iGATE's (IGTE) CEO Ashok Vemuri on Q2 2014 Results - Earnings Call Transcript

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 |  About: iGATE Corporation (IGTE)
by: SA Transcripts

Operator

Greetings, and welcome to the iGATE Corporation Second 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.

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

Salil Ravindran

Thank you, Jessie. Good morning everyone and thank you for joining the call to discuss our second quarter 2014 financial results. We hope you have all had a chance to review our earnings release. I have with me today, Ashok Vemuri, iGATE’s President and Chief Executive Officer and Sujit Sircar, our Chief Financial Officer. A copy of today’s press release and supplemental financial information are posted on iGATE’s Web site under the Investors section. Today’s call is being recorded and a copy of the transcript will be available later today on our Web site.

We’ll start with Ashok providing you with an overview of our results for the second quarter, along with details on our operational performance. 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 the third quarter and rest of the 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 Web site, 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 these measures to GAAP, as well as related information in our earnings release, as mentioned available in the Investors section of our Web site, igate.com. Please also refer to the investor’s 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 everyone. I am extremely pleased with our second quarter performance and the attraction we are beginning to build in the market with our clients.

Revenue for the quarter was $311.7 million, an increase of 3.2% sequentially and 10.1% year-over-year. We saw a significant uptick in the demand for our services across all verticals and horizontal services particularly in our North American markets. This has truly been a seminal quarter for us. We have entered into a partnership to implement a transformational technology and best practice process for the long-term care business for one of our clients, by far the largest partnership in the Company’s history.

Our investments in building out industry utility solutions for our LTC clients through our proprietary ecosystem, IBAS and Monster data management solution IDMS for BFS clients is reinforcing our positioning as a transformational ITOP Solution Provider. The partnership that we entered into a recently announced deal is one of the three large deals that we spoke about in the previous quarter. Typical to the construct of ITOP deals there would be a ramp-up period and slight margin impact in the short-term. Having said that, I expect the overall margins to expand in the latter half of the year, we continue to be well placed in the remainder of the two large deals in which decisions are awaited in the coming quarter.

I am very happy to report the progress my team is making in their adoption of the verticalized structure and the industry domain capabilities that we are building. The response from our clients is also heartening and we are seeing results of the same ahead of our expectations.

Gross margins came in at 36.6% and non-GAAP EBITDA was 22.5% for the quarter. As a result of our annual wage increases and the impact of the investments we have been making in our solutions and people capabilities. These profitability results are in line with our expectations and we will continue to make investments to drive growth, while at the same time maintaining our focus on our medium-term gross margin target of 40% and EBITDA margin of 25%.

I am glad to announce that we have successfully refinanced the high yield bonds of 770 million placed at 9% interest in 2011 with a 685 million at an average cost of 4% on the back of rating upgrade by S&P and Moody's. In the quarter our normal interest expense was 12.2 million, while we had a onetime interest expense of 51.8 million related to the refinancing exercise we completed in the quarter. The refinancing has enabled us to reduce more than 50 million in interest costs annually on a Q1 run rate basis. Sujit will obviously give more details around that.

During the second quarter, we added nine new clients including five Global 2000 clients. Client additions continued to be broad-based across geographies and industries. As I have said earlier, our focus has been and will be towards mining our existing relationships. In this regard we have made further progress by improving our annualized revenue per client metric to 4.3 million this quarter from 3.6 million per active customer a year ago. We believe that there is further room to improve this metric and this continues to remain a strategic priority for us.

Our North American market continues to be the dominant market and grew 4.4% sequentially. Our European portfolio continues to be in investment mode. We are seeing strong traction in this market growing by 44% year-on-year though on constant exchange rate it has remained flat sequentially. We are seeing business opportunities outside the UK which has been our predominant European presence. Our focus markets in Europe outside UK continue to be Germany, Switzerland, Nordics and the Benelux. In anticipation of deals that we are working on closing in the continental market we have opened a new delivery center in Budapest, Hungary. This will add to the existing delivery capacity in Stockholm, Sweden and together these locations will act as near shore centers to service European customers.

In terms of verticals banking financial services and retail CPG clients continue to show strong promise. Our reference data and testing solutions are seeing a lot of traction with our BFS clients. In retail we are seeing traction with quick service restaurants with our store-in-a-box solution. Our specialized offerings in the product engineering space continued to grow. Some of the new clients that we have added are top names in this space.

iGATE entered into two other strategic partnerships in the quarter, one with XTEL, the leading provider of sales automation solutions for the consumer goods industry to deliver comprehensive sales solutions to the consumer goods industry in the U.S. and Canada. The other was OpenSpan to utilize OpenSpan desktop automation and activity intelligence to enhance contact center operations and consulting services to our clients in North America and Europe.

During the quarter, we launched the comprehensive iGATE After Sales Service solution. This SAP-based solution empowers organizations to deliver post-sales customer service to enrich customer experience and drive customer loyalty which can lead to higher customer satisfaction and retention. During the quarter, we launched a new logo designed to showcase the Company’s refreshed vision, mission and core values. Our new brand identity and redesigned value proposition has resonated well with our stakeholders.

