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iGATE Corporation (NASDAQ:IGTE)

Q1 2014 Results Earnings Conference Call

April 10, 2014, 07:30 AM ET

Executives

Salil Ravindran - Head of Investor Relations

Ashok Vemuri - President and CEO

Sujit Sircar - EVP and CFO

Analysts

Mayank Tandon - Needham & Company

Daniel Perlin - RBC Capital Markets

Edward Caso - Wells Fargo Securities LLC

Joseph Foresi - Janney Montgomery Scott LLC

Glenn Greene - Oppenheimer & Co Inc.

Brian Kinstlinger - Sidoti & Company

Vincent Colicchio - Noble Financial Group

Operator

Greetings, and welcome to the iGATE Corporation First Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Salil Ravindran, Head of Investor Relations for iGATE. Thank you. You may begin.

Salil Ravindran

Thank you Melissa. Good morning everyone and thank you for joining our call to discuss the first quarter 2014 financial results. We hope you all have had a chance to review our earnings release and the fact sheet which is already up on our website. With me today on the call are Ashok Vemuri, iGATE’s President and Chief Executive Officer and Sujit Sircar, iGATE’s Chief Financial Officer. Today’s call is being recorded and a copy of the transcript will be available later today on our website.

The agenda for today will be as follows. Ashok will provide you with an overview of our results for the first quarter and will update you on our progress along around the stated priorities of the company going 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 general expectations for the second quarter. 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 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 find a reconciliation of those measures to GAAP as well as related information in our earnings release, as mentioned in the Investor Relations section of our website, igate.com. 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. I will start by reviewing our results for the first quarter. Then I will update you on some of the initiatives and investments that I have discussed in the previous quarter.

Revenue for the quarter was $302.2 million, an increase of 10% year-over-year and 1% sequentially, slightly better than our flattish expectations. Despite the investment we've been making to drive growth, we have been able to realize operating efficiencies and leverage across various pieces of our business and held our non-GAAP EBITDA at 25%. We will continue to make investments to drive growth, while at the same time maintain our focus on our gross margins as well as EBITDA which we have stated and continue to believe in the long-term will be at 40% and 25% respectively.

During the first quarter we added nine new clients, including four Global 2000 clients. Client additions have been broad-based across geographies with seven in North America and two in Europe and have been broad-based across industries with two in banking and financial services, two in retail and CPG, two in healthcare and life sciences and two in manufacturing with one in services.

We are experiencing sustained and broad-based growth momentum across multiple service lines and geographies in our top five clients. One of our core strategies is to expand our business from our mid-sized accounts and we believe our verticalized organizational structure and enhanced enterprise capabilities, especially in the digital space are providing traction for meaningful opportunities.

Most of our client budgets were finalized by late January to early February and they are in-line with our expectations. We believe that while there has not been a substantial increase in dollars available the spending priorities play into our service trend in areas such digital, mobility, BPO productized applications or platforms like financial instrument data and third-party administration.

We continue to see traction with our transformational iTOPS business model leveraging the offshoring model with large cooperation both in Europe and U.S. Decision cycles however continue to remain elongated, especially for client programs designed to drive revenues. We are tracking favorably with regard to the previously discussed three large deals. The exact timing on large deal closure is a function of many variables but we are comfortable with our position in that.

For our traditional IP services we continue to see an increased traction in Europe as more and more companies are willing to increase their offshoring spends. North America which is our largest market also continues to do well in this area. We are experiencing strength in the retail space where our clients have demonstrated a willingness to spend, based on our ability to demonstrate value. In the engineering space our automobile, industrial automation and high tech clients continue to grow. In the banking and financial services segment we are seeing a lot of traction for our testing and reference data offerings and in the insurance and healthcare space we are seeing demand for our third-part administration service offerings.

Our organization is now fully operating in the verticalized structure that we implemented last quarter. Our vertical leaders have been empowered and are now accountable for driving investments for their business units. This has developed capabilities and platforms so that they can serve their respective clients in a focused fashion. They are now fully responsible for their unit P&Ls and I am extremely happy with the acceptance of the model by my team as well as my clients.

We continue to add more iGATErs to help drive our growth. We crossed 30,000 employee mark this quarter with a net addition of more than 1,100 people. With this we have added more than 2,500 people in the last six months. iGATE University, which we had discussed on the last call is being built in Pune and is expected to be ready by the end of the next quarter. This will centralize our training, enabling us to on board freshers more effectively and efficiently in large numbers.

