Satyam Computer F1Q08 (Qtr End 6/30/07) Earnings Call Transcript

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Satyam Computers Services Ltd. (SAY)
F1Q08 Earnings Call
July 20, 2007, 9:00 AM ET

Executives

V. Srinivas - CFO
B. Ramalinga Raju - Founder and Chairman
Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses
Venkatesh Roddam - CEO, Nipuna

Analysts

Rod Bourgeois - Sanford Bernstein
Trip Chowdhry - Global Equity Research
Jamie Friedman - Susquehanna Financial Group
Joe Foresi - Janney Montgomery Scott LLC
George A. Price Jr. - Stifel Nicolaus & Co., Inc.
Julio C. Quinteros - Goldman Sachs & Co.
Ajay Nandanwar - India Capital
Sandeep Shah - ICICI Securities Ltd.
Anthony Miller - Arete Research
Ashish Thadani - Gilford Securities Inc.
Ashwin Mehta - Ambit Capital
Bhuvnesh Singh - Credit Suisse First Boston
Diviya Nagarajan - Motilal Oswal Securities Ltd.
Dipesh Mehta - Khandwala Securities
Kanchana Vydianathan - Pacific Crest Securities
Suveer Chainani - Macquarie Securities
Harmendra Gandhi - Brics Securities
Arvind Ramnani - Bank of America
Surendra Goyal - Citigroup
Parul Inamdar - Edelweiss Securities
Shlomo H. Rosenbaum - Stifel Nicolaus Co.
Sunil Tirumalai - Credit Suisse First Boston
Kunal Sangoi - Edelweiss Capital Ltd

Presentation

Operator

Good morning and good evening. This is the course call conference operator. Welcome to the Satyam Earnings Conference Call for the First Quarter of 2007-08. As a reminder for the duration of this presentation, all participant lines will be in the listen-only mode, and this conference is being recorded. After the presentation, there will be an opportunity for you to ask questions. [Operator Instructions].

At this time, I would like to turn the conference over to Mr. Srinivas Vadlamani, the CFO of Satyam Computers. Please go ahead, sir.

V. Srinivas - Chief Financial Officer

Thank you. Thank you, Resham. A very good morning, and good evening to all of you. And thank you for joining us to discuss our Q1 results.

Joining me on this call, are Raju and Ram from Satyam, and Venkatesh from our subsidiary, Nipuna. Before we start the discussion, I would like to draw your attention to the fact that during this call we may make certain forward-looking statements concerning our future growth prospects. Such statements involve a number of risks and uncertainties associated with our business. Please refer to our various periodical filings with SEC for a description of such risks. The company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the company.

I now hand over the session to Raju.

B. Ramalinga Raju - Founder and Chairman

Thank you, Srinivas. Good morning and good evening. Thank you for joining us on the call today. First quarter of fiscal 2008 was a landmark period that commemorated the first 20 years of Satyam's journey to deliver stakeholder value. It's all the more inspiring to be into the 21st year on the heels of an encouraging performance, and then an upgrade to our annual guidance.

In Q1, Satyam recorded sequential revenue growth of 10% in U.S. dollars. However, an unprecedented appreciation of the rupee against all major currencies during the quarter one reduced a corresponding growth rate in rupees to 2.87%. Our revenue increase compares very favorably with the guidance stated at the beginning of Q1.

EPS for Q1 was at Rs.5.67. In Q1, we added 29 customers, including two Fortune U.S. 500 corporations. Our net addition of associates in Q1 was 2716. The number of customers billing more than $5 million, increased to 65 during the quarter.

Our first quarter highlights included revenue growth across all verticals and similar achievements in our service offerings and regions. Engineering Services and Infrastructure Management Services grew by 14% and 36.4% respectively, validating significant investments in these areas over the past several years. Expansion in these services is over and above accelerated growth in Consulting and Enterprise Business Solutions, which grew by 15% in Q1, another strong showing for a practice that has grown swiftly and steadily for a long time.

In addition, our focus on maximizing customer value by delivering integrated business solutions and by partnering with them in their business transformation has resulted in stronger relationships. That also led to an increase in strategic engagements. For example, Nestle selected Satyam as a partner for its Global Business Excellence project in Q1.

Moreover, our continued focus on expanding our global footprint has resonated with the market. Our enhanced presence in Asia-Pacific and Europe has led to increased opportunities and regional growth. This along with our well-established strength in the U.S. positions us to leverage our global presence to service the transformational efforts of our customers.

Furthermore, during Q1 we engaged in discussions with numerous high-profile global clients at SatyamWorld Customer Summit. More than 50 CXOs and 150 other decision makers, attended the event. These discussions indicated that the demand environment is positive. Against this backdrop and our current performance, we have increased our annual guidance as per U.S. GAAP. Our revenue growth will be between 34% and 35.5% in financial year '08 and earning per ADS will grow between 28.3% and 29.7%.

I am delighted to share with you that Satyam has been ranked as Number Three global outsourcing vendors and Number One among Indian IT services companies, in a survey conducted by Brown-Wilson Group Inc., for the Black Book of Outsourcing, Top 50 Best Managed Companies 2007.

Overall, it was a strong first quarter performance, and a good beginning to financial year '08, a year when Satyam's total income will exceed the $2 billion mark. I now request Srinivas to describe the financial highlights for Q3.

V. Srinivas - Chief Financial Officer

Thank you, Raju. Our detailed financials and our investor link have been posted on the website, and I assume that most of you would have got an opportunity to go through the same.

Now Q1 has been a very good quarter for Satyam, as we have seen an improvement in all operating metrics. Strong volume growth witnessed in the earlier quarter continued with increasing contribution of offshore revenue. Increase of revenue productivity along with higher utilization, helped us mitigate margin challenges posed by steep rupee appreciation during the quarter.

In Q1, our revenues grew around 10% sequentially in US dollar terms, and 3% in rupee terms as rupee appreciated 7% during the quarter, which impacted our revenues by Rs.138 crores. Sequential volume growth for the parent company was 9.5%, with offshore volumes growing at 13%. This is the fourth straight quarter of double-digit increase in offshore volume.

Offshore billing rates were up by 1.31% and onsite rates increased by 1.46%. Because of rupee appreciation, EBITDA margins for the quarter declined by 64 basis points sequentially and our consolidated Indian GAAP to 22.42%; rupee appreciation affected our margins by 230 basis points; visa cost impacted the margins by 100 basis points; increase in RSU charge impacted the margins by 40 basis point, and losses in subsidiaries impacted by another 30 basis points. The total impact on margins during the quarter was 400 basis points, which was mitigated to large extent by strong operating performance.

Billing rates had a positive impact of 85 basis points on margins. Offshore contributed 60 basis points, utilization added 45 basis points to the margins and other operational efficiencies added another 145 basis points to margins. Net-net, there is decline of only 64 basis points in this quarter and despite of such as steep rupee appreciation. Because of whatever appreciation we have seen in Q1 we now expect the margins for the whole year to decline by around 125 basis points, compared to last financial year. This is a year-on-year decrease of 125 basis points.

Increments have been finalized at 16% for offshore association, 5% for onsite associates. The impact of increments on the margins is around 350 basis points. The loss of margins because of increments was little bit recouped [ph] by operational efficiencies and the increase in revenue productivity. These increments are in effect from 1st July. So they will have an impact on our margins in Q2.

Coming back to Q1, the gross manpower addition in the parent company was 3,978 and net addition was 2716, which included almost 1300 freshers. We now expect the gross manpower addition for fiscal '08 to be around 15,000 to 16,000, against our earlier guidance of 14K to 15K stated at the beginning of year.

Parent company's cash and bank balances increased by $24 million during the quarter. CapEx for the quarter was $22 million. CapEx for fiscal '08 is estimated to be in the range of $80 million to $100 million. Nipuna reported revenues of $11.9 million, a sequential growth of 4%. Because of 7% rupee appreciation and salary increments, at net level Nipuna had a loss of $2million. For fiscal '08, Nipuna is expected to achieve revenue of $ 61 million and be EBITDA positive. In accordance with our earlier guidance of net profit, Nipuna is expected to have marginal losses for the year on account of rupee appreciation witnessed in Q1.

