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Wipro Ltd. (NYSE:WIT)

F1Q10 (Qtr Ended 6/30/09) Earnings Call

July 22, 2009 9:15 am ET

Executives

Sridhar Ramasubbu - Investor Relations

Azim Premji - Chairman

Suresh Senapaty - Chief Financial Officer

Suresh Vaswani - Joint Chief Executive Officer, IT Business

Girish Paranjpe - Joint Chief Executive Officer, IT Business

Manish Dugar - Chief Financial Officer, Wipro Technologies

Analysts

Joseph Foresi - Janney Montgomery Scott

Mark Marostica - Piper Jaffray

Trip Chowdhry - Global Equities

Ed Caso - Wells Fargo Securities

Moshe Katri - Cowen & Company

Ashish Thadhani - Gilford Securities

Viju George - Edelweiss

Neville Elisha - Pacific Crest

Ashwin Shirvaikar - Citigroup

George Price - Stifel Nicolaus

Rachael Stormonth - NelsonHall

Operator

Good morning. My name is Gene and I will be your conference operator today. At this time I would like to welcome everyone to Wipro’s quarter one results and earnings call for period ending June 30, 2009. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Sridhar Ramasubbu, you may begin your conference.

Sridhar Ramasubbu

Thanks, Gene. Good morning, ladies and gentlemen, and good evening to the participants across the globe. Rajendra, Rushab, Aravind, Lalit, join me from Bangalore in extending a very warm welcome to all the participants to Wipro’s first quarter results and the earnings call for the period ended June 30, 2009.

We have with us today Mr. Azim Premji, Chairman, Mr. Suresh Senapaty, CFO, who will comment on the IFRS results for period ended June 30, 2009. We are joined by Joint CEOs of IT business, Suresh Vaswani and Girish Paranjpe, and other senior members of the Wipro management team who will be happy to answer questions.

During the call we might make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995. These statements are based on management’s current expectations and are associated with uncertainty and risks, which could cause the actual results to differ materially from those expected.

These uncertainties and risk factors have been explained in detail in our filings with Securities and Exchange Commission in the U.S. Wipro does not undertake any obligations to update forward-looking statements to reflect events or circumstances after the date of filing thereof.

The call is scheduled for one hour. The presentation of the first quarter results will be followed by a question-and-answer session. The operator will walk you through the procedure for asking questions.

The entire earnings call proceedings are being archived and transcript will be made available after the call at our website. I’m available on e-mail and through mobile as well to take any questions and table it to the Wipro team in case you’re unable to ask questions for any technical reasons.

Ladies and gentlemen, over to Mr. Azim Premji, Chairman, Wipro.

Azim Premji

Good afternoon and good morning to all of you depending on where you are located. Thank you for joining us.

As we come to a close of the first quarter of the new financial year, we are more hopeful of the future than we were before. In the last few quarters, governments and businesses across the globe reacted swiftly to the downturn, the results of which can be seen in the emerging signs of stability in the macro environment. There is more liquidity in the system. Stock markets are off their lows. Consumer confidence is increasing. Corporations have generally been more hopeful this quarter, both in their commentary and in their results.

While these are the initial baby steps on the path to recovery, there is a growing confidence that the environment is stabilizing. As we look at the IT business, we are starting to see the first signs of the stability as ramp down starts to taper off and volumes start to stabilize.

In this context, Wipro Limited posted a 5% year-on-year growth in revenues and 13% year-on-year growth in net income for the quarter ended June 30, 2009. Our IT services business revenue was in line with our guidance on a constant currency basis.

The currency tailwind enabled us to exceed our guidance on a reported basis. Our focus on operational excellence continues to set industry leading benchmark. While these results are satisfying, it is important to appreciate that the world around us has changed. What we are now experiencing is a fundamental reset of the economy and the financial system, and the return will be to a new reality. As an organization, we continue to adapt ourselves to this new reality. Specifically, I’d like to discuss two areas of focus, our go-to-market strategy and our operational excellence drive.

Let me talk about our go-to-market strategy first. We continue to become more strategic to our customers and are increasingly participating in large and complex transformational deals to deliver end-to-end integrated solutions across our differentiated product lines.

We have stepped up investments in emerging geographies. Our early investments in India and Middle East have provided a strong platform for growth and market share. We’ve invested in further enhancing the quality of our sales people and bringing more local talent to drive the needs of transition and change management capabilities.

We believe that our investments in go-to-market put us in a good stead to gain wallet share and increase our proximity with our customers and capitalize on emerging opportunities.

Our focus on improving operational excellence and our ability to work with our customers to change and improve our engagement model has resulted in our showing improvement across all key levers of utilization, across bulge improvement, offshore mix improvement resulting in operating margin expansion. The gains on account of ForEx have mitigated the drop in realization during the quarter.

As we prepare ourselves for this new reality, we remain incredibly optimistic about the long-term viability of the Indian IT industry. We continue to invest for the future in opportunities like cloud computing and green IT.

