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Infosys Limited (NYSE:INFY)

F3Q2012 Earnings Call

January 12, 2012 8:30 a.m. ET

Executives

Sandeep Mahindroo - Investor Relations

S.D. Shibulal - Chief Executive Officer and Managing Director

V. Balakrishnan - Chief Financial Officer and Member of the Board

B. G. Srinivas - Senior Vice President, Head of Europe and Global Head, Manufacturing

Prasad Thrikutam - Senior Vice President, Global Head, Energy, Utilities, Communications & Services

Sanjay Purohit - Head-Products, Platforms & Solutions

Basab Pradhan - Senior Vice President, Head of Global Sales, Marketing and Alliances

Stephen Pratt - Global Head of Consulting and Systems Integration

Analysts

Edward Caso - Wells Fargo Securities

Joseph Foresi - Janney Montgomery Scott

Moshe Katri - Cowen & Company

Rod Bourgeois - Bernstein

David Grossman - Stifel Nicolaus

Keith Bachman - BMO Capital Markets

James Friedman - Susquehanna

Nabil Elsheshai - Pacific Crest Securities

Operator

Ladies and gentlemen, good day and welcome to the Infosys Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions) Please note that this conference is being recorded.

I will now like to hand the conference over to Mr. Sandeep Mahindroo of Infosys. Thank you, and over to you, sir.

Sandeep Mahindroo

Thank you, Merina. A very warm welcome to everyone on this call to discuss Infosys’ financial results for the quarter ended December 2011. I’m Sandeep from the Investor Relations team in New York. Let me start by wishing you all a very Happy New Year. Joining us today on this earnings call is CEO and MD, Mr. S. D. Shibulal, CFO, Mr. V. Balakrishnan and other members of the senior management team. We’ll start the proceedings with a brief statement on the performance of the company for the recently concluded quarter followed by the outlook for the quarter and year ending March 31, 2012. Subsequently, we’ll open up the call for questions.

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

I’ll now like to pass it on to Mr. S. D. Shibulal.

S. D. Shibulal

Thank you, Sandeep. Good morning to everyone. We had a good Q3 quarter. We have grown by 4.4% in constant currency and 3.4% in reported currency. Our revenue is $18.6 million in reported currency and $18.23 million in constant currency. Margins are up by 3% quarter-on-quarter from 28% to 31% operating margin and net margin is also up quarter-on-quarter from 23.5% to 25.4%.

This has been a good quarter for client additions as well as for deal wins. We have added 49 new clients this quarter, 18 of them net, 6 of them in Fortune 500. Interestingly enough if you look at the last nine months, we have added 120 new clients which is probably one of the strongest client additions we have seen in a nine-month period in the history of Infosys. It means that clients are choosing us. Clients are choosing us as a partner in their journey, and as and when they decide to spend, as and when they become confident about their spending, we will definitely benefit from that.

Quality of growth is pretty good. This quarter, in constant currency terms, our pricing has gone up -- our revenue productivity has gone up by 0.8%. Year-on-year, it has gone up by 5% and if you actually look at the last nine months, it has gone up by 6.1%. This is a reflection of our tremendous focus on high quality growth. We are focused on high quality growth and we clearly believe that as long as we deliver business value, as long as we participate in the growth and the differentiation journey of the client, as long as we strengthen our strategic partnerships, we will continue to achieve that in the long run.

We had good wins this quarter. We won five large deals, one transformational deal. Two of the five large deals were more than $500 million, including (REBIT). It’s a strong quarter for large deals. Growth has been all around this quarter. We have seen the non-top 25 grew by 4.9%, which means that the broader base of clients grew this quarter.

Attrition has come down from what it was four quarters back. In Q3 of FY ‘11 we had attrition of 17.4% and this Q3 we have attrition of 15.4%. So, there is a 2% drop in attrition on a quarter-on-quarter basis from last year this quarter to this quarter. Our product and platform strategy is working well. We have $300 million of booked revenue, TCV in the pipe, and multiple deals. Finacle is also doing well. We had 10 wins this quarter. We have -- as I said we have signed multiple large deals.

Now, in this background I also want to give a color on the environment. The environment is definitely volatile. It is challenging. It is challenging for our clients. There is overall uncertainty in the market. The European crisis, the unemployment in the U.S., lack of political will to quickly sort out some of these issues in the coming election year, and downward trend in growth in emerging markets. All of these are concerns for our clients and they definitely have less visibility about their future. They are not confident about taking decisions and that is being reflected in the velocity of decision making, velocity of business. There is marginal downturn in the velocity of business from the beginning of Q3 to the end of Q3.

We had noticed it early on, and in the middle of Q3 we had said that our revenue will be closer to the lower end of the guidance and that’s where we ended up. We have -- based on all this, we remain cautious. We have given a guidance of flat to 0.2% growth for Q4. Budgets are being finalized. We expect majority of the budgets to be closed before the middle of February. Early indication is flat to marginally down, that is the early indication. The critical question is that even after closing the budgets will they spend. And that will be determined by multiple factors, the factors about the environment as well as factors about and their confidence in their future.

