iGATE's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.16.14 | About: iGATE Corporation (IGTE)

iGATE Corporation (NASDAQ:IGTE)

Q4 2013 Earnings Conference Call

January 16, 2014 07:30 AM ET

Executives

Salil Ravindran - Head of Investor Relations

Ashok Vemuri - President and CEO

Sujit Sircar - Chief Financial Officer

Analysts

Glenn Greene - Oppenheimer

Mayank Tandon - Needham & Company

Edward Caso - Wells Fargo

Joseph Foresi - Janney Montgomery Scott

Amit Singh - Jefferies

Brian Kinstlinger - Sidoti

Operator

Greetings, and welcome to the iGATE Corporation Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

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

Salil Ravindran

Thank you Christine. Good morning and thank you for joining our call to discuss the fourth quarter 2013 and full year 2013 financial results. We hope you have all had a chance to review our earnings release. With me today are Ashok Vemuri, iGATE’s President and Chief Executive Officer and Sujit Sircar, iGATE’s Chief Financial Officer. A copy of today’s press release and supplemental financial information are posted on iGATE’s Investor Relations website. Today’s call is being recorded, and copy of the transcript will be available later today on our website.

Our agenda for today will be as follows. Ashok will provide you with an overview of quarterly and full year results in the context of our business strategy and will outline his key priorities for iGATE moving forward. This will be followed by a discussion on our financial performance in greater detail by Sujit. Ashok will wrap up with some comments around our general expectations for calendar year 2014. Finally, we'll open up the call for your questions.

Before we begin, I would like to remind everyone that some of the statements made during today's discussion may be forward looking in nature and may involve some risks and uncertainties. These risks and uncertainties may cause actual results to differ materially from those set forth in the statements. Additional information concerning these risks and uncertainties can be found in the company's recently issued press release, also available on our corporate website, as well as our latest SEC filings. iGATE Corporation assumes no responsibility to update any forward-looking statements.

In our call today, we will refer to certain non-GAAP financial measures, which we believe provide additional information for investors and better reflect the way management views the operating performance of the business. You can also find a reconciliation of those measures to GAAP measures, as well as related information in our earnings release, as mentioned in the Investor Relations section of our website. Please also refer to the investor fact sheet for further details on our results.

With that, I will now turn the call over to Ashok.

Ashok Vemuri

Thank you, Salil and good morning to everyone. Let me start by reviewing our results for our fourth quarter and the full year. Then I propose to discuss some of the initiatives we have been implementing to streamline our go-to-market and move us closer to our customers so we can provide more value. We’ll also highlight some investments we’re making to help drive our growth.

During the quarter, I spent a lot of time talking to our customers as well as new business prospects. As you may remember, at this time last quarter we were in the middle of Bonfire, our annual customer event in North America. And since then, Bonfire is in different parts of the world and got the opportunity to meet with many more clients.

What is clear to me in my interaction with our clients is that they believe we have a very strong -- we provide strong value in how we help to grow their business and streamline operations. We are poised at an interesting point in our journey and see many meaningful opportunities ahead of us to capitalize upon.

Moving to our results. We’ve delivered fourth quarter 2013 results which we believe are good on all counts. Revenue was $299.3 million, an increase of 10.2% year-over-year and 2% sequentially. Non-GAAP earnings per diluted share was at $0.49, representing year-over-year growth of 8.9%. For the full year 2013, revenue grew 7.2% to $1.15 billion. And our non-GAAP net income was $150.3 million or $1.88 per diluted share compared to $121 million or $1.56 per diluted share in 2012.

During the fourth quarter, we added nine new customers including five new Fortune 1000 customers. From a geographical split perspective, we’ve added four in North America and five in Europe. Industry wide, we’ve added six in manufacturing, one in insurance, one in healthcare and life science and one in the BFS that is the banking and financial services space.

As we have seen in the last couple of quarters and as we expected, Europe continued to perform well due to ramp ups in some of the large deals that we had won in the past and we have discussed with you. Our clients are spending to their IT budgets and overall program ramp up for our wins in previous quarters continued to track our expectations.

Europe will be a focus area for us and will attract additional investments. We have picked the countries in Europe that we will focus on, make the investments and build a stronger go to market team. We closed a healthy amount of multimillion dollar deals in the quarter with both new and existing clients. This adds to the meaningful number of multimillion deals including several very large deals closed during 2013. In fact during 2013, we won the highest dollar value of orders in the history of our company. And as we enter 2014, we believe we have a healthy pipeline that complements what we achieved in 2013. I’m therefore pleased with our performance and I am confident that our momentum will continue in the next year.

Now let me talk a little about the strategic priorities that I have. After being in my role for some time now, I believe the company has the right ingredients and capabilities to capitalize on the growth opportunities in the industry. To achieve this, we’ll make strategic investments around three specific priorities, namely solutions that is products and platforms, sales and go to market from a people perspective, and physical infrastructure.