The university will also be entrusted with the responsibility of [innerving] [ph] and nurturing our next batch of leaders from within the organization. We are committed to revamping our go-to-market strategy. We are hiring in the market and re-tooling our performance management to be relevant to client needs and our growth aspirations.

We are focused on strengthening our alliances and partnership with industry leaders to drive a stronger suite of client-focused offerings and create a better ecosystem for ourselves. Our program on tail accounts management continues with very little impact on our financials and we have come to the end of that program and exercise in this quarter. It is allowing us to refocus our energies on building meaningful relationships and providing appropriate services to our strategic clients with focus on services that they require. We are close to completing our exit from non-strategic geographies and have also improved our process for new account qualification.

We believe these steps are necessary as we continue to look at maximizing our resources to drive growth. We are also focused on monetizing relationships and assets to drive more value within our mid-sized account segments where we see significant room for expansion. These efforts have begun to reflect favorably in our revenue per account metric, which has improved from $3.5 million per active customer on an annualized basis a year ago to more than $4 million per active customer today, and we think there is significantly more room to grow.

There are lot of other exciting initiatives at iGATE which are strengthening the organization. Our credit rating was upgraded by S&P and Moody's from B+ to BB- and B1 to BA3 respectively, post which we completed our refinancing of $325 million at a competitive rate of 4.75% which was used to retire an existing 9% debt. Sujit will of course discuss this in greater detail with you.

We will be hosting an Investor and Analyst day, at the 15th of May in New York City. At this event we will be elaborating on the topics we just discussed along with other initiatives to drive long-term differentiation growth and profitability. We'll also be showcasing a few of our selected capabilities of the event to give you a deeper understanding of iGATE. I hope you can join us either in person or via the webcast.

Before I hand the call over to Sujit, I am also proud to announce that we won VCCircle Awards for the year 2013 under the Best IT Company of the Year category. The VCCircle Awards are presented to the most outstanding private equity or VC-backed Indian companies that have not only deliver tremendous growth in their respective industries but also had a long standing impact on the economy and industry in general.

We also won the third Fun @ Work HR Award for the year 2013 in recognition of the positive work environment that we have created for our employees. It has been an honor to be acknowledged for our efforts. We also successfully held the second addition of the iGATE's CEO Golf Tournament at the Pinehurst Resort & Country Club. The event was graced by CEOs of leading organizations with proceeds from the winnings going to charity.

I am pleased with the start we have made in 2014 and I am confident that our new vertical structure combined with the investments we are making in product type applications and platforms under the iTOPS model, the continuing a focus on our go-to market strategy positions iGATE for long-term success.

With this let me hand over the call to Sujit.

Sujit Sircar

Thank you, Ashok, good morning, good evening to everyone, whichever part of the world you are in. Thank you for joining us on this call.

Our revenue for the quarter were $302.2 million compared to $299.3 million in the previous quarter and $274.9 million in the first quarter of 2013. On a year-on-year basis revenue grew 10% and 1% sequentially. Revenue was negatively impacted by $1.8 million from the movement of Canadian dollar against U.S. dollar. This was partially offset by a favorable movement of the euro and other currencies, resulting in an adverse net impact of $1.4 million for the quarter. On a constant currency basis our revenue grew 1.5% quarter-over-quarter.

This quarter our largest customer accounted for 15% of total revenue while our top 10 customers contributed 50% of total revenue. We have streamlined our active customers to 295 by closing down 16 non-strategic accounts in this quarter.

Gross profit margin was 37.5% compared to the last quarter of 39.8% and 38.1% in the first quarter of 2013. The decrease in margin in the quarter was attributable to our advanced hiring which impacted utilization as well as seasonally higher visa cost of $7.5 million for this quarter. We expect the gross margin to slightly dip in the second quarter due to the annual compensation revision and then recover from there in the latter half of the year.

SG&A for the quarter was $42.7 million compared to $51.3 million last quarter and $42.8 million in the first quarter of last year. Our SG&A for the prior quarter was impacted by expenses towards customer events, legal expenses and restructuring exercise. This quarter witnessed reversal of doubtful debts provision made three years ago of $1.2 million. On a normalized basis our SG&A has been running around $45 million to $46 million and we expect to be in that range in the coming quarters.