Being said that, if you look at our new strategic direction of Building Tomorrow’s Enterprise and Infosys 3.0, it is very clear that we participate in all facets of clients’ business. We do transformational work which will enable them to create growth. We do operational work which is a driver for efficiency and productivity for the clients, and also reducing total cost of ownership. We are seeing traction in the products and platform space which is a way for us to deliver innovation through the Building Tomorrow’s Enterprise framework to the client.

So, we clearly believe that as long as we are centered around the client, centered around client’s priorities of growth, differentiation in return on investment. As long as we strengthen our strategic partnership, as long as will deliver higher business value, as long as we build more and more capabilities in the local markets, we will be able to achieve our aspiration of high quality growth.

With that let me now hand it over to Bala.

V. Balakrishnan

Good morning, everyone. We had done better, another challenging environment where we are in. In the beginning of the quarter we gave a guidance of 3.4% to something around 5% growth in revenues because the clients’ budgets looked good and the indication was they could spend the budget. But when we went to the quarter, the environment became much more challenging. The concerns on global economic environment only increased. That made the clients more cautious on the spending. So, in the middle of the quarter, we came and updated saying that our growth could be somewhere closer to the lower end of the guidance. And if you look at the actual numbers, that is where we ended up with.

Our top line grew by around 3.4% and the EPS grew by around 11.8% for the quarter. The operating margin increased by 3%, mainly on the back of rupee depreciation. The average rate of rupee was $51.37 for the quarter as compared to the $46.30 for the last quarter, resulting in a deprecation of 11%. It could have technically increased the margins by around 4.4%, but we have some increase in other costs and the utilization to drop to some extent. So, net-net, our operating margin went up by around 3% for the quarter.

On the non-operating side, the overall losses because of foreign currency is only $4 million, because we had a hedging loss, to some extent was offset by the translation gain what we saw, and the interest income has gone up because the yield has gone up. The average yield on our portfolio is something around 9.7%. The effective tax rate is around 28.6%, but if it’s normalized to non-operating income, the effective tax rate on operating income is stable at around 27.8%. We guided for an EPS of $0.79 to $0.80. We ended up with $0.80. So, net, net, on the top line, we are closer to a lower end of the range. On the EPS front we are at the higher end of the range of what we guided for.

We added 9,655 employees. Our guidance was 8,000. The attrition rate too has come down to 15.4% for the quarter. Our DSO days are 61 days. We have a hedging position of something around $847 million at the end of the quarter. We believe the currency markets will continue to remain volatile and we do take a short term view on the currency and hedge for the next two quarters at any point of time. We are continuing with the practice. We’re not changing that because we believe that the currency environment will remain volatile for some more periods to come.

On the guidance, we had revised the guidance for the full year. We assume the revenues to be flat from what we ended up in Q3 for Q4 too. We assume the currency at 52 for the next quarter. We assume the pricing to remain constant from what we saw in the third quarter. So if you put all this together, we believe our operating margins for the full year, that is fiscal 2012 as compared to fiscal 2011, will remain stable within a narrow band of 50 basis points.

So, net, net, I think we are in a challenging environment. The clients are cautious, the budgets are getting finalized. We will have a better view of fiscal 2013 maybe in the beginning of April. But as long as the environment is stable, I think next year could span out to be better, but if there are any catastrophe in Europe, probably it could impact the global markets and it could impact the sentiments of clients. It’s too early, the early indications are that budgets could be flat or slightly down. What is relevant for us is off-shoring components in the budget. Hopefully, if the environment remains stable and if there is no, any big shock, hopefully the next year could look better.

With this I conclude. We’ll open it for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from Edward Caso of Wells Fargo Securities. Please go ahead.

Edward Caso - Wells Fargo Securities

Hi, good morning, or good evening. Could you talk about the difference between growth in Europe and the U.S., somewhat surprisingly you had Q-on-Q growth in Europe, U.S. was less so?

S. D. Shibulal

Let me request B.G. to give some color on the European growth and Ashok to give some color on the U.S. growth.

B. G. Srinivas

Hello, yeah, this is B.G. Last quarter Europe we saw significant growth primarily driven on two fronts. One is, existing clients across financial services, manufacturing sector and retail. We saw uptake in growth from existing programs as well as cross-selling new services into these accounts. We also saw a significant jump in the number of clients we added during the quarter, 14 new clients added in the quarter within Europe. Again, the clients are spread across different segments, but also equally spread across U.K. and the continent. We also saw two large deal wins in Europe, and both in the order of magnitude of $500 million each, and some of it is existing business which is getting consolidated. And these are multi-year deals.