Before I get on to them, I will give you a brief flavor on our recent vertical alignment. We believe that due to our size and scale, we needed to restructure organization into focused units with deeper domain capabilities that streamline our go to market and move us closer to our clients. This also empowers verticals to take a more holistic approach decisions by aligning their respective sales, delivery and consulting themes to a single goal and making them responsible for their respective P&Ls. We have successfully completed this realignment in December and we spent -- and this was done in a record time of 45 days. We believe these changes will enable us to better leverage the enormous talent we have, more effectively identify emerging opportunities with our clients, increase focus of our sales teams, institutionalize our delivery engines and thereby drive growth.

Regarding new business, we remain very confident in our healthy pipeline and our ability to win new clients, considering the stable macro environment and our customers’ willingness to engage with us and spend their budgets. However, due to the recent realignment, we expect that some of the new lead conversions could potentially get pushed out by a quarter or so.

With that said, this new vertical structure is the right long term move for iGATE as we proceed to this new chapter in our growth story.

We also recognize that in order to maximize our new structure and return to market growth rates, we need to make targeted investments in the business, as long as they are tied directly to our revenue objectives.

The first area we have identified is our solutions. With our new vertical structure, we will be investing in deepening of industry expertise to provide more targeted solutions and services. For example, we will be creating more industry frameworks, drive more IP and targeted solutions, especially in areas in regulatory and compliance in [BFSI] or seek third-party administration services in the insurance and healthcare space. Especially our solution supporting management of financial instrument data is seeing a lot of traction from our banking clients, which we will continue to invest in.

We will also be investing in the horizontal capabilities. In this line, we have created a new digital practice within our organization based on the demand drivers that we witness within our client base. Another important area is leveraging our alliance network by partnering with software companies where we can add meaningful value on top of their products.

The second area that I would like to talk about is our sales go-to-market. To prepare for our future growth, we are investing in our people and adding capacity in our main areas of focus. This is reflected in our headcount increase this quarter. On a net basis, we have added 1,450 people across the company, which is the highest quarterly addition in the company’s history. We believe that our current utilization in the 80% range does not provide us with the bench strength and skill set diversity that we will need for the growth plans envisaged by us. Therefore we will continue with our ramped up recruitment and hiring efforts with the sales and go to market it will be in the markets that we operate in, in the Americas and Europe.

As a result, we expect from a delivery perspective that our utilization target for the next several quarters will come down from current levels as we stock up for our anticipated growth.

To help better train, we [influx] the people, I'm also happy to announce that we're creating an iGATE university, which encompasses all the trainings in the company under one umbrella. This will help centralize and institutionalize our training program and will strengthen our relationship with academic institutions.

Finally to ensure we have the facilities necessary to accommodate our growing employee base, we're accelerating investments in our physical infrastructure. We propose to spend up to $200 million in CapEx and augmenting our existing delivery locations over the next three years. The exact quantum of investment that we will invest would be aligned on a yearly basis to the growth path that we charter.

We have added capacity of more than 1,600 feet in Mumbai and Hyderabad this quarter. In addition, we have created a near-shore center in Halifax, Canada. And we're also looking at alternatives for creating near-shore delivery centers in Eastern Europe to cater to our European business. These near-shore centers provide us with expanded service delivery options for our clients and also enable us to become more integrated with our client organizations.

So as we can tell, there are lots of exciting things that are happening at iGATE. I'm also proud to announce that Arogya World, a global health non-profit organization conducted a Healthy Workplace Survey in India as part of the Clinton Global Initiative Commitment to Action leveraging workplaces as platforms of wellness advancement and chronic disease prevention. iGATE has won a Gold Level Award and I'm pleased that our efforts to create a healthy workplace for our employees has been recognized.

As a management team and employee base, we are aligned around our new go-to-market model. This combined with a solid business environment and the investments I outlined, positions us well for the future.

I will provide you with some additional comments on our thoughts on 2014 at the end of prepared remarks, but will now hand over to Sujit to provide you with more details on our financial performance for the fourth quarter and full year 2013.

Sujit Sircar

Thank you, Ashok. Good morning, good evening everyone, whichever part of the world you’re in. Thank you for joining us on this call. Our revenue for the quarter was $299.3 million compared to $293.4 million in the previous quarter and $271.6 million in the fourth quarter of 2012.

On a sequential basis, revenue grew 2% and grew 10.2% year-over-year. We’re pleased with our performance. This quarter, our largest customer accounted for 14.3% of total revenue, while our top 10 customers contributed 50.2% of total revenue. We ended 2013 with 302 active accounts. As part of our strategic realignments, we have been winding down smaller accounts that are not strategic to our business and small in nature including 17 this quarter.

Gross profit margin was 39.8% compared to last quarter’s 41.4% and 40.6% gross margin in the fourth quarter of 2012. We continue to hold 40% as our gross margin target in the medium and long-term, but as of this quarter, we could see some variation based on currency movement and the investment that we’re making.