I am also proud to announce that we won the 2014 Global Customer Value Leadership Award for product engineering services presented by Frost & Sullivan. The award is presented to companies that have demonstrated excellence in implementing strategies that proactively creates value for its customers with a focus on improving the return on investment.

We have been recognized as one of the top-10 sourcing standouts in North America by ISG Global Outsourcing Index 2014. The placement is based on annual contract value of commercial contract awards. We have also been recognized as a global high performer in the HfS Enterprise Mobility Services Blueprint Report 2014 which demonstrates our execution capability of digital transformation for clients that include social analytics and cloud, and that significantly enhances the client’s mobility experience. In addition, iGATE also won the MMA award for managerial excellence in the services category.

iGATE Corporation annual report 2013 won the gold award in the technology and IT Services category in the prestigious LACP Annual Report Competition. iGATE also bagged the Best In-House Honors Award for the Asia Pacific Region and was recognized for developing one of the top AP annual reports in the Asia Pacific region. We held our Investors and Analyst Day in May in New York, which was attended by numerous trade analysts and members from the financial community. We are particularly thankful to our clients who came forward and presented on our behalf at the event. The feedback of the event has been extremely positive for the clarity [indiscernible] and disposition that we were able to present on the back of our interactions and client endorsements.

We continue to have strong hiring numbers with a record addition of 1,907 employees in the quarter. The quarter also saw a record of 570 people joining in a single day. The robust hiring that we have shown in the last few quarters is a testament to our ability to attract talent and the anticipation of ramp-up in our key deals and clients. With this we have moved our hiring model successfully from just in time to hire for growth. Our utilization as a result has declined marginally from 74.2% to 73.8% in the quarter, a decline of only 40 basis points as ramp-ups have also increased and continue per schedule.

During the quarter the Phase 6 of iGATE's Bangalore campus was inaugurated. The new building has a seating capacity of 1,400 people. The work on setting up of iGATE University is in full swing and some exciting partnerships with academic institutions are underway. We hope to inaugurate the iGATE University by late quarter three to early quarter four of 2014.

Before I handover the call to Sujit, I would like to say that I am extremely pleased with our second quarter results and believe ourselves to be on the right path of growth.

With this I will now hand the call over to Sujit.

Sujit Sircar

Thank you, Ashok. Good morning everyone and thank you for joining us on this call. Before I discuss the financial performance in details, I would like to announce that we have successfully refinanced the high yield bond of 770 million placed at 9% interest in 2011, with 685 million at an average cost of 4% with a combination of term loan of 360 million and a high yield bond of 325 million. The issuance of high yield bond was on the back of rating upgrade by S&P to BB minus with stable outlooks from B plus and Moody’s to BA3 from B1 in light of our operational performance and our ability to manage leverage in the future. This has enabled us to reduce more than 50 million in interest cost annually on a Q1 run rate basis.

Our revenue for the quarter was 311.7 million compared to 302.2 million in the previous quarter and 283.3 million in the second quarter of 2013. On a year-on-year basis, revenue grew 10.1% and 3.2% sequentially. This quarter, our largest customer accounted for 16% of total revenue while our top-10 customers contributed 51% to total revenue. We ended the quarter with 292 active clients compared to 295 in the prior quarter and 315 a year ago in line with the plan. Gross profit margin was 36.6% compared to last quarter’s 37.5% and 37.9% in the second quarter of 2013. The decrease in margin in the quarter was anticipated and is attributable to our annual wage increase and the investment we are making in solutions and people.

ForEx had an adverse impact of 0.6% on margins because of Indian rupee appreciation against the U.S. dollar from 61.9 to 59.7. We expect our gross margin to recover from here in the second half of the year. SG&A for the quarter was 47.5 million compared to 42.7 million in last quarter and 49.4 million in the second quarter of last year. The increase is on account of annual wage increases and the expenses of around 2 million towards the rebranding exercise and the conduct of Investor and Analyst Day. This will remain in the same range for next few quarters. Depreciation and amortization expenses for the quarter was 8.7 million compared to previous quarter of 9.6 million, this will go up marginally in the coming quarter as we complete the built-up of our physical infrastructure in Bangalore, Mumbai and Pune.

For the quarter the GAAP EBITDA was 66.5 million or 21.3% while non-GAAP EBITDA which excludes stock-based compensation and restructuring expenses was 70 million or 22.5%. In the quarter, our normal interest expense was 12.2 million and we had a one-time interest expense of $51.8 million. The one-time interest expense includes the call premium on our old senior notes of 36.2 million and write-off of unamortized debt issuance charges of 15.6 million both related to refinancing exercise we completed in the quarter. This one-time expense is excluded from our non-GAAP numbers. Going forward, our interest expense would be in the range of 7 million to 8 million.

