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Infosys (NYSE:INFY)

Q3 2014 Earnings Call

January 10, 2014 8:30 am ET

Executives

Sandeep Mahindroo - Principal of Investor Relations

S. D. Shibulal - Co-Founder, Managing Director, Chief Executive Officer, Director and Chairman of Infosys Technologies (Sweden) AB

B. G. Srinivas - President and Director

U. B. Pravin Rao - President

Rajiv Bansal - Chief Financial Officer

Srikantan Moorthy - Group Head of Human Resources and Senior Vice President

Nagavara Ramarao Narayana Murthy - Co-Founder and Executive Chairman

Analysts

Moshe Katri - Cowen and Company, LLC, Research Division

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

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

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

Rahul S. Bhangare - William Blair & Company L.L.C., Research Division

Keith F. Bachman - BMO Capital Markets U.S.

Trip Chowdhry - Global Equities Research, LLC

Ravi Menon - Centrum Broking Private Limited, Research Division

Operator

Ladies and gentlemen, good day, and welcome to the Infosys Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindroo of Infosys. Thank you, and over to you, sir.

Sandeep Mahindroo

Thanks, Enba. Hello, everyone, and wish you all a very happy new year. I'm Sandeep from the Investor Relations team in Mysore. I would like to welcome you all to our Q3 FY '14 earnings call. Joining us today on this call is CEO and MD, Mr. S.D. Shibulal; Presidents, Mr. B.G. Srinivas and Mr. Pravin Rao; CFO, Mr. Rajiv Bansal, along with other members of the senior management team. We'll start the call with some remarks on the performance of the company for the recently concluded quarter before taking up -- before opening up the call for questions.

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

I would now like to hand it over to Mr. S.D. Shibulal.

S. D. Shibulal

Thank you, Sandeep. Good morning, everyone. Let me take this opportunity to wish all of you a happy new year. We had a decent quarter, Q3, as we expected. Our revenues grew by 1.7% in reported terms and 1.2% in constant-currency basis. Our onsite volume declined by 3.4%, while offshore volume increased by 2.6%. Overall volume increased by 0.7% since our offshore referred mix went up by 1.3%. Our operating margin expanded by 1.5% sequentially, excluding the impact of the provision of visa-related matters that was made in Q2. We added 54 new clients. The number of $1 million clients went up by 26. The number of $1 million clients today stands at 495. Our growth was predominantly in non-U.S. geographies and Asian verticals.

External business environment continues to improve gradually in most business segments. Clients are becoming more confident about spending and are willing to engage more on new initiatives. At the same time, they remain careful when it comes to making large spending decisions. Budget activity for our clients is moving on a timely basis. Overall, across the verticals, we see mixed trends regarding 2014 budgets. We expect the budgets to be flat across all verticals together. B.G. and Pravin will elaborate on verticals and budgets subsequently. Pricing continues to be stable. Our revenue productivity went up by 0.7% quarter-on-quarter this quarter. However, we continue to see pricing pressure on large deals and commoditized services.

Infosys led -- continues its momentum with 14 wins this quarter, 8 in platforms and 6 in products. We continue to invest and see traction in the strategic areas: social, mobile, analytics, cloud.

Across verticals, these technologies are opening up newer opportunities. While each of these is individually powerful, the true value to clients is when these technologies come together to drive their business agenda. A very relevant example is TradeEdge, an insight-driven sales platform that we launched in Q3, which clients are using to sense and fulfill consumer demand in emerging markets. In this platform, we use analytics capability to gain visibility across the distribution channel. We use mobile capability to empower the distributors, sales force to accelerate order intake. And lastly, this platform is delivered on the cloud to help the brands drive cost lower and accelerate rapid penetration of new markets.

During the quarter, we are realigning our business portfolio to further enhance our focus on deepening client relationships, increasing market share, creating service differentiation through innovation and agility. We have appointed B.G. Srinivas and Pravin Rao as Presidents. B.G. will focus on global markets. Pravin will focus on global delivery and service innovation.

We are going through a transformation. We had earlier expanded the executive council, so that the heads of the units and business functions can participate in executive council deliberations. And we are going through transformation, we have been exploring multiple ideas. Once the new Presidents were implemented, President sectors were implemented, we have -- once the new President sectors are implemented, it is appropriate to create governance sectors under their respective areas. Hence, the executive council was disbanded, effective April 2014.

Based on our performance from Q1 to Q3 and what we expect for Q4, we have increased the revenue guidance to 11.5% to 12% in U.S. dollar terms. Now we will ask B.G. to talk about his business segments. B.G.?