SG&A for the quarter was $49.1 million compared to $46.8 million last quarter. The increase is attributable to the customer events and the full quarter impact of the increase in our sales headcount to drive up growth. Overall, we continue to expect moderate increase in our SG&A expenses in the upcoming quarter as we continue to drive values returning to our revenue growth t industry levels by investing in people and infrastructure.

As part of the overarching initiative to consolidate the corporate structure of iGATE group companies, we completed the merger of our Indian subsidiary we discussed in quarter one of 2013. We have paid property transfer fee and stamp duty cost of $1.3 million and another $800,000 towards corporate structure consolidation in this quarter, the final cost towards all these initiatives $7.5 million for the year and we excluded from our non-GAAP calculation.

Depreciation and amortization expense for the quarter was $8.9 million compared to the previous quarter of $8.4 million. D&A, slightly increase in line with our increased investment in physical infrastructure.

For the quarter, GAAP EBITDA was $67.9 million or 22.7%, while non-GAAP EBITDA, which excludes stock-based compensation and merger and reorganization expenses was $74.7 million or 24.9%. This quarter saw a forex loss of $4.2 million compared to a loss of $4.4 million in the previous quarter. Other income for the quarter was $4.7 million. This was largely attributable to booking of capital gains on our short-term investments.

Interest expense was $20.6 million, an increase from $20.3 million in the prior quarters due to the additional financing we announced in November. Tax amount for the quarter was $5.8 million or 15% rate compared to $14.6 million or 31% in the previous quarter. The decrease was due to reversal of certain prior period tax liabilities which in aggregate lowered our effective tax rate. Our full year effective tax rate was 28% and we expect our effective tax rate for 2014 to be in the range of 28% to 30%.

For the quarter, GAAP net income was $33.1 million or $0.30 per diluted share. Our non-GAAP net income, which adds back to amortization, stock-based compensation, preferred dividend and acquisition of preferred stock net of tax was $39.7 million or $0.49 per diluted share compared to $36.3 million or $0.46 per diluted share in the previous quarter and $35 million or $0.45 per diluted share in the fourth quarter of 2012.

On a full year basis, revenue grew by 7.2% to $1.15 billion in 2013. For 2013, GAAP net income was $129.8 million or $1.21 per diluted share. GAAP EBITDA was $262.4 million or 22.8%, while non-GAAP EBITDA, which excludes stock-based compensation and mergers and reorganization expense was $284.8 million or 24.7%.

Our non-GAAP net income which adds back amortization, stock-based compensation, preferred dividend and accretion to preferred stocks net of tax was $150.3 million or $1.88 per diluted share compared to $121 million or $1.56 per diluted share in 2012.

Now moving to the balance sheet, as of December 31, 2013, cash and cash equivalent was $746 million. The total debt as on that date was $1.18 billion after we paid down around $78 million of debt during this fourth quarter. For the quarter, we generated cash from operating activities of $26 million. CapEx for the quarter was $15 million.

Let me give you an overview of the refinancing strategy of the company. As we previously announced, we entered a $360 million credit agreement in November and we expect to take approximately $300 million to $325 million of additional debt towards the end of April in order to refinance $770 million of debt which comes due in mid May.

During the refinancing, we expect to pay a pre-closure premium of 4.5% of senior notes which amounts to $35 million. In addition, we will also absorb the outstanding amortization of debt issuance cost during our refinancing, which should amount to around $60 million. Our expectation is that we will see our interest expense come down meaningfully in the back half of the next year when the overall debt will reduce and it should be around $55 million to $60 million for 2014 versus $88 million in 2013.

Since we are utilizing the excess cash to retire debt, we do not expect to see much other income in 2014. Our DSO improved to 60 days compared to 65 days in the past quarter, which is currently one of the best in the industry. All-in-all, we are in a solid financial position.

With that I’ll hand the call back to Ashok.

Ashok Vemuri

Thank you, Sujit. While we do not provide formal guidance, I will provide some general commentary around our thoughts for the first quarter and for the full year 2014. We believe the macro environment continues to improve and that the industry is poised for growth and we ourselves are well positioned for success in that. We are confident that we will continue to progress towards that goal of returning to industry growth rates in the second half of 2014.

With that said, for the first half of the year we are expecting fairly small sequential growth. This is very much inline with seasonal patterns due to the timing of project kick-offs in the first quarter along with some large programs coming to their natural conclusions.

In addition, as we focus our resources to be more aligned with our new vertically-based structure, over the next couple of quarters we will continue calling some of our smaller accounts that are not strategic to a business so that we can focus in accounts where we see meaningful opportunity for expansion.

We have initiated this process in our current quarter and believe this will have a small impact on revenue growth over the next couple of quarters, but we believe that again it’s the right move for our business going forward. When combined with what we discussed related to our vertical realignment, our expectation is that you will see sequential growth rate return to industry levels in the back half of 2014, but our full year 2014 revenue growth should accelerate from 2013 levels.

On the margin front, as I have discussed, we're investing for growth, but recognize that growth will take time. Due to the current investments I have discussed with you, I expect our margins to come down in the first half of the year and return back inline with our 25% adjusted EBITDA and 40% gross margin goals towards the end of the year.