Turning to U.S GAAP, revenue for the quarter grew 10% sequentially to $452.3 million and net income for the quarter was $93.1 million, and a sequential growth of 8% after factoring in stock compensation charge of the $5.9 million.

Overall, we have had a very strong quarter in a very challenging external environment, reflecting the robustness of our business model. Thank you, and now we'll throw open the session for Q&A.

Question And Answer

Operator

Thank you very much sir. We will now begin the question-and-answer session. Please note that all participants who have logged into the call are allowed to ask questions. There is no specific priority for participants in India and the ones outside India. [Operator Instructions]. The first question comes from the line of Mr. Rod Bourgeois from Bernstein. Please go ahead sir.

Rod Bourgeois - Sanford Bernstein

Great. Rod Bourgeois here. Hey, I had a question about the growth outlook; I mean a question about the receivables. You have increased your fiscal '08 revenue guidance by 5.5 points, and this occurring pretty early in the year. You mentioned the sort of confidence that you have with your customers that I guess is giving you some visibility into the growth outlook, but I was hoping if you could give us some specifics on what's giving you the confidence in raising your guidance by this magnitude this early in the year? And to what extent is this confidence coming from large PDO [Parts Disposition Order] that are ramping up right now?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Increase: Rod, good morning this is Ram Mynampati here. There are obviously a number of factors that go into our consideration as far as revised guidance is concerned. Clearly the inputs that we got from the customers at Customer Summit are important, but from a near-term perspective what we see in the pipeline and the pace at which the prospects are converting into customers and orders, would also play a great role. We also have closed two large deals this year; one obviously we have announced with Nestle. We would also have orders worth almost $100 million that we have won from a retail client and that we expect with to ramp up. So we have taken a look at the ramp-up patterns that we see clearly visible among the existing customers and the momentum that we see in Q1 that gives us the confidence, in addition to the fact that we have outperformed the guidance in Q1 by about 5% or so. So, on the back of 10% quarter-on-quarter growth in Q1 and the visibility that we have in the pipeline, that's the confidence that we have.

As far as the specifics related to ARP is concerned, clearly ARP is a strong suite of ours. In this quarter as well, we have grown almost 14% or so and that continuous to be a very strong market segment. But we are also seeing other services segments like Infrastructure and Engineering Services. At least, we believe that the momentum that we are witnessing in Q1 would continue in the next few quarters, perhaps may not be to the same magnitude. And we're also seeing fairly good prospects across the vertical market lines. The assets have grown very nicely this quarter. Telecom continues to be very strong, retail and healthcare have grown very nicely this quarter. So clearly, all round we are saving good prospects and the momentum that we see coming into the Q2 is what gives us the confidence for the revised guidance.

Rod Bourgeois - Sanford Bernstein

And in your opinion, this is your second quarter in a row where you've posted growth above your peer group. Can you characterize what you think is enabling you to do that right now? Is it just large deals that are ramping at this point in time, or is there something else happening out there that's allowing you to pose better growth the last couple of quarters?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Well, we can only speak for ourselves. We can't speak for others. What we see is the opportunities that we are pursuing are coming to fruition quickly, and the relationship management strategies that we have adopted, particularly in the large existing customers seem to be paying off. And, we are able to service the opportunities coming our way effectively, as well as some of the large deals that we have won have ramped up and continue to ramp up nicely. So, I can only speak for what we see in the market, and we will leave the rest of it for others.

Rod Bourgeois - Sanford Bernstein

Okay great. One quick question on the DSOs and receivables outlook; would you expect the DSO picture to attenuate after you make it through some of this large deals that are currently in the process of ramping up? Can give us any sort of outlook on the receivable picture?

V. Srinivas - Chief Financial Officer

Rod, this is Srinivas here. This quarter, we have seen a marginal increase in the receivable days. Last quarter it was 87 days, this quarter it has gone up to 90. But I characterize it as a quarterly phenomenon. Our drive to reduce the receivable days continues, and we want to bring it down to as much as possible. So I think in some... may be a couple of years back, this number used to be almost 110 days or so. So, over the period we have brought it down, and we will continue our efforts in lowering this number further.

Rod Bourgeois - Sanford Bernstein

Alright, thanks guys very much.

Operator

Thank you. Mr. V. Srinivas [ph]. Are you ready to take your next question, sir?

Unidentified Company Representative

Yes.

Operator

Ladies and gentlemen, before we proceed, we will like to inform you please limit yourself for one question per participant, so that everyone has a turn to ask a question. Our next question comes from the line of Mr. Trip Chowdhry, from Global Equities Research. Please go ahead sir.

Trip Chowdhry - Global Equity Research

Thank you, and again congratulations on very good execution in a very difficult and challenging exchange environment. Few questions, regarding the pricing trends like in U.S. employees' salaries in Silicon Valley is rising about 10% a year. Midwest it's about 5% and New York City is around 12%. I was wondering when you engage with your clients in these various outsourcing and offshoring deals, have you factored the fact that if a client is in Silicon Valley, works say in Midwest, works say on East Coast, you are asking them to... if a contract by the rate at which the salaries in the local markets are increasing, for example, you have mentioned the fact that your contracts are coming around 3% to 5% higher. I think you are leaving something on the table; you can easily go up to 10% higher. Any thoughts on that?

V. Srinivas - Chief Financial Officer

Can you help us, can you provide some consulting?

Trip Chowdhry - Global Equity Research

I was just wondering like what kind of push backs are you getting?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Thank you. Yes, Trip this is Ram Mynampati here. You know what, the numbers that we have shared with you are on an average. When we are saying, few bidders [ph] are coming at 3% to 5% higher prices, those are the average numbers that also says that there are some customers that are coming in at higher than that, and some customers perhaps lower than that. So we are giving ballpark figures. Clearly, there is a difference in the costs that we incur in delivering services in different geographies, and that doesn't limit to only U.S, that is true in across various other geographies as well. In proportion to the costs, our rates would obviously be different, depending on the type of customers that we service, the type of services that we deliver and at what point in the value chain are we engaging with our customers. So all those are factors in our pursuit as well as our ability to renegotiate. Without getting into specific details about the geographies that you mentioned, all those are factors that we consider as part of our renegotiation.

B. Ramalinga Raju - Founder and Chairman

Just to add to what Ram has stated, I do agree with what you have broadly indicated it. Generally speaking, we do today have adequate reasons to go back to the customers in many instances, to ask for better prices, which our colleagues are on an ongoing basis attempting wherever it is reasonable to do so. The rupee has appreciated, the salary hikes have been consistent, and in many instances high. And we also have an environment of the quality and the type of our services are also constantly improving. Therefore, the value that the customers are able to derive is on the rise. Therefore, these things are very much being kept in mind by our customer-facing colleagues, in appealing to our customer... pay salary... the price hikes, wherever it is appropriate.

Trip Chowdhry - Global Equity Research

Perfect. I won't ask the second question. I will ask it, may be in the second round or offline. Thank you.

V. Srinivas - Chief Financial Officer

Thank you.

Operator

Thank you Mr. Chowdhry Our next question comes from the line of Mr. Jamie Friedman from Susquehanna Investment. Please go ahead.

Jamie Friedman - Susquehanna Financial Group

Hi. Thank you its Jamie Friedman. My first question is for Srinivas. Srinivas, when you are describing a 125-basis point decline in the operating margin this fiscal year, could you help us decompose as you have for the actual numbers for the quarter, the rupee impact, the subsidiary loss offset by the offshore and utilization contribution?

V. Srinivas - Chief Financial Officer

You want the numbers to be repeated again. I said it in my speech.

Jamie Friedman - Susquehanna Financial Group

Srinivas, I thought that what you had said was I recall the first quarter actual numbers and I was asking you to describe the impact with the fiscal '08 guidance?