So this is definitely one of the best quarters in Europe in the recent past and while there has been a spike in revenues within the quarter, it doesn’t necessarily mean secular trend, but at the same time we have significant traction by adding new clients and adding new deals of sizeable nature, and this could help us give us good growth momentum at least for the next two quarters. The external environment in Europe continues definitely to be uncertain. There are no easy answers for fixing that problem but at the same time we see a fair degree of stability within our clients in terms of their businesses. At the same time, there is enough caution and the client IT spend early indicators in Europe continue to be downward or flat. So this is what we see as of now.

At the same time we continue to invest in Europe. We see from medium-term to long-term perspective, there is enough opportunities for Infosys. We continue to invest in Germany, France which are still under-developed from outsourcing perspective, but we have seen our investments paying dividends in the last two years. These two markets have grown at 40% to 50% year-on-year. Our near-shore centers in Czech Republic and Poland, we continue to invest and we are adding talent to support the continental market. Thank you.

Stephen Pratt

Hi, this is Steve Pratt. I’ll just give a quick commentary on U.S. and then maybe Basab, the Head of Sales can discuss also. So the quarter-over-quarter growth in the U.S. was 0.9% which is less than Europe. I wouldn’t draw too many conclusions, sometimes our business, especially with big deals is lumpy and so I don’t think this is a trend that we would see over time. The U.S. business continues to be very healthy. We’re very strong across sectors and I think it’s also important to keep in mind that we’ve just gone through a very important transformation of our company to what we are calling Infosys 3.0, which is really consolidating our service offerings around business IT services, around consulting and systems integration and products and platforms which really gives us a simplified and consolidated organization structure, and also align by vertical so we’re closer to the client. So, with that, the last piece that went into place at the beginning of Q3. And I think we’re very well positioned to compete strongly going forward. So, I’ll turn it over to Basab.

Edward Caso - Wells Fargo Securities

My last question is just on apples-to-apples pricing this is about that time a year where you’re talking to your clients. Could you just give us some sense on, just sort of the apples-to-apples-based pricing in your different offerings? Thanks.

S. D. Shibulal

So, pricing we are seeing as stable. Actually as I said, pricing has gone -- our revenue productivity has gone up. Even this quarter our revenue productivity in constant terms has gone up by 0.8%. Year-on-year, the revenue productivity has gone up by 5% and actually if you consider a nine-month period, it has gone up by 6.1%. Which means that our constant focus on delivering higher and higher business value, engaging with our clients better and better, building new capabilities in consulting and system integration, creating non-linearity through products and platforms is yielding results. It is in a tough environment but it is yielding results. And right now we’re considering the pricing as stable.

Operator

Thank you. The next question is from Joseph Foresi from Janney Montgomery Scott. Please go ahead.

Joseph Foresi - Janney Montgomery Scott

My first question here is, can you be more specific about what you are seeing in the macro and is there a chance that this is specific to a particular group of clients or a particular area within your client base? In other words, I’m wondering have we seen any delays? Are budgets being set later than usual, what would cause that March guidance and do you think it is specific to a particular group of the revenue base?

S. D. Shibulal

So I did not get that question properly but I believe your question was about budgets and decision-making, is that right?

Joseph Foresi - Janney Montgomery Scott

Yeah, that’s right, and maybe you could just hone in on what is happening there?

S. D. Shibulal

So, I will give part of the answer and then I will hand it over to Basab to give a wider picture. You see, what we’re seeing is velocity of business coming down, and it has marginally come down. In the beginning of Q3 itself we said there is slowness in decision making and multiple scrutinies of large opportunities. We have seen that marginally increase during the quarter and velocity of this business margin they are coming down. In fact, we noticed it halfway through the quarter and that is when we said that we will be closer to the bottom of the guidance. Now, let me ask Basab to give you a little more color and then probably it can come back to me.

Basab Pradhan

Okay. I also sort of only party got the question, but just continuing from where Shibu left off, what we are seeing on the deal sizes especially with respect to how clients are seeing their own budgets, there is a general cautiousness in our clients where there they have the money to spend. They believe that technology is important for them, it gives them competitive advantage. They want to get that competitive advantage but at the same time because of the things that are happening especially, what’s going on in Europe and how it might impact their own business, they don’t want to make very long-term commitments. So, even when we do let’s say a big transformational deal, the first, we might do a big proposal, but first statement of work will be for a particular scope, which is more contained. And if they choose to stop it after that they get some value for the money they have spent. So, that’s kind of what’s happening. I don’t know if that answers your question completely or not.

S. D. Shibulal

And let me add to it a little bit more. Occasionally, we are seeing that even in the programs which are in flight where the ramp ups are supposed to happen, there has been some delays in getting the ramp ups done. At the same time we are not seeing cancellations. It’s important to note that we are not seeing cancellations. But you see 30% of our work is in consulting and system integration. The average lifespan of a program is somewhere between 9 to 18 months. Which means that if I consider it as nine months, every quarter I have to refill the cup with one-third of the transformational work. So, if the velocity of business comes down then that creates challenges in doing that and also growing on top of it. So when we talk about velocity of business, and it’s marginally down, what we mean is delays in decision making, larger opportunities getting scrutinized multiple times, programs which are on ramp up cycle getting slowed down, and general caution in spending even though the budget is there.

