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Executives

Salil Ravindran - Director, Investor Relations

Phaneesh Murthy - President and Chief Executive Officer

Sujit Sircar - Chief Financial Officer

Analysts

Brian Kinstlinger - Sidoti & Company

Jeff Martin - Roth Capital Partners

Jon Maietta - Needham & Company

Vince Colicchio - Noble Financial Group

Jiva Ramaswamy - PJ Funds

iGATE Corp. (IGTE) Q2 2009 Earnings Call July 22, 2009 9:00 AM ET

Operator

Greetings. And welcome to the iGATE Corporation second quarter 2009 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Salil Ravindran, Director of Investor Relations for iGATE Corporation. Thank you. You may begin.

Salil Ravindran

Thank you, Diego. Good morning, ladies and gentlemen. And welcome to this earnings call to discuss the iGATE financial results for the second quarter.

With me on the call today are Phaneesh Murthy, President and Chief Executive Officer of iGATE and Sujit Sircar, iGATE’s Chief Financial Officer. This call is being webcast on our website and the replay of this call will be available within a few hours. Our earnings release which has been forwarded to you all is now posted on our website.

We will start with a brief overview of iGATE’s performance during the quarter, and the overall outlook by Phaneesh, which will be followed by the financial highlights by Sujit. Subsequently, we’ll open the floor for discussions. Before I hand over the floor to Phaneesh, I would like to remind everyone that statements made during this call that are not historical facts or forward looking statements, these forward looking statements include our financial growth and liquidity projections, as well as statements about our plans, strategies, intentions or beliefs concerning our business cash flows, costs and the markets in which we operate.

Without limiting the forgoing the words, beliefs, anticipates, plans, expects and similar expressions are intended to identify certain forward-looking statements. These statements are based on information currently available to us and we assume no obligation to update these statements as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward looking statements, including those listed in the cautionary language at the end of our news release some of which are beyond our control. As a reminder, we will not discuss further guidance during the quarter in one-on-one meetings or calls and we have no intention at this time of updating our guidance as circumstances change.

I will now turn the call over to Phaneesh.

Phaneesh Murthy

Thank you Salil. Good morning and good evening to all of you based on wherever you are. I am just going to cover; first I will start off with what we are seeing in the market, I will get into our own results and what are the highlights in the Company. In the market I think we are seeing better business environment than clearly was there in Q1 of ‘09. We are starting to see signs of decisions being made. We are starting to see people recovering from the recession and in effect starting to restructure their organizations. We believe a lot of this restructuring will end up in decisions being made towards offshore a little more. Bulk of the decisions which are now being made I believe are also in the area of infrastructure operations management and business process areas.

If you look at the broad statistics, it looks like about 17, 18% of app development and maintenance dollars are already being spent in India. However, less than 2 or 3% of ops dollars are being spent in India. And I believe that the comfort level and the need for many of these companies is to do a little more. I also believe that many of these companies have started making decisions largely because many of the banks and financial institutions that actually return the TARP money are in the process of returning the TARP money.

So, on a business environment basis, I believe that, it’s certainly more positive than what it was in the first quarter of ‘09. Built on the back of some of the decisions that essentially got made more in our existing customers than anything else, I think we had a reasonably good growth in revenue and a very nice growth in margin, continuing to prove that we have been quite prudent in our cost and quite conservative in our cost management.

For the first time, we added 100% of our customers through all first time offshoring people including the couple of customers that we added towards the end of the quarter which in effect will be customers for the July quarter. It’s a very interesting phenomenon, we have never had this strange thing that 100% of our additions of first time offshorers, we have normally been more a second-time offshoring kind of a Company where people have understood what they want, are now smarter about it, and then they come to us. The challenge of course with first-time offshorers are that, that project starts tend to be smaller, more gradual, need more hand-holding, but the good news of course is that we are starting to get the first-time offshorers.