V. Srinivas - Chief Financial Officer

Okay. Yes, 125 basis points. Whatever has... a decline of 64 basis points, already I have explained. Then, basically what is going to happen is while this entire 125 basis points we will attribute to the rupee appreciation, but there are so many things that when... things to it. For example, I already touched upon it in Q2, we have this increments coming up, which will have on year-over-year basis, 350 basis points impact. So we need to absorb that. And then of course, we will also have tailwind coming from the visa charges coming down going forward, whereas in Q1 we had 100 basis points impact. But going forward, we may not be spending similar kind of... that will give us some tailwind. And in terms of various other relievers, other than saying that we will continue to focus on those levers like offshore composition moving back and then loading the fact that we trying to move it up. And then, of course broadening the associate pyramid, like taking more and more entry level trainee programmers and thereby reducing the cost of delivery, and better fix it with project monitoring, and of course renewing of SG&A. So these are various levers that we have and we expect all these things to come to our rescue. And of course, the pricing which we have already seen, 2% to 3% rise in increase is what we have factored in into our guidance. So combining all this, net-net we are paying year-over-year basis there is going to be 125 basis points decline, in Indian GAAP consolidated. But when it comes to U.S GAAP the decline is going to be only 50 basis points, because we have this FAS 123 charge in this year, which is going to help us in kind of mitigating the decline to only to 50 basis points and be at big level.

Jamie Friedman - Susquehanna Financial Group

Okay, thank you that's helpful. And then just as a follow-up, Srinivas; in the quarter in the other income lines the foreign currency exchange line item was significantly higher the loss associated was higher than what we expected, but it was offset by the other income expense. I guess, could you help decompose what happened in your hedging strategy that impacted the foreign currency exchange and how it was generalized over to the other income line items. Thank you?

V. Srinivas - Chief Financial Officer

Yes, we have a translational loss of around $25 million and hedging gain of roughly around $23.5 million or so. Net-net around $1.5 million that is around to Rs.6 crores in Indian rupees is loss we have taken in the other income. We have hedged with a sum of around $750 million as on 30th June, but that number used to be around $450 million as on 31st March. So we have gradually increased that number during the quarter. So that is number one. Number two we also adopted a very simple and conservative accounting of taking the all the losses on a month... on a MTM basis to the P&L, unlike various other accountancy practices that are in vogue, wherein one of these losses are costed in balance sheet. We have not done that, everything is taken to the P&L. So that is the reason why you will see a loss... a marginal loss. But overall, I think we are quite pleased with our hedging strategy, over the years because we... the guiding principle, our cardinal principle here is not to make money out of it, because we are not in the business of ForEx, we are in the business of IT. So, as along as I can protect myself from the headwinds of appreciation, I think I have done my job better. So if you look at over the last three, four years; the loss or the gain is more are less around a nominal amount of $1million plus or $1 million minus. So this quarter also similarly, we have $1.5 million loss. So overall I think on the hedging side, I think we are doing quite well, and we will continue to focus on this particular area.

Jamie Friedman - Susquehanna Financial Group

Excellent. Thank you very much. I just want to sneak in one last question maybe for Ram, which is that, about the BFSI vertical increased sequentially by 5.5%. It increased year-over-year only 12% and I was wondering if there might have been a reclassification of a client that may have impacted the year-over-year growth. Thank you.

V. Srinivas - Chief Financial Officer

Not really, there is no reclassification. What we have seen is that there is a greater growth in the BFS segment of the BFSI, and the insurance has not done as well as BFS has. That's what we had to with BFSI number being what it is. But there is no reclassification of the customers.

Jamie Friedman - Susquehanna Financial Group

Thank you very much.

Operator

Thank you. Our next question comes from the line of Joseph Foresi from Janney Montgomery. Please go ahead sir.

Joe Foresi - Janney Montgomery Scott LLC

Hi guys. My first question here is just, what's your... going back to where you were talking about earlier. You were talking about the accounting being more a month-to-month basis for your hedging program. Is this... should we look at this loss in the first quarter as a one-time large loss that you're changing the accounting for, or what do you expect that other income line to sort of like going forward?

V. Srinivas - Chief Financial Officer

That is very difficult... this is Srinivas here, to predict. It all depends on how the rupee behaves going forward. I think... I don't think the loss... the large loss in Q1 within only $1.5 million, that as it be other income line. So, I think you will not be able to predict as to how this will be in future, but I think... I can only say that, we will do whatever we can, under the circumstances to ensure that the impact on the other income line because of this rupee appreciation will be as minimal as possible.

Joe Foresi - Janney Montgomery Scott LLC

My next question here is, some of your competitors have talked about sort of maintaining at least their net margin even if they rupee operating margins come under continued pressure here from the rupee. Is that something that you guys are focused on sort of returning, because if revenue growth is going strong and sort of returning the upside here to the investor?

V. Srinivas - Chief Financial Officer

Yes definitely, I mean it is our endeavor to sustain our margins. But it's kind of unprecedented appreciation, 7% in this quarter and based on our guidance of Rs.40.50. For the year, if you look at FY08 guidance, the rupee appreciation is around 10%. That is what already we have factored in into our guidance. So that will have a steep impact of around 3% that is 300 basis points. Then on top of it, we have the increments having an impact of 360 basis points, then we have the RFCO charge going up year-on-year. So all these things are having an impact of almost 700 to 800 basis points. Yes, I fully agree with you that the main savior is going to be the growth, the top line, that is where we are completely focused on, and that will give us many solutions for this problem we are facing. All told 125 basis points is what, at this point in time, we are aiming and we are comfortable achieving for the year.

Joe Foresi - Janney Montgomery Scott LLC

And just one last one I'd like to sneak in here. Could you may be characterize for us, what stage you think the growth is in ARP, package implementation. Are we in the early stages here? Do you feel like those... there is a long room to grow? Are we moving towards the middle stages? If you can just characterize it. Thanks guys.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Joe, this is Ram Mynampati here. It is a really difficult to identify the stage at which we are in the growth, because you know it is a moving, sliding window if you look. There are different customers that we are servicing, each customer is at a different stage of engagement, and every quarter we are adding new engagements and new customers. So overall, I think it's a sliding scale, that's all I can say. There are some that are in early stage, there are some that are in mature stage. But we continue to see fairly good growth opportunities in the broader Enterprise Solutions space, and we have fairly updated what the potential in the market. That's the extent that I can put a color on, thank you.

Joe Foresi - Janney Montgomery Scott LLC

Okay, thank you.

Operator

Thank you, Mr. Foresi. [Operator Instructions]. Our next question comes from the line of Mr. George Price from Stifel Nicholas. Please go ahead sir.

George A. Price Jr. - Stifel Nicolaus & Co., Inc.

Hi thanks very much. I just want to clarify a couple of things that you have gone through before, not to be the dead horse [ph] but, just on the operating margin now being down a 125 bps year-over-year in fiscal '08; last quarter the guidance was for flat. Looking back at your comments that the puts and takes last quarter, it seems that basically the variance this quarter is mainly due to the rupee. I just want to confirm that if there aren't any other changes that might be impacting the change in margin guidance?

V. Srinivas - Chief Financial Officer

Hi. This is entirely because of the rupee.

George A. Price Jr. - Stifel Nicolaus & Co., Inc.

Okay.

V. Srinivas - Chief Financial Officer

Otherwise, we could have maintained our stance.

George A. Price Jr. - Stifel Nicolaus & Co., Inc.

Okay. Just also on the wage increases; they seem to be a little higher than what we've seen at other companies, both onsite and offshore modestly so, and I think we've sort of seen that in prior quarters or prior years with Satyam. I guess is there a particular reason maybe why Satyam has to be towards the upper-end of the wage increase range?

V. Srinivas - Chief Financial Officer

This is a one of the important decisions we have taken last year as well as this year, which we are very happy to announce that they borne fruit very effectively, that has a direct result in our attrition coming down from almost near 20% to now 14.9%. So I mean the benefits we get out of lower attrition, I am sure will more than outweigh we losses or the impact of the higher increments we are giving will have on our margins. Net-net I think it is a... yes, I agree that we have given higher than the industry average the last year, even this year as well. But that is strategic and we are very happy that it is giving us the desired results.

George A. Price Jr. - Stifel Nicolaus & Co., Inc.

Okay, and if I could I mean to kind of be the dead horse on the stuff below the line. But I don't think I am... I still don't think I am clear on what's going on with Fx and other income. Just looking at the P&L that you provided before the interesting income expense, where you have $23 million loss in Fx and $22.3 million other income gain, what's kind of driving those?

V. Srinivas - Chief Financial Officer

You are asking about the other income?

George A. Price Jr. - Stifel Nicolaus & Co., Inc.

Well yes, both the loss on Fx $23.1 million and then the other income $22.3 million in the P&L. I just still not clear as to what exactly is driving those or would have expected and why we see Fx to be a little bit different.