Before I turn the call over to Salil, I want to reiterate how pleased I am to be here. I also want to express my gratitude to all iGATE employees for their contributions to our success this year and thank our customers and shareholders for their ongoing commitment to us. I look forward to spending more time with all of you in 2014.

With that, let me hand it over to Salil.

Salil Ravindran

Thank you, Ashok and Sujit for that wonderful overview of our results and financial performance. With that I think we can open the floor for questions. Christine?

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions). Thank you. Our first question comes from the line of Glenn Greene with Oppenheimer. Please proceed with your question.

Glenn Greene - Oppenheimer

Thank you, good morning. I guess I just wanted to drill down a little bit more on sort of your thinking on the 2014 outlook. I guess I understand some of the seasonality and the calling of some of the small customers. But I wanted to get more of the sense for your visibility toward the back half as it’s more just a function of sort of known deals and projects that you have already won that are going to ramp during that timeframe or how much of it’s sort of contingent on pipeline activity sort of coming to fruition, just a better sense of the visibility toward the back half growth?

Ashok Vemuri

Yeah. So few things in that, one of course is that there is a certain amount of seasonality and projects in our closures and run-offs, but we’re also seeing ramp ups from some of our existing deals and business that we had won. But more importantly what we have in our pipeline, we believe we have a fairly healthy pipeline which will convert over a period of time into the year. So by the time these large deals actually come to fruition and revenue [clicker] begins to happen we would have flipped into the second half of the year.

Overall, in our financial services business, in our communication business, I guess with the exception of insurance and especially in our European business we are seeing a very good traction for some of our solutions and platforms like third-party administration or financial instrument data. We are seeing a healthy pipeline in the Americas market in manufacturing and retail. I think with the exception of our insurance business we do expect to be able to close two or three large deals towards the middle of the second quarter or at the beginning of the second half.

Glenn Greene - Oppenheimer

Okay. And in terms of sort of like strategic positioning and where you think the company is at this point, are you kind of comfortable on kind of the path you are on, are more changes to come or you are kind of aligned where you want from a vertical and sort of talk about some of the solutions you want to invest in but where are we sort of in sort of your strategic roadmap? And as it relates to it, what’s the order of magnitude of the investment that we’re talking about? And I understand sort of the somewhat of the implications for the first half margins, but maybe you can help frame that and how we get back to sort of target margins by the end of the year?

Ashok Vemuri

Yeah. So we’ve set on the path to verticalization. We have announced the structure. The leadership is in place. There is clear commitment from the management team and their next level towards this particular model, but obviously it’s early days this has to be and we have to spend a lot more time and effort and money in getting the solutions and our programs aligned with this vertical organization. And I think even though we have successfully completed the process for the benefits to kick in, it will take a couple of quarters.

I am actually fairly comfortable with where we are in terms of our go-to-market strategies and where we are in terms of our client interactions. But clearly we need to spend a lot more time and effort in redefining and retooling if you will our sales and go-to-market which is area where we believe we have some weakness which we need to correct.

We also think that this will be a year of consolidation. It is a new strategy. It is a fairly large change. We will be making investments in building out these platforms. The quantum of investment is something that is currently being worked out and should be closed out in the next one week or so. But we think that combined with the CapEx investment of $200 million, our solutions investment across the verticals, which is in the range of about $15 million to $20 million we will be able to accelerate our growth and meet our expectation growth from EBITDA, as well as margins in the second half of the year.

Glenn Greene - Oppenheimer

Okay. Thank you very much. I will jump back in.

Operator

Thank you. (Operator Instructions). Our next question is from Mayank Tandon with Needham & Company. Please proceed with your question.

Mayank Tandon - Needham & Company

Thank you, good morning. Ashok, I just wonder if you get some numbers around your comments regarding industry growth. Should we consider the industry growth rate as NASSCOM in your mind as a benchmark to what you are trying to get to by the end of this year, if you could just quantify around that and then also wanted to see a stop? So can you go back and just give us a little bit more clarity around the debt restructuring how that's going to flow through the model? I am sorry I missed some of these comments earlier.

Ashok Vemuri

Yeah. So when we’re talking about industry growth rate, we’re obviously saying that when we exit 2014, our run rate will be comparable to where the industry leaders are, at least that is our goal. I’m not so sure if I can hang my head on to what NASSCOM says because that number keeps changing. Well we definitely want and then getting into 2015, we want to be in a position where on a quarterly basis our growth rates are comparable to the best in the industry and they are where our competitors are. On the debt restructuring, let me hand back to Sujit.

Sujit Sircar

Thanks Mayank. Looks like you have some bad throat. Anyway Mayank, the way for it’s to be done is that we will be doing a refinancing of $770 million. And there is a call premium attached to it, which is 4.5% that is $35 million. We will be, we have almost $500 million of cash, which we will be putting the part of the money from there on, it includes that $350 million loan, which we have taken recently. And the rest of the $300 million to $325 million is something which we are going to refinance in different markets. So we will do the refinancing of that rest of the amount will be $300 million.

