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iGATE (NASDAQ:IGTE)

Q1 2013 Earnings Call

April 11, 2013 8:00 am ET

Executives

Araceli Roiz

Phaneesh Murthy - Chief Executive Officer, President, Managing Director and Director

Sujit Sircar - Chief Financial Officer and Executive Vice President

Analysts

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Brian Kinstlinger - Sidoti & Company, LLC

Mayank Tandon - Needham & Company, LLC, Research Division

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Amit Singh - Jefferies & Company, Inc., Research Division

Pinku Pappan - Nomura Securities Co. Ltd., Research Division

Operator

Greetings, and welcome to iGATE Corporation's Conference Call. [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 begin.

Araceli Roiz

Thank you. Good morning, and thank you for joining our call to discuss our first quarter 2013 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 responsibility to update any forward-looking statements.

I will now turn the call over to Phaneesh.

Phaneesh Murthy

Thank you, Araceli, and good morning, everybody, all of you in the U.S. I'll just talk a little bit about our first quarter results. We actually did about $275 million in revenue, a little bit of growth, a steady quarter from my perspective. We found that the growth was fairly broad based. We saw it across multiple customers in multiple verticals. It was relatively broad based with everybody chipping in a little, no large any one specialty in any one vertical, which contributed to this little growth. We also -- we actually dropped in gross margins a little because we spread the visa processing costs over a couple of quarters. So we actually did a chunk of our visas in Q1, which we filed for, and then there'll be a little bit of a balance of the visa processing in Q2.

On the customer win side, we actually added 6 new Fortune 1000 customers. We added 8 in North America, 2 in EMEA. Four of our client openings were in the manufacturing, retail, distribution, logistics sectors and 2 in the insurance and health care sector. We -- in EMEA, we added 1 in banking and financial services and 1 in manufacturing.

So overall, I believe I'm quite pleased with the work that we have been able to do in opening some quality new names in the quarter. We've also added a number of sales and marketing people. We've actually added about 41 new people in the last 4 months on the sales and account management side, as we continue to ramp up the teams in North America and in Europe. We, therefore, believe that the SG&A expenses will actually be up, overall, at a steady rate. In addition, last quarter, we also successfully did 2 things. One was our corporate branding. The ads that we had released, which basically denounced 'Time & Materials' model and urged customers to move to the outcomes-based model. I think that was the first one, which showed [ph] we've got a fairly positive response on -- both from prospects and actually from existing customers. The second part, I think, is the fact that the CEO Cup, as part of our corporate branding effort and as part of our initiative to actually move up to the CEO suite, actually went off very well. It was a big hit, and we believe that this will be a good sustained branding initiative from iGATE for the foreseeable future. So again, we're quite positive there. Our EPS, adjusted EPS of $0.51, again, came in a little stronger than we had originally envisaged.

So all in all, a fairly steady quarter. But with every steady quarter, there was also some bad news. One of the deals that we were -- large deals that we were working on, revenues have been pushed out. We believe we don't yet have a handle -- since this is a fairly recent event, we don't yet have a handle on how far the revenues are going to be pushed out. It could be as little as a quarter. It could be as much as 2 or 3 quarters. We don't know at this moment since this is a fairly recent occurrence.

The second large deal is tracking as per schedule for Q3 revenues. So that, I think, is going on, relatively, at a steady pace. In addition, the company's pipeline continues to be fairly strong. We have about $3.5 billion in the pipeline, which, again, is roughly at the level that we were in the last quarter. We see spending continuing to track closely with budgets this year, so that's actually a fairly positive thing that the budgets have gone up marginally. A lot of the spending that we are seeing is associated around the new technology spaces, like mobility as a cloud and also the social analytics and big data areas.

In addition, we have also started seeing some initiatives on what we are calling transformational reengineering, where people are taking a lot of legacy stuff and trying to see if they can move all of that to newer technologies. So that is, again, a fairly interesting trend because that could signal -- the initial conversations of policies could signal the coming back of relatively large projects over time.

So I think my overall comments in this for the quarter, a fairly steady quarter with a small hit on the margins because of the visas that we did apply for, and I do believe that while one of the deals have got pushed out by as little as a quarter, as much as maybe 2 or 3 quarters, we believe that, overall, the pipeline growth overall, the new deal closures are relatively steady, and we look forward to continuing the top line growth over the course of the rest of the year.