Our Consumer Care business has also weathered the economic downturn commendably. Santoor, our flagship brand, emerging as number one toilet soap in South India in market value share as measured by AC Nielsen for the period April-June ‘09. Our Toilet Soap portfolio grew much ahead of industry growth rate in the quarter ending June 30, ‘09.

In our international business of Consumer Care, we have double-digit industry leading growth rates in several markets.

I will now request Suresh Senapaty, our CFO, to share the financial highlights of the quarter with you, following which our management team will be happy to take questions.

Suresh Senapaty

Good morning to all of you in United States and good evening to all of you in Asia. While taking you through some of our performance highlights for the quarter, let me draw attention to the fact that for the convenience of readers our IFRS financial statement has been translated into dollars at the noon buying rates in New York City on June 30, 2009, for cable transfers in Indian rupees, as certified by the Federal Reserve Bank of New York, which was $1 equals to Rs.47.74.

Accordingly, revenue of our IT Services segment that was $1,033 million and in rupee terms Rs.48.27 billion, appears in our earnings release as $1,011 million based on the convenience translation.

Effective this quarter, we’ve started reporting our financials under IFRS. We will continue to report non-GAAP adjusted net income under IFRS, which will exclude the impact of accelerated stock-based compensation accounting.

Once India reporting converges with IFRS effective April 2011, it will enable reporting single GAAP reporting.

Moving on to our results. Our IT Services revenue for the quarter ending 30 June was $1,033 million, a sequential decline of 1.3% and year-on decline of 3.3%.

On a constant currency basis, our IT Services revenue was $1,014 million in the range of our guidance. Our constant currency growth on a year-on-year basis was 2.1%. We have seen growth rate starting to pickup in some of the verticals, communication and media service providers grew 6% sequentially, energy and utilities grew 5% sequentially, and healthcare and services grew 7% sequentially.

Retail recorded an impressive year-on-year growth of 23% in constant currency, while manufacturing grew 9% year-on-year in constant currency. Of the new customer wins this quarter, 60% of them were in retail and manufacturing. BFSI is showing signs of stability, while technology and telecom continue to face challenges.

Package implementation and BPO delivered sequential growth of 3.5% and 4% respectively. Our India and Middle East business grew 21% year-on-year on constant currency basis. Our focus on large accounts has resulted in accounts greater than $50 million on a trailing 12-month basis increased from 14 in quarter one of FY ‘09 to 17 in quarter one of FY ’10.

In terms of operation, our fixed-price moved up 30 basis points and offshore mix moved up 160 basis points sequentially. Effective this quarter, (inaudible) under the Global IT Services includes Citos as well.

Our onsite realization improved sequentially by 1.3%, while offshore realization dropped by 1.1% sequentially. Our volumes dropped 1.5% in the quarter as against 6.3% decline in the previous quarter.

Our continued focused on realigning our cost structure has resulted in our margin improving by 0.5% in the current quarter to 22.3% despite the challenging environment.

As of June 30, our DSO, that is days of sales outstanding, was unchanged from the previous quarter at 60 days. Our IT Products business revenue was flat on a year-on-year basis in the current quarter due to reduction in capital expenditure by Indian corporate.

The improved margins and profit before interest and tax grew by 13% on a year-on-year basis. Wipro Consumer Care and Lighting business continue to see good momentum with revenue growth of 9% year-on-year, and profit before interest and tax growth of 27% on a year-on-year basis.

On the foreign exchange front, our realized rate for the quarter was 46.74 versus a rate of 47.14 realized for the quarter ended March 31. On a quarter-on-quarter basis, ForEx gave us positive impact to margin of 1%, including the benefit of cost currency. As at period end, after assigning to the assets in the balance sheet, we had about $1.2 billion of ForEx contract, 1.65 billion total contracts and raised between 40 and [51.50].

Our net cash balance on the balance sheet was Rs.29 billion. We generated free cash flows of Rs.14 billion during the quarter, a year-on-year increase of 150%.

We will be glad to take questions from you.

Sridhar Ramasubbu

Gene, we can start the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Joseph Foresi from Janney Montgomery Scott. Go ahead please.

Joseph Foresi - Janney Montgomery Scott

Hi, guys. You’ve mentioned sort of a movement to stability. I was wondering if you could talk about what you are using as a measurement to sort of gauge the stability. And maybe just talk about why you feel now it’s improving for the client base in general?

Suresh Vaswani

This is Suresh Vaswani here. Clearly it’s based on our own performance, improved performance in the last couple of quarters. So, for example, in Q4, we had a sequential sort of decline of about 6%. In Q1 it was negative 1%, but better than negative 6%, and Q2 we’ve given a positive guidance. So our outlook is clearly based on what we see as our earning potential, what we see as our customer base, what we see as a funnel, what we see as the deals that we’ve won and the projection of that going forward.

Joseph Foresi - Janney Montgomery Scott

Okay. You talked about the pipeline last quarter being perhaps better than it was a year ago. I was wondering is that coming in at the pace that you expected it and/or when can you expect to realize some of those types of increases.