V. Srinivas - Chief Financial Officer

Yes, this is what I was mentioning the 23... the highest year is the translation loss. We need to convert all our foreign currencies assets into Indian rupees. So at that time we will incur a translation loss, and the lower figure the positive number you're seeing there of $22 odd million and yes, basically that gain because of the hedging. We forward sell our dollars and because of that we have a gain coming in. So even though for example, today dollar is 40-50, since I am forward selling it, I may get say Rs.42. So to the extent I am mitigating the loss to some extent. Those are the two lines and net impact is what we take to the P&L and our other income.

George A. Price Jr. - Stifel Nicolaus & Co., Inc.

Okay. I Understood. Thank you.

Operator

Thank you Mr. Price. Our next question comes from Mr. Julio Quinteros from Goldman Sachs. Please go ahead.

Julio C. Quinteros - Goldman Sachs & Co.

Good morning guys or good evening. I have one quick question. Can you just clarify the 125 basis points that you are talking about relative to the 50 basis points that I think you mentioned under U.S. GAAP? Are those the exact same numbers or what is the nuance for the differences in those two margin targets for fiscal year '08?

V. Srinivas - Chief Financial Officer

This is basically the stock option differences in accounting between both the GAAPs primarily. One is the stock option charge between both the GAAPs, and also there could be some kind of charges under U.S. GAAP for our acquisitions that we are making, which also may have some impact. So... another thing I would like to buy your attention is that the 125 basis points under the Indian GAAP is EBITDA, that is before depreciation; under U.S. GAAP what we are talking is EBIT that is after depreciation, that will also cause some difference.

Julio C. Quinteros - Goldman Sachs & Co.

Perfect. Thank you.

Operator

Thank you Mr. Quinteros. Our next question comes from the line of Mr. Ajay Nandanwar from India Capital. Please go ahead.

Ajay Nandanwar - India Capital

Hi, congratulations on great number. Just a couple of questions regarding your strengths in some of the areas; it seems like your Enterprise sales I want to look on up, lots of ADM's sales have whether increased or have grown slowly at 3.5% to 4% in quarter-on-quarter. And that seems like a trend that's in there for last four quarters or so. And also your manufacturing sales are out of strong this quarter. Is this a system... is this the company which is cost conscious just because ADM is very cost saturated after weakness that you see?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Yes this is Ram Mynampati. This is particularly quarterly trend that perhaps is specific to a given quarter. And now if you are looking at manufacturing for instance, we have seen very good growth in manufacturing sectors in the last few quarters. This quarter just happens to be such a quarter where that is not the case. But I would not read into either of those things that you have mentioned as long-term trends. The fact that our Enterprise Solutions practice is very strong, fairly gives us a significant growth in that space. But we've not been focusing on ADMS deliberately in order to grow Enterprise Solutions. So the stage at which we are in the business is such that ADMS is lower than CNBS. But I wouldn't read too much into that.

Ajay Nandanwar - India Capital

Sir, but if I look at your ADM from Q1 '07 to Q1 '08 it is gone from 48.5% from the company's revenue to 43.7% on a sustained basis. So that is... there is some kind of more than a quarterly trend there, churn somewhat?

B. Ramalinga Raju - Founder and Chairman

Part of it is clearly explained by the fact that the Enterprise Solutions has grown really fast. It is not clearly reflective of that the ADM that's not growing at the reference level. As Ram has stated and both are very strategic to us and our confidence is we are developing special facilities in both these areas and with equal emphasis. We are confident that application development in mainframes also would see going forward better growth rates.

Ajay Nandanwar - India Capital

Also in Infrastructure Management side, the company has [ph] grown pretty nicely. Are they areas of strength that you see in terms of specific services or verticals or geographies?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Like anything else then we have leading a service, we can choose specific areas within that service line, and given the understanding that we have with our customers, we targets specific market segments. In case of infrastructure as we have been sharing with investors for last few quarters, that has been a focus area for us. We are building confidence in that space across multiple service lines in infrastructure and what we are seeing is that, we are able to market effectively in specific verticals, and also infrastructure services become part of few of the large deals that we've won, given that we are delivering integrated services as a large deal, some of the bulk is attributed to the ramp up in our large deals. So it's just a result of the focus that we brought to the two other service lines Infrastructure and Engineering.

Ajay Nandanwar - India Capital

Give your thoughts, slightly more specific about which verticals and which infrastructure services are you seeing more traction at?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Well, again while there are some quarterly phenomenon that's visible here. But our endeavor is to market infrastructure services across all the verticals, because infrastructure is such a common aspect of every market segment. It is just a matter of time rather than one vertical not looking at infrastructure as a focus; Remote Infrastructure Management, Security Administration and bunch of things that we are doing on Infrastructure Management that are focus areas for us. I would not point to one or two verticals that are good candidates for infrastructure. I think the opportunities exist in every one of the space. And the other thing that we are seeing is that this is an opportunity for us to integrate multiple service ends, for instance, with the offer maybe for us to integrate infrastructure and BPO services among many customers' Infrastructure and Engineering Services. So one opportunity identified is the service line would lead to ancillary opportunity in another service line as well. So it's a fairly interesting market. I don't know whether we need to be any more specific than that.

Ajay Nandanwar - India Capital

That's great. Thank you so much and best of luck.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Thanks.

Operator

Thank you Mr. Nandanwar. Our next question comes from the line of Mr. Sandeep Shah from ICICI Securities. Please go ahead Mr. Shah.

Sandeep Shah - ICICI Securities Ltd.

Thank you. Looking at the first quarters other income, its not being that high. But despite that, the second quarter EPS guidance is close to around 4% to 5% sequential decline. I do understand that the wage inflation will affect the margins, but it seems that the EPS decline what we have guided for the second quarter seems high. So can you just quantify what is the outlook on the operating margin for the second quarter to cause... to achieve the revised guidance of the EPS, the third quarter and the fourth quarter growth on the EPS will be around 15% Q on Q?

V. Srinivas - Chief Financial Officer

Yes this is Srinivas here. It is going to be a decline as you rightly mentioned in Q2, this primarily because of the increments that we are giving, effective 1st of July. While I'll not be able to talk any specific numbers there, but it is going to decline in Q2 and then quickly catch up in Q3 and Q4. Net-net, at the end of year if you look at it, it will decline at around 125 basis points. Other than that quarter-on-quarter we are not giving any guidance at the margin level.

Sandeep Shah - ICICI Securities Ltd.

And this high utilization rates are sustainable?

V. Srinivas - Chief Financial Officer

That is one of the important lever and important focus areas and initiators within the company, and we will continue, while we will not be able to comment or give any specific number here, I suffice to say that we will try to keep it as high as possible, that is what we have been doing historically.

Sandeep Shah - ICICI Securities Ltd.

Okay. I am sure in the other income in ForEx gain or loss accounting, do we do mark-to-market for the options also?

V. Srinivas - Chief Financial Officer

Yes everything is market-to-market.

Sandeep Shah - ICICI Securities Ltd.

Okay. Thanks very much.

Operator

: Thank you Mr. Shah. Our next question comes from the line of Mr. Anthony Miller from Arete Research. Please go ahead.

Anthony Miller - Arete Research

Yes hello gents. There is a couple of interesting trends here and I am trying to see if they are two related with quite dramatic changes in them. The first one is pricing; your price realization dramatically increased this quarter twice the size sequentially as last quarter. Yet your proportion of fixed bid work also declined dramatically about 3 percentage points over the last quarter. And I am wondering whether what's actually going on here is you are actively trying more into type of materials at folk works [ph] so that you can come on to assess what pricing which will of course drive your top line. But surely if it is the case as you move more away from fixed speed doesn't that expose on margins further down the line?

B. Ramalinga Raju - Founder and Chairman

We don't think in fact to move away from fixed bid and in fact we may pursue a greater proportion of fixed bid being bid. And the pricing increase last quarter and the fact that the fixed bid may have declined marginally are not related as such. The price increases have happened are on account of some instances that we may have renegotiated better prices and also on account of the fact that we now have better realized prices that we may have been able to establish on account of better productivity.

