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Wipro Limited (NYSE:WIT)

F3Q06 Earnings Call

January 17, 2007 8:15 am ET

Executives

Sridhar Ramasubbu - IR

Azim Premji - Chairman

Suresh Senapaty - CFO

Sudip Banerjee - President, Enterprise Solutions

P. R. Chandrasekhar - CEO of Americas and Europe

T. K. Kurien - CEO, BPO Business

Pratik Kumar - EVP of Human Resources

Suresh Vaswani - President, Wipro Infotech

Lakshman Rao - COO and President, Technology Services

Rajesh Ramaiah - IR

Analysts

Trip Chaudhary - GBL Equities

Joseph Foresi - Janney Montgomery Scott

Bryan Keane - Prudential

Moshe Katri - Cowen and Company

Julio Quinteros - Goldman Sachs

Edward Caso - Wachovia Securities

Ashish Thadhani - Gilford Securities

Samad Masood - Ovum

Suneet Kamath - Canaccord Adams

Michael Guilbault - Technology Business Research

George Price - Stifel Nicolaus

Anthony Miller - Arete Research

TRANSCRIPT SPONSOR
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Operator

Ladies and gentlemen, thank you for standing by and welcome to the earnings call for quarter ended December 31, 2006. At this time all participants are in a listen-only-mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Sridhar Ramasubbu. Please go ahead.

Sridhar Ramasubbu

Thanks Gloria, and thanks everyone for joining us for Wipro's quarter ended results for December 31, 2006. Jatin, Lalit and Rajesh from the IR Team join me in conveying our warm welcome and our New Year greetings to everyone.

With us today we have Mr. Azim Premji, Chairman; Mr. Suresh Senapaty, CFO, and other members of senior management team including the business unit heads. I hope you have had an opportunity to review the press release we issued today morning under US GAAP.

Let me give you quickly the agenda for today's call. Azim Premji will share his thoughts on our performance and prospects, and Suresh will take you through the financial highlights of this quarter. As a reminder, when we discuss our results in today's call, some of the issues we discuss maybe forward-looking, and I would like to advise you that you these statements may be subject to known and unknown risks and uncertainties that could cause actual results to vary materially. Such risks and uncertainties are discussed in detail in our filings with SEC. Wipro assumes no obligation to update the information presented during today's call.

The call is scheduled for an hour. The entire earnings call proceedings are being archived and transcripts will be made available after the call at our website www.wipro.com. I am online on email, and if you have any specific questions which you are unable to ask, please send me a mail and we will address those questions as well at the end of the Q&A.

So with that, let me turn over the call to Mr. Azim Premji, Chairman, Wipro.

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Azim Premji

Right now, you would have seen our results for the quarter ended September 30th -- for third quarter ended December 31, 2006. While the management team would be happy to answer your queries, I would like to take some time before that to share some thoughts on our performance and prospects.

For the quarter ended December 31, 2006, Wipro Limited recorded revenue growth of 41%. We have some line problem. Just give us a second please.

I am sorry about this interruption. We have had another satisfying quarter. Wipro Limited recorded revenue growth of 43% year-on-year and profit growth of 40% year-on-year. Revenues from our Global IT Services at $641 million for the quarter we are well ahead of our guidance of about $633. This was driven by strong growth in our Energy and Utilities Vertical, Technology Infrastructure Services and Enterprise Application Services. Continuing the good momentum, our Financial Services and Retail Businesses delivered 50% year-on-year growth. Manufacturing Vertical and Europe geography posted sequential growth rates ahead of the company average.

We saw some mercury wins in our BPO business. We added 37 new clients, of which 8 were Global 500 or Fortune 1000 clients.

On the operations front, we saw lowering of our rate of attrition in both the IT and the BPO business. That coupled with improvement in other operational metrics helped us largely offset the profitability pressures from wage increase and rupee appreciation. As a result, we were able to maintain and deliver an operating margin within our narrow range in our Global IT business.

Continuing the strong momentum our India, Middle East and Asia-Pac IT business recorded strong YoY revenue growth of 74% and profit before interest and tax growth of 39%. Wipro Consumer Care and Lighting business also grew well with 32% year-on-year revenue growth and 26% year-on-year profit growth.

On the global delivery front, we continue to pursue our approach of focus expansions of our geographical footprint. Our Romania center is now operational and we are creating a third center in China and we will be expanding our Brazil center that came though our Enabler acquisition. We continue to be leaders in the quality journey. This quarter, we were assessed at maturity level 5 based on the new CMMi V 1.2 model, which was released in September 2006. We are one of the first organizations globally to achieve this milestone and importantly this includes all our locations including overseas locations.

Wipro Infotech, our India, Middle East and Asia-Pac IT business was the Employer Branding award conducted by Indiatimes Mindscape, ITM Bangalore and Stars of the Industry, an independent body based in the US which has been regularly conducting the awards in service excellence.

Looking ahead, we think the capabilities we have built and the investments we are making on our initiatives will help us deliver value to our customers and enable us to continue to grow ahead of the industry. I will now request Suresh Senapaty Our CFO, to comment on financial results before we take questions.

Suresh Senapaty

Good morning ladies and gentlemen and good evening to ladies and gentlemen here in India and Asia-Pac. My best wishes for the New Year to all of you. Let me comment by highlighting the fact that for the convenience of the readers, our US GAAP financial statements have been translated into dollars at the noon buying rate in New York City on December 29 as certified by the Federal Reserve Bank of New York, which is $1 is equal to INR44.11.

Accordingly, revenue of our Global IT Services segment that was $640.5 million or in rupee term 28.67 billion rupees appears in our earnings release as $650 million based on this convenient translation. Global IT Services revenue for the quarter of $640.5 million included $587.5 million from IT Services and $53 million from BPO Services. The sequential revenue growth of 8.8% in Global IT Services segment comprised of 8.9% growth in revenues of IT Services and 7.1% growth in revenues of BPO services. Sequential revenue growth of 8.9% in IT Services was primarily driven by volume growth of 9.3%.

On the ForEx front, our realized rate for the quarter was INR44.77 versus the rate of INR46.14 realized for the quarter ended September 30. As at the period end after assigning to the assets on the balance sheet, we had about $188 million of contracts at rates between 44.80 to 45.77.