Tax amount for the quarter was a benefit of 3 million compared to cost of 13.4 million or 29.7 million in the previous quarter. This is due to reversal of certain tax provisions taken in the past without with the normalized tax rate for the quarter was 30.8. We expect this rate to continue in the future. For a quarter, GAAP net loss was 5.4 million or negative $0.07 by diluted share which is due to the one-time charge of 51.8 million mentioned earlier. Our non-GAAP net income which adds back amortization, stock-based compensation, preferred dividend, a call premium on our senior notes and accretion to preferred stock, net of tax was 39.5 million or $0.48 per diluted share compared to 36.4 million or $0.45 per diluted share in the previous quarter and 34.5 million or $0.44 per diluted share in the second quarter of 2013.

Moving to the balance sheet, as of June 30, 2014, cash and cash equivalent were 279.4 million while the total debt as on date was 737 the net debt only $457 million. For a quarter we generated cash from operating activities of 26.2 million and CapEx for the quarter was 24.6 million. The DSO for the quarter was 66 days and overall we’re satisfied with our financial performance.

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

Ashok Vemuri

Thank you very much Sujit. While we do not provide formal guidance, I’ll provide some general commentary around our expectations for the third quarter and the remainder of the year. As stated in our last couple of calls, our expectation for the second half of the year continues to be positive with revenue growth higher than the first two quarters. The success of our industry utility platforms and our positioning in large deals, including the recently announced ones gives us the confidence that our structure, value proposition, client engagement and relevancy and therefore our revenue and margin growth are tracking well.

Large deals while providing predictable and sustainable annuity revenue growth are dilutive to margins in the short-term. We expect adjusted EBITDA to be higher though in the third quarter due to operational efficiencies and scale benefits as some of our large deals have begun to kick-in. We will continue to invest for growth both from our people and solution and platforms perspective and reiterate our medium to long-term margin goal at 25% adjusted EBITDA and 40% gross margin.

With that let me hand the call back to Salil.

Salil Ravindran

Thank you, Ashok and Sujit for providing that great overview of our results and financial performance.

With that we can open the floor for questions. Jessie?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from the line of Mayank Tandon with Needham & Company. Please proceed with your question.

Mayank Tandon - Needham & Company

Ashok congratulations on a good quarter. Based on your comments around an acceleration in the second half I just wanted to be clear, are you referring to sequential growth or year-over-year growth as you look at the back half. So if you could just clarify that?

Ashok Vemuri

So for our back half we expect growth to be at a higher rate than we had in the first half and we expect in the immediate quarter growth rates to be around the same growth rate that we have in the second quarter.

Mayank Tandon - Needham & Company

And again this will be on a sequential basis or on a year-over-year basis?

Ashok Vemuri

On a sequential basis.

Mayank Tandon - Needham & Company

Okay.

Ashok Vemuri

Yes.

Mayank Tandon - Needham & Company

And regarding the big deal, so just looking forward both in the back half of this year and then also into fiscal ’15. How should we think about the contribution of these big deals in any given quarter or year? In other words how much revenue will you get from mining at existing clients versus the ramp-up of these large deals?

Ashok Vemuri

So the bulk of the revenue growth will still come from mining of the existing clients, we have to obviously get better and better at that and we’re moving in the right direction as indicated by the metric of revenue per client on an annual revenue per client basis. But our ITOPS business as it begins to expand beyond IDMS and IBAS and more arrow heads gets created which are industry-specific ITOP solutions. We’re already seeing traction in the marketplace and we believe that the percentage of revenue contribution from this will actually accelerate over the next six to eight quarters, starting from may be three quarters out from here. As you know large deals take a significant amount of time for revenues to kick in and we have begun to notice that some of these transactions is appropriately structured and given the urgency that some of clients have in terms of implementing these solutions they can be accelerated to start kicking in, in three quarters. So our anticipation is that while we’re going to continue to focus on that and the revenue contribution is going to in a steady fashion increase, our main focus will continue also to be to mine our existing accounts. We have an excellent set of clients, marquee names, clients who have demonstrated great faith and confidence in our capabilities and as we have re-invented ourselves and build capacity to service them the traction that we’re finding in both in Europe as well in North America makes us feel comfortable that that mining activity will be successful.

Mayank Tandon - Needham & Company

Great and I will just squeeze one more question in. Now this is for Sujit around the financing and interest expenses. Sujit how should we think about, you gave us the debt level and of course the rate but just want to be clear in terms of the interest expense for the back half of this year? And then what is your expectation on the interest income earned on the cash that you have both in India and the U.S.

Sujit Sircar

So interest expenses will be $7 million to $8 million per quarter from here on. And interest income will be marginally higher between $3 million to $4 million from next quarter.

Mayank Tandon - Needham & Company

Great.

Sujit Sircar

As we increase the cash it will go up from there.

Mayank Tandon - Needham & Company

Great, thank you.

Operator

Thank you. The next question is coming from the line of Anil Doradla with William Blair. Please proceed with your question.

Anil Doradla - William Blair & Company

Hey guys, thanks for letting me ask a question and congrats Ashok on the good results, so it’s fair to say that CNA did not contribute during the quarter, is that right, just quick clarification?

Ashok Vemuri

Yes, it did not contribute. That’s a recently signed deal typically. It will take us a good quarter to do the transitioning and maybe a quarter and a half to two in fact. Plus, we have to ramp-up our capabilities, ramp-up the people. So there is a lot of ground work that we need to do which we have started post the signing of the transaction. But yes there will be contribution from this deal this quarter as well as very marginally if at all in the next.