One thing you must notice that when we bid that $770 million, there was a debt issuance cost which gets amortized over the period of five years as a period of the loan, since we are going to refinance this loan that $16 million will be coming in one time hit in the books.

So, the true thing is that 300 million to 325 million of loan to refinances, rest will be funded from whatever cash we have as of December 31, 2013.

Mayank Tandon - Needham & Company

Okay, thank you. Will that be a non-GAAP or GAAP expense, the premium that you have to pay for the loan?

Sujit Sircar

Non-GAAP.

Mayank Tandon - Needham & Company

Okay, thank you.

Operator

Our next question comes from the line of Edward Caso with Wells Fargo. Please proceed with your question.

Edward Caso - Wells Fargo

Hi, good evening, good morning. I was curious as you re-strategize, re-tailor your business, if your competitive profile has changed, are you facing new players, are you going more against tier 1, Accenture, IBM, can you give us some sense there? Thanks.

Ashok Vemuri

Yeah. So Ed, two things, one is that on the large deals that we are seeing especially on the integrated technology and operations, we are running into some of the larger multinational players, there is no doubt about it. In fact of the three large deals that we are engaged in and where we think we are in a fairly advanced stage, we have in the cycles either competed with some of them or are in the final stages with some of them. And that of course is something that’s new for us, but the last two or three deals that we have won which are substantial, have been against them. So our track record against that is definitely improving.

And when we go -- we are also as I said earlier building out our digital practice, we had a digital practice in the company which is fairly distributed and consolidated that and making push in two specific areas; one is the entire analytic space and the other is mobility. There again, we've seen that the competitors are either again the large multinational players of course, the Indian players as well, but a lot more of the niche companies, which have very specific and focused capabilities in the verticals and on technology. So, I would say that as a large, so in the large deals we are seeing more multinational competitors in our existing client base on a regular basis, we have seen usual Indian players, but in the niche spaces, I mean in the digital and in the analytic space and the mobility space, we're seeing a lot more of the niche players that we're competing against.

Edward Caso - Wells Fargo

Can you talk a little bit about employee attrition, what the trends have been, where it is today? And will you expect it to rise here during your adjustments? Give us some sense, both for the market’s impact on attrition as well as the company specific. Thank you.

Ashok Vemuri

Yeah. So, we have the attrition of about 15.5% that is fairly I think maybe ahead of some of our competitors. And we have very clear hiring plans. As I said this past quarter of Q4, we had a net addition of 1,450. At a gross level for the next year, we're looking at in the region of about 10,000 additions. We don't expect apart from the initial flurry of senior management attrition that we saw when we launched the verticalization program; we have not seen any attrition post that at senior management or even middle management level. But again this is Q4 and Q1 are also not necessarily the norm because a lot of people go in our Q2 and Q3 for studies and they change jobs at that time. But we’re very comfortable with that attrition rate; we are very bullish on our ability to meet the gross 10,000 hires. We’re ramping up our recruitment engines especially in the markets. And with the plan to open up our eastern European center, we do expect to be able to also support our European operations and add more go-to-market people in Europe.

Edward Caso - Wells Fargo

If I can sneak-in one more, some of the other, your competitors have talked about sort of changing the way they compensate whether it’s the timing or whether they’re paying for people with more cutting edge skills faster and higher than others. Can you talk about strategies here on the variable versus base components and how you may be adjusting your comp approach to be competitive in the market? Thank you.

Ashok Vemuri

Yeah. So, we’ve retooled our performance management system. One is that we have made it twice a year, so performance appraisals and payout on variable pay will happen twice a year. We’re also incentivizing our client services group and the vertical businesses, as well as the horizontal business for getting larger deals. The incentive program for pushing revenue growth in Europe is again something that we’ve put into place. So, we in the marketplaces we’re trying to hire different types of skills, especially in mobility and digital, in the digital practice we’re finding that we have to pay a very different type of compensation which is different from the one that we regularly pay both on the base as well as on the variable. And I think we will have to do that, otherwise we will not get the talent. So we have factored that as well.

Edward Caso - Wells Fargo

Thank you.

Operator

Our next question comes from the line of Joseph Foresi with Janney Montgomery Scott. Please proceed with your question.

Joseph Foresi - Janney Montgomery Scott

Hi. I wonder Ashok, out of all the changes that you are making there, what to you is the most important; and if you could just give us any color on that, the opportunity there and if it’s quantifiable?

Ashok Vemuri

Yeah. So the biggest change for us, I mean first is to me, we verticalzied our company, so as to make smaller units that are more focused on the business of their clients, and these are two standalone P&Ls where the leadership is accountable to the business that is one head and so on before.

The second set of this entire evolution is retooling and redesigning our entire go to market, whether that is hunters, whether that is farmers, whether the fact how we sell, who we sell to, the profile of people that we have, the kind of talent that we need to acquire, there needs to be some amount of haircut in that because some of our teams have not [naturally] been as affective as they should be.