B. G. Srinivas

Thank you, Shibu, and again, good morning, everyone. I will cover the following business segments, namely financial services, manufacturing, energy and telco.

Firstly, on financial services, we continued to see clients focusing on cost takeout out of operations, and there is a clear direction of those savings into development of new products and services. In terms of focus areas, digital transformation, risk and compliance-related spending is the order of the day. There is a clear focus on modernization of infrastructure and legacy applications that are influencing some of the client spending as well.

Pipeline is relatively healthy and comprises a good mix of large deals as well as platform deals. We are seeing a significant interest in our platform-based offerings in the last 3 quarters within the financial services sector. At the sector level, there is definitely pickup of lead momentum, and we continue to see this as we enter the next quarter. In insurance, again, we are seeing a mixed bag in terms of clients' IT budget outlay, while some of our clients have indicated their budgets are going to go up and some of the spending is going to go from nondiscretionary to discretionary as well. In other cases, there is -- the budgets are relatively flat, and in few cases, the clients are looking at a bit of a cut.

Looking to the next sector, manufacturing, the overall business momentum remains stable. We are seeing improvements in automotive, commercial, aerospace and industrial manufacturing. There is definitely weakness in the high-tech sector, which is putting a lot of pressure on discretionary spend in this vertical.

Information management, analytics and digital consumers are some of the key things that are creating transformation in our clients' business. Also, we do expect in manufacturing vertical, the budgets to remain flat overall. Within high tech, seeing a decline in budgets due to the impact of reduced PC sales, while in automotive, commercial aerospace and industrial manufacturing, we are clearly seeing the budgets rise.

The telecom industry is continuing to have challenges. The wireline telco sector is severely under pressure for top line growth. The spend levels have muted as clients continue to see new challenges. And that is definitely keeping a check on both discretionary and nondiscretionary spend. Relatively, the wireless carriers, particularly in Europe, there is definitely time for investments and deal activity, and the pipeline is only seen [ph] in certain pockets in the sector.

Energy sector is definitely doing relatively well. The IT spend will be marginally up for the coming fiscal. We are also seeing activities in all 3 services. This sector is heavily dependent on core ERP applications, namely SAP, and there are further opportunities in the area of consolidation and upgrades.

I would now like to pause and hand over to Pravin Rao to cover his business portfolio. Over to you, Pravin.

U. B. Pravin Rao

Thanks, B.G. Good evening. In retail, CPG and logistics, we are seeing increasing spend in the areas of cloud, infrastructure, business intelligence, analytics and ERP-led transformation. We see an uptick in discretionary spend, though they remain in a stop-and-start mode. The deal pipeline has improved marginally over the last 3, 4 quarters.

In the life sciences segment, we see headwinds in terms of patent cliffs. This, however, translates into opportunity in terms of large outsourcing deals. In resources and utilities vertical, we see a lot of focus on cost optimization and increasing spend in the areas of cloud, mobility and analytics. In addition, in global resources, we see companies focusing on simplifying their operations and improving supply chain efficiency. Budgets for the next year are down in the segment due to revenue challenges facing the clients.

In the growth market unit, comprising of Australia, China, Japan and Southeast Asia and Middle East, we see different dynamics at play in the individual markets. There is focus on cost reduction and consolidation of spend in Australia. In China, clients are investing in ERP and analytics, after centralizing their operations. In Japan, demand is being driven by the need to simplify IT and drive revenue-generating spend. Overall, in the region, deal pipeline is decent, though the ticket size is small.

In the services sector, the new age information services companies leveraging digital are increasing spend, while the traditional print media is cutting spend.

In travel and hospitality segment, we have seen an uptick in spend, driven by economic stabilization and mild recovery in the U.S. We have almost 20 engagements in cloud and Big Data. Cloud is driving the IT organization towards more outcome-based, SLA-oriented constructs. Clients are also excited about the possibilities of contactability and open standards that would help eliminate vendor lock-in and maximize performance.

In mobility, we have started over 25 engagements in quarter 3 in the areas of sales force automation, device management and enterprise productivity. Clients are also looking to establish mobile app factories to cater to their mobility requirements. We see good levels of interest for managed pay-per-use model here as well.

I will now to pass on to Rajiv to elaborate on the financial performance.

Rajiv Bansal

Thank you, Pravin, and a very good morning to all of you. I'll take you through the financial highlights. Our third quarter revenue was $2,100 million as against $2,066 million in the previous quarter. This is a growth of 1.7% in reported currency and 1.2% in constant currency terms. Our gross margin for the quarter improved by 80 basis points to 36.1%. Operating margin for the quarter improved by 150 basis points to 25%, mainly on account of initiatives to increase efficiency in our operations.