Depreciation and amortization expenses for the quarter were $9.6 million compared to the previous quarter of $8.9 million. The increase is in-line with our increased investment in physical infrastructure. For the quarter GAAP EBITDA was $70.8 million or 23.4% while non-GAAP EBITDA, which excludes stock-based compensation and restructuring expenses was $75.2 million or 24.9%. In the current quarter interest expense was $23.6 million.

The major development from a financing perspective was the completion of the credit upgrade and refinancing exercise. After our credit rating was upgraded B+ to BB- by S&P and from B1 to BA3 by Moody's we successfully placed $325 million senior notes at a pricing of 4.75% due in 2019. Proceeds from this placement along with the placement of funds that we completed last quarter will be utilized to prepay our $770 million of 9% senior notes in the end of April. The call premium of $35 million and amortization charges of $15 million which we will incur in Q2, 2014 will be excluded as non-GAAP expenses. This will result in an annualized interest cost saving of $50 million plus from the levels in Q1, 2014.

Tax amount for the quarter was $13.4 million or 29.7% compared to $5.8 million or 15% for the previous quarter. For the quarter GAAP net income was $31.6 million or $0.29 per diluted share. Our non-GAAP net income which adds back amortization, stock-based compensation, preferred dividend and accretion to preferred stock net of tax was $36.4 million or $0.45 diluted per share compared to $39.7 million or $0.49 per diluted share in the previous quarter and $39.9 million or $0.51 per diluted share in the first quarter of 2013.

Now moving to the balance sheet, as of March 31, 2014 cash and cash equivalents were $760 million while the total debt as on date was $1.2 billion. The net debt is only at $422 million, representing a multiple of 1.4 times current quarter of adjusted EBITDA run-rate. For the quarter we generated cash operating activities of $17 million, CapEx for the quarter was $16 million. All-in-all we're in a robust financial position. And with that I hand the call back to Ashok.

Ashok Vemuri

Thank you very much, Sujit. What Sujit just explained in terms of robust financial position is extremely important for us at iGATE as we seek to build a much more differentiated and viable business model. While we do not provide formal guidance let me give you a little color in terms of where we expect the second quarter to be. Our expectation is that we will continue to see modest sequential revenue growth. We currently believe that with the traction that we have built in the first quarter and what we will build in the second quarter we will see acceleration in the back half of the year.

On the margins front we expect adjusted EBITDA to be modestly lower in the second quarter due to our planned annual wage increase but as again we expect to continue to also make investments, but as I've stated before we remain committed to our stated goal of 40% gross margin and 25% EBITDA in the long-term.

The other important event in the second quarter is that the refinancing of the 9% bonds that Sujit talked about will reduce interest cost for us beginning May. We're off to a stable start to the year. We're seeing traction in both our iTOPS business and our traditional IT services business. We have the confidence of our clients, we have the confidence of my team and I am confident overall that we've positioned ourselves appropriately and in very short record time to drive stronger continued success.

With that let me hand the call back to Salil.

Salil Ravindran

Thank you, Ashok. Thank you, Sujit for that nice overview of the results and the performance. With that we will now open the call for the questions. Melissa?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Mayank Tandon with Needham & Company. Please proceed with your question.

Mayank Tandon - Needham & Company

Thank you. Good morning and congratulations on a good quarter. Ashok I wanted to just get a little bit more insight into the bookings for the quarter, where did that come out versus the last several quarters where you have been running ahead of historical levels and then what were the key drivers of the bookings in the quarter and then where do the pipelines stand at quarter end?

Ashok Vemuri

So let me actually take each one of those questions in sequence. So in terms of orders, one, we don’t reveal the data on that but the trend continues to be fairly stable. One of the interesting things that happened in the first quarter is that slippages that we had from the fourth quarter on some of the programs actually got completed and successfully completed and transitioned. And then expansion of those programs happened in Q1 which is why we are basing our confidence of growth in subsequent quarters on that. Secondly some of the programs that ended and did not get funded in January, the programs that ended at the end of last year and did not get funded for what two to three weeks in January, have been funded. So that again gives us the confidence.

The pipeline has been cleaned. We had pipeline, you know of about $3.8 billion which we have cleaned up to be relevant, two big deals that we think are viable and are winnable or something that we can compete in. So our pipeline right now stands at about $3 billion and we continue to add to that pipeline both in terms of large deals as well as smaller more strategic deals in the areas of digital mobility et cetera. These are not large transactions but these are smaller transactions.