Anthony Miller - Arete Research

But thething is your fixed bid... the decline isn't just a quarterly phenomenon. This is the third successive quarter it's gone down. If you look back to September quarter, it was 39 point something. Now it's 32 point something. So, it kind of belies your efforts on saying that you are trying to maintain or increase fixed bid, where as your competitors have been increasing fixed bid?

B. Ramalinga Raju - Founder and Chairman

Well we believe that trend would change, and there may have been instances where we would have found fixed bids as not as remunerative under given circumstances. We may have gone slow on given contracts that we may have put in place, and that in fact also speaks for the emphasis that we are laying and realized by this being better. And we expect that going forward the proportion of fixed bid would only go up.

Anthony Miller - Arete Research

And do you see a set of an equilibrium levels that's... what do you think is the appropriate mix of fixed bid versus time and materials?

B. Ramalinga Raju - Founder and Chairman

No, we are not... while we are having internal targets, we have not given the guidance on the same. But we believe that if we make judicious choices and systematic about how we are managing fixed bid, and how we are adjusting issues set on productivity and better opportunities for realized prices being improved.

Anthony Miller - Arete Research

Okay then. Thanks very much.

Operator

Thank you Mr. Miller. Our next question comes from the line of Ashish Thadani from Gilford Securities. Please go ahead

Ashish Thadani - Gilford Securities Inc.

Yes hi, good evening. Great quarter. In non-ADM engagements can you talk a little about who you are specifically competing against head to head, and whether the win rate has changed over time?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Ashish this is Ram Mynampati here. We can't be company specific rather than to say that the competitive mix today is far more global than it has ever been and there are clearly instances where we compete with the dominant Indian players as well as global systems integrators. And that hasn't changed the dramatically in the case of only non ADMS. I would say that's a broader observation and that it is probably equally valid for Enterprise Applications of non-ADMS opportunities as you have put it. Now different organizations obviously bring different the core competences in pursuing opportunities. To that end, there is going to be difference in who we compete with in a given opportunity, and that's true with ADMS as well as if it is non-ADMS. So in the last few quarters we haven't seen any great shift as far as competitive mix is concerned. We tend to compete with few or many of the same players that we have been competing sort of few years now.

Ashish Thadani - Gilford Securities Inc.

Okay. So it appears that perhaps the results might be driven a little bit more by a deeper and fast deeper penetration and more rapid ramp up of some declines that you actually won?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

And also our ability to develop our deeper competencies and our ability to market those competencies more effectively. I know one thing that we are trying to do consciously is to deliver value to the customers by investing and creating the right competencies beyond technology or beyond product, to be extent that we are able to bring our solutions closer to the business situations, our ability to resonate well with the customer is greatly enhanced. So I would say that not only the state is strengthened in a given market but we have as is the case with Enterprise Solutions. But our ability to create the right business solutions that resonate well with customers is probably what we are doing greatly nowadays.

Ashish Thadani - Gilford Securities Inc.

Great. And if I may how far has rupee appreciation pushed back your profitability at Nipuna in terms of time? And also again staying with Nipuna, can you talk a little bit about what the ownership structure is looking like, based on your discussions?

Venkatesh Roddam - Chief Executive Officer, Nipuna

Hi, this is Venkatesh here. I think rupee appreciation has actually affected us, more than it has IT. So to that extent while we look at the year end and then we retain our outlook to say that we will be cash positive for course for the year, I think it will have impact on the net level in one way or the other as a quarters pass by. As far the ownership structure is concerned, as it was announced in the January results, I think during the course of this quarter, the external investors are in the process of actually exiting the organization, so thereby converting Nipuna into 100% subsidiary in the true sense of the work by about the end of this quarter,

Ashish Thadani - Gilford Securities Inc.

Terrific. Thank you very much.

Operator

Thank you Mr. Thadani. Our next question comes from the line of Ashwin from Ambit Capital. Please go ahead sir.

Ashwin Mehta - Ambit Capital

Yes, I just had a question in terms of the scope for improvement, in terms of some of our margin levers. They are running at offshore contribution at around 52%, which is probably the highest in the top tier companies, where do we see that to be increasing from over the next few quarters?

V. Srinivas - Chief Financial Officer

Offshore, Srinivas here... offshore is only one of the levers we spoke about. There are a gamut of levers we keep working on. Yes, I mean, we have been working on it as an initiative and as you can see this number is it to be around 42% or so, only a few quarters back and we've moved up to 52% now. So while it is very difficult for us to put any numbers there, but I can only say that our renewal continues and we need to see how much we will be successful. But I fully agree with you there are limitations, here and it is not that that we can perennially take it up, but then our endeavors continue.

Ashwin Mehta - Ambit Capital

And in terms of utilizations, we are already at around 80%. Do we see that coming down over the next one or two quarters because of the freshers coming in or?

V. Srinivas - Chief Financial Officer

Yes, that is what typically happens, when a large bunch of freshers join in a particular quarter. Definitely it will have an impact in that quarter, but it is our endeavor to again put them back into product to use thereby reducing the average cost of delivery as and less possible.

Ashwin Mehta - Ambit Capital

Okay. Thanks a lot. One last question, what would be our effective tax rate like this year?

V. Srinivas - Chief Financial Officer

As we mentioned earlier it is going to be around 12%.

Ashwin Mehta - Ambit Capital

Okay thanks. Thanks a lot

Operator

Thank you Ashwin. [Operator Instructions]. The next question comes from the line of Mr. Bhuv Singh, from Credit Suisse. Go ahead Mr. Singh

Bhuvnesh Singh - Credit Suisse First Boston

Thanks a lot for giving me a chance for questions. My question is to Mr. Srinivas. Sir can you tell us that what is the cash... what is the news that we are getting on your cash and why it is somewhat lower compared to your peers?

V. Srinivas - Chief Financial Officer

I didn't get what is return you are saying?

Bhuvnesh Singh - Credit Suisse First Boston

Yield?Just where the cash is?

V. Srinivas - Chief Financial Officer

Yes it is around 8%. I think it is basically as per the market rate. I don't think it is lower. We are making around 8% per annum before tax.

Bhuvnesh Singh - Credit Suisse First Boston

But you said basically like one of your largest peers they talked about 10% adjusted yield in the quarter and for the full year they talking about more like 9%. So I was wondering... is there some other sort of section which we can do... which can increase in someway or 8% is the level we have use stand for the year?

V. Srinivas - Chief Financial Officer

While it is not our endeavor to increase the yield, but it again depends on when we entered into a particular deposit, particular transaction with a bank. So to that extent some of the deposits will be locked in at a particular interest rate. So in increasing interest scenario we may be loser, but similarly in a decreasing interest scenario we might have gainer. So I think... so just to say that we will endeavor to increase this yield. Otherwise I think 8% is very decent.

Bhuvnesh Singh - Credit Suisse First Boston

And put it as a last clarification over there; what portion of our cash is in Indian rupees versus foreign currency?

V. Srinivas - Chief Financial Officer

Almost all of it. I shall say 90% of the overcall cash should be in India.

Bhuvnesh Singh - Credit Suisse First Boston

Okay, thanks. I really appreciate it.

Operator

Thank you Mr. Singh. [Operator Instructions]. Our next question comes from the line of Diviya Nagarajan, from Motilal Oswal. Please go ahead Ms. Nagarajan.

Diviya Nagarajan - Motilal Oswal Securities Ltd.

My questions have been answered. Thank you. All the best for the rest of the year.

V. Srinivas - Chief Financial Officer

Thank you.

Operator

Thank you Ms. Nagarajan. Our next question comes from the line Mr. Dipesh Mehta of Khandwala Securities. Please go ahead.

Dipesh Mehta - Khandwala Securities

My question has been answered.

Operator

Thank you Mr. Mehta. Our next question comes from the line of Kanchana Vydianathan from Pacific Crest Securities. Please go ahead.

Kanchana Vydianathan - Pacific Crest Securities

Hi, thank you. I have a question with respect to Europe. I was wondering if you could help us to understand in terms of your strategy in Europe; are there any specific verticals that you are focusing on and also specific regions within Continental Europe?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Well, Kanchana this is Ram Mynampati here. Clearly Europe has been one of the growing markets for us. And as is the case with a region that consists of many countries, different markets would appeal to us differently; for instance, most of the Western Europe you will see the typical focus is in financial services, banking and financial services is the focus area. In other markets, manufacturing continues to be focused, telecom is focused vertical. We can't generalize and say one market segment is equally attractive across all the various geographies. So what we do is, localize our strategies within the broader Europe to the specific regions, whether it is Western Europe, Germanic regions, Scandinavian regions, and we have specific go-to-market strategies based on what we see as the most attractive vertical in that market is concerned. Suffice it to say that the broader growth will come from these three market segments; financial services, manufacturing and telecom, and obviously the region would be picked, which one would have a greater growth.