Overall on the macro environment, we are seeing -- like I said, 2013 spending will be -- we believe is tracking relatively well to budgets at the moment, and we see, potentially, that the industry growth rate will be in the high single digits for this year.

I am now going to hand over the call to Sujit and -- to give you a little more color and flavor on the financial results of the company.

Sujit Sircar

Thank you, Phaneesh. Good morning, and good evening to 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 first quarter. Our revenues for the quarter were $274.9 million compared to $271.6 million in the previous quarter. On a sequential basis, growth was 1.2%, with 1.9% of the growth from volume offset by a 0.6% unfavorable movement in Canadian dollars and pounds. This quarter, our largest customer accounted for 12.6% total revenues, and our top 10 customers accounted for approximately 50% of total revenues. We ended the quarter with an active customer list of 312.

Gross profit margin was 38.1%, a decline from last quarter's reported gross margin of 40.6%. This sequential decline was largely due to several items including visa application costs of $4.5 million, increased payroll costs mainly attributed to the net headcount increase of 600 on delivery [ph] and increased travel costs from transition-related expenses.

SG&A for the quarter includes -- excluding D&A, was $42.3 million compared to $41.9 million last quarter, which excludes delisting costs of $0.5 million and $2.2 million, respectively. SG&A was largely in line on a sequential basis and includes the expense from our marketing enhancements [ph] , as well as an increase in the sales headcount. We continue to invest in our sales and marketing efforts and expect a modest rise in our SG&A expense in the coming quarters.

As part of the overall restructuring initiative to consolidate corporate structure of iGATE group of companies, we had completed the consolidation of our U.S. subsidiary on January 1. In addition, we have applied for merger of Indian subsidiaries in the High Court of India. For our Indian merger, a onetime transfer and registration-related costs in the range of $8 million to $10 million, which will be expensed as U.S. GAAP and excluded from non-GAAP calculation, is expected to take place in Q2.

Also in Q2, we'll absorb the anticipated annual wage inflation charge, which we expect will be -- have an impact of 2.6% to EBITDA and a visa charge of about 1%.

Depreciation and amortization expenses for the quarter was $9.3 million, flat as compared to the previous quarter of $9.6 million. The D&A should continue to trend near this figure for the next few quarters on an absolute dollar basis.

For the quarter, GAAP EBITDA was $61.9 million or 22.5%, while non-GAAP EBITDA, which excludes stock-based compensation and delisting expense was $55.5 million or 23.8%. This quarter saw ForEx gain of $2.5 million compared to an anticipated -- to an impact of $1.9 million negative in the previous quarter. ForEx gains and losses, which are earmarked against underlying transactions within the quarter, drive quarterly ForEx variability. The result of hedged contracts, which flowed through the P&L this quarter, were better than the average translation costs in gross margin and SG&A, $54.1 to a rupee.

Other income for the quarter was $17.3 million. This largely on account of booking of capital gains on our short-term mutual fund investment and certificate of deposits. These investments were liquidated based on favorable interest rates in our Indian [ph] market, regular business fundings and also due to what I'll refer to as consolidating our investment across entities in order to manage those -- this more efficiently.

Included in our other income was also $1.6 million in interest on income tax refund received this quarter. Tax amount for the quarter was $15 million compared to $6.6 million in the previous quarter. This -- the increase was due to a lower comparative effective tax rate in Q4 from reversal of certain tax liabilities. Without that onetime reversal in Q4, the tax rate would have largely been in line with Q1.

Now with respect to tax for the full year, in India recently announced the 2013 union budget, which included a change in the corporate tax rate from 32.5% to 34%. This increase will begin next quarter, and we anticipate to implement a 1.5% increase in the tax rate to [ph] increase our full year TR to 30%.

For the quarter, GAAP net income was $34.8 million or $0.34 per diluted share. Our non-GAAP net income, which adds back amortization, stock-based compensation, delisting costs and ForEx impacts on delisting-related assets and liabilities, net of tax $39.8 million or $0.51 per diluted share compared to $35 million or $0.45 per diluted share in the previous quarter.