During the quarter, we affected salary hikes in November for remaining eligible offshore based employees, which impacted our margins by 180 basis points. Operational improvements in supply chain and scale advantage in SG&A costs offsets most portion of the margin dilution due to wage hikes and ForEx impact. Operating margins of our acquisition portfolio improved by more than 500 basis points sequentially.

The acquisitions by Hydrauto Group in Wipro Infrastructure Engineering and 3D Networks in our India, Middle East and Asia-Pac IT Services business were consolidated in our financials effective 1st of November, 2006. The integration of these units is on plan.

For the quarter ending March 2007, we expect volume-led growth with stable price realization. In line with our plans, we will affect raise hike for our on-site employees during quarter four of this year. The impact of this wage hike for quarter four of '06-'07 would be around 120 basis points. We will endeavor to offset the impact through factors like improved utilization and employee mix, better profitability on acquisitions, and expect the margin to be in a narrow range excluding the impact of exchange rate.

We'll now be glad to take questions.

Sridhar Ramasubbu

Gloria, we are open for questions, now. We can start the Q&A.

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions). And we have a question from the line of [Trip Chaudhary] with [GBL Equities]. Please go ahead.

Trip Chaudhary - GBL Equities

Congratulations on a solid quarter. Two questions, first on mega deal that you won with CSFB. It seems to be very unique. Do you think you can provide some more color in terms of the ramp up, and the kind of activities this deal will conduct? And then I have a follow-on question.

Azim Premji

Yeah, Trip, thank you. This particular win has been as announced by the customer about few months back, and what the customer has talked about was that, this is a contract which will engage Wipro with its customers on multiple areas of service. It will be BPO, IT services, as well as infrastructure support services. And Pune would be the center of excellence, and the customer had talked about ramping it up to about 1,500 people in 12-month timeframe. The operation is supposed to commence in this quarter. So, we will let you know as and when we get much more higher visibility on that. But as of now, the progress is fairly smooth.

Trip Chaudhary - GBL Equities

The second question I had was regarding the Enterprise business. It seems to be very strong, at least in this quarter. Are you seeing any shifts or changes in this space, and how is the competitive dynamics being shaping out? Thank you. And again congratulations on a solid quarter.

Sudip Banerjee

Hi. This is Sudip Banerjee here. In the Enterprise business we saw growth from energy and utilities verticals as well as from retail manufacturing. Yes, we had a particularly strong quarter. We see a good demand environment. Some of the large wins that we talked about in quarter two beginning, they have started now in billing, and therefore we saw part of that reflected in the quarter three numbers. The number of customers that we are currently having, and also the number of cases in the pipeline continues to be very robust for us, both in energy and utilities, as well as in retail. We also see good customer traction in verticals like media and services. So, overall we continue to see a positive momentum and that has been factored in the guidance that we have given.

Sridhar Ramasubbu

We'll go to next question.

Operator

We have a question from the line of Joseph Foresi with Janney Montgomery Scott. Please go ahead.

Joseph Foresi - Janney Montgomery Scott

Hi, guys, and a nice job this quarter. My first question here is, I was hoping you could talk a little bit about growth rate into '07. What's your feel for sort of the spending in the IT services market? And do you still plan to focus on some acquisition growth in the upcoming year?

Azim Premji

Sekar, would you like to take the call?

P. R. Chandrasekhar

Okay. If you look at the 2000 timeframe -- 2007 timeframe for both U.S. and Europe, I think, as far as the U.S. is concerned, the overall economy we feel will remain -- continue to remain fairly stable. There might be some marginal slow downs in IT spending. Having said that, we still expect that spending on our business and the offshoring will continue fairly strong. We haven’t seen any impact, and we don’t really see any changes in terms of customer outsourcing trends, customer visits to India, across the board, whether it be the financial services business, or whether it be the enterprise business. So I think, U.S. will continue to remain strong, and we are seeing opportunities both in multiple…

Suresh Senapaty

Sekar, your voice is breaking. Operator is everybody able to hear him properly.

Sridhar Ramasubbu

Yeah, we are able to hear well, Senapaty.

Suresh Senapaty

Okay. Fair enough. Okay.

P. R. Chandrasekhar

Okay. So we are seeing into cross multiple service lines, and also I think, the market is opening up in terms of the nature of the deals, as the mega deals as well as shall I say the smaller deals across powers where we have greater opportunities. Similarly, I think, Europe is looking better. Continental Europe is beginning to open up more. We are also seeing opportunities in the Nordics. So, we continue to see 2007 as a strong year for us.

Joseph Foresi - Janney Montgomery Scott

Okay. And I guess my second question here would be on the BPO front. You guys have done a good job of stabilizing the business in the last two quarters. Is this something we can expect to continue? Do you fell like you sort of stabilized the business in that business segment?

T. K. Kurien

From our perspective, what we see -- this is T. K. Kurien. From our perspective what we see is, that we see top-line growth in line with industry, and as far as operating margin is concerned, I think, we have been pretty consistent in our guidance in the past, where we said, we'll hold the operating margin and that will range between 20 and 22%. And that’s primarily where we would be. So from a stability perspective the answer is yes. I think, we've kind of stabilized the business. Is there more work to do? As always there is.

Suresh Senapaty

And the question is also on the revenue growth, Kurien.

T. K. Kurien

I have mentioned that. We expect to be in line with industry growth in that segment.

Joseph Foresi - Janney Montgomery Scott

And then, I guess, just on the metric side, pricing came in a little bit this quarter as opposed to some of the other vendors who had bigger pricing increases. Any reason for this, and where do you expect that to go I guess in the upcoming quarter?

Azim Premji

Yeah. This is primarily because of the lesser number of working days in the quarter three compared to quarter two, and it is -- broadly that is the basic impact, and we hope certain amount of recovery of that in the current quarter, which is a much better number of working days.

Joseph Foresi - Janney Montgomery Scott

Sure. And just one last question…

Azim Premji

[multiple speakers] the whole environment looks much more stable environment.

Joseph Foresi - Janney Montgomery Scott

Okay. And just one last quick question if I could, on the attrition side, obviously attrition came in this quarter, and you guys did a very good job there. I am just curious, is that a result of the wage hikes this quarter, and do you expect that to continue to trend down or to stabilize? Thanks, guys.