The second big news as far as we are concerned from the quarter is the fact that we made a conscious decision to reconstitute our Board of Directors. We believe that we should have a Board which more closely represents our vision and our direction. And consequently we wanted to add a couple of financial services people on the Board. To that extent we have gone ahead and retired two Board members and have brought in Martin McGuinn from Mellon to be on our Board. We will be in the process of adding another Board member over the next couple of months, next two or three months or there abouts. But really the key there is that it’s a conscious constitution to try and get our Board members more in line with the vision and direction that the Company is facing.

I think the third big news is the fact that we won a number of awards in the last quarter. We were ranked number 14 in the top 50 Best Managed Vendors. We were ranked also among the Best 20 Leaders in Discrete Manufacturing and Insurance. And we were also ranked among the 20 leading providers of outsourcing services in Canada.

So, from a business front certain external benchmark and validation of what we are doing. Also from a reporting transparency and governance perspective I think for the first time we actually entered into this contest of the best produced annual reports and we are proud to say that we won the bronze award in two categories from the League of American Communications Professionals. So, I think these are some of the major highlights for the quarter.

I am going to just talk about, like I started by saying that the business environment is looking a little better than it was in the Q1. However, I do want to mention that I do believe that this is like a checkmark kind of recovery. We lost a lot, what we lose in one or two quarters you make it up for next several quarters, and, so it’s a more gradual recovery. The concerns of commercial real estate and probable card defaults, based on the unemployment rising are still very much there in all the financial institutions, and we certainly hope that the recovery does not sputter and die out.

So that’s going to be the big ticket thing, but it certainly looks positive that going into the next year budgets will probably be slightly on the up or maybe flat at worst. It does not look like any further decline or anything else but it looks like flat to upward and I think for 2010. And hopefully coming out of September, October that will start therefore driving some little bit of benefit. All of this is of course under the assumption that the gradual recovery does continue, and as many of the customers start restructuring themselves.

Having said that, the positive word about the business environment, I just do want to add a cautionary note about the legal and regulatory environment, I think we are among you know, while none of it has changed as of now, there are enough things doing the rounds in Washington which are causing us concern. Among them are the proposed taxing on worldwide income by the Obama Administration for all American companies. The proposed taxing of work coming in from India, the proposed H1B L1 regulation changes, all of them cause concern. And on the very positive side of course the Indian Government’s decision to extend the STPI benefit, the tax holiday by one more year, actually saves us a ton of money, even as we restructure some of our operations into SEZ.

So that’s kind of the company highlights. I’m now going to turn it over to Sujit to talk a little bit about the financial highlights and then we will do a Q&A. Sujit?

Sujit Sircar

Thank you, Phaneesh. Good morning everyone, 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 second quarter ended June 2009.

Our revenue from continuing operation for the quarter was 46.8 million, compared to 44.8 million in previous quarters and 56.2 million in the same period last year. In volume terms, the revenue increased by 6% sequentially and 3% from last year. The sequential growth in revenue is due to the increase in projects by top customers and easing of IT budget cuts by customers. We added three new customers during the quarter and the active customer at the end of the quarter stood at 85. Our largest customer accounted for 25% of the revenue for the quarter and our top five customers accounted for approximately 70% of the revenue.

Our gross margin increased to 38%, 38.2% from 35.3%, in the corresponding quarter last year. This gross margin was favorably impacted by increased utilization and favorable effect of currency exchange moment, but was slightly offset by the reduction in the average bill rate.

Our SG&A expenses including depreciation and amortization for the quarter was 10.3 million compared to 12.8 million corresponding quarter last year. The decrease was primarily due to corporate restructuring initiatives, deduction and depreciation, and our continued focus on cost containment.

Income from operation for the quarter was marginally up at 7.2 million, compared to 7.1 million in the same period last year. However, the operating margin improved significantly 15.3% of revenue from 12.6% in the corresponding quarter last year.

The net income from continuing operation was 6.1 million or $0.11 per diluted share, compared to net income of 5 million, or $0.09 per diluted share in the previous quarter and 7.4 million or $0.13 per diluted share in the same period last year. The net profit margins stood at 12.9% of revenue, up from 11.2% in the previous quarter, but marginally down from the 13.2% in the same quarter last year.