Now moving onto the balance sheet. For the quarter, cash generated from operating activities was $11 million net of interest payout. CapEx was $6 million. As of March 31, 2013, cash and cash equivalent was $595 million. Please keep in mind that since most of the cash balances are residing in India, they are subject to translation gain and losses.

Our DSO stood at 72 days, as in 70 last quarter, and we ended the quarter with a headcount of 28,204. With this, I'll hand the call back to Araceli.

Araceli Roiz

Thank you, gentlemen. We could open the floor for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Joseph Foresi with Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

My first question is just on the large deal that got pushed out. If you can give us a little color on why it got pushed out? Do you expect that in any of the other projects? And then, of course, if you can give us some other color on -- you hired a lot of salespeople. I know you talked about the pipeline, but are there any large deals, I mean, we could expect in that area?

Phaneesh Murthy

So the first one is that out of the 2 deals that we had talked about, 1 of them is tracking as per schedule for Q3 revenues. The other one we know has got pushed out a little. We don't know how much it got pushed out yet. While we think it could be as little as a quarter, it could be as much as 2 or 3 quarters. We'll be able to give you color shortly because this is a fairly recent occurrence. If you remember, that particular deal had some revenue attributed to it in Q2. Now in terms of the pipeline buildout, I think we are starting to see some more deals. Most of the deals that we are currently seeing in our pipeline are in the tens of millions of dollars range and nothing very large, in the hundreds of millions of dollars range. There are 1 or 2 outliers, but in those, we anticipate -- I mean, we don't currently have a good probability of success at all worth talking about. But there are plenty of deals in the tens of millions of dollars range, and that's actually what is -- what's becoming the bread and butter of the company.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. Just before moving onto my next question, I mean, is there a chance -- the deal's been pushed out. Is there a chance that -- has the contract been signed? Are you comfortable that it's going to ramp? Or is there a possibility that -- is it a matter of delay? Or is there a possibility that the deal could actually go away on the large deal front?

Phaneesh Murthy

Well, on the large deal, I would tell you that, from my experience over the last 25 years, no delay is good news. Right now, we don't anticipate that it's going to go away. But the reality is that any deal of any kind, whether it's small or large, if it gets delayed, there is a small -- there is a technically, non-0 probability that it could go away. But currently, we don't anticipate that at all.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And then just moving on to margins. When do we -- it sounds like one deal is still scheduled to start ramping. When will that start ramping? And in this quarter, it seems like there was visa costs. What can we expect on the margin front through the next 3 quarters of the year?

Phaneesh Murthy

So I think we had -- so on the Q2 side, of course, we have a deflationary impact on the margins because of 2 reasons. Reason number one being the annual wage hike that we do, which is typically done in April. That has an impact on the margins. And then there is the balance of the visa costs, which has an impact on the -- a little bit on the margins. We did take a bulk of the visa costs in Q1. From Q3 onwards, there are large deals, which are coming onto the books, that could have a potentially small deflationary impact on the margins, because I had actually outlined that the large deals, what will happen is that the deals are structured in such a way that the first 2 or 3 quarters are neutral to slightly negative in margins and then after that, it starts becoming quite positive in margins.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Any idea on the range that we can expect for this year for margins?

Araceli Roiz

In terms of the wage inflation and on the visa costs, at the EBITDA level, you're looking at potentially 4% roughly.

Sujit Sircar

So on the wage inflation, it's around 2.6% to 3%. Our visa is 1% of additional impact. But remember for Q1, we had taken 1.6%, which will not be there. So overall 2.6% and 1 -- 3.6% minus 1.6%, which we have taken now.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And then one last question for me, and we always like to get your color on this, Phaneesh, is that on the -- you've talked about the high single digits as maybe being the industry growth rate for the year. How are you feeling about demand this year versus last year? And when do you think you might be able to get the business back up over industry growth rates? And I'm not looking for guidance there, just trying to get some color on -- from your perspective.