Pratik Kumar

Hi, this is Pratik here. So, what you observed is something which we had committed on in our last quarter’s call as well, that we expected the attrition to climb down. It has -- wage increases have played a key role in our own view, but we do think that several other measures which we have initiated focused on people, and that initiatives have also helped in bringing down the attrition. Despite having been able to bring it down by about 1.5%, we still think that there is hope for us to be able to bring it down further.

Sridhar Ramasubbu

Hello. Yes.

Operator

We have a question from the line of Bryan Keane with Prudential. Please go ahead.

Bryan Keane - Prudential

Hi. Congratulations on the solid quarter. Just a question on the customer relationships, looks like the number of new customers adds were 37, that’s been down a little bit from 53 and 60 last two quarters. Obviously, it looks like the size of the some of those customers are bigger, but anything to read into about the kind of customers you guys are trying to land or the amount in the particular quarter or is it just kind of lumpy business, and it tends to ebb and flow?

Suresh Senapaty

The customer additions in quarters, the previous two quarters had an element of customers, which came into us through the acquisitions. And in this quarter, we’ve had no additional customers coming in through that. So if you look at about three quarters back the average number of customers we’ve add and which we acquired in that quarter and the numbers of this quarter is roughly the same. So we had two unusual quarters of high customers adds primarily because new customers came in through acquisitions.

Bryan Keane - Prudential

Okay. And then just a follow-up question on the pricing that you guys think you get going forward. Do you think or can you break that out between what you are seeing on pricing on renewals versus on new business? Is there a distinction between the price that you are trying to get between those two sides of the business?

Suresh Senapaty

Well, I would say the average prices that we are getting in the new business is a little better. We are also being negotiating with the customers who have come up for annual contract negotiations. We’ve had some success. I’d say the overall increase that we have got has been between 3% and 5% in the cases where we have got those increases and the average increases that we have got in the new contracts is also in the range of 3% to 5% more than the average.

Suresh Senapaty

Bryan for the new -- for the renewals we had a fair amount of success, we had more than 65% to 70% of the customers whom we approached have given us price increases and with others we are still negotiating.

Bryan Keane - Prudential

Okay. But it definitely seems like the demand there seems to be -- I mean, when you look at the environment, does it feel that pricing in general is definitely going higher then it was let’s say over a year ago period.

Azim Premji

Well you could say that for a majority of the customers but it's not universally true across all segments and all customers.

Suresh Senapaty

If you look at our blended rate for quarter three of this year versus quarter three of last year, we are up by about 2.5%.

Bryan Keane - Prudential

Okay. And then just a last question I had is one of the drivers for the margin it will be utilization you guys mentioned, utilization dropped in the quarter. Is there a target utilization that you are thinking about for the business going forward?

Pratik Kumar

Yeah this quarter -- this is Pratik again. This quarter we did see the utilization dipping primarily on account of the rupee higher-ing. This is a quarter where typically we get campus graduates joining us. We do think that with that having -- that being out of the way this quarter we should be able to see our utilization numbers picking up yet again. Do we have a target? Yes we do have a target, which we would like to hit on quarter-on-quarter so far this quarter as well.

Bryan Keane - Prudential

But I guess assuming, the goal would probably to get utilization back into the low 70s or you don’t really put a number on it?

Pratik Kumar

We don’t put a number on that, but on a net basis we are in our mid 70s and that’s something, which we think is a -- it gives us a sense of comfort that we should be able to meet our fulfillment needs based on the bench which we have.

Bryan Keane - Prudential

Okay. Thanks a lot, and congratulations.

Operator

We have a question from the line of Moshe Katri with Cowen and Company. Please go ahead.

Moshe Katri - Cowen and Company

Hey, thanks. Nice quarter. Just wanted to look at the revenue line, you had a pretty nice upside in India, and A-Pac products during the quarter. I think the upside was about 40-50 million. And then other revenues also went up sequentially by 20 million, can you address that upside where it came from?

Suresh Vaswani

This is Suresh Vaswani here. The upsides have come from one -- there is a buoyancy in the Indian markets. So, the market is growing rapidly. Second, is, we’ve got fairly strong proposition of complete IT solutions with which we address our domestic market with. So we do products, we do services, solutions, consulting. So it becomes very compelling proposition for large customers and large-medium customers. So we have been winning a lot of fees in the domestic market. Third, is we recently completed an acquisition of a company called 3D Networks, which is extremely strong in the call center integration space, and the voice and the unified communications space. So that has also added revenues to our product revenues. So it’s a combination of the market on having a strong proposition plus the acquisition that we did, which has given us to fillip in terms of product revenues.

Moshe Katri - Cowen and Company

Thanks, and did you mention during the call, how much revenues you've actually generated from acquisitions during the quarter?

Suresh Senapaty

Yeah, it’s 475 million rupees for the acquisition in the Wipro Infotech business or the Asia-Pacific business.

Moshe Katri - Cowen and Company

Okay. And then was there a dilutive impact from any of the acquisitions still during the quarter?

Suresh Senapaty

We have in the other segment, which consist of our Wipro Infrastructure Engineering business. We had an acquisition of Hydrauto, which is a Sweden based company. We have revenues of 1,043 million rupees added to the revenues this quarter.

Moshe Katri - Cowen and Company

Okay. Was there a dilutive impact on EPS from that acquisition during the quarter?

Suresh Senapaty

Yes, we did have profits from those two businesses acquired so that is added to the EPS for the quarter.

Moshe Katri - Cowen and Company

Alright, thanks.

Operator

We have a question from the line of Julio Quinteros with Goldman Sachs, please go ahead.

Julio Quinteros - Goldman Sachs

Thanks. Good evening guys, and good morning Sridhar. Real quickly, my question relates to -- first of all, actually just let me get some accountings out. Suresh, would be please walk through the positives and the negatives on the margin side if you can maybe just break them down sorted by basis points in terms of impact? Just so that to make sure we have a handle on where the positives and the negatives were from the margins?

Suresh Senapaty

Yeah, the positives -- the negatives were the compensation increase of about 180 basis points.

Julio Quinteros - Goldman Sachs

180?-

Suresh Senapaty

180 basis points.

Julio Quinteros - Goldman Sachs

Okay. Thank you.