Joseph Foresi - Janney Montgomery Scott

Okay. I think in the past Infosys has talked about wanting to outgrow the industry and it looks like this year’s growth rate is far on the line, maybe on the bottom end of where the industry is going to grow. How do you view that philosophy going forward with all the changes and what can we expect in regards to that going forward?

S. D. Shibulal

Again, it was not clear, but I believe your question was about how do you see the future, is that right?

Joseph Foresi - Janney Montgomery Scott

That’s right. Yes. I mean (inaudible) 16% to 18% for this year, you’ve talked about outgrowing that rate on a consistent basis but you’re at the lower end of that. So I am curious as to how you view those comments going forward?

S. D. Shibulal

So you know it is too early for us to comment on the next year, but there are some fundamentals which have not changed and I think it’s very, very important to keep that in mind. So, it’s early for us to give any guidance on next year. The budgets are getting closed. We expect them to get closed by February middle. We expect them to be flat and the early indication is that it will be fat or marginally down. So that is on the budgets. The critical question is will they spend the money next year. Our belief is that if there is no catastrophe, if there is no event which is a catastrophe event, the clients will get used to the new normal and then they will start taking decisions because they all, they have to do it, right. Because they need to do it. So, our belief is that if there is no catastrophe event, clients will start taking decisions. That is point number two.

Point number three is that they will go with partners whom they have chosen. That is where that new clients openings, the existing client base favors us big time. When we talk about 120 clients being opened over a period of nine months, even if the net is about 50 or 60, that means we have opportunities to grow in new accounts, 50 or 60 of them as and when they take the decisions. Clients have made their choices on whom they want to spend the money with. So if the second argument is correct, then as and when they start taking those decisions, it will benefit us. That is number three point.

Number four is, if you look at our strategic direction we have made a clear direction towards making sure that we are part of the journey in every aspect of their life. They will spend money on transformation to create growth because they need to create new products, new services, new consumer experiences. They will spend money on operational efficiency because they need to reduce total cost of ownership. They need to drive productivity improvements, they need to drive better efficiency and better alignment. That is where our operations services come into picture. And today having integrated operation services really places us in a very, very good position to take advantage of that opportunity.

And number three is about innovation. Our products and platform play, as well as our Building Tomorrow’s Enterprise framework gives us a clear opportunity for us to co-create or co-innovate with our clients. In fact, every conversation I’m having with CSOs is leading to a co-creation workshop. And last quarter we had closed a deal which is moving a client from country-centric approach to client-centric approach. This quarter we have closed a deal where we are moving a client from a non-profit to a listed corporation. All of these are being done in the Building Tomorrow’s Enterprise framework. And either through transformation or through the TPS track.

So we clearly believe that the strategic direction we have taken will put us in enormous benefit as long as we continue to focus on the client, continue to partner with them on their growth journey, on their transformational journey and provide better and better business value. So in the long-term, we believe our strategies will definitely help us produce superior financial results and that is high quality growth.

Joseph Foresi - Janney Montgomery Scott

And lastly, just really quickly, have you changed your approach to guidance at all and methodology just given the volatility in the environment? Thank you.

S. D. Shibulal

No, there is no change in the guidance methodology. We have always said that our guidance is a statement of facts as we see it at that point in time. In the beginning of the year we had given a guidance of 18% to 20%. Last year, purely due to currency fluctuations, purely due to cross currency movements, we had re-casted that guidance to 17.1% to 18.1%. In the middle of the quarter we had said that we will be closer to the lower-end of the guidance due to emerging situations. Now, given where we are, we have given you a flat to 0.2% in guidance for Q4.

Operator

Thank you. The next question is from Moshe Katri of Cowen & Company. Please go ahead.

Moshe Katri - Cowen & Company

Thanks. Bala, what’s embedded in terms of the performance by the specific vertical in your March quarterly guidance? You’re talking about roughly of sequentially flat revenue growth. Are we going to see some verticals underperforming being down year-over-year versus others, and maybe you could give us some more color on that? And then should we expect anything in terms of major movements looking at North America versus Europe on a sequential basis? Thanks.

S. D. Shibulal

So, we are not seeing major differences across verticals and we are not expecting that next quarter either. And interestingly enough, even during the downturn in 2008, 2009 our financial FSI segment was within a band of, within a very narrow band of 33% to 35% of our total revenue even during that major, major downturn. So, we don’t expect any material change in our performance. There may be marginal changes but no material change in our ratios, neither in vertical nor in country.

Moshe Katri - Cowen & Company

You mentioned (inaudible) deferrals when your project starts, is there -- are we seeing that maybe more on the FSI, are we seeing that in a specific vertical? In the past, recently, you’ve spoke about deferrals that you’re seeing in Continental Europe by some of the banks. Maybe you can kind of elaborate more on that. I am assuming, we’re seeing more -- I don’t know if it’s even across the board or this is really coming in from one or couple specific areas.