Phaneesh Murthy

I think overall demand for this year, at least from our perspective, certainly looks a little more interesting than last year at this time. I think we've also started to see, I think, 3 reasons for that. One is spending is keeping track against budget. Last year at this time, we found that spending was trailing budgets, so that itself is a slightly better environment. The second, more importantly, I think we're actually starting to see, in a fair number of customers, willingness to start transformation initiatives, which means I have 8 or 10 ERPs, can I consolidate and make it into 1 ERP. I have multiple data warehouses. Can I consolidate, make it one? I have multiple processes. Can I make one shared to [ph] this environment, et cetera? So they are all transformation plays, which typically tend to be longer term, 18, 24, 36 months kind of players, with fair number of dollars attached to it. If we are starting to see that come back, actually, that traditionally has been the bread-and-butter activities of the Indian industry. I think from our own company perspective, I do believe that, with all the changes that we are making in the sales and marketing with the brand building, et cetera, I think we are probably just a few quarters away from being able to significantly cross the industry growth rate.

Operator

The next question comes from the line of Ed Caso with Wells Fargo.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Ed Caso and Rick Eskelsen. My question is that in the press the last few days, there's a lot of negative commentary about operations in Canada around RBC. It appears the sentiment in the Indian press and the Indian -- and the Canadian regulators has gotten far more intense on the negative side. And I was wondering if you -- what comments you could offer on that front.

Phaneesh Murthy

I mean, Ed, we have seen negative press associated with the large customers doing this in the U.S. We have seen this in Europe. We have seen this now in Canada. Outsourcing became a topic for discussion over the last 10, 12 years in the U.S. elections. It had not yet become a topic for discussion or debate in the Canadian elections. I dare say that it might become one in the future. At the end of the day, we believe that companies are outsourcing because they feel that they are getting significant benefits around it. We believe -- since you specifically mentioned RBC, we believe that RBC has benefited, and we have benefited from our relationship, and we do believe that there's significant value there. Will there be a change in regulatory environment? I don't know. It's too soon to say. I mean, was there any change in the U.S. regulatory environment? Not really, in spite of all of the debates and rhetoric that we saw. Canada, it's a different country. Yes, it is. We don't know. So the answer is, at the moment, we are not seeing anything of substance. We do believe that we've also been very sensitive about this topic. We also hire a lot in Canada. We create a lot of local jobs in Canada. We anticipated that, over the next 15, 18 months actually, that we will be creating in excess of 400 and -- 400 to 500 local jobs in Canada, just based on our planned growth and so on and so forth. Now is that all good for the Canadian economy? I believe it is. Is some of the work going offshore? Yes, it is. Now I don't know exactly how this balance, but -- works out, but overall, I have always believed that it has helped economies and helped countries more than hurt economies and hurt countries. Overall, if you look over a period of time, I believe it has created more -- it has created more jobs and than taken away jobs. And that's borne out by all of the U.S. data. Now -- yes, so that's my color. I mean, I don't know. It's too early to tell yet. I have also been -- obviously, we have been quite in the midst of all of this relatively negative publicity, but we are also seeing a lot of articles coming out in support of outsourcing and the fact that they would like banks to be more efficient and do things at a lower cost point and so on and so forth. So this is going to play out over a longer term, and we don't know exactly what will happen. At the moment, we are not seeing any immediate impact.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Then, just a follow-up on the visas in the U.S. On the visa costs in Q1, I think previously you'd expected it to be primarily in Q2. So was that related to L-1 visas? Or was it fees ahead of time for the H-1Bs? And then also on the H-1Bs with the -- with them going to a lottery system, any -- do you think it'll have any impact on the ability to get workers to staff up projects?

Phaneesh Murthy

Any time that there is a -- any time the need for visas is more than the supply, you always have a little bit of challenge in terms of this. Remember these visas are -- that we have applied are for starting October 1. So it is part of our long-range planning rather than immediate short-term planning. Based on what we get, we will obviously change and readjust our planning and figure out how to handle the demand differently. In terms of the visa costs, obviously, the fact is that our sense was that the visas would expire fairly quickly this time. And therefore, we decided that we will try and push in as many visas, bang on the day that we need, bang on the day or a day before. What we had not anticipated at that point of time was that it could end up becoming a lottery system, which, of course, might have been motive to whether we did it on April 1 or just before April 1.

Operator

[Operator Instructions] Our next question comes from the line of Brian Kinstlinger with Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

I guess I'm interested on the large project that got -- that is not delayed. Is that now a signed deal? I think that was the one, on the last quarter you updated with us, that you'd been selected, the deal was still being negotiated?

