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Infosys Inc. (NYSE:INFY)

Goldman Sachs Technology and Internet Conference

Feb 14, 2012 01:20 PM ET

Executives

Steve Pratt - Head-Consulting & SI and Member-Executive Council

Sandeep Mahindroo - Principal-Investor Relations

Analysts

Julio Contreras - Goldman Sachs

Rishi Jhunjhunwala - Goldman Sachs

Julio Contreras - Goldman Sachs

Just by way of quick introduction here my name is Julio Contreras. I'm the U.S. IT Services analyst and actually joining us all the way from India today is Rishi Jhunjhunwala who is responsible for all of the India IT services coverage. Hopefully I did some justice to your last name there.

Rishi Jhunjhunwala - Goldman Sachs

(inaudible).

Julio Contreras - Goldman Sachs

And together we actually work as a part of the global IT services team with responsibility for all the coverage on the consulting and outsourcing models.

So I'm going to actually defer to Rishi for all the big tough hard questions and I'll lob a couple of soft balls you way Steve. And actually joining us today from Infosys, we have Stephen Pratt who is the head of the global consulting and systems integration practice at Infosys is also a member of the executive counsel at Infosys as well. So very exited to finally meet you and have a change to kind of have some dialogue here and a little bit about you guys are finally sort of seeing and doing on the consulting side.

Maybe just as a way of sort of level setting everybody give us a couple minutes in terms of just understanding Infosys and then how the consulting and outsourcing practice or the consulting practice fits inside of the broader Infosys and then we can sort of jump into some specific questions if that's okay.

Steve Pratt

Hi everybody. So Infosys, as all of you know, is a consulting and IT services company and that is headquartered in Bangalore, India. It is probably I think one of the real leaders in the industry and we have always been a trend setter in the things that we have done and this last year is no exception that we have in the last few quarter's reorganized 145,000 people into three fundamentally different businesses. One is the consulting and systems integration business, one is the business IT services business which is mostly the outsourcing business and then a product and platforms business and so the overall strategy of Infosys is to be able to serve our clients in those three different areas and optimize each of those three different businesses. We have obviously been a very successful company. Our Mission Statement is to earn respect as a global corporation and everyday keep earning more and more respect, both from you guys, the investors, from our employees and probably most importantly from our clients. So that's sort of a quick snapshot of Infosys.

Julio Contreras - Goldman Sachs

Sure. And then by way of just conscious in terms of the consulting practice itself, where are you guys in terms of numbers right now? How do we sort of frame the actual capabilities that you guys have in the practice?

Steve Pratt

So if you look at the consulting and systems integration business at Infosys it's about 30% revenue, about $2 billion. It's 27,000 people and the strategy in consulting and systems integration is to combine world class management consulting on site with a world class delivery of technology and process design in remote location, right now mostly in India and China and expanding and so if you look at the employees that we have on-site, our consultant typically work in industry for a few years, go to a top MBA school. We have one feeder mechanism which is right out of a the top MBA schools throughout the U.S. and Europe and a little bit in the rest of the world and that we combine that with the recruiting that we do in India and China and other places.

Julio Contreras - Goldman Sachs

Okay. Maybe just to sort of start top level down help us understand what clients are telling you guys the demand backup, the demand environment. And we came into counter 2012 with questions and concerns about the financial vertical and what was going on in Europe and then you guys put up your numbers for the December quarter and I think Europe was actually surprisingly strong and financial practice seems to actually hold up okay.

So just in terms of where you where you guys are now in your discussions with your clients, how are they talking about the sort of general background for consulting spending I guess specially?

Steve Pratt

Well as you know consulting and systems integration tends to be a little bit more sensitive to the demand environment than certainly outsourcing work. I (inaudible) with the environment where we look opportunities is improving. I think that people were very, very worried even as recently as a few months ago or certainly the last year people were very worried about what was going on in the global economy and I think at this point people have said well we didn’t die and so we're hoping that things will, so that's important thing to establish, is that the probability of having a catastrophic event is very low at this point and so there is a little bit more certainty.