Net margin for the quarter expanded to 22.1%, which was at 20.2% last quarter, excluding the visa-related matter. EPS for the quarter is at $0.81 as against $0.70 last quarter, excluding the visa-related matter, which is a growth of 11%. Our revenue per person improved by 2.2% sequentially both onsite and offshore, while our onsite referred mix has reduced by 1.3% to 29.9%. Utilization is marginally down, to 76.9% for the quarter.

Our other income was higher by $36 million in this quarter, mainly on account of ForEx gain of $19 million in Q3 vis-à-vis the ForEx loss in the previous quarter of $14 million. As you will recollect, last quarter, we witnessed extreme volatility in the currency markets, which resulted in a loss of USD 14 million. During the quarter, on the average, rupee was at INR 62.03 as against INR 62.77, an appreciation of 1.2%. We have outstanding hedges of $1.049 billion as of December end.

Effective tax rate for the quarter is at 27.9%. Our cash flows from operations is a healthy 95% of profit at $439 million. After paying dividend of $219 million during the quarter and CapEx of $122 million, our cash and cash equivalents, including available-for-sale assets and certificate of deposit are at INR 27,440 crore. We have increased FY '14 revenue guidance in dollar terms to 11.5% to 12%. This is based on what we achieved in the first 3 quarters and our expectations for the fourth quarter.

Lastly, I would like to reiterate that while we have seen early results of our initiatives to increase efficiency, we continue to evaluate our business needs and make investments wherever necessary.

Before I open the floor for questions, I would like to mention that we have Mr. Murthy, our Executive Chairman, with us to take questions from you. With that, we'll open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Moshe Katri of Cowen and Company.

Moshe Katri - Cowen and Company, LLC, Research Division

This is a question for Rajiv. Margins were up sequentially, can we get the pluses and minus in terms of -- minuses in terms of what drove the margin expansion during the quarter? And then as a follow-up, maybe talk a bit about attrition and what are the actions that the management is planning to bring down attrition in the near term?

Rajiv Bansal

Moshe, during the quarter, we had an RPP increase of 2.2% both onsite and offshore. And also, an onsite mix improvement by 1.3%, from 31.2% to 29.9%, which both contributed to a margin of 1.8%. At the same time, the rupee appreciated by 1.2%, which had a negative impact of 0.3% on the margin, giving us a net impact of 1.5%. There were also benefits from efficiency in our operations that we were talking about, initiatives that we have taken over the last 2 quarters. But a lot of that money has been flowed back in the business in terms of investment in tools for productivity and quality, for enhancing the delivery effectiveness. So though the margins have expanded [indiscernible] in the quarter, we continue to make investments in our business to ensure that we secure a good growth and a good future for ourselves.

Moshe Katri - Cowen and Company, LLC, Research Division

And on the attrition side?

Srikantan Moorthy

This is Tan Moorthy. On the question on attrition, while in terms of the LTM numbers, the numbers are high. On an absolute basis, the numbers are dropping from Q1 to Q2 to this last quarter. However, given the attrition number, we're looking at several things to curb attrition. If you look at attrition as a function of utilization, compensation, developmental opportunities and engagement, we have taken several steps in the direction. For example, on the compensation part, we changed the variability part for our people so that it is much more of a component on the fixed salary that comes in. On the aspect of development, we have created revenues for people to be reskilled so that they can get into newer opportunities as we find them in the organization and as the opportunities comes through. On the engagement part, again, we have taken several steps to engage people on being in the organizations and working together to make a difference. So there are several steps that are being taken to curb attrition. And as the utilization goes up, we expect that the attrition will come down as well.

Nagavara Ramarao Narayana Murthy

Moshe, this is Nagavara Murthy. It's nice to reconnect with you. I mean, you know our business pretty well. The reality is simply this, that the margins in our business depend on, one, of course, growth, because the fixed costs get absorbed better with growth. Second, it depends on the ratio of the effort onsite and effort offshore. And third, it also depends on the lower ratio, that is, how many people of a certain level we have to the people at next level to the people at next level, et cetera. So I think these -- as we continue to work towards better ratios in these 3 parameters that I talked about, we can indeed get better margins, but if we don't do a good job, then the margins will obviously get reduced.

Operator

Our next question is from Edward Caso of Wells Fargo Securities.

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

Rajiv, I think on the earlier call, you might have mentioned that the operating margin guidance now is sort of in the 25% to 26% range subject to potential investment. That seems to be a little higher than in the past. Is that the correct interpretation here? And is it because your cost saving efforts are running ahead of schedule?