Suresh Vaswani

So if I look at the last quarter’s performance, I think it’s been a quarter of good win-wins. We won one of our largest deal was an Indian telecom – actually not an Indian origin telecom service provider (inaudible) called Unitech in collaboration with Telenor, that was a large deal.

Then we have won five mid-sized deals last quarter of significant scale, of significant potential in terms of customer acquisition. So net-net I think what we spoke about in terms of healthy funnel has resulted in healthy order booking that we had last quarter, and this should result in good revenue performance going forward.

As I look at our funnel looking into quarter two, it looks even stronger than what it was looking in quarter one. And we estimated that the funnel size has increased by 10%. So, all in all from the funnel visibility perspective, or from a deal closure perspective, I think things are looking relatively strong. That’s all a matter of when the deals close, when does this realize into revenue, how many we win, how many we lose.

Joseph Foresi - Janney Montgomery Scott

It sounds like in your commentary is perhaps a little bit more positive and confident than some of your competitors. I wondered when you are competing on the deal, maybe you could just talk about what you think what those advantage may be in the win areas. Is it the main expertise or are people looking to domain or pricing when they’re deciding on the deals?

Suresh Vaswani

I would say that, it’s a combination of various factors. There are some deals that we won on the back of or on the strength of our domain capability and the fact that we have both IT and business process outsourcing as strong propositions from our side. The good example of that is Origin Energy, which was so weak at the intersection of strong domain capability, both in retail, energy and utilities, strong BPO capabilities, and overall strong IT Services capabilities. So I think, what works for us is the fact that we have a fairly strong spread in terms of services, we are strong on BPO, we are strong on traditional IT services, we’re strong on infrastructure services.

That works well and that coupled with the domain capability that we’ve built across all our SBUs becomes the competitive edge and a strong differentiator for us with respect to most of our competitors. Now, of course, we just have to ensure flawless execution as a part of the bid management and bid [chase process], so if we get all everything right, more often than not, we win.

Operator

Our next question comes from Mark Marostica from Piper Jaffray. Go ahead please.

Mark Marostica - Piper Jaffray

Just I was wondering if you could quantify the margin benefit over the past couple of quarters. You’ve seen a shift to offshore. And given that we see a pretty sharp drop sequentially over the past couple of quarters in billed onsite person wise. Does this imply that some of these margins benefits may be muted over the near to intermediate term?

Girish Paranjpe

Hi, Girish here, just trying to understand the question little better. You are saying that because we’ve seen margin expansion on the back of offshore movement, have we come to a point where we cannot see any further improvement in offshore element given the level that we’ve reached?

Mark Marostica - Piper Jaffray

Yes.

Girish Paranjpe

So, Mark, the story is as follows. In the mature part of our business, which is application management, infrastructure management, et cetera, I think, there is opportunity to do much more work on global delivery on offshore business as compared to what was historically acceptable. Historically, it was felt that at least 30, 35% of the work had to happen onshore and only the balance could be done offshore. As the business has matured, as client confidence has grown, I think people are much more willing to accept much smaller presence onshore as long as we have the right people in front of the client and we have a robust process to offshore and transparency exhibited to client about how the work actually gets done here. So we could even see something like 20/80 or 15/85 as far as our onshore/offshore mix is concerned.

So on the more kind of mature, the more standard processes, the client confidence is pretty high. Actually offshoring potential is pretty significant and much higher than where we are today. When it comes to newer businesses, such as system integration or consulting, [we’ll potentially] be more onshore segments, whether in New York or Europe or Japan or wherever it is. And the play of onshore/offshore that we have in our business mix even is split between these two factors. So how much more mature businesses we are able to sell versus how much of new business we are able to sell, and that really impacts. So I think, there’s a bit more potential, to move more offshore. Even if in particular quarter it does not happen, it is not because the Company has hit the roof. It’s because maybe the percentage of consulting and more system integration business has dominated, which is why the offshore mix has gone down.

Mark Marostica - Piper Jaffray

Okay. That’s very helpful. And then unrelated, selling and marketing line, I am just wondering if this 6.5, 6.6% of revenue is the reasonable run rate for FY ‘10. And I know you talked in the last call about emission improvements that resulted in some permanent reductions here. I am just curious sort of looking at the benefits from permanent reductions going forward relative to potential uptick in demand, sort of how you see the selling and marketing expense line trending this year?

Girish Paranjpe

Mark, I don’t think what we’ve seen as a reduction this quarter is something that is permanent. It’s more quarterly and some correction in the kind of (inaudible) we did. Actually we think the strategic investment should be a little bit higher. And maybe the nature of that investment will change, maybe there’ll be maybe fewer people involved, but many more senior people, many more people sitting in (inaudible) consulting part of the business. So our sense is that the sales and marketing investments in the current quarter is not representative of what we do think appropriate for this business or process.

Mark Marostica - Piper Jaffray

So for the remainder of this year, is there a rough range that you would feel comfortable with on that one item in terms of --?

Suresh Senapaty

Yeah, instead of looking at one quarter, if you look at our track record in the past three or four quarters you’ll have a better sense of what we think the appropriate level of investment is.

Operator

Your next question comes from Trip Chowdhry from Global Equities. Go ahead please.

