

S. Gopalakrishnan

Last question please.

Operator

Sure, sir. Next question comes from Mr. Srivathsan from Spark Capital. Over to you, sir.

Srivathsan Ramachandran – Spark Capital

Yes, hi everyone. Just wanted to get some sense whether you have provided for Nortel account this quarter or what is the status there?

S. Gopalakrishnan

We were not able to understand the question, can you repeat the question please.

Srivathsan Ramachandran – Spark Capital

Understand whether we provided for the exposure to Nortel during this quarter?

S. Gopalakrishnan

Yes. We normally don't comment on specific clients. What I can say is that whatever we know, we know about clients in bankruptcy, we have provided for, all that is done. Every provision we need to make, we have made.

Srivathsan Ramachandran – Spark Capital

Okay. The next is, I just wanted to get some sense on, how different is the trend between discretionary projects and maintenance projects, I just wanted to get what you saw in your survey based on is the cut more in discretionary vis-à-vis maintenance, just wanted to know what the outlook from the survey you got?

S. Gopalakrishnan

Definitely customers are looking at maintenance as well as enterprise solutions. These are two areas where they were quite positive. They are quite cautious about development, discretionary projects at this point, and that is what the survey said.

Thank you all. We have another call today evening. But please contact with our investor relationship manager if you have any further queries or write to us, and we will reply to those. Thank you very much and looking forward to interacting with you over the quarter. Thanks.

Operator

Thank you very much, sir. Ladies and gentlemen, thank you for choosing WebEx Conferencing Service. That concludes this conference call. Thank you for your participation. You may now disconnect your lines. Thank you and have a nice evening.

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