Rajiv Bansal

Our aspiration continues to have industry-leading growth and superior margins. Our aspiration hasn't changed. What you have seen in the last couple of quarters is that we needed to make investments in our business to get to growth. And as we speak, we continue to make those investments. So our margins have improved because a lot of initiatives that we took in the last couple of quarters in terms of cost optimization, quality, productivity, delivery efficiency, sales effectiveness. The cost optimization has started yielding early results, and that is the reason we have started seeing the margins being expanded. However, we have to make investments, and as and when we get an opportunity to make investments which will help us secure our future, we would do that. What I'm saying is that in the medium to long term, I see the margin stabilizing around 25% to 26% in the medium to long term, and that is the position which I've been saying for the last couple of quarters.

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

Great. And I'd be curious if -- second question and last question. On the sales side, can you talk about has the sales force in the last year or 2 gotten bigger, gotten smaller, what's the turnover been? What's the profile? I know you pulled a lot of people back into India and so forth. Can you just give us an update on size? How you're compensating them? Where they're located? And what initial impact you're getting?

S. D. Shibulal

Our sales force is fully onsite and they are compensated as per the market compensation. We are investing into sales. We have added sales force last year. Right now, we are looking at adding another set of people into the sales force. We want to have a pyramid structure for our sales force and that means that we will add a lot more people at the lower level, at the lower grade than at the upper end of the pyramid structure. This quarter, you have seen some fluctuation, but that is a quarter-to-quarter fluctuation and there is no secular trend. We will continue to invest in the sales force, and we will continue to invest at the lower end of the pyramid so that our pyramid structure becomes more healthier, and the number of people in the market will continue to increase.

Nagavara Ramarao Narayana Murthy

Well, first of all, let me -- let's make it very clear that no sales person who are efficient has been allowed to leave. Those that were not performing, some of them have left, some others on a performance improvement program, that's number one. Number two, the people that -- whatever the cost optimization we have done so far, is primarily in the area of marketing, where there are lots of senior people sitting outside India doing jobs that could have been done at lower-cost locations and therefore, that's what we have done. Third, in fact, there has -- there is an initiative to enhance the number of people that are in the market doing selling. And as Shibu pointed out, our desire is to add a considerable number of people at the lower end of the pyramid. Today, it's a diamond structure. We have too many senior people and very few junior people beating the pavement in the market. And we are bringing a change in that so that these senior people are indeed helped by the junior people who will beat the pavement. So that's the story about the sales people.

Operator

Our next question is from Rod Bourgeois of Bernstein.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Okay, great. So I have a strategic question for Chairman Murthy, and it's also great to have you back on these conference calls. So it appears Infosys has been moving towards reducing its onshore cost structure to some extent and also moving to derive more growth from application outsourcing, its traditional core business. My question is whether these types of moves run the risk in the long run of Infosys losing some ground competitively in terms of its onshore relationships with clients or potentially hurting your ability to be a leader on consulting deals? Are those long-run risks of the strategic moves that are being made today?

Nagavara Ramarao Narayana Murthy

No. Not really. I'll tell you what, we -- today, we have an onsite effort to offshore effort of 29.9% to 70.1%. We believe that we need to have people onsite who are in close touch with customers, people who bring value to the customers in terms of customer-heavy interactions, like requirement definition, presentation to the customer and then discussions on architecture, et cetera, et cetera. I think just having people who do programming, sitting onsite, I think, that's not a very smart thing. So therefore, our effort will be to have as many people as are required at customer site and people who will add value to the customer, people who will add value to the organization, while ensuring that all activities that can be done from lower-cost locations are indeed done at lower-cost locations. That's what the global delivery model is all about. That's what we have been doing for a long time. That has changed slightly, but we will ensure that the organization is robust, the organization in the future is robust, and we don't lose contact with our customers. But at the same time, we will bring better and better value, both to the customer and to the organization.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

So does that imply that your assessment is Infosys and your main competitors, the, the other top Indian firms, does that imply that you feel they have more headcount onshore today than what is necessary to sufficiently serve the clients?

Nagavara Ramarao Narayana Murthy

I think you're in a better position to make that comment than me. All that I can say is what we at Infosys want to do, but I can't comment on what our competitors are doing.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

But from an Infosys standpoint, you feel like you can serve clients onshore with fewer people, such as doing programming work onshore?

Nagavara Ramarao Narayana Murthy

Sorry, no. I said activities like programming, detailed technical design, long-term warranty, these are activities that can be done very effectively from lower-cost locations. On the other hand, those activities that have customer-heavy interaction, they have to be necessarily done onsite. That's what global delivery model is all about and that's what we intend doing. B.G. wants to add something.