Suresh Senapaty

ForEx is about 80 basis points under the US GAAP. On the Indian GAAP, it was only 60 basis points because the premium accounting is a little bit different between the India and the US GAAP, and the realization was about 20 basis points. And the mitigating factors were improved profitability in the BPO as well in the acquisition. We got some upsides in terms of the scale advantage of the SG&A and similarly there has been significant improvement in certain other areas of operational efficiencies including bulge, both onside as well as offshore including rotation and many other such operational efficiencies. So net-net, we had an impact of about 70 basis points on the US GAAP, while the ForEx was about 80 basis points.

Julio Quinteros - Goldman Sachs

Got it. Okay, great. And then when we look at the pricing improvements, I think you cited 5% to 6% improvements in new client bill rates, but when we look at the rate realization that you reported for the quarter, it looked relatively flat. Can you just talk about how quickly we should see the realization there?

Suresh Senapaty

Yes, because it takes some time for the new customers to scale up in terms of the contribution to the overall revenue. In quarter three, the revenue contribution was only 3.9% from the new customer that got laid on from April 1st.

Julio Quinteros - Goldman Sachs

Right, okay. So, in terms of timing though, how long before that 5% to 6% begins to translate?

Suresh Senapaty

What was your question?

Sridhar Ramasubbu

The question is that, when will we see the 5% to 6% increase in new customers starts getting translated into the numbers?

Suresh Senapaty

It is translating. The only point is, as with the mix of revenue coming from the new customers goes up it will reflect. So, for the quarter three, we had only 3.9% of the business coming from customers added from April 1st.

Julio Quinteros - Goldman Sachs

Got it. Okay great, and then on the commentaries that you guys have made about the outlook for the US side, I think I agree with everything you're saying. The one thing that I am just looking at and being curious about is the technology business, on the product engineering side and the telecom service provider side, with all of the kind of moves that we're seeing there in terms of M&A consolidation etc. Can you just talk a little bit about how much visibility that vertical has and whether or not you're seeing any delays or impact from consolidation or M&A in that side of the business?

Azim Premji

We have Dr. Lakshman Rao to answer that question.

Lakshman Rao

Yes, on the manufacturer side, as you're aware the Alcatel-Lucent merger has been announced and then the organization structure has been also announced. So there is some progress and then at least we have now started our discussions with respect to their ForEx strategy. But it will take some more time for finalizing the next strategies before the next engagement starts. And Nokia-Siemens, as you know Siemens is still is there to have a formal merger. So, we see that this situation may continue at most until another quarter, although we have started our discussions with them on the next state of engagement.

On the service provider side, we see a good growth. While we've been able to win a couple of deals, good deals during this quarter, and the full benefit of these deal with respect to the billing will happen in the current quarter. So, I expect good growth in the service provider side the following quarter.

Julio Quinteros - Goldman Sachs

Dr. Rao, and just in the visibility on the technology business, can you just talk about that? Is that visibility the same level that we would see on kind of the traditional application side of the business?

Lakshman Rao

No, the technology business has been having a good growth, consistent growth earlier, but for this telecom manufacturer side of business, which has slowed down. However, with a good trend coming, good work coming from other segments of the technology business -- for example, we had a good growth in the automotive, good growth in the consumer electronics, we had also a good growth in the industrial automation. These are some of the segments which where we have been able to get good growth during the quarter.

Azim Premji

So, we are seeing, telecom OEM perhaps a little bit softness on the semiconductor space, otherwise we are fairly finding the other space in the product engineering doing pretty well.

Julio Quinteros - Goldman Sachs

Great. Thank you guys.

Operator

And next we go to the line of Ed Caso with Wachovia. Please go ahead.

Edward Caso - Wachovia Securities

Thank you, Edward Caso, Wachovia. I was wondering if you can talk a little bit about any change you are seeing in the competitive landscape, particularly Accenture, IBM and global firms. And are you seeing any other global firms start to get the capabilities of those two organizations?

Azim Premji

Sekar -- I think Sekar you have been asked.

P. R. Chandrasekhar

Ed, can you just repeat that question please?

Edward Caso - Wachovia Securities

I guess my next question really is the competitive market place for you changing at all, particularly the large international firms, large global firms, and are there any new firms sort of joining in, in addition to Accenture and IBM?

Azim Premji

Yes. You are referring to the global competition?

Edward Caso - Wachovia Securities

Yes.

Azim Premji

We do continue to view Accenture and IBM primarily as very significant competitors, not only in the IT space but also in the BPO space across the globe, and we increasingly run into both these firms, as well as a host of local firms in the U.S. including say EDS, and in Europe people like Atos Origin, LogicaCMG, Capgemini, Deloitte, as we ourselves are moving up the value chain. We are also seeing many of these firms leveraging and using their India offshore centers much more often, and a lot more aggressively, both in Europe as well as in U.S. Recent additions and acquisitions of companies like Kanbay by Capgemini have also added to this mix. So the global delivery model, which has become mainstream, becomes even more mainstream both in the U.S. and is becoming increasingly more accepted in U.S. and -- I am sorry, in Europe as well. So I guess, there are two ways to look at it. On one front, the companies are growing more global in terms of their delivery, are increasingly leveraging their offshore delivery capabilities, or their global delivery capabilities. The flip of that is, we see as significantly advantageous to us, which is one, the acceptance of this across marketplaces where may be the acceptance of this was somewhat less than the U.S. and in the UK, particularly Continental Europe is increasing, one. Two, we are also getting invited into opportunities of a much larger scale as these companies are being forced to give a global delivery model in their solutions. So overall, yes, we are seeing a lot more activity from these firms for using this global model, because we are using it. Two, we are running into them more often, because we are moving up the chain in terms of the kind of solutions and the complexity of the projects we provide. We are also running into them as we do more transaction processing and more BPO kind of work. But it also validates our capabilities, gets us invited more often, and given some of the propositions we are able to provide in terms of a truly integrated offshore capability, we also have certain advantages. So I think overall, the competitive pressures are increasing, but it is both a challenge as well as creating significant opportunities for us.

Edward Caso - Wachovia Securities

Great. Thank you. I was wondering, if you -- on the level of activity on the volume side. Can you differentiate between growth in sort of traditional offerings and growth in some of your newer offerings? I am trying to understand if your base of service offerings continues to grow, or is it just sort of the growth being seeing by adding on new offerings?

Azim Premji

In terms, if you look at the growth as in terms of service lines that we are offering, clearly we are experiencing higher rates of growth in some of our more differentiated offerings, specifically infrastructure services, package implementation, as well as testing. So the growth is coming from incremental growth in these areas. But at the same time our traditional services which you could say is ADM is also continuing to grow. But the other growth is faster.