So we are going to spend the next quarter, in fact I am personally going to spend the next quarter or maybe quarter and the half on redesigning and retooling our go to market. We have some investments that we need to make in our delivery with regard to some tools and methodologies, but that is something that is a little -- we are in a little more comfortable place than I would say we are with regard to my go to market. So that is an area of intense focus, both from a hiring perspective, retooling our existing sales teams, bifurcating them into hunters and miners, hunting and mining capabilities and definitely on how we sell, what we sell, communication of our services and the kind of clients that we engage with and what kind of deals we engage with them. And so with the entire gamut of go to market sales is going to be the next big focus area which we've already started working on.

Joseph Foresi - Janney Montgomery Scott

Okay. And then if we could just focus on a pipeline, how are the large deals ramping; and can you expect, is there more large deals in that pipeline for ‘14? And then I just have a quick numbers question.

Ashok Vemuri

Yeah. So, our existing deals that we have won, the large deals are ramping up as per plan. So we are very comfortable with the way they are ramping up. We had -- we obviously continue to watch these programs very, very carefully, because these have a significant amount of risk if they are -- if they go, if they have delivery issues, because there is a revenue -- there is risk reward kind of transactions.

We also have, as I said earlier, fairly healthy pipeline in terms of large deals that three of them which we are working on right now. In fact in terms of the -- what I feel that record year last year in terms of the pipeline and we have a similar, we believe that we will be able to exceed that in terms of pipeline as we go into the year. It seems pretty good but I think the conversion probability, taking that into account will -- which is the reason why we’re confident about our second half year being -- is showing a little more aggressive growth than the first half.

Joseph Foresi - Janney Montgomery Scott

Great. And then just real quickly on the numbers; I missed it in the commentary, what was the interest expense that you are expecting for 2013 and 2014?

Sujit Sircar

So for me this will continue to the 9%. We expect not to take the further $300 million to $325 million between the range of 6 to 6.5, depending on how it goes. So that’s the way the interest rate percentage we used to calculate.

Joseph Foresi - Janney Montgomery Scott

Okay. So it’s like 88 -- I think you said $88 million in 2013 and in ‘14, I am sorry in 2014, I didn’t catch that number, those numbers.

Sujit Sircar

58.

Joseph Foresi - Janney Montgomery Scott

58. Got it. Okay. Thank you.

Operator

Our next question comes from the line of Jason Kupferberg with Jefferies. Please proceed with your question.

Amit Singh - Jefferies

Hi. This is Amit Singh for Jason, just a quick follow-up on the previous question. The one-time expense, the $35 million and $16 million, would that happen in May when the repayment timeline for the senior loan opens up? And so most of the interest expense benefit, is it in the last two quarters of next year?

Sujit Sircar

That’s correct. So, it will happen in May that’s also -- when the refinancing happens, that’s the time this expense will come. After that there is not going to be charge and all the benefits which will be upon interest will come in after that.

Amit Singh - Jefferies

Okay. So if my back of the -- sorry, if my back of the envelop calculations are right, if you can just substantiate that, is it around $0.20 benefit to your EPS for the year, for 2014?

Sujit Sircar

$58 million will be the interest, but obviously you have to take into account the $16 million is the GAAP expenses which will be coming in, so whatever that debt will differential between the $90 million, $80 million and $58 million.

Amit Singh - Jefferies

Okay, perfect. And just quickly on the headcount, you obviously increased headcount very strongly this quarter and you plan to continue doing so going forward. So, how should we think about your SG&A expenses going forward? Should we expect significant increase from here point on in 2014?

Sujit Sircar

It will be marginal increase in terms of the SG&A expenses, but as Ashok said, he is putting in a lot of investments for future growth. So now it's -- we've been able to manage our margins quite well and there is an investment phase which will be coming in for next two quarters but in terms of the medium-term, as we mentioned, we are committed to our margin goals. Sorry, Ashok.

Ashok Vemuri

Yeah. No, I think you're absolutely right. We will make these investments happen. We do also believe that our SG&A has some amount of non-productive costs which we will definitely take out. But we are committed to our 25% adjusted EBITDA and 40% gross margin goals. And we think that if -- based on the investments that we make and the returns that we get, by the end of the year on exit basis, we will be at those numbers.

Amit Singh - Jefferies

Alright. Thank you very much.

Operator

(Operator Instructions). Our next question comes from the line of Brian Kinstlinger with Sidoti. Please proceed with your question.

Brian Kinstlinger - Sidoti

Great. Thank you. I was wondering, we're hearing a lot about Europe as a strong area of demand for the industry. You mentioned, Ashok, as a focus for you. I have seen you, you mentioned you grew very well there. Are you satisfied however with your positioning given the enormous opportunity or do you think a large portion of your increased investments are focused on Europe?