S. D. Shibulal

It is more -- see as it’s that we’re not seeing project cancellations at all, nothing abnormal there. The delays in decision making we are seeing across the board. We are seeing it in SSI. We are seeing it in manufacturing in small chunks across the board. But when you are trying to grow and if your discretionary spend is under strain, then that’s becomes a challenge.

Moshe Katri - Cowen & Company

All right. And then final question, are you considering or reconsidering your recruitment plans?

S. D. Shibulal

No, we are not reconsidering the recruitment plan for this year. We have -- all the people whom we had given offers last year are joining now. Our utilization has marginally come down because of that, because people will get released to production. We had planned for 45,000 recruitment this year and I think we’ll end up at 47,000 gross. We have given 20,000 offers for next year. We are not reconsidering our recruitment plan because of all the reasons I told you before, budgets are getting closed. Unless there is catastrophe event, things will start -- our view is that decisions will start happening. Then we are very well positioned with those strategic directions as well as our Building Tomorrow’s Enterprise framework. So we believe that the decisions will really favor us, as and when it happens.

Operator

Thank you. The next question is from Rod Bourgeois of Bernstein. Please go ahead.

Rod Bourgeois - Bernstein

Hey guys. Just a quick clarification question on the demand environment. Has the decision slowness of clients that you’re citing, has that changed only marginally over the last three months? I think you used word marginally. I just wanted to clarify if that was your intention?

S. D. Shibulal

Yeah. From the point in which we’ve gave the guidance last time, last quarter to now, it is only a marginal change. But we had given some color at the time also saying that it’s happening, so from there to here it is a marginal change.

Rod Bourgeois - Bernstein

Right. Yeah. You’ve been citing decision slowness over most of the last year. That’s helpful. And secondly, in the vendor consolidation events that we see happening around the industry and this has been around for the last several years, are you doing anything new with your strategy to better compete in those vendor consolidation situations?

S. D. Shibulal

So, we clearly believe that the new Infosys 3.0 architecture is extremely well placed for those kinds of opportunities. What we have done is to -- we had service lines like IVS, IMS that is infrastructure management, independent validation services etcetera, as horizontal service lines. Now, we have combined all our service lines under the verticals and our go-to market always has been the verticals. So, now we are able to create integrated offerings. Very, very, very strong integrated offerings integrated offerings, very, very, very strong integrated offerings. For example, infrastructure management and application management, infrastructure management and independent validation, then independent validation and application development. We are able to create very, very strong integrated service offerings, and I clearly believe that that is of great help. And also on the platform side we have a very strong story.

Rod Bourgeois - Bernstein

Okay. It’s just that the platform part of your business is fairly small at this point in time?

S. D. Shibulal

Yes, I can ask Sanjay to give us some color on that particularly.

Sanjay Purohit

This is Sanjay here. On the platform side of business obviously -- so now we have 12 platforms in the market and last quarter also we have picked up another four clients, taking our overall client strength to about 23. We’ve booked about $300 million in TCV. This of course is a different kind of a model because the revenue momentum comes over time rather than coming up as upfront. But what’s more important for us is to ensure that we are on boarding more and more clients and we are seeing traction every quarter in terms of on boarding onto the 12 platforms, the Infosys Edge Platforms that we have in the market. So, the good part today is that we are seeing quarter, quarter increase on total contract value and the number of clients that are on boarding on the platform. So while your observation is right that the current revenue is small but what’s important for us is to build the momentum so that we are able to bring this to a substantial revenue stream over time.

Rod Bourgeois - Bernstein

All right, great. And Shibu, just one final question on that similar note. Obviously, your growth outlook is not just a function of macro trends since in 2012 you had expected back-end loaded growth in the fiscal year despite macro issues that you were citing. So, I guess, the question that raises is, do you expect your overall quarter-to-quarter revenue growth trajectory sort of adjusted for normal seasonality? Do you expect that growth trajectory could improve after the March quarter based on the strength of your pipeline and some of the growth strategies that you say are gaining some momentum here?

S. D. Shibulal

See, in a way you are asking for a guidance for next quarter, you know which is very difficult for us to give at this point because there are many factors which goes into that kind of a prediction, right. So, we are very closely involved in the client’s budgeting and spend process and we will have a much better view on this coming April. But I want to say this, we clearly believe that the strategic directions we have taken in Building Tomorrow’s Enterprise framework, Infosys 3.0, the ability to align in front of the clients, the ability to create deals which are cross service oriented, the ability to win large deals, the ability to drive consulting and system integration revenue. All of those things are meant to create high quality growth. They are meant to create high quality growth. We also have the capacity, right. Our utilization is 77%, we have the capacity. We have recruited people who are in training. All of those things are meant to create high quality growth. So, we are very well prepared to take advantage of the situation and we believe that all the strategic directions should allow us to create high quality growth in the long-term. There may be challenges in the short-term.