As far as the strategies in the region are concerned; one thing that we are trying to do is enhance the intimacy with a given region, investing in creating the localized competencies whether they are language specific, whether they are culture specific or whatever. And making sure that we are better positioned to deal with the unique nature of the requirements and also invest in staging the delivery, if you will by leveraging the near-shore opportunities to the extent possible before we are able to leverage our offshore capability. So we just need to make sure that we are seen as an organization, but that is culturally and operationally closer to the market and that is what has led to the success that we have achieved so for in Europe.

Kanchana Vydianathan - Pacific Crest Securities

Okay, one other question. With respect to I guess, if I were to try in the manufacturing vertical. Could you break it down into the sub-segments and help us understand, I guess if we were to look at the automotive section or the aerospace. Where are you seeing the growth and where is the growth not as greater as you had expected it would be?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Well the three things that you said automotive, aerospace and heavy manufacturing, all three are growth engines for the manufacturing vertical. Again you would see the aerospace growing in more in Europe, because of the specific opportunities that we perceive in Europe compared to U.S. Whereas you will see greater growth in automotive in the U.S. and then heavy manufacturing in the U.S. and the rest of the world. The opportunities that we are pursuing tend to be clearly focused on the competencies that we have been able to build. As you can see we have a very robust practice in automotive, we are known for the strength in automotive market. And that gives us the significant opportunities, coupled with strength in Enterprise Solutions, we are able localize our approach to specific opportunities. But you would see variations quarter-on-quarter in terms of revenue realized from a given market segment. But overall we realize a significant portion of our revenue from manufacturing vertical and that will continue to be the case.

Kanchana Vydianathan - Pacific Crest Securities

Okay. Thank you very much.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Thank you.

Operator

Thank you. Our next question comes from the line of Suveer Chainani from Macquarie Securities. Please go ahead.

Suveer Chainani - Macquarie Securities

Hi congrats guys. I think a great execution in a tough environment. Here's another one on foreign currency; I am sure you guys must be tired with it, but it's a simple question. Assuming that rupee stays at these levels, then would that be right to say that next quarter you will not face a translation loss, but you will have currency gains hedging gains. Would I be right in saying that?

V. Srinivas - Chief Financial Officer

Yes to some extent yes. What you are saying is right.

Suveer Chainani - Macquarie Securities

But still you are seeing an EPS impact southwards so of... if I could just put that together then I would assume that your contracts are not maturing next quarter but they are doing in Q3 and Q4 and therefore foreign currency gains are not getting impacted in Q2?

V. Srinivas - Chief Financial Officer

No, no. I don't think our guidance is factoring in this. See the EPS growth which we are seeing in Q2 is primarily because of the impact of the increments. In the quarter in which we are giving increments, there is going to be huge impact on the margins. So it is very difficult to recover in the same quarter, so it will be recovered over the next couple of quarters. So that is the primary reason, nothing to do with rupee.

Suveer Chainani - Macquarie Securities

I was just guessing that, yes, you would have a de-growth in there because of wage inflation, but you will have a positive impact of foreign currency gains because... and Q2 you will not have translation loss?

V. Srinivas - Chief Financial Officer

No, no. That is what I am saying; we don't take any foreign currency gains because I can't quantify it.

Suveer Chainani - Macquarie Securities

Right.

V. Srinivas - Chief Financial Officer

So to that extent, what I have taken is zero.

Unidentified Analyst

Okay. So you will not, but have translation loss in Q2?

V. Srinivas - Chief Financial Officer

I don't know, I mean that is --...

Suveer Chainani - Macquarie Securities

If the rupee is static?

V. Srinivas - Chief Financial Officer

Well, I think this is difficult to judge.

Suveer Chainani - Macquarie Securities

If the rupee is static, I am saying if the rupee is static, then you won't have translation loss.

V. Srinivas - Chief Financial Officer

Yes, yes. But I request all of you guys not to get alarmed about the rupee because please judge us based on our operating metrics. It is something which is not in our control and I can't really say in what way it goes, so guessing on it, it will be difficult. But on the operating metrics, you will see, as you can see I mean we are... we have put up a good show on almost all metrics. So this is... comes below the operating line, which is not at all in our control.

Suveer Chainani - Macquarie Securities

Perfect. Thanks a lot for your question... answer. All the best.

Unidentified Company Representative

Thank you.

Operator

Thank you, Mr. Chainani. [Operator Instructions]. Our next question comes from the line of Harmendra Gandhi from Brics Securities. Please go ahead.

Harmendra Gandhi - Brics Securities

Hello, congrats for a good quarter. Just is it fair to say that the large part of realized price hikes or which has happened or which is going to happen during the year, coming from renegotiations in the enterprise solution business?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

No, I would not say that. I would say that it is coming largely from renegotiations of contracts as well as better realization of prices in the instance of fixed price engagements. I would not limit it to only Enterprise Solutions or any thing like that. We would not be in a position to localize the trainee service segment. I would broad base it and say that it is coming as a result of enhanced pricing as well as better realization of prices.

Harmendra Gandhi - Brics Securities

Thanks a lot.

Operator

Thank you, Mr. Gandhi. Our next question comes from the line of Mr. Abi Gami from Bank of America. Please go ahead Mr. Gami.

Arvind Ramnani - Bank of America

Hi this is Arvind Ramnani, sitting next to Avi. Just wanted to check that an idea on your strategy of changing the number of freshers on projects. You said that in the U.S. that is one of your dealers. What steps are you taking to make sure that the quality of deliveries don't get affected?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Well that is our bread and butter. In terms of our delivery model, what we promised to deliver to customers is quality of deliverables. One of the things that we invest in is, developing the right processes and developing the right program and project management capabilities, to the extent that we see some risk in the quality of deliverables, we will not do that. Obviously to the extent that we are able to control the cost as well as quality, that is than we deploy the resources.

I would also quickly add that, just because we are inducting freshers, doesn't necessarily mean that we are compromising on either the quality or capability. Clearly, the fresh crop of recruits coming in are far more in tune with the technologies and far more adopted the type of things that we do. So I would not necessarily treat them as novices, I think it's a much better opportunity for us to induct them earlier into the lifecycle of engagements than perhaps was the case a few years ago.

Arvind Ramnani - Bank of America

Great, thank you.

Operator

Thank you, Mr. Gami. [Operator Instructions]. Our next question comes from the line of Surendra Goyal from Citigroup. Please go ahead Mr. Goyal.

Surendra Goyal - Citigroup

Yes, hi. Good evening everyone. Srinivas, could you help us in understanding the pricing, utilization and offshoring assumptions in the FY '08 margin guidance. And may be you could talk about YOY changes that you expect in the various assumptions?

V. Srinivas - Chief Financial Officer

I spoke about it. But let me say, some of them I can tell. For example, the pricing, we guided that on year-on-year basis, we are going to see a 2% to 3% increase. That is what we have factored in. Of that, majority of it has already picked in Q1. So that is kind of, behind us.

Second one, about the loading factor and offshore onsite mix, associate mix, all those things while we have our own internal targets, we will not be able to give any specific numbers there other than saying that these are the levers we have to necessarily work on, if at all we have to effectively address the headwinds we are going to face because of whatever rupee as well as because of the increments. So these are some of the necessary things we have to do and we will continue to focus on that.

Surendra Goyal - Citigroup

On utilization, we are almost at or maybe high in terms of last few quarters. So, do you think there is further room for improving the utilization?

V. Srinivas - Chief Financial Officer

Yes, I mean we have been. That is one of the gains. That is one of the important initiatives and we continue to focus on it. But as we move up and raise the bar, I know the scope for raising the bar further will be limited. So to that extent, yes, it is reasonable to assume that the headroom there is coming down. So nonetheless we will continue to focus on it and see where we can take it.