Trip Chowdhry - Global Equities

Two questions. First is regarding the package implementation, are you seeing on the relative basis the year-over-year, the size of your implementation has got reduced, but the number of implementations have increased as if the same as the last year in this time. Then I have a follow-up question.

Suresh Senapaty

It is year-on-year for quarter one, we have got – year-on-year there has been a growth of 18.3% in package implementation.

Suresh Vaswani

I think your question was more related to the scale of implementation, am I right in that?

Trip Chowdhry - Global Equities

Yes, yes. Like suppose you were doing say, each implementation was, say, I’m making it up say about six months and they probably did spend around instead of having bigger implementation you have many implementations, but in a shorter duration.

Suresh Vaswani

I think it’s a mix of both. We do have many more implementations and we can support our teams on the package side. So there’s a lot more system integration activity and implementation activity that we are doing now, and also we are into much larger implementations than traditionally we have been in the past. So let’s say Origin Energy implementation is a fairly large scale implementation of [basically higher] utilities. Likewise, the Morrisons deal that we won in UK is a very large scale implementation of Oracle Retail. So our deal sizes have become large, they are more system integration, they are more transformational, as the number of implementation also that we are doing compared to the pervious year has gone up.

Trip Chowdhry - Global Equities

The other question I have also is, are you seeing any implementation which involve are upgrade implementations or are they more in terms of enhanced functionality kind of implementations?

Suresh Vaswani

Again, a mix of both and some of the implementation that I spoke to you about, specifically the two cases, are actually fresh implementations. So customer is moving from the legacy systems to full-fledged re-architecting of their front-end systems. And so these are, I would say, (inaudible) implementations and not just upgrades of implementation that has already been done.

Trip Chowdhry - Global Equities

Perfect. Last question. If we look at the oil prices, say, over the last five months or so, they have almost doubled and they are above $60 a barrel and probably that is signifying an inflationary environment. And historically what we have seen in the past massive downturn, higher oil prices indirectly impacts IT budgets which somehow negatively impact almost every tech sector.

Are you seeing any indications right now say over the last two or three weeks, where the customer behavior has changed because directly or indirectly they feel they are in the inflationary environment where their resources are getting tied up directly or indirectly related to oil prices? And has your conversation changed a bit over the last say two or three weeks with your customers? And that’s all I have. Thanks again and good execution.

Girish Paranjpe

Trip, thanks for that question. It will be fascinating to see the correlation between oil prices and IT budgets. And yes, we would love to see that. In our conversation nobody has been I think [as perspective] enough to dig that up. So we have not had a chance to have that conversation with clients. On the IT budget I think most people have been waiting to see how the 2010 rate will get set up, and I think that exercise will probably start somewhat in the U.S. between September and November time period. So really we are kind of trying to get too early.

Operator

Our next question comes from Ed Caso from Wells Fargo Securities. Go ahead please.

Ed Caso - Wells Fargo Securities

Good evening. My first question along the lines of positioning for the long term. The company’s been fairly vocal on the visa issue in the United States. I’m curious maybe you can talk a little bit more about that and what your plans are as far as staffing in U.S. and Europe related to India. In other words, sort of moving more towards a global model as opposed to an Indian centric model.

Suresh Vaswani

So this is Suresh Vaswani here. We clearly are driving, I would say, a much more concerted and aggressive strategy in terms of globalization of our workforce. Today, I would say, out of the onsite people that we have in U.S. and Europe, roughly 20% would be from local population. We certainly want to drive that more going forward.

Again, if you look at our sales force also, it is roughly 30% or one-third of our sales force is locals. So net-net, these are the data points, we’re clearly driving towards offshore globalization and much more diversity across the corporation.

Ed Caso - Wells Fargo Securities

And my second question revolves around price realization. What’s the impact of actual pricing? What’s the impact of utilization?

Suresh Vaswani

Before I go to price realization, I think your question also was to do with global delivery and delivering out of centers outside of India. Now that again is a clear strategy that we are implementing. We have more than 30 centers today which are global centers in U.S., in Europe, in Asia-Pac, in South America. And we clearly are moving to a much more globalized sort of delivery model in terms of our execution of contracts across the board.

That doesn’t mean that we are compromising India in terms of the [hostile intermediary]. It just means that we are having a stronger delivery models which leverages on the resources and the capabilities across the world to deliver services to the customer. Moving on to your question on pricing, if you can repeat that I would appreciate.

Ed Caso - Wells Fargo Securities

I am just trying to understand the components of operating margin that come from price and from utilization and from foreign exchange?

Suresh Vaswani

So if we look at the last quarter’s performance, we have enhanced our operating margin by 60 basis points. And sort of peeling the onion, we had ForEx upside of 1% in terms of operating margin, which sort of gave way to the pricing pressure that we had in terms of discount given in the earlier quarters, so that impacted our, I would say, negative price realization this quarter.

So one is equated to the other, the gain on ForEx was well (inaudible) as pricing was concerned. But we still had a gain of 60 basis points in terms of operating margin and that was driven by stronger operating parameters. So we had a fixed price [NPP] ratio. We had a better offshore mix this quarter, and we had industry leading gross utilization. So that helps us move our operating margin up by 60 basis points this quarter.