Phaneesh Murthy

Yes. So just to let you know, what happened was that -- what I had updated you on last time, was that we had been invited to do due diligence. That due diligence has been completed. Due diligence has been accepted from both sides, and letters have been exchanged. The letters are just moving into contract. We don't see any deal breakers, and we see it tracking to Q3 revenue, Brian.

Brian Kinstlinger - Sidoti & Company, LLC

Great. That's helpful. And for the one that was delayed, had you already hired staff? And if not, how are you handling recruiting for that project? Will you wait until there's a signal of the project starting up? Just give us a sense how you're handling that.

Phaneesh Murthy

We have hired some staff for that, Brian. It was anticipated to start in Q2. We have hired some staff. But as you probably know, in our model, probably 20% of the staff is kind of dedicated and focused in that vertical, in that industry, in that domain, et cetera. And the balance is relatively fungible. So we believe that we'll be able to redeploy a large chunk of that staff based on the signals that we'll get over the next few days/weeks, as to exactly when the project will start.

Brian Kinstlinger - Sidoti & Company, LLC

Great. And then related to the press in Canada, I'm just curious, it's been a very short period of time, so I'm not sure how much discussion you've had. But do you think that, given the pressures, because rarely in the press is this particular customer mentioned and this is a large one for you, that they're going to have to, in any way, change the way they do business, the way they outsource? Obviously, you'll still be an outsourcing partner for them, but maybe they have to bring some of your work back in-house, do you think?

Phaneesh Murthy

The only thing, I think is -- I can say is that you probably read the same interview that Mr. Gord Nixon gave, that I read, where he was supportive of outsourcing, where he actually felt that outsourcing had given good business benefit to multiple banks, including them. And he believed that outsourcing would continue to be there. Now in addition to that, obviously, I've been talking to multiple execs. And will some things change? I do believe it's quite likely that some things will change. But at the end of the day, I do believe that while all of us, in general, are being more socially conscious, everybody, customers and vendors alike, I do believe that the business benefits and value of the outsourcing will continue to be there for all companies. You want more efficiency. You want more shared services. Everybody doesn't need to solve the problem by themselves. They can share it across multiple people. More and more problems are being solved through technology. So I mean, all of them are related in some flavor or the other to what is the impact on jobs, and I do believe all of that will actually have to continue.

Brian Kinstlinger - Sidoti & Company, LLC

And then the -- outside of the large deals, I think you've commented that demand environment is expected to be in line with budgets. But maybe to put it in context maybe a little bit better, do you think demand is stable? Is it growing outside of your large customers? Or is growth accelerating?

Phaneesh Murthy

I think demand is stable. I also think it's growing. My sense is that I think demand will start accelerating. We are hoping that demand will start accelerating in a few quarters, as we start seeing these big transformation things that we were talking about, many customers are willing to do transformation kind of deals. As they start actually moving into those deals, I think we'll start seeing demand growing a lot faster. But at the moment, I would probably characterize it as a relatively stable demand environment.

Brian Kinstlinger - Sidoti & Company, LLC

Great. Last question, maybe, Sujit, if you could break down -- I wasn't sure I got all the numbers that -- the other income. I know you have the interest expense. I know you have -- you said -- you mentioned the FX, and you mentioned the gain on changing the taxes from the past. I'm just trying to understand how other income got, overall, to be so low. Can you just go through those numbers one more time? And then maybe give us a sense for the next couple of quarters, because you're paying down debt, I think, this quarter you mentioned, what you expect other income to roughly look like?

Sujit Sircar

Sure. So Brian, out of $19.8 million, we have got $17.3 million coming in from other income and $2.5 million from exchange gains. And out of $17.3 million, $1.6 million was from the refund interest received from the income tax department on account of some interest. That's -- and the rest is a treasury income. Around $15.3 million was a treasury income. Yes, we expect that to come down. If the exchange rate remains constant, I think it will be around $6 million for next quarter.

Brian Kinstlinger - Sidoti & Company, LLC

Great. And I'm just looking at the P&L, and it says the other income loss is only $2.8 million. But the -- on the adjusted, it shows like a $17 million number, right?

Phaneesh Murthy

Sorry, what did you say?