Ashok Vemuri

So, we are not satisfied with the Europe with what we are -- have been able to do in Europe in spite of the growth that we have shown, because our European story is very UK focused. We have a fairly decent footprint I would say in the Nordics, but that's basically it. So we have identified the Germanic countries, Germany, Switzerland, Austria as well as Benelux, mostly Netherlands, the Nordics and UK as places of investment. So, what we're doing essentially is hiring people in these markets, not the UK but the others and creating country heads and we are on a fairly aggressive path for recruitment and building up capabilities.

Now obviously, we have to take a two-pronged strategy here, one of course is we will try and do it to as much of it as possible on our own, but we are not averse to looking to see if there is inorganic routes to quickly ramp up in these particular places on capabilities that we are identifying at this point in time that will resonate that with the market.

One thing that we will definitely do in the next six months or so is to setup our delivery center in Eastern Europe and that again is focused towards the Germanic market. So hopefully that again we will try and do this to the extent possible by in an inorganic route. But given the fact that the demand environment is fairly robust in Europe and we don’t necessarily have too much of a window to wait to build this ourselves, we may have to take a much different route to get to building upscale in that market.

Brian Kinstlinger - Sidoti

That makes sense. And then in regards to the first half sequential growth, you talked about it’s pretty small. Last quarter and even the quarter before on the calls, we have heard a significant piece of the ramp of that large deals you won were going to occur in the first and even second quarter more so of 2014, so maybe you can reconcile that for that please. And I have one last question.

Ashok Vemuri

Yeah. So there is -- the ramp ups are consistent in some of the deals that we have won moving from the first phase to the second phase. So there is a transition lag unfortunately that is happening. Remember that these are also deals where we have re-batched employees, so there are some of that transitions also that will happen which is causing the slowdown.

The other is that some of the deals, not large deals, but some of our larger clients, the programs that we were running there have come to -- are coming to an end between now and February. So that is also going to have a little bit of an impact on our revenues, which is why we are forecasting that Q1 especially will be slightly more muted than maybe the previous quarters.

Brian Kinstlinger - Sidoti

And the last one, you mentioned three large deals you expect to sign in mid ‘14. I think you mentioned -- have you been down selected to be the final vendor, are you still competing in each of those deals with other IT vendors? Thank you.

Ashok Vemuri

So, we are in the final two. Obviously these are fairly large and long tenured deals and they are platform-based transactions. We do it and they obviously have to go to the top of the house of the client for approvals et cetera. So we are in that process. The contractual terms and conditions also here are fairly stringent. So, it has to be -- we have to be cautious, very cautious because we don’t want to get too ahead of ourselves and end up with five or six large complex transactions which we may not be able to successfully execute upon. So, we are going to take our time, and I am sure the client also is going to take his or hers time in terms of deliberating through the contract terms and conditions and which is why it will take some amount of time. But at this point in time, we look to be in a fairly good position in these three large transactions.

Brian Kinstlinger - Sidoti

Right. Thank you.

Operator

Our next question comes from the line of [Eric Cole] with [Cole Capital]. Please proceed with your question.

Unidentified Analyst

Hello. And again, I appreciate you doing this conference call. I am just trying to have some more specifics again. Can you clarify in the December quarter in dollar value, the bookings or deals that were closed and average duration in terms of years like call it four. And then the remaining pipeline that you have for business you are going after, how large is it now, you’ve commented in the past that that had been $3.5 billion, I think about three months ago?

Ashok Vemuri

So, December quarter order flows was $432 million. We have as I said, in going into the year, we are going on the back of the deals that we have closed in FY13 and the three that we hope to close in ‘14. It’s a little difficult to quantify these -- what the value, the final sign-up value for these deals will be, because some of these deals start with smaller numbers and become large and some get start with large and we only get a portion of it. It’s a little difficult for me to call out what that number will be. But as I said, the pipeline going into FY14 is comparable if not better than what we exited FY13 with.

Unidentified Analyst

Okay. Thank you. And then just a follow-up, regarding your debt, just want to clarify the numbers. I know you have the $770 million five year coupon at 9%, which is you’re refinancing in May. You did the refinancing for credit line earlier in the quarter; I think it was about $360 million and the coupon on that was a little over 3% on average. What I am just trying to understand is what will be the average coupon I guess for the remaining debt that you have on that 770. So, most of that you are going to pay off with cash on the balance sheet and then you’re going to have a smaller five year coupon, I am guessing. And I’m just wondering why would be as high as 6%, though it seems if it might be closer to 3% based on what you’ve done one or two months ago?

Sujit Sircar

So $300 million, what we are talking about, if we take unsecured debt, which is a $770 million debt and which is shifting in the balance sheet. At this point of time, we will see in credit rating which we have. We expect that is the rate which is going in the market, so that’s how we are talking about debt.

As we come closer to the main, we will finalize that. So the balance $300 million though we have been able to take the $360 million loan from the bank, but that’s a secure debt, whereas the remaining $300 million, if we are talking about, -- we are talking about unsecured credit and that at this point of time is the same credit rating, it’s generating 56.2 times interest rate and that’s what the rate I am talking about, obviously not bound to the market and the revenue share.

Unidentified Analyst

Okay. Thank you. Best of luck.