Anil Doradla - William Blair & Company

Now we’ve seen some increased levels of activity on the larger deal sides in the back half of last year and obviously in your last earnings call. Can you share with us your thoughts on the trajectory of large deals, could we expect iGATE to be doing three to four large deals per year? And also some color on those other deal view you had some positive comments on those other two larger deals would be helpful.

Ashok Vemuri

Yes see I think so from our perspective these deals that we want to do large or small and especially on the large ones let’s focus on that are ones that we would like to build on our ITOPS capabilities. We believe the market has now moved to a place which plays into our sweet spot which is integrated technology and operation productized applications and platform solutions. So as we build more utilities like we have done for IDMS and IBAS, we will see traction build up along that.

We are not necessarily seeking out any large deals I don’t think on the traditional IT services business, there are any large deals or any kind of an aggregation that is happening outside of some rebids for large deals that were constructed maybe five to eight years ago. But having said that, our focus is going to continue to be on the -- on building industrialized platform utility and I think as traction gets built up, we will see some interesting transactions. I don’t want to put a number as to how many we will do, but in this year already and the one that we had last year in the one year period from last half to this half, we have seen good traction.

With regards to the other two deals that are in the pipeline, obviously large deals of large value and long tenure needs to go right to the top of the house before you get in the pool. It is very difficult to pinpoint when exactly they will be signed. We know the decision will be taken this quarter and as I had indicated, we are we believe well placed.

Anil Doradla - William Blair & Company

Great and finally you talked about 4.3 million per customer it was up almost a 1 million. Now you’ve talked about mining your existing customers with more a dollar content. Can you help us understand, I mean are we talking about in the next three years, you have the potential to maybe go up by another 25% to 30% or how should we be looking at the trajectory of increased content with your existing customers?

Ashok Vemuri

If you look at the list of my roaster of clients, we have some extremely impressive names that are investing very heavily in technology and process both in Europe as well as in North America. And if I look at my top-50 clients and I have already begun to make investments whether it’s in terms of having the right client services people, bringing the right solution, getting a better understanding of their business issues, better understanding of their process and technology issues. I am beginning to able to build solutions that are finding relevancy with my clients, so whether it is store in a box whether it is 360 degree customer relationship management. So there are enough industry solutions, enough industry pain points for which I am building technology and process solutions.

At the same time, I don’t want to get ahead of myself by building a portfolio of 20 or 25 solutions. We have six main industry pain points which we can address given our capabilities and the ones that we are building whether it’s in the digital practice, whether it’s in mobility, whether it’s in analytics. And our -- the actual traction is happening in these practice. Our digital practice is the one that have grown the fastest, albeit on a very small base, our business intelligence and analytics practices are doing extremely well. So as we see some of these components beginning to find traction and they are able to identify business problems that we can address through technology and process and integrated technology and process capability, I think we will see better traction and an improvement in this particular metric.

Anil Doradla - William Blair & Company

Good, congrats guys.

Ashok Vemuri

Thank you.

Operator

Thank you. The next question is coming from the line of Joseph Foresi with Janney Montgomery Scott. Please proceed with your question.

Joseph Foresi - Janney Montgomery Scott

Hi. My first question is just on the margin profile. I know that it’s going to obviously rebound a little bit in 3Q. But how should we think about the profile in ’14 and ’15, I imagine the ramp on the CNA deal is going to take a reasonable amount of time. So I am just trying to get an idea of what our expectation should be if it’s is a one-time in 3Q or if it’s going to linger into next year?

Ashok Vemuri

So the bump-up in Q3 is clearly something that we believe the marginal bump-up that we’re going to see is clearly on the back of some of the traction that we are building in the investments that we had made in the previous quarters, and we are getting a return on that and so on and so forth. CNA deal some of the preparation is already underway even before winning the final deal or signing the partnership we had ramped it up in expectation that this would happen which is what we would do for other deals typically as well. I would think that the right way to look at the margin profile is you’re right, it will bounce around a little bit as investment, the timing of the investment, the timing of building out the capacity and their utilization could get delayed by -- from a timing perspective, but broadly our focus is as I said earlier a 40, 25. We want to be a company which has very clearly articulated for itself and to all our stakeholders that we want to be at gross margin of 40% and adjusted EBITDA 25%. And I think the -- when we get to that point -- when and how we will get to that point is going to be, it is going to bounce on a little bit for a couple of quarter as we make these investments, but that’s our broad goal in the medium to long-term.

Joseph Foresi - Janney Montgomery Scott

Okay. And then maybe could you give us a little color on why you think you won the CNA deal? And are you taking on any assets or any additional risk with that particular contract?