As of June 30, 2009 the company had 6,430 employees worldwide as compared to 6,402 in the same period last year. For the six months ended June 30, the company generated operating cash flow of 19.8 million compared to 14.2 million made in the corresponding period last year.

The overall capital expenditure during the period was 5.2 million compared to 5.1 million in the same period last year. As of June 30, the company’s balance sheet remains strong with 75.3 million in cash and short-term investment, zero debt, and 160 million in shareholder equity.

During the quarter, iGATE Global Solutions Limited, wholly on subsidiary of iGATE, obtain credit rating of AA from CRISIL, an S&P company. The rating reflects iGATE’s modern business’ profile marked by average market position and improving operating efficiencies, favorable financial risk profile and adequate liquidity. The DSO at the end of June 30, was 64 days lower from 68 days in March 2009.

These were the financial highlights. With this I’ll now turn the call back to Salil.

Salil Ravindran

Diego, we can throw open the floor for Q&A now.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Brian Kinstlinger with Sidoti & Company. Please state your question.

Brian Kinstlinger - Sidoti & Company

The first question I have when I take a look at your (inaudible), it looks like GE accounted for most of the increase and I am wondering a couple things. First of all, is that because they returned to higher volumes and maintenance, is it because maybe they gave some of the (inaudible) business away. And then give us a sense generally for the rest of your client base, since GE accounted for that most of that increase, what’s going on with the rest of the client base.

Phaneesh Murthy

Brian, a quick correction, GE didn’t actually account for most of the increase point number one, and point number two, I’ll just give you an environment around GE. I think you know from what we are hearing, I think there’s a very positive climate of opinion inside GE about iGate. We have an extremely high CSAT, Customer Satisfaction rating. We also have a very high NPS score, what’s called the Net Promoter Score. And therefore, we actually continue to hope to increase our revenue base within GE over the next two or three years.

The second interesting fact that we are hearing is that a lot of the operations work of GE, which hither to was done only by one company is now going to get start getting bid out by the end of the year. And therefore, we anticipate that as part of that bidding process, we will bid and maybe pick up some pieces of the operations work. This is what we are hearing. So, I would say that over the next three years, we anticipate a growth in GE revenues. But just to clarify all of the growth did not come from the GE side.

It came from a few customers.

Brian Kinstlinger - Sidoti & Company

Not all of that. But I mean you increased sequentially two million and if I just use your top client as a percentage of sales. It looks like about 1.5 million of increase came from GE.

Phaneesh Murthy

Actually, the top clients have changed.

Brian Kinstlinger - Sidoti & Company

And what quarter was that?

Phaneesh Murthy

Just this quarter, last quarter the top clients changed.

Phaneesh Murthy

Last quarter our top clients have changed.

Brian Kinstlinger - Sidoti & Company

Got it. Understood. So, then maybe it was that client who wasn’t on the top, who provided most of that work in this quarter. Is that accurate?

Phaneesh Murthy

They provided some part of the list in the quarter. Yes.

Brian Kinstlinger - Sidoti & Company

Okay. Now, if we take a look at utilization, obviously it increased dramatically. And, I’m wondering, if the current demands continue, as you see them today. Would you expect in the second half of the year to utilization will remain level would it continue to increase, decrease? What are your targets for the second half of the year in terms of utilization?

Phaneesh Murthy

I think in terms of utilization, we are pretty much maxed out right now Brian. So we expect utilization to remain stable within a band for the next half of the year and as the demand continues to increase we will probably be hiring more. So our number of employees may actually go up.

Brian Kinstlinger - Sidoti & Company

And so what are your hiring plans as you said today, I saw an article that said you are going to add a couple of 100 people, but you know what are the overall goals for the second half of the year? Do you have any that you can share with us?

Phaneesh Murthy

I think you know to be honest with the uncertainty of volatile market we have brought our hiring back to just in time for contract. So at the moment we don’t know exactly what, but we do anticipate hiring at least a couple of 100 employees between July and December.