Operator

Our next question is a follow-up question from Glenn Greene of Oppenheimer. Please proceed with your question.

Glenn Greene - Oppenheimer

Thanks, just a couple of number of questions. Just sort of looking at your numbers, it looks like both, the top client growth was really impressive 9% Q-to-Q and seems that explain almost 50% of your Q-to-Q growth. And similarly, it might be the same answer, but your BFS growth looked really strong in the quarter as well. Maybe you could sort of just comment on what kind of happen there or is it due to prior large deal win or is it perhaps where one of your clients had sort of -- I guess sort of slowed down projects for a period of time that’s comeback and maybe just a little bit more color there?

Ashok Vemuri

Yeah. So, the two are unrelated. We have had very good run in our top client, as well as in financials, in BFS separately we have had some deal wins some new client additions, as well as a significant turn back, turnaround from maybe two quarters ago in terms of the spend of our largest financial services client with us.

Glenn Greene - Oppenheimer

Okay. I'm assuming if this was a Canadian client that has sort of stopped business for a period of time for whatever over the core regulatory reasons. Is that what we're alluding to and then sort of come back on a more normal pace?

Ashok Vemuri

No, there never was a stoppage and then start. The financial services is that actually we've added some new logos and clients and that we've seen ramp up in our large client as well. So it’s a combination of all of this stuff. The large client in financial services has never stopped and then started again.

Glenn Greene - Oppenheimer

Okay. And then just on utilization you suggested you wanted to bring it down a little bit. Do you have a sort of a target level I think you're at 79% now, what would you be comfortable at?

Ashok Vemuri

Yeah. Our comfort level is around the 75%, 76%. We really have a lot of -- we're running into transactions, where we really have to ramp up our capability. So that requires us to have a bench available which is trained in some of these new technologies. And we are having conversations around virtualization et cetera, private clouds where we have not had any past experiences nor do we have enough talent to scale in some of the programs that we think will be coming our way.

The second is that most of our delivery organization is not trained to vertical solutions and vertical delivery organization. So that is going to take some amount of time, which is again why we need a substantially larger bench and that's why we're hiring more people so that we can train them and get them ready.

And the other thing we're doing also is in preparation for some of the things which will take two to three years. We are increasing the hiring at the base of the pyramid, basically freshers from campuses and in specific skill set, especially in the area of analytics and mobility we are going to continue to hire only in the lateral -- we're going to hire laterals. And hopefully over a period of time we’ll build up enough capability and competency to provide training internally as well.

Glenn Greene - Oppenheimer

Okay. And then just one more in response to the previous question, I think you talked about $432 million of contracts closed in the quarter. Could you just parsed up between new contracts or new logos versus renewals or sort of existing books of business?

Ashok Vemuri

Yeah. We don’t disclose that, $432 million is the closure for last quarter we don’t flip that into any others.

Glenn Greene - Oppenheimer

Okay. Thank you.

Operator

Our next question is a follow-up question from Mayank Tandon with Needham & Company. Please proceed with your question.

Mayank Tandon - Needham & Company

Thank you. Sujit, so I heard you on the debt going from $88 million of the interest expense in 2013, if I heard you correctly is that $58 million in 2014. So I thought that what about the interest income? What are you earning in India and what are you earning outside India on the cash?

Sujit Sircar

Most of the money which is there currently Mayank is outside India, that’s in the -- so currently the amount had come down significantly in between $2 million to $3 million, $3 million, $3.2 million was a treasury income actually last quarter and which we continue anything between $2 million $3 million as we go on making the payment.

Ashok Vemuri

Refinancing happens.

Mayank Tandon - Needham & Company

Okay. So, we should assume that level of interest income going forward in the model in terms of refinancing?

Sujit Sircar

Yeah. So for the modeling purpose you can take $3 million to $4 million of first two quarters and then close it down to $1 million or $2 million for the next period.

Mayank Tandon - Needham & Company

Got it. And then the one-time profits you may occur to a refinance is that something that you are going to report? Just to be clear, is that going to be started into your non-GAAP details, so would you report that as one-time expense that will not be included in the one-time GAAP EPS numbers you report your second quarter?

Sujit Sircar

Okay. So $35 million is a one-time non-GAAP expenses which will happen and $16 million is a GAAP expense itself, because it’s getting annually amortized over a period of time as of now itself. So there will be no change in terms of that, but it would be one-time kind of taken out, so it will be a part of the GAAP expense itself.

Mayank Tandon - Needham & Company

Okay. So, $35 million ahead in the second quarter for one-time?

Sujit Sircar

That’s right. Yeah.

Mayank Tandon - Needham & Company

Got it. Okay. Thank you.

Operator

Thank you. Ladies and gentlemen, due to time constraint, we have ended the question-and-answer session. I would now like to turn the floor back over to Mr. Ravindran for closing comments.

Salil Ravindran

Thank you, Christine. Thank you all for joining, pleasure to have you on the call. We will meet you all again next quarter. Thank you.

Ashok Vemuri

Thank you.

Operator

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.

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