Surendra Goyal - Citigroup

Okay. And like out of the total hiring of 15,000, 16,000 that you gave, what is the number of trainees in that, if you could just help us with that?

V. Srinivas - Chief Financial Officer

It will be around... it will again change based on the business requirements, but reasonable to assume it will be around 50% to 60%.

Surendra Goyal - Citigroup

Thank you so much.

Operator

Thank you, Mr. Goyal. Our next question comes from the line of Mr. George Price, Stifel Nicolaus. Please go ahead.

George A. Price Jr. - Stifel Nicolaus & Co., Inc.

Hi. Most of my questions have been answered. But I just wanted to go back and clarify one thing I may not it heard correctly. But could you just give us... repeat the guidance in terms of the way that operating margin you expect to change in fiscal '08 versus fiscal '07 in both U.S. GAAP and Indian GAAP. Thank you.

V. Srinivas - Chief Financial Officer

Yes. I mean this one single most reason for the difference if at all, is the FAS 123 charge which is there only in U.S. GAAP. Last year, it is $12 million; this year we expect it to come down to $6 million. So that will give me some scope to improve the margins. And the other one is the 125 basis points is before depreciation. That is what we call EBITDA in Indian GAAP. Whereas the EBIT is after depreciation, that will also give some difference. So these are the two primary reasons. Otherwise, the fundamentals are same in both the GAAPs.

George A. Price Jr. - Stifel Nicolaus & Co., Inc.

I am sorry, was the U.S. GAAP operating margin guidance down 50 basis points year-over-year, did I hear that correctly?

V. Srinivas - Chief Financial Officer

Yes that is what I said.

George A. Price Jr. - Stifel Nicolaus & Co., Inc.

Okay, apologies. Thank you.

Operator

Thank you, Mr. Price. Our next question comes from the line of Ashwin from Ambit Capital. Please go ahead Mr. Ashwin.

Ashwin Mehta - Ambit Capital

Just I wanted to understand in terms of our offshore onsite contribution, how doses it differ across our core service line and where do we see the maximum scope in terms of improvement in this coming from?

V. Srinivas - Chief Financial Officer

Hi again we will not be able to share. It is reasonable to assume that it will obviously be different. For example, it is reasonable to assume that in ERP Enterprise Business Solutions, that segment will be a little higher, but we will not be able to share numbers across the service lines.

Ashwin Mehta - Ambit Capital

Okay, thanks.

Operator

Thank you, Ashwin. Our next question comes from the line of Parul Inamdar from Edelweiss Securities. Please go ahead Ms. Inamdar.

Parul Inamdar - Edelweiss Securities

Yes, good evening sir. Just one worry over here the Enterprise Solution business accounts for almost 45% of the current revenue. So if you would see the incremental revenues of that coming from this segment in the quarter, it accounts to almost 50% of the incremental top line. So do you think this is a limiting factor or do you think this should correct you?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

It depends on how one looks at it this could be seen as a great strategic advantage. And Enterprise Business Solutions are closer to being able to provide business solutions to customers, and that is the direction in which we are headed. This is a competence, brings together the spread systems to a common value creating platform and therefore, it is not to be necessarily seen as a negative, on the contrary it can be a great positive. So this we believe going forward can be... they may be differentiated and it has been slow in the past and this has been also giving us number of cross-selling opportunities, this number of customers. It so happens that we have 165 Fortune 500 clients and in many cases, the establishment of the relationship we declined in the first place may have happened on account of our pronounced strength in this space. And thereafter, we have come in many cases to work on many offerings with the customers.

Parul Inamdar - Edelweiss Securities

Sure sir. Still have one more thing, I think the total client contributions, in the past couple of quarters are we seeing that the long-term sort of 10,000 doing better than the top ten. Even within the top 10, it's generally the top 6 to 10 which are doing much better than 2 to 4. So do you think this is going to correct somewhere or do you think this trend will continue?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Well, first of all to put things in perspective, we don't deal with static set of customers that comprise the top 10. Top 10 is the order... decreasing order of the customers that gives us revenue. So the fact that some one who is not in the top 10 and has grown well this quarter might put that customer into the top 10 next quarters. So we can't really read trends into that other than to say that is the threshold revenue for entry into the top 10, is that growing or not. And we have seen significant increase in that threshold. Today, we have seen the 10th largest customer on an average, the threshold has grown by about 15%. That means, it is... the 10th largest customer is giving us significantly higher revenue today than what was the case a few years ago. That is most important rather than whether the top 10 is contributing or not. And I would say, the fact that we have only 35% of our revenue coming from the top 10 is a fairly positive trend in the sense that we are broadening the base that we use to generate our revenue. But there is a greater opportunity to grow I would look at that as very positive sign, rather than negative.

Parul Inamdar - Edelweiss Securities

Sure, thank you sir and also the best.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Thank you.

Operator

Thank you, Ms. Inamdar. Our next question comes from the line of Shlomo Rosenbaum from Stifel Nicolaus. Please go ahead

Shlomo H. Rosenbaum - Stifel Nicolaus Co.

Hi, thanks for taking my question. I just have two housekeeping questions. Can you guide me one, with the quarterly annualized turnover and then afterwards, if you could separate your hiring expectations between IT services hiring and then Nipuna hiring?

V. Srinivas - Chief Financial Officer

The PBN attrition is 14.9. If you look at Q4, sorry Q1 annualized, little bit on 13.8% or so. And in terms of the hiring plans, I already spoke about, we have 15K to 16K at the gross level, that is the gross addition we're looking at only in the parent company. And out of that, the freshers composition is difficult to talk about. It is based on the business needs, but may be roughly around 50% to 60% may be freshers, but that will vary depending upon the business needs.

Shlomo H. Rosenbaum - Stifel Nicolaus Co.

Well, how about do you have a breakdown for what would expect for Nipuna separately from rest of the company?

V. Srinivas - Chief Financial Officer

We're definitely not giving any guidance for the subsidiaries.

Shlomo H. Rosenbaum - Stifel Nicolaus Co.

Okay thanks.

Operator

Thank you, Mr. Rosenabum. Our next question comes from the line of Dipesh Mehta of Khandwala Securities. Please go ahead Mr. Mehta.

Dipesh Mehta - Khandwala Securities

Our domestic utilization declined slightly during the quarter, any specific reason for that?

V. Srinivas - Chief Financial Officer

No, no. I think, this is I will say as a quarter-over-quarter kind of an evolution. If you look at for example, yearly number, last year and this year during the FY07 to FY06 our revenue will be almost 60%, domestic revenues. So this particular thing in a particular quarter is not a secular one just a quarter-over-quarter aberration.

Dipesh Mehta - Khandwala Securities

And because it explains from I think from last eight quarters, I have never seen this kind of thing?

B. Ramalinga Raju - Founder and Chairman

Yes we appreciate. But this is not to be seen as having the domestic market witness in a de-growth. On the contrary we believe that there are greater opportunities in the Indian marketplace.

Dipesh Mehta - Khandwala Securities

So you would expect 90 plus for the full year?

B. Ramalinga Raju - Founder and Chairman

No we are not in a position to give any guidance.

Dipesh Mehta - Khandwala Securities

But we expect at least some guidance?

B. Ramalinga Raju - Founder and Chairman

All we are saying is our confidence for growth in Indian market continues to be high.

Dipesh Mehta - Khandwala Securities

Thanks.

Operator

Thank you, Mr. Mehta. Our next question comes from the line of Anthony Miller from Arete. Please go ahead.

Anthony Miller - Arete Research

Yes thank you. Just a follow up question on enterprise as it is quite strongly in this KPO business. Can you just give us a view as to where the demand is currently coming from? I mean, for example, is it mainly coming from new installation green fields or is it mainly migrations and upgrades and recent rollouts. Is it stronger in SAP than Oracle, is it better in some regions than the others. Can you just add a little bit of subtle colors to that please?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Anthony, this is Ram Mynampati here. I hate to say this, but it consists of all of those things, because our enterprise solution is fairly broad in the definition as well as the reach. I would just leave you with the start of two broad sense in the market and perhaps that can explain to an extent. Number one; there is a greater adoptation of packaged applications for a larger segment of solutions in the market than custom apps. That's the trend that we have been seeing and we believe that trend is increasing. To that end, I think it is supported by two things; one is the enterprise applications are becoming richer in functionality and capability. And second, organizations have come to the conclusion that implementing an enterprise application and extending it and modifying it is better and more cost effective alternative than building applications from scratch. So it is a greater adoptation of enterprise applications across many more market segments than what one would have expected a few years ago, that is one trend.