Edward Caso - Wachovia Securities

Thank you very much.

Operator

(Operator Instructions). And we have a question or a comment from the line of Ashish Thadhani with Gilford Securities. Please go ahead.

Ashish Thadhani - Gilford Securities

Yes, good evening, great quarter. For the acquisitions completed since December 2005 in the Global IT segment, what are your short-term and long-term margin objectives? And then also is this pace of acquisition activity likely to continue, or do you have most of the targeted components in place at this time?

Azim Premji

Now I request Sudip Banerjee to answer this.

Sudip Banerjee

Hi, this is Sudip. In the quarter that’s gone by, overall, we’ve had a 330 basis point improvement from all the acquisitions within Global IT from December ‘05 onwards. We’ve had one acquisition, the one of the semiconductor intellectual property company in Austria and France. If you exclude that, then for the first time the cumulative operating margins from all the acquisitions that’s double-digit for the first time. Our longer term objective is of course for all of the acquisitions to -- the margins to be in line with that of Global IT business margins. We, however, understand that some of these are onshore-based companies that will never reach the same level of margins, but we expect to get significant synergy out of these and then all of these to be able to get significantly better margin. So, we think that we are already in line for all but one of them to achieve those numbers in the next few quarters, but in the long-term we expect all of them to be in line with the Global IT margins. In terms of pace of activity, we have an active funnel. We continue to look at acquisitions in North America, Europe and other parts of the world. We have become more confident of the acquisitions, of the way we have been able to integrate them and derive the synergy benefits, so we are looking at slightly larger acquisitions, a little more complex acquisitions so that we can extract the right synergy and stimulate growth from them. We are not going to look at accretive -- at revenue aggregation as a strategy for our acquisitions. We continue to look for deeper domain expertise and expansion of our service lines for our M&A going forward.

Azim Premji

And Ashish, as you have seen, while we didn’t do any acquisitions so far as the Global IT business is concerned, we did one for the Indian IT Asia-Pac business, and we did one for Wipro Infrastructure Engineering. And both of those acquisitions has been consummated effective 1st of November, and the response so far both from the customers and the new entities are very, very encouraging.

Ashish Thadhani - Gilford Securities

Thank you. That’s very helpful. Also Mr. Senapaty, on an organic basis, what was the quarter-on-quarter and year-on-year revenue growth rate, is it possible to break that out?

Suresh Senapaty

Sure. I think, the growth rate of the acquisition piece in the WT part of the business is almost similar to that of the organic growth. So the [percentage is unknown or it's] different. The entities we had in quarter three are the same as in quarter two, so there is a complete like-to-like comparison, and the growth has been similar. We saw only a margin expansion in the acquisition portfolio.

Ashish Thadhani - Gilford Securities

Okay, terrific. And then one or two smaller items, can you quantify the on-site salary increase that you referred to a little earlier? And then second, how many $50 million wins did Wipro get in the last quarter and in all of calendar '06?

Suresh Senapaty

So, as the on-site salary is concerned, yes, effective 1st of January, there will be about 2 to 4% increase, which will be there and that will impact about 1.2% in the current quarter. So far as the large deal wins are concerned, we have communicated on a quarter-to-quarter basis, and so far as the last quarter is concerned, we had got good wins of the customers, some of them we talked about and we think those customers will be like large wins for us in terms of converting them into large accounts.

Ashish Thadhani - Gilford Securities

Okay, terrific. And one final question on the tax rate. What is the outlook for the fourth quarter and beyond?

Suresh Senapaty

Within 100 basis points. We do not see significant change in those tax rates.

Ashish Thadhani - Gilford Securities

Alright, thank you very much.

Azim Premji

Thank you.

Operator

And we have a question from the line of Samad Masood with Ovum. Please go ahead.

Samad Masood - Ovum

Hi, guys. I just wanted to get a bit more color on the European growth, you talked about BPO as well, as obviously it's going to be a driver of growth this quarter. I just wanted to get a bit more detail on what have you actually been selling this quarter in Europe and UK that has driven growth [faster gross margin] business a bit more. Could you give me some examples?

P. R. Chandrasekhar

This is Sekar here. In Europe, we did have a strong quarter in the Enterprise business. We continued to have a strong quarter as we've had in the last few in the Financial Services business. PS like in the U.S. was somewhat more muted. On the service provider side as well, although the numbers don’t quiet indicate it, we had some good wins in Europe which we think will result in expanded opportunities going forward. The wins have come in within the enterprise space in energy and utilities. We are seeing some good traction on manufacturing front in particular not only in the U.K. but also in Continental Europe. We are also beginning to see some positive signs in the Nordics market particularly in the area of manufacturing. In the Financial Services front, insurance remains strong, but we are also seeing some opening up of opportunities in the banking sector. From a service line standpoint the TIS or our infrastructure business was particularly strong as it has been in the U.S. as well, with some notable wins that we have got in Europe. Testing has continued to grow, and we think that it will give us some opportunities going forward. And the package implementation business has came in fairly strongly. So, overall, both in terms of the verticals as well as in terms of the service lines, it was a fairly strong showing.

Samad Masood - Ovum

Thanks. Could you just remind me what you actually mean by the enterprise business and TSPs? I just need to be clear and make sure we are on the same terms here?

P. R. Chandrasekhar

Okay, the Enterprise business, I was referring to was broadly the manufacturing, energy and utilities, the transportation, media, healthcare and the manufacturing verticals.

Samad Masood - Ovum

I understand. And TSP, you were saying?

P. R. Chandrasekhar

TSP is the telecom service provider Business.

Samad Masood - Ovum

Of course, sorry, I misheard that. And, could you tell me if there is any sort of difference between the UK and Continental Europe currently in terms of the types and services being taken on, is it more ADM in Continental Europe? I assume as you are still breaking into those new markets, particularly, making the Nordic. Is it sort of less mature in the types of services that are being taken up? Or are you seeing sort of, what we might describe as full service deals, which combines some package implementation, some ADM and also some BPO something like that and perhaps infrastructure as well?

P. R. Chandrasekhar

No, our success in Continental Europe is fairly broad based. In fact interestingly enough, we have actually even made some account openings and new penetrations using both infrastructure services as well as package implementation. So, actually our wins and our success in Continental Europe is not only in ADM, but in other service lines as well.