Brian Kinstlinger - Sidoti & Company, LLC

If you look at your P&L on the quarter, other income loss is minus $2.9 million, right?

Sujit Sircar

Yes, $19.76 [ph] million.

Brian Kinstlinger - Sidoti & Company, LLC

And then if you look at the other income on the reconciliation, it's $17 million. What were the -- that means there's $15 million of offsets to the other -- to the interest expense, right?

Sujit Sircar

Yes, that's right. The $1.6 million out of that is onetime, which is like the interest from the government. So that's taken out, and $15.3 million is the treasury income.

Brian Kinstlinger - Sidoti & Company, LLC

$15.3 million was treasury income?

Sujit Sircar

Yes.

Brian Kinstlinger - Sidoti & Company, LLC

That was the reversal of the taxes?

Sujit Sircar

And that's toward the $1.6 million for the reversal of taxes.

Brian Kinstlinger - Sidoti & Company, LLC

Got it. And so basically, to get to what we think going forward, we should just reverse the $15.3 million and the $1.6 million, and that's about what it should look like? Or will it change given you're paying down that low-interest-base debt?

Sujit Sircar

So this obviously, as I said, because the interest rate scenario in India is going down, so we have booked our profit, which was on a long-term basis, so that's the reason it's high. And this $15.3 million, which was there and booked in this quarter, is pretty high because they have booked it for a long-term reason. And so this amount will come down in the future, quarter 2, considering we are thinking of repaying the debt. And as of now, considering the stable exchange rate and when we pay down the debt, we expect anything between $5 million to $6 million of treasury income next quarter.

Operator

The next question comes from the line of Mayank Tandon with Needham & Company.

Mayank Tandon - Needham & Company, LLC, Research Division

Phaneesh, if I heard you right, you mentioned that, in a few quarters,, you expect to get back to industry-type growth. So that would suggest that we'll see a sequential uptick for the remainder of the year despite the fact that one of your big deals got pushed out. Is that a fair assessment? And is that the way to model your business over the next several quarters?

Phaneesh Murthy

I certainly believe that growth, based on the broader demand environment, and otherwise, we are going to be a little bit of growth definitely, even on a sequential basis, we are going to see a little bit of growth. We see Q3, obviously, because of the one large deal anyway coming on, we'll have a little bit of a growth. And there are enough deals, Mayank, of the tens of millions of dollars range in the pipeline, which makes me feel comfortable. Plus, the number of deals where we are being picked effectively as 1 of 2, 1 of 3, is making me feel better. While it has no immediate revenue impact, these are all the ways that you really drive growth over time. So yes, I'm actually feeling a little more comfortable, notwithstanding the one deal that [ph] got pushed out a little.

Mayank Tandon - Needham & Company, LLC, Research Division

So just to pin you down a little bit more, as you exit 2013, can we expect growth to hit that high single-digit number that you indicated would be industry growth for this year on a year-over-year basis?

Phaneesh Murthy

On a year-over-year basis, I don't know if it's the exiting of this year or the beginning of next year, but yes, I mean, obviously, that is our goal, Mayank.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And clearly, you have some margin headwinds this year, and you've obviously called them out. When can we expect you to get back to that 40%, 25% margin profile that you've talked about longer term? And obviously, you were there in 2012.

Phaneesh Murthy

I think what we are seeing is that once we have absorbed these deals in 3 or 4 quarters, they go back to comfortable margins. And so to that extent, Mayank, I think that's really what we would anticipate, 3 or 4 quarters after the deals to be back at those kinds of margins.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. So were it not for these big deals, would you be at 40% growth and 25% EBITDA margin for this year, even adjusting for some of the visa costs and wage inflation levels?

Phaneesh Murthy

Yes. I mean the visa costs while we know that's a onetime cost, this is there every year, and we've always managed it. And wage inflation, although it comes in Q2, remember we always kind of manage it. So we are hovering around that area, yes.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And then one final question, Sujit, just remind us again how much of that $595 million in cash is sitting in India. And then how do you propose to potentially refinance or pay down that $770 million in debt starting in 2014?