The other thing that is contributing to our pipeline is strategic sourcing deals. We are now in a place where our clients believe we are large enough to be a material player in these large strategic sourcing deals which are in the traditional lines of businesses and services like ADM, infrastructure, et cetera. And also at the same time small enough to be flexible to be able to meet their needs. So overall I am very comfortable with the state of my order bookings and pipeline which I think will begin to reflect in the quarters to come.

Mayank Tandon - Needham & Company

Okay, thank you for that. And then I know on the last call you had talked about trying to get to industry growth sometime this year. Is that still the aspiration and should we think of that more as a second half target or do you think you will end the entire year with a growth rate that at least matches with industry levels? And I am assuming when you talk about industry growth you are referring to NASSCOM numbers.

Ashok Vemuri

So last quarter, as I have maintained in my previous conversations with everybody, I don’t necessarily hold too much currency to this so called industry growth rate and NASSCOM numbers, they tend to change fairly dramatically. This is a year for us to stabilize our operations, continue to invest in our business. I am actually very pleasantly surprised that my team has been able to take this ball and really run from day one, in terms of their acceptance of the model, the acceptance of the model by the client and the fact that we continue to make the investments without deterioration to the EBITDA.

We will continue to make the investments and we do expect a moderate deterioration in the EBITDA but now with one quarter’s experience I feel a lot more confident that, that dilution probably is going to be fairly minimal.

The other thing is, as I've mentioned we have come to nearly the end of our exercise in tail account management, which either were in the wrong geographies, we were doing the wrong business, or we had the wrong financial structure and incentives on that. We’ve been fairly successful, as Sujit mentioned, to engage 16 of our clients -- essentially disengaged in a mutually cordial fashion. And I think as we continue to move away from non-focus areas and concentrate on areas that are really the ones we want to work in we will see a better result in the subsequent quarters.

Mayank Tandon - Needham & Company

Okay, just one final question for Sujit. Sujit, did I hear you right, you said the interest expense is going to be $50 million that would be lower than what you had initially thought. I believe last quarter you had said you expected $58 million for fiscal '14. Did I hear you right?

Sujit Sircar

No, I said the savings and interests costs from current rate will be more than $50 million plus. So interest costs will be much lesser than the $50 million because if you look at it my interest cost is, on $325 million is 4.75% and on $360 million is less, around 3% weighted average, so effectively you know your per quarter interest cost will be to $9 million only.

Mayank Tandon - Needham & Company

Okay, just to be clear I remember last quarter you had said $58 million for fiscal '14, is that number now going to be given that you got a lower rate on the bond offering than you had, maybe planned, is the interest expense for fiscal '14 going to be closer to $50 million?

Sujit Sircar

Yeah, that's right.

Mayank Tandon - Needham & Company

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Dan Perlin with RBC Capital Markets. Please proceed with your question.

Daniel Perlin - RBC Capital Markets

Thanks, good morning. So I just wanted to ask a few questions, the first is really around the pricing environment. We've heard a lot from other industry participants and competitors talking about this and I just wanted to get your sense. And if you could give in the context of the types of deals that you are winning when you talk about the pricing environment, kind of large transformational deals versus some of these less differentiated types of transactions? Thanks.

Ashok Vemuri

Yeah, so pricing environment overall is fairly stable and we continue -- we expect that, we expect to see that going forward as well. There are two different -- we do expect to see two different types of transactions, one on the large deal we are seeing significant competitive pressure from -- and I think I see signs of the desperation if I can put it that way in terms of pricing for large deals which is neither healthy, it's not healthy for the IT industry as such.

The second is on transactions where there are product type applications or platforms that we are looking at. We actually are able to command a premium. So we are fairly confident with what we have been seeing that we'll be able to hold those particular rates in the marketplace.

Traditional businesses which are commodity or tending to get commoditized there is very little scope for price increase and I think the fact that we can -- we are getting the pricing that we had with slight improvement I think we are satisfied with that. But overall I would say we do expect to see in large transactions, a certain amount of desperate play or little more from our larger competitors.

Daniel Perlin - RBC Capital Markets

Okay, and then I think you mentioned that you won two deals that were in the Global 2000 type client base. Are those considered, are those going to be considered large deals as you just described them or are they going to be more of these transformational type of deals that you may be able to differentiate?