Samad Masood - Ovum

Okay, that’s great. And just my final set of questions on the margins, I don’t know if I am missing something here, but just my rough calculation showed that your acquisitions, aren’t the -- profitability of the acquisitions isn’t actually that high with the nine months to 2006 do you quote acquisitions, that operating income of that segment was actually a loss, 246. Would you be able to just explain why we are talking only about acquisitions being a margin -- having a positive effect on margins? I got the impression that they are actually pulling your margins back?

Azim Premji

Yes, what you said is right. For the nine months, it was $247 million. What we had said is, it has improved by about 500 basis points from the previous quarter and if we exclude one of our acquisitions, which is what Sudip talked about, which is an acquisition for IT-based revenues, the margins are in excess of double-digits for the balance acquisitions. So, one acquisition is making a loss which is having a big impact there.

Samad Masood - Ovum

And that’s not an IT related acquisition, that’s --

Azim Premji

It is an IT related acquisition--

P. R. Chandrasekhar

It is an IT related and we are expecting to break even by quarter one of next financial year.

Samad Masood - Ovum

Okay.

Azim Premji

That acquisition was on the R&D side.

Samad Masood - Ovum

Yes, okay. And also just a bit more on margins, your margins are overall for IT services and BPO, notably lower than your rivals, Infosys and TCS. Could you perhaps explain why you think this is? Your attrition is higher. I wonder if you guys are finding it a bit harder on the labor front and this was having a large effect. I just wanted to get your sort of qualitative or anecdotal view on that? Hello?

Azim Premji

Yes I think they have, Gloria, Pratik? Can you just ask the question once again, was it specific to the BPO segment or was it opposite or other --?

Samad Masood - Ovum

No, I am looking across the margins for IT services and, yes BPO as well. It seems that your attrition rates are higher and I wonder if you guys are actually having a bit of tougher time on the labor front in India. Would you be able to comment on that?

Pratik Kumar

This is Pratik here. Just on the overall margins and the margin pressure, I am sure Senapaty will respond, but I thought I would just pick on your observation on the attrition front. A little while earlier I had -- we did share how we performed on the attrition front in this particular quarter, which was improvement over the previous quarter, which we anticipated. We think we can do better than that. I must at this stage clarify that our attrition numbers, what we publish and what we report, is the quarterly number, annualized number, which we give, unlike some of the peers where the method of calculation reporting is on the trailing 12-month. So, it's not naturally apple-to-apple comparison, I thought I would just point that out. Just as a closing comment on the subject of attrition, as we said, this was an improvement over what we were able to report last quarter, and we think that our own efforts are geared towards the direction to bring it down further. Hopefully, we should be able to see it in this quarter, and going forward as well. Senapaty, would you like to comment just on the operating front?

Suresh Senapaty

I think the way we have operated the operating margins in the range of about around to 25%, 24 or 25% kind of range. Our objective is whatever growth or whatever margin we get more to be able to reinvest, whether it is sales and marketing and various new initiatives or whether it is innovation or R&D, to be able to deliver satisfaction to the employees and the customers. So, some of the margins has been because of the investments we are doing to acquisition, the kind of expenditure enhancement we have done on the sales and marketing side. But clearly throughout the quarter, investment has been done in that respect.

Now, if you look at from a growth perspectives, I think the financial services have grown amongst the top two or if you look at over the last eight quarters, similarly our enterprise solutions also, growth has been very decent again amongst the top three. So far as the product engineering side is concerned, like we said, we had some softness with respect to the telecom OEM side, and there has been some let’s say patchiness on the semiconductor side, also that we are seeing. So, in some form, and in some form of cyclicality that we are going to face, let’s say ‘05-‘06 our growth very good so far as the tech business was concerned. ‘06-‘07 has not been, and perhaps it will be so for a few more quarters before we pick it up because there has been some more initiatives that we have taken in the form of acquisitions, which particularly the ones in the IT related will take its time because it is a little bit transformational and some we have done to be able to enhance our penetration into the existing customers.

For example, we have seen a strong presence in some of our customers in the wireline area, broadband area. We’ve done an acquisition to be able to address the wireless area. Similarly, the joint ventures that we have planned with Motorola, particularly in the telecom engineering space, or the acquisitions that we have done in the Quantech, which is our Computer Aided Design and Engineering areas, we think some of these initiatives that we are ceding in, will show up in the next two quarters in terms of growth. So overall, similarly BPO, we talked about -- we had a muted growth for the last few quarters. We are seeing quarter-after-quarter we are inching up. Like we even stated I think in few quarters we should be able to go ahead of the industry there. We have already done well and stabilized on the margin front, and we will now pickup on the growth front too. So overall, I think we are growing faster than the industry. There are varieties of initiatives we are taking to take this growth faster. And also from a sales side if you look at, we have generally been good in terms of acquiring more and more clientele. But so far as our farming on the client are concerned, we have not done as good a job compared to some of our peers. So we over the last few quarters and going through quarters more, we will be disproportionately spending more of our allocation onto the farming side of our sales engine, so that we can enhance our share of the wallet to be able to do more and more value-added services and make those accounts much more profitable and also enhance customers’ delight. So that is the kind of approach we are taking, and hopefully you will see the results two quarters ahead.

Samad Masood - Ovum

Thank you very much. It’s very useful.

Operator

And next we will go the line of Suneet Kamath with Canaccord Adams, please go ahead.

Suneet Kamath - Canaccord Adams

Yeah. Hi, thanks for taking my call. I have been listening to -- following the company for a while, and I just wanted to make sure that my understanding is correct. As you said, you are trying to move up the value chain, trying to acquire more customers moving into Western Europe, Nordic countries. And as you do that, is it safe to assume going forward that there are pricing pressures, given that the cognition increases and everyone is going after the same clientele, the same dollars so you'll have pressure on your prices going forward?

Sudip Banerjee

This is Sudip here. The pricing pressure comes when you are in any competitive situation. But the general market situation today is that the prices that are being offered on most deals are also related to the kind of skills that you bring to the table. So wherever you can show differentiation through, I guess the skill that you bring in or the solutions that you propose or the innovations that you promise to the customers through productivity gain, so all that has a bearing on how the customer treats your price. So as we said earlier, that we have been seeing steady movement on the price front in all new contracts, and -- which is an upward movement and we have also seen a reasonable improvement on the contract negotiations, that again we have seen an upward movement. So we think that situation will continue. We will be able to get our realization based on what is our target for all those contracts.