Brian Kinstlinger - Sidoti & Company

Okay, and it looks like pricing was down about 7 to 8% depending on offshore outsource at looking at year-over-year and this morning we heard some comments from one of your competitors that I think at least one of the headlines said pricing is stabilizing, so I guess take us through your thoughts and what you are seeing on pricing, what you think going forward and what’s happening with your existing customer base, are they asking still for reductions, are they coming back to you and what you are seeing out there? Thanks.

Phaneesh Murthy

I think there are two or three factors contributing to the pricing realizations decline. The first one was that the Jan, Feb, March quarter was a little brutal. That’s the time when people were asking for all of the cuts. We have not had fresh requests and therefore you would argue that the pricing environment is getting a little more stable. That’s point number one. Point number two, being the reporting currency being dollars and the large chunk of the revenues being non-dollars in either Euros or Canadian dollars or whatever it is, has the cache of the Euro declined against the U.S. dollar, in effect our realized rate came down.

But therefore just to complete the thought, we do believe that while the environment remains very competitive overall because in most of the deals we are actually finding fairly severe competition. Overall, I think the existing customer pricing pressures, I think have stabilized.

Brian Kinstlinger - Sidoti & Company

And do you expect them to return at the beginning of next year when everyone comes back to the table and talk about current volumes and yearly expectations, do you expect or do you expect that the stabilization will continue?

Phaneesh Murthy

Currently we actually have further stabilization to continue.

Brian Kinstlinger - Sidoti & Company

Okay. Last question, I have a bunch more and I’ll get back in the queue. I’d like to get your thoughts on the 50-50 role for the visas. Let’s just assume for one second that it goes through, how does that change your recruiting in the United States? Does that mean you wouldn’t be able to bring over workers temporarily, meaning, you have to carry lower utilizations in the United States. Just give us a sense of what that would mean to your business?

Phaneesh Murthy

I think first of all my own view is that, I think it’s a rule which is clearly in my mind, ill conceived. The fact is that, there are a couple of other rules I think now couple of other bills which are starting to get a little more support which actually talks about really locking down the borders in Mexico, building high electric fences and all of that stuff, at the same time talking about increasing the flow of H1 and skilled workers.

So I am very happy that there are multiple points of view being floated by multiple senators right now. The fact is that a 50-50 rule because none of the companies can actually -- ideas of the rule so for the whole industry and specifically iGATE. In effect what will end up happening is it will hasten the pace at which work gets out of the country. It will not achieve the purpose which they think it will, which is that jobs will be created inside the country.

What will end up happening is that we will start doing projects very differently; for example, we have a center in Mexico which is in the same time zone. We will probably utilize more work from our Mexican center. We will probably utilize a higher growth in our Mexican center by having more people come from Mexico to the U.S. where they don’t need the H1B because of being part of NAFTA.

So I think our business models will change and we are ready for those changes in business model. But I do believe that, that’s about one of the most ill conceived things that exists out there. To me it makes no sense, because people think that everything else is going to remain the same but that much more U.S. employment is going to happen, that’s not going to happen because it’s too difficult to ensure I mean if you look at large companies they have 15, 20,000 people here and out of 15, 20,000 people may be less than 5% are U.S. citizens or residents.

And for us we have close to 20% being U.S. citizens or residents. So even there we have a 30% problem but our problem is much smaller because it’s in the 100. And even then we can’t correct it immediately, so my own sense is that I believe that it will just force us to change our models then we are ready for those changes in models.

Brian Kinstlinger - Sidoti & Company

Just a follow up to that before I get back in the queue. I mean supposing it does happen and maybe we all agree its not going to achieve that what they want it to achieve, but suppose it did happen and you had to bring more of your Mexico employees up here. Does that at all change the margin profile of our business and the profitability on your employees or not really?

Phaneesh Murthy

Not really. I think the Mexican employees coming here, working on onsite trades, it won’t change it by any significant manner.

Brian Kinstlinger - Sidoti & Company

Okay. Thanks.

Operator

Our next question comes from Jeff Martin with Roth Capital Partners.

Jeff Martin - Roth Capital Partners

I was wondering if you could go into a little bit more detail on margin gain you had in the quarter, you said part of it was due to currency and I assume part of was due to utilization, could you help us break that down and understand the sustainability of the current level, for the second half of the year?