Ed Caso - Wells Fargo Securities

Are you able to put each of those pieces in basis points? Also can you spilt out the 60 basis point improvement in those pieces?

Suresh Senapaty

Ed, I can walk you through offline, is that okay?

Ed Caso - Wells Fargo Securities

Great. Thank you.

Operator

Our next question comes from Moshe Katri from Cowen & Company. Go ahead please.

Moshe Katri - Cowen & Company

Can you walk us through maybe sort of the things that you’re seeing and some of the verticals that were highlighted, retail, manufacturing, financial services, and maybe also talk about some of the trends that you’re seeing in North America and in Europe? Thanks.

Suresh Vaswani

Okay. So let me work back. This is Suresh here again. I could give you a broad paintbrush in terms of how we performed across the verticals and maybe give you a similar perspective of the geographies. Let me start with the healthcare and services SBU. I think we’ve had what we delivered strong sequential growth performance where we had 7% sequential growth. RCTG, our Retail, CPG Transportation and government vertical, (inaudible) SBU, has shown a strong year-on-year growth of 13%. Manufacturing also has come in with a positive growth performance of 4.5%. Energy and utilities has done well from a sequential perspective, and we see good potential in this business going forward given the sort of consolidation that has taken place and given the transformation initiatives here.

Our BFSI segment has shown an improved performance. Last quarter it was nearly flattish in terms of growth from a negative sequential growth in the previous quarters. So that is very, very encouraging. And then we have the [CNP/HPO], which is a combination of technology/telecom and the [CMH], the telecom service provider type of businesses. So here we face challenges in terms of some of the structural changes taking place on the technology side of our business and on the telecom equipment side of our business. But we are seeing quite a strong upside on the telecom services provider business, particularly in some of the emerging markets where we’ve won substantial size deals. So that’s one perspective in terms of the verticals.

In terms of geographies, U.S. and Europe have shown a slight decline last quarter in terms of sequential growth. Japan market is quite challenged, because most of our business is on the technology side. There were challenges on that side in the Japanese market. So we’re driving a lot more enterprise business in the Japanese market. Asia-Pac market we’ve got extremely strong traction and we’ve had a good performance last quarter of [37%] and Indian and Middle East was very, very strongly differentiated. In fact it stands out as a part of our total business portfolio. We’ve had a robust growth in terms of 21% y-on-y growth in the local currency terms. That’s the broad perspective in terms of geography and verticals.

Moshe Katri - Cowen & Company

Okay. And then can you repeat the list of the different variables that benefited margins this quarter? And how much did they benefit in terms of basis points?

Suresh Vaswani

We gave an overall number of 60 basis points, which was because of the stronger gross utilization number and stronger fixed price project number and a stronger price mix. Combination of factors which resulted in the 60 basis points improvement, we haven’t split it up and we can do it offline with you.

Moshe Katri - Cowen & Company

Okay. And then finally, can you also talk just finally on pricing trends? Again, the general feedback is that most of the pricing or negotiations have already been taken place last quarter, et cetera, et cetera, but do you think that there is a risk that we’re going to go through another phase of pricing or negotiations down the road? Thanks.

Girish Paranjpe

Moshe, Girish here. Let me put that answer in two parts. So with most of our longstanding clients, we have a Master Services agreement, and where we have Master Services Agreements most of the negotiations are kind of done. So in few clients we have things [kind of in] currently in progress, but even those will probably get done this quarter. So all the results of these negotiations are what you see the impact of that flowing through in the current quarter which ha sled to a small decline in the net realized offshore revenue contribution.

And in fact there is still another set of negotiations that takes place on a vis-à-vis basis. So especially where the deals were of a significant size, independent of what has happened in the MSAs, or in case where we have not longstanding clients, but new deals that we are signing, and we end up having a negotiation which then has an impact on the margin.

The good news is that in many of these cases where we are pricing deals, we try to make them into outcome-based deals, which is why the percentage of fixed price volume that we had before that has almost doubled over the situation two years ago. And in those fixed price projects, while the realization may be under pressure, our margins actually turned out to be superior because we have many more levers to use in the execution of those projects.

Moshe Katri - Cowen & Company

Great. Thanks.

Operator

Next question from Ashish Thadhani from Gilford Securities. Go ahead please.

Ashish Thadhani - Gilford Securities

I have a question on the head count. In relation to your closest peer, Wipro has been noticeably conservative on head count addition. Does this divergence betray any lack of visibility or confidence in the near term? And how would you reconcile these contrasting trends? And further, should we expect head count to pick up in the coming periods?

Girish Paranjpe

So Ashish, Girish Paranjpe here. From our peers, I think for multiple quarters we were challenged when we reported our campus offers and they were (inaudible) compared to the peer group. And the question that we’re asked is whether we’re being too conservative over the outlook, whether we didn’t have confidence in the outlook and so on.