Sujit Sircar

So currently around 75%, 80% of the money is lying in India, and we proposed to, by the Q2, we'll be able to pay some of those debt. And remember, this was not about the $770 million. It's about the other loans which we have taken. $770 million is -- we plan to refinance and we plan to -- and pay some of those out of it. We have been able to generate more and more cash flow in U.S. itself, and so the pent-up [ph] cash is definitely -- so slowly out of that $600 million, previously, so 10% [ph] of the cash was lying in U.S. So slowly, it has come down to 70%, 80% in India and rest in the United States. So we are building up our cash to refinance and partly pay $770 million. And that other loan, which is not there in the United States, we are going to pay it off expected in Q2 time frame.

Phaneesh Murthy

So Mayank, just to clarify on the $770 million, we believe that, that's due only in the Q2 of next year and not in the beginning of 2014. It's Q2 of 2014. Based on the current bulk [ph] price, which is hovering at around $109, we believe that we will be able to refinance at quite a bit lower rate and use a part of our current cash to be able to pay down a part of that debt.

Mayank Tandon - Needham & Company, LLC, Research Division

Can you give us a little bit of a sense of how much you would refinance versus how much you would pay down? Is it 50-50? Is it 2/3 refinance, 1/3 paydown?

Phaneesh Murthy

The fact is that if you look at the other loans, we'll be paying that off first, the $265 million and so on. So those loans, we'll pay off first. Obviously, we'd like to keep some money for our CapEx and for our working capital needs. So I would probably gauge probably about 1/3 roughly, give or take.

Operator

The next question comes from the line of Glenn Greene with Oppenheimer & Company.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Most of my questions have been asked and answered but a few left. Excluding the big project ramp that was delayed, can you just sort of give us a sense, just broadly, on the base business in terms of the state of kind of project ramps? Is it kind of tracking expectations? Is it somewhat better than it was 3, 6 months or so ago? Or just sort of the status of the project ramps?

Phaneesh Murthy

Certainly, Glenn, I think it is a little better than what it was a few months ago for us. I mean, if you remember, last year was a relatively flat year for us. We've only started the growth. We're already starting to see growth. I think the growth -- the advantage of growth, which is broad based across multiple customers, across multiple verticals, is that there's no one special event which is causing that growth. So I anticipate that a little bit of the growth will continue on a fairly broad-based manner, Glenn.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then similarly, just a high level on pricing trends, what you're seeing?

Phaneesh Murthy

I'm not seeing any appreciable difference in the market on price stability. We continue to see where deals are highly competitive where they're being without -- like last year, they continue to be competitive. The rest of the stuff, we continue to see that, when you offer a value proposition, we are getting the prices and the margins that we would like.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then you, obviously -- it looks like you hired a little -- you hired a bit in front of that big project ramp that was anticipated for the second quarter, kind of the first meaningful hiring that we've kind of seen since the big acquisition. But what are your expectations from hiring from here? Do you kind of like maybe slow down given that the big project's been delayed or kind of what's your expectations as we proceed through the year in terms of hiring?

Phaneesh Murthy

I think it's just a question, Glenn -- we need to assess what the delay is. And based on that, I think we will be able to redo -- this is a fairly recent occurrence, so we've not been able to remodel our hiring plan. But clearly, from a Q2 perspective, we don't anticipate we'll be doing a whole lot more of net hiring. But after that, based on what this project -- we'll be able to assess the project over the next 10 days or 15 days, and then based on that, we'll be able to project out our hiring plan. But I just don't have that answer yet right now.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then just quickly the final one, the 6 Fortune 1000 clients that were signed or landed in the quarter, any way to give us sort of a frame of reference for annual revenue contribution in aggregate?

Phaneesh Murthy

Not a way to give you that completely, but one of the things that we are seeing is that the quality of our account openings is actually going up quite nicely. And if you look at it, typically what ends up happening is that the accounts which opened in Q1 contribute the most for the revenue, and the accounts which opened in Q2, et cetera, contribute a little less. But we anticipate that, in this year, typically, about 2% of our revenues will probably come from new accounts.

Operator

The next question comes from the line of Jason Kupferberg with Jefferies.

Amit Singh - Jefferies & Company, Inc., Research Division

This is Amit Singh for Jason. Just quickly on your sales transformation in North America. I remember last quarter you had mentioned that you are 60%, around 60% done. Where do you stand right now? And what type of results have you started seeing? And also along with that, if you talk about North America in general and all the verticals, I know you mentioned that the growth is broad-based, but are there certain verticals which are performing better than others?