B. G. Srinivas

I also want to bring this in respect to the various services we offer, and that's really a distinction to be made. For example, our consulting-led business will continue to be focused and we are driving efficiencies even in those service lines. In the traditional business IT operations, the offshore ratios can be significantly increased. And hence, we need to make a distinction when we talk about service line specific ratios, both in terms of offshore-onsite ratios and lower ratios, and even at an organizational level continue to support our clients on transformation initiatives, support our clients in helping them optimize business processes. And the third element of our business, which is product platform, IP-led business we'll continue to stay focused. At a strategic level, there is no change in direction as far as Infosys 3.0 is concerned, but we are making decisions in each of the service lines to drive and optimize efficiencies and making sure, at the same time, we stay relevant to our clients' business, both with respect to the local capability and capacity we need and making sure that the rest of it can be delivered in different Centers of Excellence around the world. Thank you.

Operator

Our next question is from Joseph Foresi of Janney Montgomery Scott.

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

My first question here is also a strategy question. I believe when Infosys 3.0 was rolled out, a part of the point of the change in business strategy was to move away from some of the commoditized work. Now we see a new strategy out there where it seems like Infosys is getting back to its fundamentals. Could you help us reconcile what Infy 3.0 was, how your new strategy is different, and what was working and what wasn't, that you're changing?

S. D. Shibulal

Well, I think, first and foremost, Infosys 3.0 was all about increasing client relevance. And under that umbrella, we had launched -- we had broadly categorized 3 offerings: consulting system integration, business and IT operations, products and platform. There was never ever any intention of not growing any one of these offerings. We were very clear that we will have to grow all the 3 offerings to achieve our goal of industry-leading growth. Some of them, for example, the products and platform, would be on a lower base, which means that it will grow faster than our average. That is the strategy behind Infosys 3.0. Now if you look at the performance, if you look at our consulting system integration business, which is a transformational business, which in light of renewed [ph] productivity, has gone to 33.4% as of this quarter. If you look at the business and IT operations business, we have been very focused on winning large outsourcing deals. You remember, business and IT operations give us about 62% to 63% of our revenue. For us to achieve industry-leading growth, there is absolutely no way we can do it without winning large outsourcing deals in business and IT operations. So by creating that offering, what we were trying to do was to increase our ability to compete in the market; create better solutions, which are more relevant to our clients; create multi-tower solutions, which will bring in much more value to our clients; and to be price-competitive in the market. If you look at our performance in that space, performance have improved continuously. This quarter, we have closed about $500 million of TCV in that space. Last 2 quarters, we have closed about $1.5 billion TCV in that space. Please remember, large outsourcing deals are multi-year deals. They take about 5 to 7 years to realize the revenue. First year, the revenue realization is usually about 8% of the total deal closure of the year, and next year onwards, about 20%. That is the pattern which we have seen. So as I said, we are very focused on winning large outsourcing deals in the business and IT operations space. Lastly, on the products and platform space, this is about creating intellectual property, and either providing it to the client as a cloud-based offering or on a license-based offering. This quarter, we have 14 new wins in the products and platform space; 8 for platforms and 6 for product licenses. And for example, this quarter, we launched TradeEdge, which I talked about. So we will continue to focus on all the 3 offerings. We are very, very clear that for us to create industry-leading growth, we have to win in all of them. One is about transformational capability and helping our clients grow and transform their business. The second one is about operational capability. It is about reducing total cost of ownership, making sure that we win large outsourcing deals and with the BITS [ph]. And the third one is about products and platform, which is all about intellectual property-based offering and which will convert our clients' fixed cost to variable cost.

Nagavara Ramarao Narayana Murthy

Well, I think, as Shibu said, there is nothing wrong with this strategy. Any company that aspires to be the industrial -- as I say, industry's leading player has to have all the 3 components. But somehow, we didn't do a good job in enhancing the contribution from large BITS, as we call, projects. And that said, we have Mr. Prasad, who will be leading SGS. So in short, that he adds considerable value to all our other segment heads. So the reality is that we must have much higher contribution from the strategic global sourcing initiative. And with Prasad taking that over and working with various segment heads, Sanjay, Mohit, Sandeep, Rajesh, Manish and Ravi and others, we believe that we will be in a position to focus much more on contributions from BITS, too.

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

So I guess my question is -- so by -- it sounds like you're getting back to the basics at Infosys, is that correct, and you're maintaining -- you're still maintaining the 3.0 strategy?