So I think in the [prospective turnout] that we would probably try to be conservative as compared to what our peers have done. So I mean we made the right call. I think we are getting the benefit of that with not having any overhang. Going forward, we will also take another look at how the demand is shaping up and what the opportunity of fulfilling the demand is. And when we go to campus sometime next year, we will decide what’s the best way to kind of make offers again.

But it has also come to light for us is the fact that in a lot of our (inaudible) types of deals. We’ve been able to leverage standard platforms much more in this group and automation to bring down the actual number of people who are required to execute certain projects. So as a result, actually it was small, and I’m not saying that we have solved the problem entirely. To a small extent we’ve been able to delink the revenue through the head count. So if I don’t go out and hire 10,000 people, it doesn’t automatically mean that I’m giving up that much revenue.

Ashish Thadhani - Gilford Securities

Right, right. No, that’s certainly helpful. And I was wondering if you could look beyond September, and share any broad expectations that you might have for the second half on the type of recovery that you might anticipate for March as we sit here today?

Girish Paranjpe

It’s a $1 million question. All of us are trying to figure out how the demand will shape up. At this point we have only educated guesses. If you want us to share educated guesses, happy to do that. But I must (inaudible) because this is merely based on one position at this point of time and what we’ve seen is that people are virtually taking stock and (inaudible) every quarter and deciding how they want to take decision for that quarter.

But having put all the caveats, I think our view is that we see slow improvement. And I’m not (inaudible) slow improvement in the next couple of quarters. And that improvement will probably get consolidated depending on how the budget projects for 2010 for many of our clients. So I would say the real turning point will come on the basis of 2010 budget. And after that how actually people feel confident enough to spend that money. Having said that, there are some sectors which are currently challenged structurally, and that may continue to affect overall growth, especially in the telecom equipment vendor side, as well as in the technology side. There is lot of structural change [represent of] yet realized and only then that is behind us, we’ll feel much more confident on an overall basis.

Ashish Thadhani - Gilford Securities

But you’re confident that the tough quarter is behind you?

Girish Paranjpe

Yes.

Ashish Thadhani - Gilford Securities

Okay. And then one point of clarification, the guidance of 1.035 to 1.053 billion, so in apples-to-apples comparison the relevant figure for comparison would be the constant currency 1.014 in the current quarter, right?

Suresh Senapaty

1.033.

Ashish Thadhani - Gilford Securities

1.032?

Suresh Senapaty

033. That’s correct.

Ashish Thadhani - Gilford Securities

I’m sorry. I didn’t quite get that.

Suresh Senapaty

Ashish, the guidance is given based on the reported number was just 1.033.

Ashish Thadhani - Gilford Securities

Okay. So you’re saying that you’re looking for flat from 1.033 the guidance is going towards 1.035 to 1.053?

Suresh Senapaty

Yes. So it is 0.2 percentage change, and is 1,035 to 1,033.

Ashish Thadhani - Gilford Securities

Okay. That’s helpful.

Operator

Your next question comes from Viju George from Edelweiss. Go ahead please.

Viju George - Edelweiss

Yeah, hi. I’d like to understand how the management would like to us to think about guidance, because you started reporting in a band only very recently. How should we sort of reconcile to your earlier practice of giving a point guidance? Is the point guidance likely to be at the lower end of the band or the midpoint? Thank you.

Suresh Senapaty

Viju, the very fact that we’re giving the range, if we could pin it down to one number, then there’s no value in the range. So we would like you to accept as well as possible in the range.

Viju George - Edelweiss

Okay. More pertinently, if we have to attach a probability to within the range, would you say that we’ve got to attach a greater probability to the midpoint of the range, because and that --

Suresh Senapaty

Our guidance would be just go with the range --

Viju George - Edelweiss

So you’re saying there’s equal likelihood of hitting the lower end as well as of the midpoint as well as higher end, or would you say that you aim to get towards the midpoint? Because in this quarter you’re actually going little below the midpoint, the median.

Suresh Senapaty

Viju, we won’t guide you to go on the upper end or the middle line. It could be at lower end, it could be at the high end. So...

Viju George - Edelweiss

So it could be at like --

Suresh Senapaty

It’s impossible to give you all the points to --

Viju George - Edelweiss

Okay.

Suresh Senapaty

This is a consequence of the external environment and therefore we are in the range what we said.

Viju George - Edelweiss

Yeah, I understand that. But I just wanted to get a sense that you are attaching equal probability to the right through the range without saving the midpoint?

Suresh Senapaty

That is true.

Viju George - Edelweiss

Okay. The other question I had was just relating to the new business in this quarter. It seems to have come much below what it used to be in previous quarter. So is it some challenges out there that you’ve noticed with regard to your clients in this quarter in terms of at least getting those up as per expectations?

Manish Dugar

Viju, hi. This is Manish here. The new business the way we report is it gets reset when we begin the year. So the percentage which seems to be very low in this quarter is because we have many customers which has started only in this quarter will qualify for that revenue. And it continues to get built up throughout till the end of the year and then the trough gets restated again. So...

Viju George - Edelweiss

Manish, I think that I just meant for that math. And I find that it’s much lower than what it used to be at the same quarter last year.