So the good news is that the clients, their timing for decision making is stable at this point whereas historically we've seen them in periods of uncertainty. People tend to stretch out people decision-making cycles and so that's stable right now. From a budget perspective overall though according to our information that the IT services budgets for clients for next year will be flat to moderately down.

Of course our plan to take market share to in to grow a healthy amount. From a pricing perspective I guess across the company we're expecting flat pricing. We may see a in consulting and system integration a slight increase in pricing because I think we still have some ways to go and we have still some headroom there.

Julio Contreras - Goldman Sachs

Maybe if you can help characterize the demand of what it is that clients are coming to your right now for because there is always that trade off of growth versus pure cost savings and I think this kind of plays a little bit to the strengths of where Infosys ultimately can help clients but with the overlay of thinking that there is a consulting practice inside of there, the clients sort of say, look we've got a lot to do but less money so we want to engage you guys to help us understand how to get through that sort of challenge. But are they investing in growth or do you think that this is more just kind of a cost focused environment if you will?

Steve Pratt

No, they are absolutely focusing on growth. Just to give you an example, we are working with a consumer products company who said they wanted to expand into a new geography and that the countries in that area were very desperate and in different processes, different governance, different ways of doing everything and so they hired to basically come in and create common processes, common governance, common systems of ways of interacting with their customers, interacting with suppliers, distributors and so it's very much a growth focused.

Also one of the world's largest consumer products good companies, they hired us to look at how they again in this case interact with their suppliers and distributors and to redesign that whole customer experience and to roll that out basically across the planet and we're doing a lot of very interesting things in Omni-channel commerce which is looking at how the web, if you look at the web and social media and retail stores and telephone, all interact. I think we legitimately can claim to be the leading consulting firm in the world when it comes to that kind of work, especially in retail and life sciences.

Julio Contreras - Goldman Sachs

Go ahead Rishi.

Rishi Jhunjhunwala - Goldman Sachs

Yes, sure. Maybe one question on your Infosys 3.0 strategy as you articulated it last year, what kind of time horizons you are looking for to implement it and how is it going to change the shape of (inaudible).

Steve Pratt

Right. So being Infosys to reorganize 145,000 people, we gave ourselves 30 days and we did it. That's not to say that everything is completely buttoned down but I think the reorganization to Infosys 3.0 is behind us now and we can look at optimizing going forward.

For those of you who don’t know, there are a couple of basic points at Infosys 3.0. One was to organize into those three businesses that I talked about and the other was to focus on verticals much more significantly and I will say that this is something that is strategically important for the company that other people will have not done, that if you look at what it takes to optimize a consulting and systems integration business from an HR point of view, how do you attract, retain, develop those people, how do you sell in the market, how do you build client relationships, it's very, very different than an outsourcing business and outsourcing business is more about efficiency and how can you and repeatability and those kind of things and then of course the products business is also very different and so whereas before we were structured in a way that made it very, very hard to optimize each of three businesses, that moving to Infosys 3.0 allows us to optimize those three businesses and to align more closely to our clients through the verticals. So these are very important things we've done but it's largely behind us.

Rishi Jhunjhunwala - Goldman Sachs

And there have been multiple management changes including the new CEO and everyone is that, do you think we are pretty much behind it swapping the major vertical heads last month or do you think that they have more scope for people to move around the organization?

Steve Pratt

Well its part of our philosophy. If you look at the history of Infosys we have moved people around a lot. A lot of companies do that. Certainly General Electric is famous for that, giving people different responsibilities and different experiences. If you look at BG, Srinivas, he used to lead the Enterprise Solutions group and then Europe and then manufacturing and now financial services and I think to develop good executive talents, having different experiences within a company is a really good thing. So I wouldn’t read anything into it other than that's what it is and we will continue to do that over time. Obviously CEOs session process is a different process. It's a board driven process and so that has its own life cycle.