U. B. Pravin Rao

Yes, I think so. The entire Indian software industry was founded on the principle of the global delivery model. And global delivery model was founded on the principle of globalization, which is all about sourcing capital from where it is cheapest, sourcing talent where it is best available, producing where it is most cost-effective, and selling where the markets are, without being constrained by national boundaries. And that's what globalization is about, that's what global delivery model is about, and that's how you make this a better world. And therefore, yes, I really do. I think getting back to basics is extremely important, without losing focus on modern trends, without focus -- without losing focus on modern -- on new opportunities. So that's what the company is doing, that's one of the reasons why...

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

The last question -- just a last question from me, though, is sticking with that train of thought, so I guess the basics brings back into question the amount of commoditization that's taking place, because the whole idea behind Infosys 3.0 is to get away from the commoditized business. By getting back to basics, don't you run the risk of running into more and more commoditization? Or how do you mitigate that factor when you return to the basics?

Nagavara Ramarao Narayana Murthy

Well, I think that's a good question. While -- I mean, when Shibu was speaking, he spoke about our forays into transformational projects, which contributed somewhere around 33.2% or so. PPS, Products, Platforms and Solutions, is still in its infancy. Along with Finacle, it adds approximately about 6%. Therefore, the reality is that about 70% of our revenue has to come from large business IT services kind of projects. Now here, you are right, the reality is that the success in this is conditioned by the adage, the market determines the price, the company determines the cost. So therefore, we have started several initiatives on improving the profitability effectiveness of this company. They are all -- they're still work in progress. And as we move forward, as we see completion of some of these and as we see visible impact from some of these, I am sure you will realize that some of these initiatives are indeed in play. At this point in time, we cannot comment on some of those because they are still work in progress.

Operator

Our next question is from Rahul Bhangare of William Blair.

Rahul S. Bhangare - William Blair & Company L.L.C., Research Division

I was wondering if you could just discuss a bit about what drove some of the sequential weakness in North America? Was it just seasonal or something else that you can point to? And then conversely, what's driving some of the strength in Europe?

B. G. Srinivas

No, there is nothing secular about it. This is just a quarter-to-quarter variation. This quarter, Europe grew much faster than U.S., but I don't see anything secular.

Rahul S. Bhangare - William Blair & Company L.L.C., Research Division

Okay. And then you've mentioned in the past that the large deals you've been signing have been price-sensitive. Can you give us a better sense for the margin profile of these engagements you've won over the last 12 months or so, maybe relative to corporate margins?

Rajiv Bansal

So I think, first and foremost, I should tell you that pricing is stable for us at this point in time, and so as the pricing went up by around 0.2% [ph] [indiscernible] went up by 0.7% this quarter. The large outsourcing deals are price-sensitive. And as Mr. Murthy said, though these are deals where market determines the price and we need to determine the cost, we are actively looking at various incentives, which will make sure that our cost is managed on these large outsourcing deals. At the same time, I also believe that it is about solutions, that we actually create a solution which is absolutely relevant to the client, which is the best in the industry, the client gets that most level of confidence and put a team in place, a team in front of them, which they will believe will deliver that solution in the most effective manner. I still believe that there is pricing power even on these deals. Then the other piece is, we also have to look at the lifetime profitability of the deals. These are deals that -- these are the large outsourcing deals are the ones where we will have to invest in the beginning on transition and maybe some other investments. But we also need to look at the profitability from the life of the deal. So when you look at these deals, when we look at these deals, the first and foremost thing for us to do is to create the best solution so that we can demand a premium. Second is to take a look at the lifetime profitability of the deal and see how, at the different stages of the deal, once the deal becomes stable, how can we drive efficiency and productivity through which we can achieve our margin.

Operator

Our next question is from Keith Bachman of Bank of Montréal.

Keith F. Bachman - BMO Capital Markets U.S.

I'd like to revisit a subject that's been asked earlier, but ask it in a different way, and that is, how would you respond to the comment that you're sacrificing growth, both near term and longer term, for profits? If I think about your sequential improvement in operating profit, it's fairly impressive, yet your growth in the quarter, I think, is going to be below other leaders such as TCS and Cognizant. And even if I assume that your growth implied for the next quarter, it seems like fairly weak growth. In addition, as mentioned previously, you're moving some of your labor from onsite to offshore, and yet as we reflect on what the opportunities are for the next wave of opportunities, Cognizant calls them the SMAC stack, that would seem to go contrary to that trend, because it would seem that winning those deals would require more onsite capabilities and expertise in the higher-end consulting areas. So the bottom line on the question is, when would you expect to emulate other industry-leading growth companies? Or would you expect to be below the growth levels of these other companies, as you call it, going back to basics, which seems to be more commodity type of work?