Manish Dugar

If I remember the numbers correctly last quarter, quarter one versus this quarter, the difference is not significant.

Suresh Senapaty

Viju, it also (inaudible). So you have to look at in perspective of the overall growth. So this quarter-on-quarter we would have grown 5% we could see that there’s a growth that we’d have got because of the new customers between 0.5% to (inaudible) is reasonable.

Operator

The next question comes from [Neville Elisha] from Pacific Crest. Go ahead please.

Neville Elisha - Pacific Crest

Yes. On the volume side just to follow-up on that. I was wondering if you could talk a little bit about how much the slight improvement in volumes was due to any less ramp downs from existing projects versus your ability to close or start new projects. And then maybe a little bit more color on close rates. I think you said they’ve gotten a little bit better. Is that the case and do you expect that to continue to get better going forward?

Girish Paranjpe

Last quarter, actually we had a 1.5% decline, although global headcount went up by 407 people. And that 1.5% volume decline was a combination of new project starts. So that head increase was for the multiple [time starts] as offset by kind of closure of projects which had come to a logical end. The color I would want to share with you is that as compared to maybe the last quarter, last calendar and the first quarter of this year, where there were situations like standing projects were cancelled under pressure of budget. I think that trend has largely abated.

So what we see now is more about logical end to projects and start of new projects. And unfortunately at the end of last quarter it was that the number of logical end of projects exceeded the new start of projects. But our expectation is that as we move forward the number of new project starts and head count added because of that will be more than the (inaudible).

Suresh Senapaty

Senapaty here. If you look at our guidance was down to quarter three of last year December ‘08 was (inaudible), we held on pricing. Quarter four, also we held on pricing. There was a marginal set down, there is a volume decline. And we have guided that so far as the quarter one is concerned, it would have an impact both on the pricing as well as volume.

And as you go forward, we also look for much more stability on the pricing, but the volume is something that we are [particularly] more uptake. And therefore, if you look at the guidance that we have given, it will be more based out of volume growth that we would be looking for.

Neville Elisha - Pacific Crest

Okay. And then just real quick to follow up on an earlier question, just so I understand. The stabilization you’re saying in financial services, is that both in Europe or U.K. and U.S., or is that primarily USA?

Girish Paranjpe

I would say both because in some sectors like investment banking may be there is more coverage. (inaudible) It will be retail banking and in insurance that we have much more global companies. So I would say that it’s kind of broadly on both places.

Operator

Your next question comes from Ashwin Shirvaikar from Citigroup. Go ahead, please.

Ashwin Shirvaikar - Citigroup

Hi. I just wanted to know, can you comment on the European pipeline. Specifically, it seems as though over the last couple of quarters Europe has been moving more aggressively towards the use of offshore outsourcing?

Suresh Vaswani

I would say both the Europe and U.S. pipeline, both of them are equally good, insofar as we’re concerned, except the type of pipeline is slightly different. So Europe is, I would say, not as mature, particularly countries like Germany and France are not as mature in terms of the outsourcing process as U.S. has been.

So we are now beginning to see a lot more system integration, a lot more first-time type of outsourcing contracts in Europe vis-à-vis the U.S. So the funnel looks good both in U.S. and Europe.

On a relative basis, one can’t single out if the Europe funnel is bigger or smaller than the U.S. model. The type of opportunities are slightly different. So there’s much more application support and managed services type of opportunities in U.S. and much more system integration and much more first time sort of outsourcing opportunities in Europe.

Ashwin Shirvaikar - Citigroup

Is there any noticeable difference in either pricing trends or closure rates, decision making, how fast or how slow?

Suresh Vaswani

No. Relative U.S. and Europe, one can’t really single out whether the deal closures are faster in U.S. or Europe. So I don’t think there’s any substantial difference in terms of pricing. Pricing relates to the type of contracts we’re bidding for, and I’ve already shown color that the retail opportunity differs.

Ashwin Shirvaikar - Citigroup

Okay. And when you look across verticals, obviously there is quite a bit of difference in relative growth rates. What kind of services are sort of working better, selling better? What isn’t really selling?

Suresh Vaswani

So in fact, while we look across all the verticals and try to single out the services which are relatively doing better and go down the service line path, I would believe that BPO presents a strong opportunity. I would believe that package implementation, and package implementation particularly in Europe can be singled out. And I would say infrastructure services had been a lot stronger. Now these three service lines, and maybe even testing services come out relatively stronger in terms of (inaudible) versus, I would say, the ADM service line or the product engineering service line.

Ashwin Shirvaikar - Citigroup

Okay. And one clarification, your comments on BFSI, do they include the impact of the Citi captive acquisition or not?

Suresh Vaswani

Yeah, they do. The Citi acquisition was a part of our overall BFSI business and so therefore the overall BFSI picture includes the Citibank acquisition.

Ashwin Shirvaikar - Citigroup

I meant in your commentary on the trends with stabilization. So if you excluded acquired revenues, would you still comment that the BFSI is getting more stable?