Ashok Vemuri

No, we want -- we don’t want to do deals that require us to leverage our balance sheet so we’re not taking over any assets, I think the IBAS solution long-term care business by itself is in sort of at an inflection point, given that the pricing for some of these products was done at the time when the average life expectancy was probably in the 70s to mid-70s. And with that changing, this is a block of business that consumes a significant amount of reserved dollars but does not generate the kind of revenue from a premium perspective. So this requires significant amount of administrative change, requires a significant amount of investments in technology and process, which hither to have been neglected because these were not necessarily profit or revenue generating products for our clients. So with our efficiency with some of the productivity benefit and the fact that we have build a utility platform that is allowing us to gain attraction in this marketplace. We think this is a very interesting market long-term care as well as mix-up and as it progresses into a wider utility-based model including life, we think we will be in an extremely advantageous position to monetize this opportunity.

Joseph Foresi - Janney Montgomery Scott

Okay. And then just last one from me. With all the large deals coming through and the acceleration of growth rate, can you talk about there being any barriers to ramping any of these businesses? I think you’ve spent a little bit of time talking about recourses, how many people can you hire now, how many could you have? And are there any gaining factors when you go after some of these deals?

Ashok Vemuri

Well, we have to obviously not get overexcited by large deals, I think though as I have said in the past it sounds very exciting to announce these kind of deals, one has to understand that these are long tenure deals. Technology by its very virtue it doesn’t remain static. If you’re signing a five, seven year deal technology would go through a complete refresh an entire generational refresh in five years. So we have to be careful when we are taking on that we understand the business. We understand what we are signing up to that we are confident that we would able to refresh our technology and process. And that we will be able to acquire capability both in the marketplace importantly that understands the business, understands the process, the technology is a commodity, you can do it anyway. The process capability, the domain expertise the ability to translate all that we have promised into actual deliverables to the client is the one that’s important.

So we don’t want to get overheated in terms of going out there and signing many, many large deals. We want to be careful that we are signing on the right ones that these are the ones that we believe are a win-win for both our clients and for us and that leverage the capabilities that we have and that one that we want to build. So I think those are the important criteria, in terms of, of course there is a always a capacity by itself is not very hard to hire but the appropriate and relevant one, takes time, effort and a cost. So we have to ensure that the economics of our model are also kicking in and we’re just not going and hiring 1,000 consultants who may probably not be able to give us the right kind of business model or the economics of that business model would not be right.

Joseph Foresi - Janney Montgomery Scott

Okay, thank you.

Operator

Thank you. The next question is coming from the line of Jason Kupferberg with Jefferies. Please proceed with your question.

Jason Kupferberg - Jefferies & Company

Thanks guys. I just wanted to start with a revenue question, I think you said in response to a prior question that in Q3 you expect your quarter-over-quarter top-line growth rate to be similar to the 3.2% that we saw in Q2 is that right?

Ashok Vemuri

Around that point is appropriate from where we can see it today, yes.

Jason Kupferberg - Jefferies & Company

Okay. And then does Q4 see acceleration versus that kind of 3%, 3.5% range?

Ashok Vemuri

Q4 is a little too far out for us to really put a definitive kind of a number out there. But as I said if I look at my second half and compare that to the first half, I feel extremely positive about my performance in the second half of the year.

Jason Kupferberg - Jefferies & Company

Okay. And then just to circle back on the margins a bit, I know you said second half will be better, talking about the gross margin specifically I think you ran about 37% here in the first half of the year, it sounds like you’re not going to get back to 40 in the second half of this year or are we thinking more like kind of 38 plus, kind of range or is it closer to 39 based on what you’re expecting from utilization and all the other drivers?

Ashok Vemuri

Yes. It’s a little difficult to pin point that on exact number like that, but I think where we have, where we are right now is actually, we’re not at 40% definitely that’s our goal and we want to move towards that, we don’t want to wait for an eternity to get there. We want to move in that direction.

Jason Kupferberg - Jefferies & Company

Okay. And then just last on Europe, can you talk about, a little bit more about the strategy there, obviously not huge part of your business today but growing significantly and it sounds like there is some genuine expansion opportunities especially on the continent. So, can you just talk about how you are going to market there? How you are trying to build your brand and tell your story and pick up some new wins?

Ashok Vemuri

So, for us Europe is actually the most exciting place given the traction of course you have to remember that our presence in Continental Europe is very low, so anything that we do gets amplified because it’s a low base but we are seeing very good traction in the Nordics. We are seeing very good traction in UK of course we are seeing good traction, beginning to see good traction it is early days for us in Germany. Switzerland continues to be a dominant market for us, so we are actually now creating country heads for this, so that we can actually localize to a certain extent our capabilities. But we broadly think that we don’t want to do over-localization or be in every country in Europe. We have fixed the countries that we want to be. We are building a sort of an identity on the back of some of the transactions that we have done.

Our Budapest Center is on the back of what we think will be a combination of near-shore service requirements as well as off-shoring requirements from our European clients especially our Nordic clients. So, we are very confident that as the percentage of revenue from Europe is actually only going to increase. It’s not just the large deals but breaking into some very specific sectors where we have strength whether it is product engineering space, whether it’s financial services as well as on the manufacturing side especially on the auto manufacturing side.

Jason Kupferberg - Jefferies & Company

Okay, thanks for the color.

Operator

Thank you. The next question is coming from the line of Glenn Greene with Oppenheimer. Please proceed with your question.