Phaneesh Murthy

I think, in gross margins we have gone up to 38 and change, that we continue to believe is a function of the increasing iTOPS revenues, it’s a function of increasing utilization and a part of that is actually coming from the currency. We believe that as long as the currency stays roughly stable we actually believe that we will be able to sustain margins at this level because we have borne the burnt of the price declines and yet we are gaining in efficiencies. So we believe that the margin structure is relatively stable.

Jeff Martin - Roth Capital Partners

Okay. And then segueing into iTOPS, are you gaining traction, I know you’ve got one significant customer who is utilizing it quite a bit. Are you getting traction with other customers at this point? And what is the percentage contribution of revenue from what you would call necessary iTOPS?

Phaneesh Murthy

First of all the percentage contribution has gone up to 13% and its getting close to the 15% internal goal that we had for the end of the year. I do believe that the recession is actually forcing a stronger adoption of the iTOPS model and an outcome based pricing, because people are looking for value right now, much more than ever before. And as a consequence, other customers have started doing projects with us in this model. So, I am actually much, much more bullish about the base of adoption today, than I was probably two or three years ago, I think the recession has actually helped the base of adoption a little.

Jeff Martin - Roth Capital Partners

Okay. And then, you didn’t mention specific guidance or view for growth for the second half of the year. Do you care to take a stab at that and should we look at third quarter as being flat to up from the second quarter on a revenue basis?

Phaneesh Murthy

I do believe that the worst has been behind us. I talked about the concept of a check mark recovery, so I do believe that we are in a growth phase. It will be up compared to Q2; Q3 will be up compared to Q2, and based on our current visibility we anticipate Q4 will also be up barring any holiday stuff etc., etc. which we’ll come to at the next quarter. But currently, we do anticipate an uptick, a continued uptick.

Jeff Martin - Roth Capital Partners

Great. And then could you discuss your progress in the healthcare vertical -- you had two customers you signed last quarter, how was it progressing and what’s your end on that?

Phaneesh Murthy

They’re actually been contributing quite nicely. One of the customers is going really nicely and we anticipate that going into 2011, by 2011 that customer could end up being in our top four or five customers. And you know, certainly they are going very nicely. The other customers that we acquired is also, starting to contribute to revenues in a reasonable way, but it’s not a star, but one of the customers is clearly looking like a star.

Jeff Martin - Roth Capital Partners

Great. And then, other three customers you signed in the quarter, any of those have the potential to be top five, over time?

Phaneesh Murthy

Not the three customers that we signed in this quarter, because what happened is that like I was saying they are all first time offshorers and generally first time offshorers I think take a long time to scale their revenues they, and many of them are dipping not just toes right now, but they are pretty much dipping toenails in the water.

Although the customers are fairly large, they are all multibillion-dollar companies.

Operator

(Operator Instructions). Our next question comes from Jon Maietta with Needham & Company.

Jon Maietta - Needham & Company

Hey thanks very much. Phaneesh I was just wondering if you’d comment a bit on the type of work that you have seen rebound, is it predominantly the application maintenance and development or other type of work, whether it be integration type of work?

Phaneesh Murthy

I think the three pieces of work that we are seeing growing a little for us, A, first is business process, the second is infrastructure operations management, and the third is application maintenance. We are still not seeing any discretionary spend, we are still not seeing any application development to speak of.

Jon Maietta - Needham & Company

Okay. And then on the margin line, Phaneesh you talked about gross margins being stable going forward? Do you think you have some opportunity to expand gross margins, if we see that sequential revenue growth that you had mentioned?

Phaneesh Murthy

I believe clearly I mean, our goal has always been 40-20, model if you remember 40% gross margin, 20% EBITDA, so I mean you know, I completely believe that we have the opportunity to do that. I think we were there, if you remember John, couple of quarters ago, when the markets were not so bad and we certainly intend to get back there as quickly as possible.

But some growth in revenues will help us move those margins along.