Suresh Senapaty

Yeah, qualitatively. We were talking on the quarter-on-quarter basis. Since last two quarters, we have already included that in.

Ashwin Shirvaikar - Citigroup

Right.

Suresh Senapaty

So with or without doesn’t make a difference.

Operator

The next question comes from George Price from Stifel Nicolaus. Go ahead please.

George Price - Stifel Nicolaus

Thanks very much. A number of my questions have been answered, but I did want to follow up on the comments you had on investments, specifically on the sales side. I was wondering, if you could give a little bit more color around what those investments are. What are you looking to do to improve the quality of your sales and marketing efforts?

Suresh Vaswani

Let me take that. This is Suresh here. So we are doing a few things actually. First and foremost, we have appointed a new [Global GM], Head of Sales. He’s American citizen, will be based in New Jersey in the U.S. So that’s a recent appointment. He’s a local American. The person’s a local American.

Second is we’re currently looking at enhancing our client engagement management structure, which we spoke about earlier in this conversation. So we are looking at much more senior people to handle some of our large accounts and we classify them as mega accounts and gamma accounts.

Then we are looking at aligning our entire structure in terms of [practitioners], and pre-sale folks and delivery folks really behind the client engagement managers.

We are investing a lot more on the consulting side of our business. And a lot of our consultants will work in our strategic accounts hand in hand with the client engagement managers. While we look at more strong performing of accounts to serve the initiatives that we just spoke about, we’re also looking at hunting in the U.S. and Europe markets in terms of looking at collective opportunity or looking at customers where we believe we can scale substantially.

So it’s not a mindless sort of hunt. It is a fairly targeted hunt in terms of qualifying customer opportunities carefully and only going for customers where we believe that we can scale. So these are some of the initiatives at the geography level.

If you switch back to the SBU level, which is an integral part of our sales system, so to speak, a lot more [grooming] capability, lot more system integration capability and a lot more transformation capability, which we’re consciously building up as we move into our future.

George Price - Stifel Nicolaus

Okay. And I believe you talked about looking at the trajectory as a percent of revenues, sales and marketing, say, over the last four quarters, would be representative of what you think on a percentage of revenue basis, that would be representative of what you think it should look like going forward making these types of investments, is that correct?

Suresh Vaswani

Yes. Partly, yes. The only clarification I would like to give is at the end of the day sales and marketing is a capitalization. It’s a strong back office and a SBU structure also that we have. So a lot of people in India are involved in pre-sales activity, good management activity and good process which also we’re building on substantially.

George Price - Stifel Nicolaus

Okay. And that would not fall in the sales and marketing bucket, correct?

Girish Paranjpe

Hi, Girish here. No, the people who are visibly involved in sales and marketing work and (inaudible) are included in sales and marketing. But then, as they say, it takes a village to win a deal. And there are lots of other people who are supporting the sales and marketing effort, who are not normally classified as sales and marketing.

George Price - Stifel Nicolaus

Okay, okay.

Girish Paranjpe

I think that’s what Suresh was referring to.

George Price - Stifel Nicolaus

Got you, understood. Last question around this topic. Does how you’re looking at the investments you want, that you’re making and that you want to make, does that change at all based on your assumption of the trajectory of recovery in demand? That is, do you think you would, all else equal, need to invest more along these lines, if you have a slower, more drawn out recovery, as opposed to maybe something sharper?

Suresh Vaswani

We have taken a few decisions in context of our investments and one key decision we’ve taken is we will invest, not necessarily keeping the short-term challenges that we face, but we will be looking at the mid term and the long term. So we try to classify the planning process into Horizon 2 and Horizon 3. And we’re looking at Horizon 2 and Horizon 3 initiatives in terms of what are the transformation that is likely to happen, and making those investments today. So clearly no compromises in terms of making short-term compromises and sort of giving away our long-term initiatives or investments in the long-term initiatives.

Immediately the way we look at it short and mid term, our Horizon 2 initiatives are much more targeted at building domain capability, consulting capability and system integration capability. On the whole longer-term perspective, we’ve identified, I would say, seven mega fields which run across all customers, all issues, which we’re consciously now beginning to invest in and some of these things are cloud computing, green IT, collaboration, social computing, information management and so on. So clearly the driver is not only short term in terms of achieving short-term results, but also earmarking investments for the mid term and the long term.

George Price - Stifel Nicolaus

Great. Thank you very much.

Sridhar Ramasubbu

Gene, we will take the last question from Rachael.

Operator

All right. We have Rachael Stormonth from NelsonHall. Go head please.

Rachael Stormonth - NelsonHall

Thank you. I was also asking for breakdown of the (inaudible) sales and marketing improvements, so thank you for that.

Suresh Vaswani

The question has been answered.

Sridhar Ramasubbu

Yes. There is no more questions, right, Gene?

Operator

That is correct, sir.

Sridhar Ramasubbu

Yeah, so we’ll wind up. Thank you very much for joining the call. The IR team is available for offline queries. At this time, there are no queries as such. So we will close the call for today. Thank you.

Operator

This does conclude today’s conference call. You may now disconnect. Thank you.

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