Suneet Kamath - Canaccord Adams

Alright. Just a final question on that, and if that is the case, and your outlook and just to give some sort of color guidance going ahead, if that is the scenario that you're painting for the next 12 months or 14 months. And you've got this wage pressure at the bottom, and you've got these other pressures to do forming out to expand your clientele. So can we expect the margins to be stable or can we expect may be a few bps reduction going ahead on an overall basis, I mean, IT service and BPO. So, if you can just provide some color on that? That’s it. Thanks.

Suresh Senapaty

Our intention is that in the medium to long-term, we should be seeing much more stability in the margins, really to be moving within a narrow range. Because there are enough levers for us to be able to optimize on, whether it is a bulge, whether it is offshore on-site mix utilization, and multiple other initiatives. So from that perspective, there are counter initiatives already available, and many of them can be used to be able to see much more stability.

Operator

And next we will go to the line of George Price with Stifel Nicolaus. Please go ahead.

George Price - Stifel Nicolaus

Thanks very much for taking my question. A number of my questions have been answered, but I wanted to just follow-up on some of the commentary around larger deals anticipated to come up in 2007. I wonder if you can maybe give us a little bit more color about what you are seeing in terms of large deal flow this calendar year and into -- basically into fiscal ’08 in terms of a number that you are actively pursuing, maybe the timeline when you think some of the more notable ones might be awarded or announced. And just refresh my memory also on your views on how you look at margin impact of these deals in the near-term and intermediate term. Thank you.

Sudip Banerjee

Let me note, Sudip again, the deals that we have been seeing in the last eight, nine months have been of a size which has been much larger than what we used to do in the previous 12 months or so. We announced during the course of the second quarter, some of the large wins, and we continue to see many more customers coming up with RSPs, many more prospects coming up with RSPs which are of significant size. As far as the margin of these deals are concerned, well you pick and choose the business that you can execute profitably. So, we don’t go after every single RSP, we don’t go after every single large deal in the marketplace, but we pick ones where we -- which are in our sweet spot, where we think we have the strength to execute it well, and which gives us a margin which is as per our expectations. So, while there would be many more fresh deals available in the market as we go forward, and while we are getting invited to play in many more large deals than ever before, we will continue to pick and choose the ones to play in, which play to our strength both as our service line strength, as well as our integrated strength of providing IT plus BPO skills together. And we will also select those on the basis of profitability.

George Price - Stifel Nicolaus

If I could ask you a couple of follow-ups related to that. First, what -- in terms of near-term ramp up impact, what kind of impact is I guess acceptable to you within the range of what you are willing to sign up for? And then the second is what kind of influence or impact you are seeing in these deals, particularly as more and more stuff goes offshore from the outsourcing advisors out there, you are seeing them play a lot more as intermediaries? Thanks.

Sudip Banerjee

Well, as far as outsourcing advisors are concerned, we see the advisors like TPI, [Wayne], Gartner, neoIT, some Indian players as all being very active in this market, and we see many of them advising clients to do larger deals and also to invest more services, IT related services with players who have a strong base in India. As far as the ramp-up question is concerned, ramp-ups are different for different clients. Some clients want to go very fast up when they sign the contract, and some others actually sign a large frame agreement, and then give us a hunting license within the [top] to then start going after the business, and doing the ramp-up. So we have mixed features as far as ramp-up is concerned. Also it depends on what services the clients starts off first with. If it’s application maintenance, that’s something which ramps up very fast. On the other hand, if it’s a package implementation, then that requires us to go there, study the existing impact of what is being done. There is a consulting element involved upfront in that, and that has a slower take off period.

George Price - Stifel Nicolaus

Thanks very much.

Operator

And next we will go to the line of Anthony Miller with Arete Research.

Anthony Miller - Arete Research

Yes. Hello, again. Gentlemen, a couple of questions please. One about pricing, and one about salaries. Earlier on in the call you said that about 60% to 75% of the clients that you approach for salary increase -- pricing increases gave you those pricing increases. I think, the numbers might have been slightly different on the first con call, but that’s what they have. For those clients that you ask for salary increases, but they said no, what was the outcome, did you hold your own or did you in fact have to reduce your prices, and if so by how much? The second here is on salaries. Yes, sorry, do you want to answer that one first.

Rajesh Ramaiah

Let me answer that question, this is Rajesh here. The facts are -- I said, we had taken stock of top 100 customers which we have, and which came up for renewal. I said that 70% of them came up for renewal during 2006 and between 75% and 80% of them gave us a price increase between 3% and 5%, that’s the fact. So the balance were either flat and a very few of them where negative as well. But that’s a very small percentage, but the others were kind of flat.

Anthony Miller - Arete Research

Okay. That’s fine. And on salaries, as you sit here today, can you see any indicators which would suggest that your salary increases in next fiscal will be any way greater than the ones you have being giving this fiscal?

Pratik Kumar

This is Pratik again. At this stage, we see nothing in the environment to suggest that some of the assumptions, which we would be taking in for this year's increase would be any different from what we did in the previous year.

Anthony Miller - Arete Research

That’s great. Thank you very much.

Sridhar Ramasubbu

Gloria, probably we will take the last question.

Operator

Yes, sir. The last question will come from the line of Michael Guilbault with Technology Business Research. Please go ahead.

Michael Guilbault - Technology Business Research

Hello, this is Michael with TBR. We went and checked out, my question has to do with your IMS business, your Infrastructure Management Business. Since you have constructed that global command center and you really made a push for that. I was just wondering, what percentage of the infrastructure management revenues actually come from Infotech from the domestic market?

Suresh Senapaty

We report the infrastructure management services for the global market separately and for the domestic markets separately. So, a large proportion of our business in the domestic market does come from the infrastructure side. So, just to give you some -- what exactly was this question, are you asking what proportion of the domestic business is infrastructure services?

Michael Guilbault - Technology Business Research

Yes, I am curious about the percentage of your service revenue from Wipro Infotech that can be accounted for by Infrastructure Management Services.