Operator

The next question is from [Dave Kay of BED]. Please go ahead.

Unidentified Analyst

Yeah. Hey guys, I wanted to just ask a very high level question just on this year’s growth and it tended, I guess a little more on the trajectory, but if we break down the 16% revenue growth, it’s about 10%, 11% from just core volume, 4% to 5% from price and 1% to 2% from FX. That’s pretty clear that that breakdown based on what we’ve seen so far year-to-date and the way you’re guiding for next quarter. As we look next year, you’re talking about much more flattish pricing environment which we’ve seen for about four quarters now. So year-over-year I would expect the recent sequential patterns to drive pretty much flat pricing growth and FX is actually a headwind. So unless we see volume reacceleration, the target growth 10% next year and I don’t expect you to give guidance on that core volume growth, but is it at least fair to think about, like you said the pricing environment is stable and FX is a headwind. So to see anywhere near growth that you saw in fiscal ’12, will be able to see a pretty nice reacceleration in core volume. Is that at least a fair way to put this all into perspective?

S. D. Shibulal

So for all practical purposes we are assuming that the pricing will be stable. Which means that the majority of the growth will come out of the volume, that is true.

Unidentified Analyst

Okay. And at...

S. D. Shibulal

But at the same time we will continue to build capabilities and implement strategies which will allow us to increase our revenue productivity. But for all practical purposes we assume stable pricing which means that majority of the growth will come from volume.

Unidentified Analyst

Okay. That’s great. And then just a second question. Over the last several years we have seen pretty big growth in the interest component or the other income component of pre-tax earnings. So, this year it looks like that the interest component will be about 15% of pre-tax earnings. So, it’s pretty important that the rates hold up. I would imagine you’re seeing a little bit of interest rate weakening with the rupee being weaker. Is that fair, maybe to kind of put in context, what sort of interest rate you see on your cash over the next several quarters?

V. Balakrishnan

Well, we do focus on operating margins. Non-operating, the income related to what we hold in the balance sheet. The interest rate regime is in favor of us now. Today, we get a yield of something around 9.7% on our portfolio. Go forward when the inflation comes down in India, there is a probability that interest rates could come down. You’re right. But our focus always had been in maintaining or increasing the operating margins and non-operating is non-core to us, but we do hold strategic cash to meet our strategic objectives. So that is not a focus area that could go up and down. The key for us and the key focus area for us is maintaining the operating margins.

Operator

Thank you. The next question is from David Grossman from Stifel Nicolaus. Please go ahead.

David Grossman - Stifel Nicolaus

Thanks. You know I am trying, I think the revenue deceleration, I got that piece, but I am still trying to reconcile the margin dynamic. Can you help us reconcile the reported margins, both gross and operating. Factoring in the different variables including pricing, utilization, the incremental investments you’re making in the business, and then obviously the impact of currency?

V. Balakrishnan

Well, David, we don’t look at it by verticals, we focus to manage the whole business as a portfolio. Of course, our revenue productivity depends on different aspects of the business, whether the onsite-offshore mix or the geography mix or the services mix or the vertical mix, so we take a portfolio approach. We don’t try to look at each of our industry vertical, try to see the utilization margin and stuff like that. Because some of the new verticals we start, these are all too strategic. Some of it could be in an investment phase, some of it could be losing money, but at the overall company level, we need to focus on all high growth areas and try to manage it as a portfolio.

David Grossman - Stifel Nicolaus

Right. So I guess what I am trying to understand Bala is that, it appears that you’re talking about flattish pricing trends. I guess utilization is off modestly as you continue to ramp hiring in the face, some deceleration in revenue, and obviously you increased investments. But you had a fairly significant tailwind you know from the depreciation of the rupee. So I guess I’m just trying to understand the magnitude of all these different things and how they are impacting the margins?

V. Balakrishnan

No, no, right now rupee is a tailwind because rupee has depreciated, but we have gone through times when the rupee appreciated too. See, as we keep saying always, we have different levers within the business. We have the utilization rate, we have the onsite-offshore mix, we have the services mix, and of course the currency comes and benefits or impacts us once in a while. We had demonstrated again and again at different currency level, our ability to maintain margins. Because we do focus on high quality growth that gives us enough flexibility to maintain the margin to some extent in spite of currency level. It doesn’t mean we will be able to do it in the future, but we have done it in the past and our model has enough flexibility to manage it.

David Grossman - Stifel Nicolaus

Okay. Maybe just a different taxi, you obviously decided to maintain your hiring rates and actually exceeded them in the quarter. How should we think about your bench relative to how you managed it historically? Is this really more a time and place thing just because demand trends have softened, or are you thinking to continue to drive growth you may want to maintain perhaps a bigger bench than you’ve done historically?