Second trend that we are seeing is that the type of enterprise applications and the type of opportunities we see depend on the market segment. For instance, you would expect a product like SAP to be very strong in manufacturing or pharmaceuticals whereas a product and suite of RP product will be stronger in BSSI. So it depends on the type of market that you are pursuing, the type of strength that a given vendor would bring about. But what is more important is the opportunities are coming from not just the organic product centric solutions, but are coming broader integration opportunities that we are addressing. I think that's the things that we are seeing in enterprise applications space. It is very difficult for us to localize to a product, or a market segment, or a geography, but it depends on really what it is that you are discussing and what is the best opportunity to service in that particular situation.

Anthony Miller - Arete Research

I want to be fair to say then that this is also the area which is demanding the premium pricing?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Relatively speaking, I guess in the sense that there's obviously higher price related to higher level of competency and that also goes to say that it will probably include higher cost to the enterprise service as well. But I wouldn't say higher prices only come from enterprise services. As I said in the other question... answer to other question, it's not fair to conclude that the price increases are coming only from enterprise apps.

Anthony Miller - Arete Research

Are you able to get enough skilled staff to fuel the growth particularly in enterprise and particularly in SAP, as I understand there are shortages?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Well, obviously it varies based on the type of competence, type of product and type of market. We are doing well in many segments and we are not doing as well in some segments.

Anthony Miller - Arete Research

Okay. Thanks very much again.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses

Thank you.

Operator

Thank you, Mr. Miller. Our next question comes from the line of Mr. Sunil from Credit Suisse. Please go ahead.

Sunil Tirumalai - Credit Suisse First Boston

A quick question, can you please repeat the breakup for the margin operating for this quarter, its going to be a bit I couldn't catch it early on.

V. Srinivas - Chief Financial Officer

You want Q1 margin analysis?

Sunil Tirumalai - Credit Suisse First Boston

Yes, the breakup, that's right.

V. Srinivas - Chief Financial Officer

Yes, I mean the... in Q1 or Q4, the Indian GAAP the operating margins declined by 64 basis points. What I was sharing is that this is the outcome of many other things that happened in this quarter. So to get a full picture, I think we need to see what really, what are the various moving parts and what really happened. That is also one kind of spelling, so we have for example, the rupee appreciating by 7% which has an impact of around 230 basis points. Then we have around 100 basis points headwind by way of visa expenditures going up. Then we have another 20 basis points coming up because of RSU charge and subsidiary performance. So this totals to roughly 400 basis points. But because of various other operational improvements, we could cover up roughly around 334 basis points... 336 basis points and then net-net only 64 basis points is one not reflected there. This 336 basis points came up from various sources with dominant one being the quarter-on-quarter pricing increase of roughly around on a blended basis 1.1%, that is one and then we have offshore going up. And then also we have the loading factor improving. So these are some of the things which helped us in capping the decline in the margins to 64 basis points.

Sunil Tirumalai - Credit Suisse First Boston

Okay, that's great. Thank you, sir.

Operator

Thank you, Sunil. Our next question comes from the line of Kunal Sangoi from Edelweiss Securities. Please go ahead.

Kunal Sangoi - Edelweiss Capital Ltd

Thank you. Sir my question is regarding the engineering solutions that we have now with the TTN revenues now crossed over $100 million. What kind of... if you could brief, what kind of work do we do in this particular segment and what are the opportunities that are ahead of us and how are we addressing that?

B. Ramalinga Raju - Founder and Chairman

So, as we have said with you all in the past, this is a very exciting opportunity for us. Just to reset the stage for the market, it broadly consists of two types of services. One is the mechanical engineering related services and second is the hi-tech services if you will, electronic systems on the chip and services loaded to the chip. Those are the two broader services that constitute engineering services. We also have a small component of our services coming from geographic information systems, but that's a fairly small component.

And as you can see, the drive for engineering services is coming from... again let me just paint you a broader picture. Our ability to extend the reach into services space, for a long time if you take manufacturing, for a long time, we were involved in delivering services in the core manufacturing area, but now we are extending the reach into the broader design as well as the operational support systems, if you will. So the involvement in engineering comes from our ability to extend beyond the core manufacturing. So we are able help product design, help with new product introductions, help with the configuration management, help with a bunch of things that would involve organizations coming up with new products and also coming up with new machinery that also make you would deliver products.

So, mechanical engineering in that sense, broadly is attractive in market segments like manufacturing, like retail and perhaps few other markets. That's for transportation, logistics, these are the market segments where we see mechanical engineering playing a larger role and that's the type of services we are very involved in. We are involved in helping introduce new products, helping design new machinery and also managing the configurations of the products that are being built.

On the hi-tech side, as I am sure you know telecom, media entertainment tend to be the most attractive market for this. But we were also seeing convergence of multiple markets; for example, opportunities of services where automotive and electronics come together and there is an opportunity for us to deliver services to make the automobiles have a greater extent of automation and electronics, as part of the new introduction of automobiles. There is a far greater opportunity of convergence of vertical that drive hi-tech engineering services.

Kunal Sangoi - Edelweiss Capital Ltd

Okay. So, if I could just ask you the breakup, may be not in terms of number but broad detail as to what the verticals... would the manufacturing be, manufacturing vertically, vertical contributing about 60%, 70% of the engineering?

B. Ramalinga Raju - Founder and Chairman

I can't give you a number, but suffice to say that manufacturing is a significant number. Yes, because all the three sectors, automotive, aerospace and heavy manufacturing, all three would have opportunities for both type of engineering services, both the mechanical engineering as well as the hi-tech engineering.

Kunal Sangoi - Edelweiss Capital Ltd

Okay. That was helpful. And sir, second was regarding the infrastructure management services, we've seen that if you still could offer us some comments on that. We have seen that the infrastructure management over the last four quarters, if you look at the CAGR, is in growing a little lower than the company average. What is happening on that side and how does the environment look?

B. Ramalinga Raju - Founder and Chairman

Well, if you look at this quarterly number, infrastructure grew by 30% quarter-on-quarter, so we are catching up obviously, we are doing the things right for... the right go-to-market strategies are giving us that kind of acceleration. As I have answered in response to another question, not only the direct marketing related to the services, but we also see integration of services coming from multiple service lines as a result of the large strategic deals that we have won. In operational, I think those strategic deals also we are delivering infrastructure management services and the like. So that is also contributing to the growth. I am not going to say here... sit here and say that we will experience 30% growth quarter-on-quarter henceforth, but at least we are seeing positive signs of infrastructure management and the investments that we have paid. We have made an infrastructure management paying off.

Kunal Sangoi - Edelweiss Capital Ltd

Okay, okay. Thanks so much and all the best.

B. Ramalinga Raju - Founder and Chairman

Thank you.

Operator

Thank you, Mr. Sangoi. Ladies and gentlemen, that was the last question. I would now like to hand the floor over to the Satyam management for their final remarks.

V. Srinivas - Chief Financial Officer

I'd... this is Srinivas here. I would like to thank every one of you for dialing in and for your active participation. If you have any further questions, please do get in touch with us and I would like to once again thank every one of you.

Operator

Ladies and gentlemen, thank you for choosing Chorus Call conferencing facility. Thank you for your participation. You may now disconnect your lines. Thank you.

V. Srinivas - Chief Financial Officer

Thank you.

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Comments

[Nidhi Kadalbal:]

So rupee appreciation had the biggest impact, per the following paragraph. Now that we have adjusted our view to the new levels of rupee, maybe it will not affect again unless it appreciates again.

creating-wealth.blogsp.../

<blockquote cite="Because of rupee appreciation, EBITDA margins for the quarter declined by 64 basis points sequentially and our consolidated Indian GAAP to 22.42%; rupee appreciation affected our margins by 230 basis points; visa cost impacted the margins by 100 basis points; increase in RSU charge impacted the margins by 40 basis point, and losses in subsidiaries impacted by another 30 basis points. The total impact on margins during the quarter was 400 basis points, which was mitigated to large extent by strong operating performance."<block...

2007 Jul 22 11:17 AM