Glenn Greene - Oppenheimer & Company

Thank you. Just a few questions, the first one may be just sort of going back to the utilization level sort of hovering around 74% and the hiring expectations and you obviously have been ramping up hiring in front of demand. But may be sort of on intermediate term outlook, how should we be thinking about the ramp and sort of growth that adds and your comfortable sort of at a utilization level around the 74% level?

Ashok Vemuri

Yes, so I am actually comfortable around the 74% to 76% in terms of utilization. The utilization has dropped also because a lot of these people, they are not on the beach they are on the bench, they are in training. A significant number of them are in training, as we are ramping up some of our deals, both large deals that we won in the past, creating new capabilities around digital practice and analytic, very small businesses earlier for us, still small but growing fairly rapidly. We need to be building expertise and capabilities, right from how you write a solution, how you write a proposal, how you sell it, how you deliver it. The whole paradigm shift that’s happening in terms of how these things, how these capabilities get delivered in service as compared to the traditional services like independent validation or infrastructure et cetera.

So, a lot of that bench if you will is getting consumed through training. We have estimated a gross hire of about 6,000 at the start of year. We are still going with that. We that’s the right number, there is we have also based capacity in case we need sudden ramp ups of capabilities both from a hiring perspective as well as from a training perspective which is why we are building out the iGATE University at a very accelerated pace.

Glenn Greene - Oppenheimer & Company

Would you expect that level of hiring to sort of pick up in 2015 especially with the CNA deal ramping?

Ashok Vemuri

Not specifically for the CNA deal because of the CNA deal hiring is going to happen now. We can’t wait till ’15but as we ramp up some of our existing large deals and hopefully we consign some more then we will have to relook at the gross hiring numbers for ’15.

Glenn Greene - Oppenheimer & Company

Okay. And then in the quarter your top client growth was terrific. It looked like it was 8% Q-to-Q. Any sort of call outs are in that, I get the question does that level of growth sort of sustainable or is there something abnormal in the quarter?

Ashok Vemuri

The growth in our top client is on the back of two or three things. One is that we have expanded our business into their line of business which we were not in the past present. We have expanded our total number of service lines that we are bringing to the table. A lot of the growth actually very interestingly has happened on the analytics based in our top client. We are able to occupy spaces that are competitively getting vacated by some of our competitors and as we are able to bring a set of services beyond North America into other geographies that’s also creating traction for us. I think we have demonstrated our value on a continuous basis to our client and hopefully on the back of that it will be a sustainable growth and sustainable relationship.

Glenn Greene - Oppenheimer & Company

Okay, just one more question. The offshore realization rate, look like was down, I don’t know, 250 basis points Q-to-Q, I don’t know if your FX was a drag on that or may be just any explanation for what happened on the offshore realization?

Ashok Vemuri

And so that’s -- so pricing for us has remained fairly steady and there is slight uptick realized rates have gone down because some of these transactions especially on the large deals acquire prior investment. So also when you go to a client and you say that now I am building out this particular capability whether it’s an analytics or mobility or distill and you have not in the past demonstrated that capability there is a certain desire for clients to say okay prove it to me and build me a prototype or do a test case. And typically those are initiatives that happen on a pro bono basis so therefore the average realized rate does go down. They are very conscious of that fact that we don’t go overboard and doing too many pro bono but the fact of the matter is that as we tie and establish our credentials in some of these areas there will be some amount of that average realized rate dropping. But I think the point of putting is whether it’s dropping for the same reasons and quarter on quarter which we don’t think will happen.

Glenn Greene - Oppenheimer & Company

Okay. So it’s a question of competitor where commodity like services is more about sort of offering enticements to or proving yourself to get some new clients I kind of think?

Ashok Vemuri

Yes, it’s like doing a pilot so in past of build out like for example analytics platform for a medical diagnostic company. It will be easier potentially in somebody is like and demonstrate a tangible platform or product rather than showing up and saying I can do it or demonstrate through a presentation. So that investment, that is an investment we’re doing this selectively but we’re doing it because we really think we have the capability and we’re able and we want to demonstrate that in the marketplace.

Glenn Greene - Oppenheimer & Company

Great, thank you.

Operator

Thank you. The next question is coming from the line of Edward Caso with Wells Fargo. Please proceed with your question.

Edward Caso - Wells Fargo Securities

Thanks. Congrats on the quarter. I am curious to how much success or not you’re having being sort of a medium size provide as opposed to some of the let’s call them Tier 1 providers. Are you still getting traction as to sort of more, smaller fleet of foot attentive or have the Tier 1 sort of narrow at that gap?

Ashok Vemuri

Well, we definitely do -- so there is a perception thing the clients do believe that if they’re a mid tier smaller company you will be more attentive you will be more flexible. But I think they don’t necessarily sign off large deals on that basis. They sign large deals on the back of demonstrated capability if they do that on the back of a strong value proposition having tangible solutions. And I think the whole mix of our small companies when deals because they are flexible in sense I think that that’s getting countered. If you look at what I’ve talked about earlier in terms of the standings that we had on the recent ISG report, we are in the top 10. We’re probably the only mid tier company to be across geographies and across capabilities in the software. And I think that speaks to the fact that we are in the spaces that we have decided to compete against we are doing extremely well and it start probably some to do with the size and flexibility and all that but in my opinion fairly little. It’s more about competency and capability.