Suresh Senapaty

Okay. So, on a broad base, purely talking about infrastructure services, close to 25% of our business of Wipro Infotech is accounted for by infrastructure services. 25% of our total revenue is accounted for by infrastructure services.

Azim Premji

That is Infotech.

Suresh Senapaty

Wipro Infotech.

Azim Premji

While, 70 odd million dollars of the Infrastructure Services for quarter three, we are talking about, that is only Wipro Technologies. We did primarily the customers in the North America, Europe and Japan.

Suresh Senapaty

So, from a global perspective, it's roughly 10% of our business, which is accounted for by infrastructure services. From a domestic perspective, it is 25% of our business, but the other clarification I would like to give is a large proportional of the business that we do in India is revolving around infrastructure, so we do a lot of PC business, we do a lot of system integration business, which also generates a lot of infrastructure services.

Michael Guilbault - Technology Business Research

Okay. I understand that. And the question is, I understand a lot of the -- well several of your competitors don’t seem to be focusing very much on the domestic market, and they say, they claim that the reason behind it is that the margins aren’t so good there. Can you give me any kind of visibility into why operating margins would be different domestically versus internationally?

Azim Premji

Okay. Let me just start, and then I will request Mr. Senapaty also to give his views. But the domestic focus which we give to Wipro Infotech is clearly a big differentiator for us, vis-à-vis, most of our Indian global competitors. One is we’ve historically been there in this market, our diversification into IT started off by focus on the domestic market. Two is we’ve always viewed the domestic market as a very strategic market for us, and therefore we’ve continued to invest and if and now today the India market is beginning to look extremely exciting.

Michael Guilbault - Technology Business Research

Yes.

Azim Premji

The Indian market is beginning to look extremely exciting, and we find ourselves in a very unique position of having built up tremendous capability, and therefore we are able to drive quite substantial growths vis-à-vis market growth here. So, just to give an example, in the last quarter our growth was roughly 3x that of the market growth in India. And the business is also beginning to -- we are driving services revenues, so therefore the business is also looking pretty attractive from an operating margin perspective. Now, the margins will never be close to what the global margins are because the mix of the business is different. Here we do product, we do services, we do solutions and consulting, and the product business tends to be lower margin than what the services margins are, while globally our business is largely all services where the margins tend to be higher.

Michael Guilbault - Technology Business Research

Okay.

Azim Premji

Having said that, the services margins in the domestic market are also pretty exciting.

Michael Guilbault - Technology Business Research

Okay. Alright, well that sounds good and its clear that Wipro has a differentiator there and that you've long time been dedicated to the market. So, overall then --

Azim Premji

And just one more point if I may add is that, we are still speaking about the domestic market. We certainly believe that we must be a major force in the domestic market to be a major force globally, so that is one. And second is, the domestic market has – has been an incubator for a lot of services that we launched globally. So the infrastructure services that we've launched, that we are very strong in and we lead globally has been thanks to the sort of the dominant presence we’ve had in the infrastructure services market and the domestic market. So, it is an incubator for us in terms of services and proposition that we launched globally. Just to give you another example, we launched total outsourcing as a service in the domestic market over the last one and half to two years. We have been very successful, and we also launched that service in the global market, and we've already two wins in that -- in the total outsourcing market globally last quarter.

Michael Guilbault - Technology Business Research

Okay, very interesting to you. Not only are you a clear leader in the domestic market services, but also you are using it as an incubator, very interesting. The question then is, the last question I guess is, for infrastructure management services overall what kind of utilization rate do you get in that particular vertical, seen as it is growing?

Azim Premji

Say what kind of a?

Suresh Senapaty

Utilization rates?

Michael Guilbault - Technology Business Research

Yeah utilization of your employees and headcounts if you have, I am wondering how many people you've dedicated to them as well.

Azim Premji

See our utilizations – well, our utilization runs it runs actually higher than our overall utilization of Wipro Technology, and it’s been consistently so. So the utilization runs higher --

Suresh Senapaty

Typically it has been growing well and even when something is growing well, therefore always tends to be much better utilized.

Azim Premji

The infrastructure business is a big growth driver for us. Even if you look at our last quarter performance, the performance was 20% less sequential growth. At last quarter we've grown roughly 80% year-on-year. So it is a high growth business and a big growth driver for us globally as well as a big differentiator for us globally.

Michael Guilbault - Technology Business Research

Okay. Could you give me any color to -- about how much higher than the average 5 percentage points higher or are you getting 75% or 80% utilization or do you have a limit that you want on utilization?

Suresh Senapaty

We're not breaking -- you're talking about infrastructure management services?

Michael Guilbault - Technology Business Research

In particular, correct.

Suresh Senapaty

Yeah we are not breaking the utilization figures for different verticals or service lines. It will be a couple of percentage points more than what we have for the IT services. That should give you some color.

Michael Guilbault - Technology Business Research

Great, thank you. Just a very last question is about IMS, do you have a -- how many employees do you have dedicated to that service line at this point with its growth?

Azim Premji

For the global market, it is roughly close to 5,000 people, dedicated for infrastructure services. In the domestic market, it is larger. It's close to around 8,000 people. So, totally across Wipro, we have 13,000 people dedicated to infrastructure business, infrastructure services business.

Michael Guilbault - Technology Business Research

Very good. Well gentlemen, thank very much about that. And I appreciate you taking our time.

Sridhar Ramasubbu

Okay, thank you. Gloria, there is one question on email. This is from -- appears to be retail investor, [Cedric D'Silva] from Kuwait. He is asking when Wipro will consider next bonus. The answer is the dividends, the stock dividends, bonus issues get addressed at the end of the year, Cedric, and it will be decided some where in April, 2007.

With this we'll close the call, and thank you very much for all your participation. The IR team will be available offline to answer any further questions you may have. And the digitized replay will be made available from 12:00 noon Pacific at the dial-in numbers communicated in our press release, as well as email. And just a reminder, that we have scheduled a Wipro Analyst Day in the US on January 30 at NYSE, New York, and in India on February 9, and please register to participate in these events. Thank you and good luck. Over to Gloria

Operator

Ladies and gentlemen this conference will be available for the replay afternoon today through January 31. You may access to AT&T teleconference replay system at any time by dialing 800-475–6701 and entering the access code 858231. International participants dial 320-365-3844. Those numbers again are 800-475-6701 and 320-365-3844. The access code again is 858231. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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