Ashok Vemuri

So we have added four Global 2000 clients, of which two are transformational transactions, transformational programs that we are embarking on, these are longer tenure. The other two are strategic sourcing kind of transactions where we will be doing traditional services.

Daniel Perlin - RBC Capital Markets

Okay, and then the other thing I just wanted to ask when you talked about adding, I think it was 1,100 employees, the vast majority of those I suspect are going into kind of offshoring and is that a function of trying to fill the demand gap for now Europe looking much more aggressively at moving into their interest in offshoring?

Ashok Vemuri

Yeah, so our hiring is to create essentially for two things, one is that we have to be in a position to service the demand that we are beginning to see. We can't do that just in time, so we have to prepare our resources and build out the capacity. And the second one is that we need to be hiring in the marketplace people with a differentiated set of talent, whether it's around technology, architecture whether it's around mobility, whether it's around digital practice, et cetera. And hopefully as we add those people the evolution or the flow through of that work for pure technology work which we can offshore readily will also increase.

So we think it's a function of both the fact that we are seeing demand and we are seeing differentiated demand, but we have to be ready for both of them.

Daniel Perlin - RBC Capital Markets

Okay, and just one last one, when you think about kind of how the revenues are going to kind of trend in based on the types of deals that you are now interested in and going after and your ability to capture larger transformational deals, is that something we need to be mindful of in terms of the elongation of how like it's recognized into your revenue pool even though you are talking about the second half showing some acceleration or is there a balance that you guys have in that backlog and your bookings that you are talking about where you could have some sort of short end projects that are going to drive that second half growth but so these bigger deals are going to take multi-years to recognize? Thanks.

Ashok Vemuri

Yeah, so you have to have both of it. You have to have a fair mixture of large deals where in the year that you open the large deal the annual contract value for that year may be fairly low but it begins to accelerate over a period of time. So you need a transaction of that kind also as well as you need projects and programs that you win which are six months, nine months, 12 months, 15 months durations so that you can keep the revenue meter ticking as it will. So we need a combination of both of that.

When we look at how we will perform or we're going to build our capacity we look at a combination of order bookings, we look at a combination of pipelines, existing project renewals, we look at new transactions and new programs as well as programs that we opened last year, for example large programs that we had last year, how they are trending and tracking this year and our expectation or the way revenue will come for large transactions that we will do this year. So it's a combination of all that which is how we base our capacity creation or how we base our training programs or how we base our go to market strategy.

Daniel Perlin - RBC Capital Markets

Okay, thank you very much.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Edward Caso with Wells Fargo Securities. Please proceed with your question.

Edward Caso - Wells Fargo Securities LLC

Hi, great. Thank you. Good morning, good evening. Just want to make sure we're really clear here on the change in the interest, what the decline is in the sort of run rate is and whether the numbers quoted are including the reduced interest income because obviously some of it is being -- some cash is being used to pay down some of the debt as well. So if you just clarify for us the sort of the quarterly reduction in run rate on a net interest basis? Thanks.

Sujit Sircar

So I can talk about first the interest expense. So interest expense will be on $325 million, 4.75% and on $360 million around 3% interest and apart from that there is a working capital of $50 million in India which attracts a 1% interest. So that's the interest line. There will be some amortization cost which is a $1 million for the full year. So that's the interest cost from May onwards. So May onwards this will be the interest cost.

Interest income truly it depends on what you get out in terms of the market. Currently in India we're having around $150 million of cash which attracts around 9% interest which we get. So and we generate close to around $100 million of cash in India which attracts 9% interest. So overall that's the way the interest income will come in and interest expense is a easy line. But obviously interest income depends on the working capital movement and also on how much you get the interest expense depending on what the market situations are.

Edward Caso - Wells Fargo Securities LLC

So our work suggests that the run rate net interest line would be about $8.5 million a quarter once you get past the transition, is that reasonable?

Sujit Sircar

Around $9 million interest expense line.

Edward Caso - Wells Fargo Securities LLC

Okay, and that's before the lost cash?

Sujit Sircar

Correct.

Edward Caso - Wells Fargo Securities LLC

Okay, and I guess my other question is around I was sort of surprised that your SG&A number, how much of decline it was quarter-on-quarter and a similar dollar number to what it was a year ago, despite a higher revenue base. So I guess I am trying to see where the investments are actually flowing in there or have they not shown up yet. And I guess I am a little concerned that maybe you are under investing for the desired growth rate?