Jon Maietta - Needham & Company

Sure, that makes sense. And just the last question I have Phaneesh, its sound like DSSI that industry vertical has improved somewhat. Healthcare you touched on, I just wonder if you could touch on some of the other verticals – manufacturing, media. Just in general have you seen the tide change there a little bit as well or is it too early to tell?

Phaneesh Murthy

I think manufacturing. We have not seen any appreciable change in the tide from our point of view. I think what we are seeing, we’ve added another media customer and that I think has started contributing to revenues. But overall, current spending in media is not something that we can hang a lot of confidence on yet. They have got quite badly hit with the lack of advertising revenue and those kinds of things. So, if I were to say, what has improved from January to July? I would really say that bulk of the improvement in the environment is in the banking and financial services space and healthcare for us because of the fact that we got into a couple of customers.

Operator

Our next question comes from Vince Colicchio with Noble Financial Group.

Vince Colicchio - Noble Financial Group

Sure. Could you talk a little bit about your growth prospects going forward with your new top client?

Phaneesh Murthy

You know I do think the satisfaction and happiness is extremely high with our current top client. I do believe that, they are continuing to look at ways to restructure their own cost, if you look at RBC’s own financials. They are going through a little bit of pain. And consequently, they have to restructure that cost a little more dramatically. So, I think a lot more work will end up in India.

Now, having said that, clearly there are good prospects for growth, having said that, we have what roughly almost 1500 people working with them now. We have roughly 1500 people working with them. And, I’m assuming and we have currently there, pretty much their only provider. At some point of time, I’m assuming that somebody might take a look at that and hoping that they need to diversify. But, we see growth prospects as of now.

Vince Colicchio - Noble Financial Group

Any developments that you could mention on the Japan partnership?

Phaneesh Murthy

Well. You know, I think two pieces. The first one is clearly, the fact that the Japan partnership is moving along quite at a healthy pace. And, I would actually without offending anybody for Japanese. I think it’s moving along at a very frantic pace. We have already done a lot of executive level meetings. I have gone and visited the board members of all of their clients.

After that there have been follow-up meetings and for a partnership agreement which was signed probably three months ago, I would turn around and say that getting revenues this year itself is looking very likely, and which I think is a very good pace for a Japanese partnership. Actually, it is a very good pace for any partnership anywhere I think, but definitely a very good pace for a Japanese partnership.

Vince Colicchio - Noble Financial Group

And could you update us in terms of your current thinking with regards to your cash I know that strong cash position helps you in terms of competitive positioning, but you know any plans there?

Phaneesh Murthy

You know we have been aggressively looking to utilize our balance sheet for the purposes of acquisition. We are talking to multiple people, however I think we have run into two sets of problems, the first one is that any company you talk to in today’s market place obviously feels that they are significantly undervalued and you know if that’s the case, it becomes very difficult to have a valuation discussion or to have a meaningful conversation.

The second, more important thing I think is the fact that it’s just an environment where everybody is doing a lot of talking, but not much action is happening. And so we’ll continue to keep the cash on the balance sheet. We’ll continue to look for ways to lever the balance sheet basically looking at acquisitions but we haven’t yet found anything.

Parallel to our construction activity is on phase four expansion in our Bangalore campus continue, and we are roughly burning about $5 million of cash a quarter. On that construction activity, and that will go on for at least another couple of quarters, at which point of time I think you know we are slowing down the construction activities, once we have enough capacity built-up.

Vince Colicchio - Noble Financial Group

So, actually how much capital spending should we assume for the year? Maybe that’s for Sujit.

Sujit Sircar

We have around $15 million of CapEx expected spending.

Vince Colicchio - Noble Financial Group

Okay. And Sujit, one other for you. What tax ratio should we assume for this year? If you can give us any help for next year, that will be great.

Sujit Sircar

On the tax, I think you know we have an effective tax rate around 4% and it can slowly go up in the next year as we kind of lot more facilities come out of the STPI thing. So, it will slowly go up from four to 7%.

Operator

Thank you. Our next question comes from [Jiva Ramaswamy with PJ Funds].

Jiva Ramaswamy - PJ Funds

Hi. Question for Phaneesh. This is not part of this quarter. I was looking the website. You guys have a mission, 2012, iGATE want to be a billion dollar organization. It’s a good mission. Do you guys have a practical, workable plan to achieve that? Because only there are only three years left.