V. Balakrishnan

Well, we always said we are comfortable with the utilization, excluding trainees, in a band of somewhere between 76% to 80%. The peak, in some year we went to 81%, 82%. We want to retain that flexibility, because if we are looking at an opportunity to grow, you need that capacity in the system. Because when the growth comes we don’t blink. We added more people this quarter than what we targeted. In fact, we targeted for 8,000 hiring. We ended up with 9,655. But don’t forget whatever we hire from October, that is for next year, not for this year because we have a lead time of around six months training for people we hire from the campus and then they become billable. So whatever we are hiring now that is for next year. On an overall utilization front we are comfortable between 76% to 80%. We want to retain that flexibility if we can because we don’t want to miss on the growth.

David Grossman - Stifel Nicolaus

Okay. And then just one last question is that in terms of your visibility and not getting into clients necessarily, your verticals, but is the visibility a lot different? I think I understand the dynamic in terms of the economic environment, but in terms of some of the larger customers is the visibility getting worse or is it getting -- did it get better over the course of the quarter in terms of what their spending plans are going to take over the next six months?

S. D. Shibulal

So we expect that once the budgets are closed and the decision making starts, we will have a better visibility. See there is another point I want to give you at this time. Our pipeline is pretty strong. It is not like our pipeline has weakened. So it is not lack of opportunity or lack of pipeline. What is happening is that the decisions are not happening, that is what is creating the issue. So from a pipeline perspective we have a pretty good pipeline and we closed five large deals this quarter which is pretty good, and it was around $500 million and above. So the deal pipeline is pretty strong. The decision making is where we are seeing an issue. We can definitely hope that after the budgets are closed and people will consider the current environment, our view is that the decision making will happen.

Operator

Thank you. The next question is from Keith Bachman of Bank of Montreal. Please go ahead.

Keith Bachman - BMO Capital Markets

Hi, thank you. My first question follows from the past line of questioning. If you continue on with the hiring plans and growth doesn’t improve, aren’t you at risk for compressing your margins from where we are here and how do you respond to that scenario?

S. D. Shibulal

So, we are quite comfortable between 76% to 80%. We have operated in that bracket even before, even slightly lower. Now, as what we know -- and another point is as I said, our pipeline is strong. We’re not -- see, you’re looking at one quarter and trying to think it’s a secular trend, and we are not considering it that way. We’re not seeing a secular trend of downturn. We are at this point in time given all the information we have given in the guidance. Last quarter we gave the guidance and when the situation changed we actually talked about it. We are not considering a secular trend of downturn and we clearly believe that in the long term, we will need these people. So, that is why we have continued with the recruitment.

Keith Bachman - BMO Capital Markets

Okay. Let me ask a different question, it looks like your top clients, your revenue performance of your top clients is less than the broader revenue performance of the company. Can you speak to why and does that continue?

S. D. Shibulal

No, actually if you look at the eight quarters and we have -- if you look at it you can see that there are multiple quarters in which the top clients have grown faster than the rest, the rest of the world has grown faster than the top clients. This quarter the non-top 25 actually have driven the growth. So, in that sense the growth is broad-based, which is a good thing. And which also shows that the new clients whom we have added, we are able to create growth out of them. So, I wouldn’t consider that again as a secular trend. It will be a quarter-to-quarter aberration.

Keith Bachman - BMO Capital Markets

Okay. The final one for me then relates to that, when during over the next few -- over the next month, we’re going to get more reports from other companies, and how would you anticipate share to shake out in terms of your relative share in the markets that you’re serving this quarter and over the next couple of quarters, both in terms of client additions and/or revenue, relative revenue performance? Because it looks like you’re, again particularly relative to Cognizant, looks like you’re losing a little bit of share. But I want to get your views on how you would anticipate share dynamics to unfold over the near-term?

S. D. Shibulal

So, I think there are two factors of this, right. Because the performance is a reflection of the strategic direction and the aspiration which each corporation has. And different corporations take different strategic directions and different aspirations and that is what is reflected in my mind and the performance. So, when you compare performance it’s very important to keep in mind that what is the foundation on which the performance happened. In our case, we are looking for high quality growth. We are looking for high quality growth, what does that mean? Superior growth, superior margins, that’s what it means. And that is our aspiration. I’m not guaranteeing that that’s going to be happening every turn of the next future, but that is our aspiration.

All the strategies we have put in place, increasing consulting and system integration revenue, Building Tomorrow’s Enterprise, Infosys 3.0, integrated service offerings, local investments in Germany and France, local recruitment in U.S., all of these are meant to achieve our aspiration of high quality growth. Which is higher growth and industry leading, or at least one of the industry leading, but otherwise the industry leading margin, and that is our aspiration. So, when you measure -- compare performance, this is an important benchmark to keep. If you compare performance of the piece rather than the whole, then the observation may not be the right one. So, from a high quality growth, that is the benchmark which we need to compare rather than only one aspect of the performance.

Operator

Thank you. The next question is from James Friedman of Susquehanna. Please go ahead.

James Friedman - Susquehanna

Yes. Thank you for taking my question. Shibulal, with the two transformational deals that you announced over $500 million, what vertical was that in?