Ashok Vemuri

So Ed let me take that. I actually think -- I don't think we're under investing. It will take some time for that to come -- for that to get reflected in the SG&A. I will also ask Sujit to contribute to this answer. But we're in the market hiring especially in profiles and resources that we need as the nature of our business is changing. If you look at our traditional IT services and consulting business this quarter it's down by 2%, if you look at our iTOPS or BPO business, that is actually gone up by 2% and 1% respectively.

So we need a differentiated set of talent, we're also very conscious of the fact that we had ramped up our sales engine to a point which was probably not sustainable in terms of quality. So we're seeing an involuntary accretion there as well which is impacting us. But this is not a sustainable SG&A number and I think Sujit will give his commentary on that as well.

Sujit Sircar

So Ed, what I had said is that this quarter is around $42.3 million. Our average rate will be -- our average SG&A will be around $45 million to $46 million. Last quarter we had a bad debt reversal of $1.2 million, so that is creating a little bit of aberration. But our SG&A will be around $45 million, $46 million which is like almost 7%, 8% higher than the last year. And also as Ashok mentioned we're trying to refocus our spend, our sales dollars spend. So we've come out of some of the geographies as well. So we're trying to kind of put in our money in terms of getting more effective revenue and that's why we're strategically moved out from some of the geographies which doesn't give adequate returns.

Edward Caso - Wells Fargo Securities LLC

Just so I am clear that $45 million to $46 million is that average for Qs 2, 3 and 4 or is that the average for like the whole year including Q1?

Sujit Sircar

No, it will be Q2 onwards.

Edward Caso - Wells Fargo Securities LLC

Q2, onwards. Thank you. Congratulations.

Ashok Vemuri

Thanks.

Operator

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

Joseph Foresi - Janney Montgomery Scott LLC

Hi, I just wanted just a little bit of clarification on your industry growth rate return comment. It sounded like you expect acceleration this year and momentum heading into next year but you're not expecting to get back to industry growth rate this year, is that correct? And then just if you can give us some color on what's in the pipeline for large deals as well?

Ashok Vemuri

Yeah, so I think the comment that I've made in the previous quarter and this quarter is that I am not sure what this industry growth rate number is. I think we're comfortable with the investments and the returns that we're getting. I actually expected to get a return over a much longer period of time for the investments that I am making in training, in creating some product type applications et cetera but we're seeing that come quickly. The revenue growth will take some amount of time as we close these deals, as I said earlier in my comments that decision making is still elongated. We're very favorably positioned on three large transactions. It's a question of -- sometimes it's a question of timing in terms of when the signature et cetera happens, in which quarter you actually end up reporting it.

But on the back of where we stand with all these transactions as well as some of the newer transactions that we're entering, new programs that we're entering into existing accounts with existing IT services capabilities that gives me the confidence that growth will begin to kick in at higher rate in the back half of the year with -- as compared to the first half of the year.

Joseph Foresi - Janney Montgomery Scott LLC

Okay, and then just a quick a metrics question and it's a two parter so maybe I am going a little low on my question quota, but, first utilization came down this quarter, is that ahead of business or in-line with it? And then second you saw a pretty good growth in the last couple of quarters from your top client, what's going on there and can we expect that to continue?

Ashok Vemuri

So utilization is a deliberate move to bring down utilization. We were operating in the fashion where we were hiring just in time. That obviously does not create an institutional culture for performance. We've not had the time to train ourselves, so we've hired about 2,700 -- 2,500 people in the last two quarters. They are undergoing training, so they are on the bench; they are not at the beach. And we need these people because of what we see in the pipeline and what is coming down the pipe.

In terms of our large clients we're in extremely comfortable position with them. We've concluded our contract negotiations and today we feel that we will continue to show the same level of growth as we have in the previous years.

Joseph Foresi - Janney Montgomery Scott LLC

Thank you.

Operator

Thank you. Our next question comes from the line of Glenn Greene with Oppenheimer. Please proceed with your questions.

Glenn Greene - Oppenheimer & Co Inc.

Yeah. Thank you. Just to clarify, so it sounds like the three large deals that you're pursuing are still out there in the pipeline and you feel confident about them, but they weren't either of two sort of global deals that you won in the quarter? And then just related to that can you just remind us where you are in terms of the ramp of the big deals wins from last year, what's the status of those deals?