Phaneesh Murthy

Yeah.

Jiva Ramaswamy - PJ Funds

Now, we are in a 200 million range.

Phaneesh Murthy

Yes. No, I think Jiva we felt we had a plan, I think we’ve lost a couple of years based on the market conditions around that. And we have not yet given up on that theme. We still want to continue to grow aggressively and if a couple of acquisitions may and can help us synergize some stuff, we can do some interesting things then.

Jiva Ramaswamy - PJ Funds

Okay. Okay. The another one, I was checking the Infosys also. Their EBITDA margin around 30%. I guess, we are doing around 15 to 20%. Why there is a difference, maybe Infosys commanding more premium pricing, because you are from Infosys, so you know why Infosys is making more EBITDA margin than iGATE?

Phaneesh Murthy

I think you know there are two three pieces to this, the first one is the gross margin of Infosys is about 3 or 4% higher than us. So it’s not like they are commanding the higher price or anything like that, because the gross margin difference is only about 3 or 4% different. The bulk of difference comes because of scale. At their scale, they lose hardly any. Their SG&A is 12% or thereabout. Our SG&A is about 23%. And that makes the big difference.

Jiva Ramaswamy - PJ Funds

Okay. So is there a plan, we can do SG&A less.

Phaneesh Murthy

No, I think it’s a function of scale, so especially as our revenues go up you know that’s when we will end up having SG&A as a smaller and smaller percentage of our scale.

Jiva Ramaswamy - PJ Funds

Okay. And also two Board of Directors had resigned in the last quarter, just they want to retire or is there anything else happening in the Company?

Phaneesh Murthy

I think I mentioned that in my opening talk I said as a conscious philosophy of the Company to increase its quality of governance and to align directors more closely with the direction of the company, we want to bring in directors who are specialists in areas like financial services, healthcare, etc.. And therefore we retired two directors, we have added one in financial services. And we are in the process of adding another one.

Jiva Ramaswamy - PJ Funds

Okay. And also right now how iGATE is managing the H1B bench candidates, you know may be lot of people in the bench right now are we paying on the bench or sending back home or how you are juggling that H1B bench candidates right now?

Phaneesh Murthy

Our H1B bench is no different from our total onsite benches. We have a common HR policy for everybody. And so, as far as your concern it’s a common HR policy.

Operator

Our next question comes from Brian Kinstlinger with Sidoti & Company. Please state your question.

Brian Kinstlinger - Sidoti & Company

Thanks. I have a handful of follow-ups. First of all to follow-up on the M&A that you talked about, I think I have asked this on most calls. Is it still focusing on US focused companies where the client base has leveraged to push those clients offshore is that generally what your focus is on?

Phaneesh Murthy

I think two, three focuses, yes, I think, one is clearly in the healthcare space and that is US based companies where we can do significantly more work and add to margins, etc. The second one is broadly in the BPO space and that could be both US or India focused companies because we want to add capability and expertise in various processes, because we believe that the next two or three years, a large amount of operations work will actually end up in India.

Brian Kinstlinger - Sidoti & Company

Okay. And on the tax rate, how is it that you guys have been able to recognize an effective tax rate of 4%, I think most of the peers are in the 10 to 18% range maybe, maybe a little bit lower, but it seems yours keeps going down, what has gotten you to 4%?

Phaneesh Murthy

Okay. Couple of things, Brian. What happens is that last couple of years we have been extremely conservative in terms of our tax recognition and when the actual assessment happens, the aggressive position which we take in our returns, which comes in after the assessment of the tax that is over, but in terms of conservatism when we provide for the tax, we have always been conservative, so a lot of assessment has happened in last one year and we have been getting those credits from the assessment part of it, one.

And our India profits are also lower than the others. So that’s a profit from the Indian part of the business which is taxable. I mean where our work is for the Indian market.

Brian Kinstlinger - Sidoti & Company

I misunderstood that part. Say that again, Phaneesh.