Phaneesh Murthy

In terms of the first question, Amit, I think we are probably about 80%, 85% done on that sales transformation. It probably -- as you know, it probably takes 2 or 3 quarters for the new teams to settle down before they can start contributing, and probably 5 or 6 quarters before they can start contributing more meaningfully. In terms of the growth rates, I think in terms of the growth across verticals, this quarter, we have actually seen fairly broad-based growth. I mean, it's a little across the board. So we saw growth in the banking. We saw growth in manufacturing. We saw growth in insurance, which are our 3 largest sectors anyway. So it's fairly broad based, Amit.

Amit Singh - Jefferies & Company, Inc., Research Division

Great. And just on the -- coming back on the larger deals, are there any other megadeals that you're pursuing? And just to tag along with that, as you're dealing with like bigger and bigger deals now, how's the competitive environment, as I believe, you're coming face to face with some of the larger players more often now?

Phaneesh Murthy

So I think I just did mention that some of the larger deals that we are working on have a low probability. The megadeals that we're talking about have a low probability, therefore not worth really talking about. But the competitive sector varies, Amit, I mean, in all of these deals. I mean, most of the deals, large deals that we are seeing, typically are of high tops [ph] in nature. So the competitive set is very different from our traditional offshore kind of based competitor set, which, if you noticed, has been the reason why our win rate has been obviously a little higher. I mean, in the last couple of deals that you saw that we actually did bring them -- land them both. So the probability right now is too small to talk about those deals. So once the probability go up on the megadeals, we'll give you some flavor on this.

Operator

The next question and final question comes from the line of Pinku Pappan with Nomura.

Pinku Pappan - Nomura Securities Co. Ltd., Research Division

I just wanted to drill a bit further into the next quarter margin impact. You mentioned that, net of the visa and the salary hike, there's going to be some -- closer to a positive [ph] impact on your margins. I just want to understand, are there any levers you can use to kind of offset those margin impacts, maybe utilization, which you kind of did this quarter, can you burn some of the bench that you have or any other levers that you're looking to kind of offset the impact from the visa hikes?

Sujit Sircar

Sorry, the margin impact next quarter is -- for wage inflation is around 3%, and additional visa is 1%, and we have, this quarter, taken 1.6%. Yes, so these are the 2 main things, which will hit next quarter, the visa of 1% and 3% on the wage inflation. But it will not have this quarter's 1.6%. In addition to that, in GAAP, we have got -- because of the merger, we are going to do some registration costs and our listings which might have onetime cost of $8 million to $10 million will be coming in -- will be taken out for the non-GAAP purpose.

Phaneesh Murthy

On the -- on your question on efficiency improvements, typically, what we find is that efficiency improvements come over the year, not in a quarter. Obviously, our first motivation will be to burn as much of that bench, which is not dedicated to a domain, and then we'll continue to work off that.

Pinku Pappan - Nomura Securities Co. Ltd., Research Division

Okay. And could you mention what kind of salary hikes you're giving on site and offshore?

Phaneesh Murthy

We are anticipating, depending on the levels, rates, et cetera, in India, something like 9% to 12% and offshore, something like 2% to 3% and on site 2% to 3%, yes, around that range.

Pinku Pappan - Nomura Securities Co. Ltd., Research Division

Okay. Okay. The last question I have is -- I was look at your metrics. Your banking and financial services revenue seem to have slightly dipped during the quarter. I mean it's just a little bit of marginal dip, 2%. I just wanted to understand if there is something particularly happening with vertical? Or this more of a, I mean, quarterly aberration?

Phaneesh Murthy

No, no, it's just a quarterly aberration.

Operator

We have reached the end of our question-and-answer session. At this time, I would like to turn the floor over back to Ms. Roiz for any closing comments.

Araceli Roiz

Thank you. Once again, I want to thank all the participants for joining us on this call. Please feel free to call me or email me, and we'll schedule a callback. Go ahead, operator.

Phaneesh Murthy

Thanks very much. Thank you, everybody.

Operator

Thank you. This does conclude 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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