S. D. Shibulal

Well, I think we want to be very clear, first and foremost, our aspiration is to have industry-leading growth and industry-leading profitability. We have done it many times in the past. That's very important. We have done it many times in the past. And we'll still get the premium over many of our peers when we go in front of the client. That is one part of the answer. The second piece is, even last quarter, when I talked about Q3 and Q4, I had said that usually, Q3 and Q4 are soft quarters for us, especially Q3, because of the holidays and furloughs. And if you look at our guidance, because we had said it is a soft quarter, I believe that we have seen decent performance in Q3. Going forward, our objective will be to make sure that we achieve growth, industry-leading growth. At the same time, through the initiatives that we are doing internally, so the initiatives that we are doing internally, will drive operational efficiency, will drive cost optimization, will drive more offshore and achieve our margins. We have done this in the past. We clearly believe that we can do it in the future, and that is where we are.

Nagavara Ramarao Narayana Murthy

Let's look at some data points here. Last year, we grew by 5.8%. This year, we have said that we expect to grow between 11.5% and 12%. That means we will be doubling the growth rate. That I think is pretty good. Though by absolute number, we are -- we'd certainly like it to be even higher. Second, as B.G. pointed out, there are areas where 100% of the effort is delivered onsite. For example, our consulting services, Lodestone, et cetera, 100% of the consulting service part is delivered onsite because we believe that is required. On the other hand, there are areas where we may need anywhere from 35% to 45% of effort being delivered onsite, that some of the IMS deals, et cetera, et cetera, that's where we are quite flexible. However, in areas like this, where an ideal ratio could be between 15 to 85 or 20 to 80, certainly, I think our aspiration is to move towards creating a very efficient global delivery model so that we have growth and we have margins.

B. G. Srinivas

One last comment on this. I just want to clarify, going back to basics would not mean that we'll drop the ball on consulting services nor PPS. All the 3 service lines will continue to be the focus area. We are making an increased effort to win large deals, drive automation, drive efficiencies, so that our ability to win large deals in the core business is enhanced. It does not mean that we will not focus our energies on consulting-led business and transformation business at all.

Nagavara Ramarao Narayana Murthy

But also, let's look at this, why don't you people look at the data on the contribution of the so-called consulting-led businesses to Infosys, total revenue, and that of other players? And you will notice that there's a much higher percentage for Infosys than our competitors. So there is no truth in the assertion that we are moving away from those. So that's something I want you people to look at it.

Rajiv Bansal

Actually, to continue on what Mr. Murthy said, and give you the numbers, I believe the industry average for consulting and system integration is approximately around 20%, and we are at 33.4%.

Keith F. Bachman - BMO Capital Markets U.S.

Okay. If I could just ask a follow-up, then. A, how would you think about your growth relative to the industry for calendar year '14? And B, implicit with what you're demonstrating in terms of moving work from onsite to offshore, how are you thinking about the U.S. immigration issues? It would seem almost implicitly, that you're less concerned about that, but I just want to hear on those 2? A, how are you thinking about your growth relative to the industry in calendar year '14? What are your targets, what are your objectives, relative to the industry, if you don't want to give specifics? Then b, how are you thinking about the immigration bills versus your move to transition more work offshore versus onsite?

S. D. Shibulal

So as I said, our aspiration will be to have industry-leading growth and -- but I just want to go back to what Mr. Murthy said. Last year, we grew by 5.8%, and this year, our guidance right now is 12 point -- sorry, in constant currency terms, actually, it is 12.4% to 12.9%, which is more than double last year's growth rate. And again, as Mr. Murthy said, we still aspire for more. I think we would still aspire for more. Next year, I talked about the aspiration, but at the same time, it will be too early for us to discuss any specific numbers. In the end...

Nagavara Ramarao Narayana Murthy

I think we will let you know on April 10.

S. D. Shibulal

On April 10, we will have the numbers.

Keith F. Bachman - BMO Capital Markets U.S.

Yes. I wasn't looking for specifics, just relative to the industry, particularly against Cognizant and TCS, if you would aspire to be at relatively consistent growth rates to whatever those companies demonstrate for calendar year '14, or is that too high of a target?

Nagavara Ramarao Narayana Murthy

Yes. At this stage, we cannot comment. We will certainly talk about it on April 10.

Keith F. Bachman - BMO Capital Markets U.S.

Okay. And then perhaps just finishing off on the immigration bill, then I'll cede the floor.