Phaneesh Murthy

See the work that we do for the Indian Market customers is taxable. That does not come into the tax holiday. And that percentage of our revenue compared to a couple of the others that you might have mentioned is lower as a percentage of our revenue. So therefore if 98, 99% of our revenue is ending up as export revenue, we have a tax holiday on that.

Brian Kinstlinger - Sidoti & Company

Right.

Phaneesh Murthy

Worse is if for somebody else if its 93 or 92% of the revenue or whatever right. So that’s the difference.

Brian Kinstlinger - Sidoti & Company

Well I guess I’m thinking the US based firms that aren’t the Indian based ones like yourselves, what I mean that by is where they’re headquartered, they don’t do so much in India as well and

Phaneesh Murthy

If you look at it, almost 17 -- our leverage being so high, our offshore ratios are pretty high in so what happens is that since our offshore ratios are very high or approx the tax fee revenue for us is much higher than the amount of revenue out there for our onsite, offshore ratio is what 21, 22% compared to maybe if you look at the ratio for some couple of other companies it may be 30, 35%.

Brian Kinstlinger - Sidoti & Company

Okay. Well, I’ll take that one offline. Turnover, I am curious, what turnover was and how much was voluntary versus involuntary?

Phaneesh Murthy

I think our turnover is at an annualized rate of less than 3% right now. So it’s very, very low and we have not laid-off anybody, as a conscious policy we have not laid-off anybody. At the same time we are very, very clear about the fact that we have a policy in place, which is to clean out the bottom three, 4% of our employees, normally when we put them on that kind of a notice, they would automatically leave by themselves, because there weren’t enough opportunities. Now, it’s just that when we put them on that notice they don’t leave, we are still forcing them out. But that is the bottom, it’s always been a policy of the Company.

Brian Kinstlinger - Sidoti & Company

Yeah, okay. On the other income line, can you tell us, how much was other income versus the loss on FX?

Phaneesh Murthy

We had on other income; totally we had reported a 900,000 loss. We had a two million on the hedge and the other part being the income on the interest part of it.

Brian Kinstlinger - Sidoti & Company

Two million on the loss on the hedge and then so it was 1.1 million interest on the cash?

Phaneesh Murthy

Correct.

Brian Kinstlinger - Sidoti & Company

Great. And then last question I have Phaneesh, couple of quarters back, it seemed before the recession that Australia had some big opportunity to expand, there were some of the states out there. Just give us a sense of what’s happening there, has talks pretty much died down for now? What is your expectation in the next couple of quarters there?

Phaneesh Murthy

No, no, no we actually have added one state, already to the system. So, that’s the shared services platform which we were talking about. We’ve added one state already, so it’s giving us incremental revenue, but marginal incremental expense. And we are in discussions with various states. The problem is that various states had different contracts expiring at different times, for this work with other vendors. And in a sense that it will come up for negotiations at different points of time as the contracts expire.

Brian Kinstlinger - Sidoti & Company

Second okay. And does that mean...

Phaneesh Murthy

And that had hardly any incremental expense, but it had incremental revenue.

Brian Kinstlinger - Sidoti & Company

So, is that profitable or do you need that to have more scale for that to be profitable?

Phaneesh Murthy

No it’s very profitable.

Brian Kinstlinger - Sidoti & Company

And when you take a look at the next four to six quarters. Are there several states that end their contracts with their previous vendors or is it going to take a while?

Phaneesh Murthy

I think it’s, I think we are anticipating that over the next four to six quarters we’d probably end up getting two more states.

Operator

There are no further questions at this time. I’ll turn the conference back to Mr. Ravindran, for any closing remarks. Thank you.

Salil Ravindran

Thank you, Diego. Thanks everybody for joining our call. If you have any follow-up questions that you might like to discuss, feel free to send me an email or give me a call. Once again, I look forward to joining, to meet you on the call next quarter, just in about three months time. And we will hopefully meet in-between during any one-on-one meetings or conferences. Thank you, have a good day.

Operator

Thank you, ladies and gentlemen this concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.

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Source: iGATE Corp. Q2 2009 Earnings Call Transcript
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