Ashok Vemuri

Yeah. So the first part of your question is two deals that we've talked about in the -- of the four, do not include the three deals that are in the pipeline. Those deals are in the works and as I've said we feel confident about where we're situated in regard to success in those deals. The deals that we won in last year, as I was saying earlier, some of the programs in those came to an end. There was a delay in funding them in January. They are now fully funded, they are ramping up.

Obviously these are software programs, some of them started in the latter half of last year. So the ramps are slow but the one that started in the middle of the year is ramping up in a very comfortable fashion and delivering the results successfully for both the client as well as for us.

Glenn Greene - Oppenheimer & Co Inc.

Okay, let me try another way of sort of asking about the growth expectations. Let's assume that NASSCOM doesn't exist and doesn't have a forecast out there. And you sort of grew 10% this quarter, so just getting sort of clarification on your sort of back half acceleration comment is that more of a Q-to-Q acceleration for the back half or do you think you sort of grow at a faster level than the 10% as we get into the back half ?

Ashok Vemuri

So relative to our sequential growth in the first half quarter-on-quarter, the quarter-on-quarter growth in the second half will be higher.

Glenn Greene - Oppenheimer & Co Inc.

Okay, and just one quick clarification, in the press release as Sujit was quoted about some kind of the rupee ForEx concerns so rupee is relatively stable so I just wanted to make sure I understood sort of the background of where that comment was coming from, could it any way relate to the elections going on in India or what was kind of the thoughts process behind that comment?

Ashok Vemuri

So Glenn yes it's back of the election which is going on in India and it's been stable, it's been around 60 at this point of time. But what after the election gets over and depending on which party comes in, what majority and whatever it is, there might be some bit of fluctuations which is foreseen. And is it kind of red, I don’t think so, it's in between green or yellow.

Glenn Greene - Oppenheimer & Co Inc.

Got it, okay, that helps. Thank you.

Operator

Thank you. Our next question comes from the line of Brian Kinstlinger with Sidoti & Company. Please proceed with your question.

Brian Kinstlinger - Sidoti & Company

Hi, good morning, thanks. Ashok can you update us on the progress you are making in Europe outside of the UK where you mentioned last call you are making investments to build your footprint is the infrastructure and the management team in place to your satisfaction?

Ashok Vemuri

So when we talked about Europe and the Balkans, predominantly UK we have significant traction building up in the Nordics on the back of one or two deals that have given us a visibility into the marketplace. We've opened a mini delivery center in Sweden, actually right outside Stockholm which we believe that from a financial -- so this is an insurance client perspective, that's a good market and we are going to use that to expand in to the whole of Nordics.

We are going to set up an office in Switzerland as well because we have a significantly large presence in Switzerland. And more importantly that volume is growing and the transactions we are doing there are growing reasonably well, so we will be setting up an office there.

Germany, we are in the process of setting up a management team that is obviously going to take a little longer than in other parts of the world but I think by the end of second quarter, beginning third quarter we will have a fully functional German team. Results from that of course will take a little longer but the team will be up and functioning by the end of second quarter, first month of the third quarter.

Brian Kinstlinger - Sidoti & Company

Great, and then it didn't sound like you won any large deals in the first quarter. I am wondering if you lost any and as you are expecting three, is that just a 100% win rate on the large ones that are coming pretty soon or are there more than three that you are actually bidding on and you expect may be a some win rate on that?

Ashok Vemuri

So large deals -- actually very hard to close a large deal in the first quarter because there is low budget clarity and a lot of other decision, clarity is not there, in January budgets gets closed around early February. So we did not expect to be able to get a sign off on it and then people are on vacation, it's spring break and all that stuff, so we don’t expect a decision, but sometimes these large deals they tend to get -- they split over for various reasons and sometimes it's a question of timing when that signature shows up with us and when we can report that.

So in terms of the three large deals, we are in a good position we believe but there are multiple variables that come into play here. I would say -- we have been extremely selective about the large deals that we go after. We don’t want to be in a situation where we sign up some 10 large transformational transactions and not have the capacity to provide 110% service to each one of them. So we want to be cautious about what we sign up, we -- but ones that we want to go after, I would say our win ratio is about 60% right now.

Brian Kinstlinger - Sidoti & Company

Great, last question, is your aggressive hiring initiative complete, the utilization where you wanted to be and then are you done purging clients, or are there still a handful of clients that you want to purge?