S. D. Shibulal

So I’m going to ask Prasad, Prasad Thrikutam, who heads our Energy, Utilities and Services market to talk about it.

Prasad Thrikutam

So, hi, this is Prasad. There were two transformational deals, one was in our manufacturing vertical, where we actually used our Building Tomorrow’s Enterprise as a platform for creating a future of a specific business process for this organization. So we are actually designing the business process and innovating the business process using technology. And the other one which Shibu kind of mentioned at the beginning, is a company that is based in the U.S. It’s in the services sector. Where they were moving from a not-for-profit status to a for-profit status, which means the entire enterprise architecture, not from a technology standpoint but from a business functions, you know how do they do forecasting, how do they manage their financials, how do they manage their product development strategy, how do they manage their supply chain strategies. The entire set of operating functions of the company were reviewed and then a new strategy was developed. So that is the second transformational win that we talked about. I hope I answered that question.

James Friedman - Susquehanna

Yes. Thank you for the clarification, Prasad. My second question was for Balakrishnan. I was wondering, Bala, with regard to the dividend, the company has been generous with its special dividends. The cash flow remains healthy, the growth may be decelerating, wondering if similar to others in the industry, IBM, Accenture, would you consider raising the regular dividend?

V. Balakrishnan

Well right now, pay up to 30% of our net profit as dividend every year and one-time dividend comes in only when we don’t have a use of cash. Today, we have close to some $3.7 billion of cash. We believe that strategic required in the business, because one of the areas we look at for our growth is also strategic M&As. So if we find some nice strategic fit we’ll use the cash. And I don’t agree with you that our growth is not decelerating. Even if you look at fiscal 2012 we’re still growing at 16%, 16% is not a small growth. And we believe if you look at the opportunities in the market, we have the ability to grow at a much faster pace. You do get impacted by short-term economic environment but if you take a medium to long-term view, we have a potential to grow double-digit for many, many years. There are opportunities in the market. So, I don’t think we have come to a saturated point in growth for us to look at making a permanent, accelerated dividend payouts.

James Friedman - Susquehanna

Okay. And my last question maybe for Sandeep. Am I correct that your number one customer which did continue to decelerate, is still in the BFS vertical?

V. Balakrishnan

Can you please repeat the question?

James Friedman - Susquehanna

Your number one customer, is it still in the BFS vertical?

V. Balakrishnan

Yeah. It is in the financial services vertical, yes.

Operator

Thank you. The next question is from Nabil Elsheshai of Pacific Crest Securities. Please go ahead.

Nabil Elsheshai - Pacific Crest Securities

Hi, guys, thanks for taking my question. I just wanted to ask about the investment in sales and marketing, you had seen some pretty steady increases in that and then it declined substantially this quarter. I’m guessing some of that is the euro, but it seems to be down even accounting for that on an absolute basis. So are you cutting back in investments in that and what’s that going to look like going forward, and if so, how does that align with kind of a more long-term focus you guys are talking about?

Basab Pradhan

This is Basab Pradhan. So, quarter-to-quarter changes in our sales and marketing expenses are really -- shouldn’t be taken as a trend. We have some lumpiness in marketing expenditure because of some major events that we -- either third party events that we do or our own events as well. But I think the headline news here is, what we are doing on re-architecting our sales force for the future and that is going very well. We have a very good handle on what we need to do for our sales force to be able to take the company into in the 3.0 realm of things that the strategy that we’ve put in place. And that is going quite well and hopefully I will have more to talk about in the coming quarters about this.

Nabil Elsheshai - Pacific Crest Securities

So we should expect to see that if it’s just lumpiness, that to reaccelerate going forward?

Basab Pradhan

No, I think it’s lumpy so it goes up and down, that’s what I meant by a lumpy. Because we do have some major events. We sponsor -- this time we were lead sponsors on, for instance Oracle OpenWorld, on an SAP event as well. So, these are fairly large commitments from us. That’s what I meant by a lumpy.

Nabil Elsheshai - Pacific Crest Securities

Okay. That’s fine. Just one other question I have, and I apologize if this was covered earlier, but just on the wage front given maybe a little bit of slackening in demand, what are you seeing on the wage inflation side and is the hiring market maybe easing up a little bit?

V. Balakrishnan

Well, wage is a function of supply and demand. This year we gave around 10% to 13% increase in offshore wages. It’s too early to decide on wages for next year. Probably, we’ll get a better view in April, but looking at the situation today we believe the wage increase for next year offshore could be in the high single-digit, not more than that.

Operator

Thank you. Ladies and gentlemen, due to time constraints that was the last question. I would now like to hand over the conference back to Mr. Sandeep Mahindroo for closing comments.

Sandeep Mahindroo

Thanks everyone for joining us on this call. We look forward to talking to you again during the course of the quarter. Thanks and have a good day.

Operator

Thank you very much. On behalf of Infosys, that concludes this conference call. Thank you for joining us and you may now disconnect your lines. Thank you.

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