S. D. Shibulal

On the immigration bill, we have not seen any change in status from the beginning of the quarter to current -- as of today. We watch it very closely. There are clauses in the immigration bill which could impact our business, which we have acknowledged in the past. But as you know, immigration bill is a very complex process. You have to have 2 bills passed, 1 in Senate, 1 in the House, and then it has to go through the conference committee. So we don't know when and what stage it will get signed. We watch it closely, and we will -- as of when we need to react, we will come up with plans to react to it.

Nagavara Ramarao Narayana Murthy

Well, I personally believe that no company should stake its future on the immigration bill of any country. Therefore, there are several initiatives, which are still work in progress, therefore, we are not in a position to comment on it. That will ensure that this company will continue to be an important player in the global IT services market, no matter what happens to the immigration bill. That's our aspiration and that's what we will certainly do.

Operator

Our next question is from Trip Chowdhry of Global Equities Research.

Trip Chowdhry - Global Equities Research, LLC

A couple of questions. There's a lot of emphasis on cloud and Big Data, software-as-a-service, and definitely, that comes at the cost of traditional players. And when I look at your spreadsheet you sent out, we were under the impression like if the business is gravitating towards the newer ITs, the old IT business from SAP and Oracle should suffer, but we are not seeing any weakness in your package implementations. What is the reason for that?

S. D. Shibulal

So I want to just go back a few years and then try to give you an analogy. When you -- when we started on the journey of package implementation in 1999 and then expanded to consulting and system integration, over the years, one could tend to believe that it will lead into the BITS business. And actually, in fact, it's true. It did cannibalize part of the business because once customers start implementing new packages, SAP or Oracle, or any other package, they stop building those applications, right? But they still continue to build applications which are very, very unique to them. Now there is a third data model where actually clients can get software-as-a-service or a platform-as-a-service, so that they don't have to build or buy the package. But this will be a gradual shift. And as an organization, we have to be relevant to our clients. We want to be in the forefront of the revolution, which the clients are looking for. While on the one hand, over a period of time, it cannibalizes part of the work available, not our revenue, work available in other parts of the industry, it will create its own opportunity. So what we are trying to do is to make sure that we are working with our clients, we are leveraging the new opportunities which are coming along. At the same time, because of our capability and capacity available in other parts of the business, we continue to win very large opportunities in both, in business and IT operations and in business transformation work.

Trip Chowdhry - Global Equities Research, LLC

Now in mobile space, I think it's about 3 years, 4 years back, you had a very interesting initiative, I think it was called Flypp, F-L-Y-P, and I think it was an app store that companies like Dell and other guys who are in telco space, white-boxing it. What is the status of that? And do you think that's a sustainable strategy moving forward?

S. D. Shibulal

So those kinds of initiatives eventually merged into PPS. And today, PPS has 7 platforms and 7 products in the market. One of them, the Flypp intellectual property, was merged into -- so for example, if you look at the Airtel Money, that's a slight variation of the Flypp intellectual property. So finally, that property ended up in products and platform. Today, they have consolidated that into 7 products and 7 platforms.

Operator

We'll take our next question from Ravi Menon of Centrum Broking.

Ravi Menon - Centrum Broking Private Limited, Research Division

Shibu, as you are changing your strategies, focusing on the basics and winning large deals, how do you think you need to change your employee profile? I mean, what sort of talent are you lacking right now? Or what sort of reorg -- or rather, I'd say, how would you need to restructure your workforce?

Nagavara Ramarao Narayana Murthy

Well, this is the first Indian company that realized the importance of education and research in creating a robust future for the company. And therefore, I think we believe that recruiting smart people, providing them good training, both in terms of classroom training and in terms of on-the-job training, and then giving them an opportunity to grow in the job and creating a very robust pyramid is the way to go. And that's exactly what we will do.

Ravi Menon - Centrum Broking Private Limited, Research Division

But so do you think that your existing employee profile is sufficient to cater to your large deals? Or is there any specific skill set or skill sets that you think you need to completely get through lateral recruitment or through internal new training program?

Nagavara Ramarao Narayana Murthy

Well, I think -- I mean, we believe that we have a cadre of well-trained professionals that can fully discharge our obligations to our customers as we seek higher and higher growth rates. I don't think that it will be an issue as far as this company is concerned.

Operator

Ladies and gentlemen, that was our last question. I now hand the floor back to Mr. Sandeep Mahindroo for closing comments.

Sandeep Mahindroo

Thanks, everyone, for joining us on this call. We look forward to talking to you again. Thank you, and have a good day.

Operator

Thank you. Ladies and gentlemen, on behalf of Infosys, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

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