Ashok Vemuri

So our tail program management is about 80% complete. As Sujit just mentioned, we had 16 accounts, there are a few of them that we still have to be -- have to come to a conclusion with the client as to what -- how to do it, not what to do. And second -- so that program has more or less come to an end. I am very happy with the speed with which that's being done. I really thought that it would linger for a while and that's in nobody interest for that to linger. So very happy that it has -- the program is 80% complete and we are moving on to being able to re-focus those resources and those capabilities to other parts, both from a client as well as a geography perspective.

I actually think that -- just what was the other part of your question?

Brian Kinstlinger - Sidoti & Company

The other part of the question is -- the hiring initiative, you got a lot more aggressive because you needed more bench, the utilization here will go lower or…

Ashok Vemuri

No, no this is the right level of utilization for us. I think we have to spend a lot of effort in retraining and training people. If you look at some of our businesses, like retail and CPG or BFS, which is ramping up fairly dramatically, we need differentiated, different types of resources as well as resources on the IT services side, which need a different set of training et cetera. So we will continue to ramp up. We need to revamp if you will our go-to-market which we've been able to do successfully. But recruitment spills over to one or two quarter. We can't have all the people that we need in the same quarter in 90 days.

So that's all that gets spilt over. So that program is going to continue to be there, but we are extremely focused on creating capacity because of what we see coming down the pipe.

Brian Kinstlinger - Sidoti & Company

Great, thank you so much.

Operator

Thank you. Our next question comes from the line of Guy Baron with RBC Capital Markets. Please proceed with your question.

Unidentified Analyst

Hi, good morning. This is [Richa] on for Guy. We have two questions. The first question is regarding your CapEx guidance of $200 million over the next three years. How far ahead do you commit to that spend and under what conditions would you forecast that to increase or decrease? The second question is around M&A. What's your current thinking on M&A in terms of areas of focus, size and financial progress? Thank you.

Sujit Sircar

So in terms of CapEx we have spent $16 million as of now this quarter. We have said $200 million is what we are going to spend. We are still committed to that because of the growth we foresee, that's why we are hiring lot of people. We have hired 2,500 people. Overall we think we will be spending close to $50 million to $55 million this year and depending on the growth for the next year we will be spending the rest of the money. So we are tracking with what we have said.

Ashok Vemuri

With regard to M&A, I think our position is that there are some capability gaps and competency gaps that we have, especially from a consultative selling or consultative positioning perspective. That's one gap that we will fill through probably inorganic route. And the other is expansion into Europe, especially in some of the areas that we have very little presence, probably a smaller ticket acquisition just to get us started off would be appropriate.

But I do think that we will -- we have the experience and expertise now after having done a merger between two very differently sized companies, so we feel confident about being able to do that but it will be not of the same ticket size. It will be definitely smaller and it will be on the back of the two things that I mentioned and/or client needs.

Unidentified Analyst

Okay, perfect, thank you.

Operator

Thank you. Our next question comes from the line of Vincent Colicchio with Noble Financial. Please proceed with your question.

Vincent Colicchio - Noble Financial Group

Yeah, you are incorporating large deal wins in your expectation for this year or does it not really matter given that the ramp up costs et cetera?

Ashok Vemuri

Yeah, so we don't typically take in to account large deals won in the year because the annual contract value of that is fairly muted for the year that you start and by the time you finish the transition, by the time you do the knowledge transfer et cetera it really takes about six odd months, and therefore you don't really realize appropriate revenue in the first year. So we don't factor that in.

Vincent Colicchio - Noble Financial Group

And what was the contribution of iTOPS to revenue in the quarter and what you expect that -- what's your objective for the year?

Ashok Vemuri

Yeah, so we don't disclose at that level, but we are happy with the way our entire iTOPS model is being accepted in the market and more importantly the assets that we are creating to drive that model. So it is integrated technology in operation, it is a platform play, it is the coming together of BPO and traditional IT services to redefine how these are positioned in the market. So very happy with the progress that we are making and it's definitely finding greater acceptance in the market.

Vincent Colicchio - Noble Financial Group

Great, all right. That's it for me. Thanks.

Operator

Thank you. Mr. Ravindran, there are no further questions at this time. I would like to turn the floor back to you for closing comments.

Salil Ravindran

Thank you, Melissa. Thank you everyone for joining the call. We will see you again in three months on the next call. Thank you all, bye-bye.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines and have a wonderful day. Thank you for your participation.

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