Edward Caso - Wells Fargo Securities

Can you talk a little bit about what kind of wage increases you had to give what kind of attrition that you’re seeing? I assume you gave them roughly April 1, what’s the reaction to that been and what are the wage increases relative to the inflation rate and NDF? And maybe little more on how important are promotions and variable comp to the retention strategy?

Ashok Vemuri

So, our incremental offshore were 9% and onsite was 3%. I think the variable pay is actually something that we are rewarding on the basis of performance. The best reflection of our performance management is one of them of course not the best is one of them is the attrition. Our attrition is around 15.5% I think the overall morale and mood in the company is definitely better I would say than it was maybe for various reasons last year and not necessarily do with compensation or that. I think there is a general level of exciting about the kind of traction we are building in the marketplace, the kind of capabilities that we are building, the kind of training that we are providing, the iGATE University is definitely a huge attraction and huge incentive that people are in the knowledge industry and they will get the opportunity to continuously upgrade their capability.

So I think the excitement levels are high. We do standard promotions every year like every other company. And we think that’s the right and appropriate time span to do this in. and we are able to attract talent. It’s not that now that we’re getting in a lot more interestingly request through higher rather than not seeking out people to come and join us, which is also very interesting, and I think is a strong testimony. I think the interesting statistic is that the number of in house employee referrals in terms of hiring has gone up by about 50% to 60%. So that tells me that my employees are happy with the state they are in I think enough to us their friends and colleagues to come and be a part of this story as well.

Edward Caso - Wells Fargo Securities

Great, can you update us on your capital deployment strategy here as you now that you’ve gotten the debt refinancing out of the way. Is it niche acquisitions, is there any chance for share repurchases or I mean was there debt pay down I mean, what’s the focus? Thank you.

Ashok Vemuri

So our focus is to continue to invest in our business. We are I think a little behind in terms of not only the kind of physical infrastructure that we have we don’t want to build campuses but we want to build good world class facilities for people from which they can be productive and efficient. And we will continue to invest heavily in our solutions. We I think have found a particular niche or space for ourselves. Whether it’s in long term care whether it’s in financial instrument data, whether it’s in the retail business we have found for ourselves particular niche where we think we’re building out a appropriate prototype applications platforms and solutions. We will really be able to transcend or move beyond the traditional IT services model. And that actually combined with scaling up our traditional capability, building new methodologies and deploying more people tools they’re spending a lot of money on training not just iGATE University but training with some of our alliance partners on technologies, on processes et cetera. All of this is where our monies are going to get consumed.

We have no buyback plan at this point in time. We definitely need to invest in building capability. We need to invest in building infrastructure. We need to in an IT infrastructure and we need to invest in getting new technologies, new methodologies unless out there, there is completely new ways in which I mean to implement a digit solution for a large retail client. You need a completely different approach to let’s say the standard waterfall mechanism. So, those are going to require significant amount of investments from people, technology, capabilities, infrastructure, et cetera, which is where all these monies that we have sort of stay between from the refinance are going to go to.

Edward Caso - Wells Fargo Securities

Great, thank you.

Operator

Thank you. The next question is coming from the line of Pinku Pappan with Nomura. Please proceed with your question.

Pinku Pappan - Nomura Financial

Thanks for taking my question. We’ve talked about the fresher hiring and how many fresher hire has been made this quarter and then how should we think about this in the year coming forward? And so I mean in the hirers that you’ve made this quarter there was a sharp increase in the onsite hires. So is this got to do with some of the large deals that you signed and you have to also then there was complains by people transferred?

Ashok Vemuri

So 40% of our hirers have been freshers I think we closed about 2,400. Yes, we are hiring capabilities in the marketplace you can’t deliver solutions and as I say in response to the earlier question you need to build new capabilities and new ways of looking at things and these especially as you move to higher value proposition technology and process solutions that capability is available only in the marketplace. And so we’ve ramped up our hiring onsite not significantly but yes definitely to be noticeable. Obviously we expect a return on that because it does not some as does not come at a same price point and also these sources by the expectation on the return on that resource is much higher as well as the flow through revenue that gets created for our off-shoring business model also needs to kick in. So we are both in terms of anticipation of large deals, we see them construct a large deal to be able to put forth a value proposition for some of these large deals to be able to set across the client and have a conversation on being able to communicate a value proposition which is any business oriented.

These deals are large bought -- let me put it the other way these deals are bought by chief financial officers and presidents of business. The articulation to them is absolute, the CFO -- she is not going to give you more time to talk about technology and she wants to know what the business value is, how quickly can you deliver it, by when, et cetera, et cetera. So different on the vision, different value proposition, different structuring of the deal and all of this therefore requires a capability some of it we have and some of it we definitely need to get from the market. And therefore whenever talking about our acquisition strategy also this is a capability that we will increasingly find in need to have on a larger scale than we have to-date. So we will see that happening. Or obviously all of that is depending on the fact that we need that to kick in the appropriate return for us as well.

Pinku Pappan - Nomura Financial

Okay, great. And what was the TCV of the deals that you won end this quarter?

Ashok Vemuri

We don’t disclose that TCV of deals won in the quarter suffice to say that from a pipeline multiple perspective we are trending in a way that gives us confidence of the point that I talked about earlier.

Pinku Pappan - Nomura Financial

Okay. And just the last question when I look at your client segregation $1 million, $10 million and $15 million client, despite the strong mining I am surprised to see this particular metric not moving sequentially.

Ashok Vemuri

So we’ve started the process. We’ve done the appropriate hiring just because we have taken that another strategy doesn’t mean that the client will get it broke it in immediate basis. The fact of the matter is that our clients like the specific industry domain process focused solutions we are bringing to the table, are they buying all of them? No, are they buying some of them? Yes. But are they giving the beginning to build -- give us a little more attention, a lot more attention than they were in the past as a result of this that’s an absolute yes. And that’s a metric I track very closely. So the top 50 clients is a very, very important constituency for us which we believe as I said earlier the 4.3 million of first line that’s a metric with significant opportunity to improve.

Pinku Pappan - Nomura Financial

Thank you very much.

Operator

Thank you. The next question is coming from the line of Dan Perlin with RBC Capital Markets. Please proceed with your question.

Dan Perlin - RBC Capital Markets

Thanks. I was wondering if you could just help me parse out this gross margin a bit more and I appreciate the fact that you are talking about a -- for it to do up in the back half. But if I understood you correct, I think you had said that the rupee effectively had about a 60 basis point impact on the current gross margin and I suspect that that’s going to be something that’s going to continue into the back half and then that leaves kind of another 80 basis points or something on a year-over-year basis. And then if we kind of reconcile what’s the question on kind of wage increases. I am just trying to get a sense of what exactly is going to kind of fall off into the back half and then understanding kind of really what the run rate level should be? Thanks.

Ashok Vemuri

So if you look at it, we had a 60 basis point impact in the margin because of the ForEx. So the ForEx as this point of time is at the same level which is was there, 59.7 was a rate which was there in Q2 and right now it’s also at 60. So effectively if the rupee stays where it is, there might not be any impact in terms of gross margin. Two, as we have been investing in wage increase is one thing. And when you have a revenue growth, the scale efficiency comes into play and that gives you a bump up in terms of your gross margin percentage. And obviously we are -- you have 1,900 people getting added that get’s -- when this gets deployed and your revenue goes up according so you definitely get a tick on that, so we believe that with the revenue growth, the scale benefit and everything remaining same, you will be a in a position to get a higher gross margin from this quarter.

Dan Perlin - RBC Capital Markets

Right, but I guess what I am trying to figure out is as we think about that in terms of margin degradation on a year-over-year basis, it still looks pretty significant and you go out of investments I would think bringing on all these transformational deals. So it is -- and it is a pretty wide margin that we’re going to be thinking about the back half of the year. So are we talking a couple of hundred basis points of margin degradation at the back half of the year or are we talking something less than that?

Ashok Vemuri

As we said, we are in the -- we are going to be in a medium term 40%. So from here on, it’s only the margin goes up. So look at it this way. It’s like 2.5%, 2.5% to 3% impact in terms of the wage bill is actually reflected in your EBITDA margin coming from 25% to 22.5% and gross margin, even if you take into account and every year if you see there is a fall of 2.5% because of this wage increase which happens during the April quarter. And from there it moves up. So you see the trend in the year-on-year basis, it just moves up from 37%, 37.5%, 240% in the Q4, back of the scheme and that’s what exactly is going to happen.

Dan Perlin - RBC Capital Markets

Okay. Alright, thank you.

Operator

Thank you. The next question is coming from the line of Brian Kinstlinger with Maxim Group. Please proceed with your question.

Brian Kinstlinger - Maxim Group

Hi, great. Thank you. Just one question, Ashok, is it related to the two large deals in the pipeline, are there still multiple vendors bidding on these two deals or is iGATE now in negotiations?

Ashok Vemuri

Multiple vendors are in negotiations. They never will let you be solely negotiating, because anything can go wrong in the contracts or anything can happen. So they typically have you till literally the last day, the last week where they are negotiating multiple as in two to three service providers.

Brian Kinstlinger - Maxim Group

I’m going to rephrase again. Are they already selected who they intend to use but the contracts aren’t in place yet?

Ashok Vemuri

I would not know that Brian because they haven’t communicated that to us.

Brian Kinstlinger - Maxim Group

Okay, thank you.

Operator

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now turn the floor back over to management for any additional concluding comments.

Salil Ravindran

Unfortunately, that’s all we have time for. Thank you all for joining us on the call today and for insightful questions. We look forward to seeing you during the quarter and to discuss our results for next quarter on this call. Thank you all. Bye, bye.

Ashok Vemuri

Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude today’s teleconference. Thank you for your participation and you may disconnect your lines at this time.

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