Rishi Jhunjhunwala - Goldman Sachs

And you paid a major part in selecting the non executive chairman after Mr. Murthy stepped down. So what was the thought process behind that and what roadmap have you laid down for them over the next three, four, five years?

Steve Pratt

No I didn’t play a part there. No, that's a board leadership selection committee I think. I wasn’t on that obviously and so I don’t know what to tell you about that. Obviously I'm very happy with our leadership. Shibu has been around for a very long time. He knows exactly how Infosys runs. He helped design a lot of it and I think has good ideas on running the company and Chris as the executive co-chairman is obviously key to our innovation and thinking for that and I think with bringing in KV Kamath brings in some good fresh ideas which is I think important and he is a very successful business person and will have a lot of and of course Mr. Murthy is like no other person. He's an amazing man.

Julio Contreras - Goldman Sachs

Maybe switching to the competitive landscape a little bit and thinking about the consulting (inaudible) practice, existing side of Infosys now, typically we have the sort of the extensions of the world on one in the spectrum. It is where you guys said and then there is sort of other places in the space. What would you today are the capabilities that you sort of feel you really need. Is it more about being better at the vertical stuff or just getting more ingrained in vertical or are there other pieces that you have to bring to the puzzle and I guess specifically the piece that I'm kind of curious about is IP, especially because it seems like with intellectual property being a bigger piece of what we're seeing with some of the other companies acquiring smaller software assets and then kind of wrapping their SI practices around that, does that kind of a model sort of in general, something that you guys would consider or is that still kind of….

Steve Pratt

Well, yeah we are constantly look at acquisitions but I don’t think that's the secret sauce to growing a great consulting and systems integration business. I think that ultimately what it comes down to is leading when it comes to delivering value for your clients and if the client can hire you and get more results for their business, then anyone else with that same investment, then you'll win in the marketplace because if you are able to differentiate like that, what it does is it increases your net margin per professional and you grow and that in turn allows you to invest in your people, right through compensation, benefits, variable pay, professional development and it allows you to invest in your market offerings which is innovative new services and if you have great services and great people that are highly motivated then you can further differentiate and then this really good cycle happens and so we're doing a lot of investment in our people, from a consulting and systems integration side and we are making very large investments and in fact I don’t know if any of you have been to our Mysore Campus in India. It's an astonishing. I think it's the largest corporate university in the world. I think we just build the largest building in India since independence if I'm not mistaken and it's sort of a mix between a high end university and a high end resort and so we're making very large investments in our people and then from an investment in our market offerings perspective, that we are doing a lot around data visualization because I think that's a big area right now that is changing.

If you look at like I said digital marketing and the interaction between our clients and our customers, through these multiple channels that’s changing very dramatically and then we're investing in sort of the core process transportation. So sales, marketing, service, manufacturing, distribution, logistics, HR, finance, those kinds of things and so we're making large investments to keep that cycle going.

Julio Contreras - Goldman Sachs

And just for context, when you think about your practice, how important is ERP, whether it's Oracle or SAP. Is that still a majority of the ERP type of work that you guys would be doing at this point?

Steve Pratt

Yes, yes although it's probably as a percentage of the whole is lessening but certainly our relationships with SAP and our Oracle are strategically important us and the reason is that we don’t think of it from a technology perspective forward. We think about it from a client issue saying. So if you want to help your clients fix sales, marketing and service, or manufacturing, logistics, distribution or HR, finance, right or IT, most big companies in the world use SAP Oracle to do those things. And so you need to understand SAP and Oracle but it's necessary but not sufficient. Where you really differentiate is on how you design the processes or how you execute the programs to achieve the client value. Knowing the technology like I said is important but it's certainly not the key differentiator.

Julio Contreras - Goldman Sachs

We hear a lot about FAS and the evolution of the SAS model eventually leading to the end of systems integration and consulting because it's all going to be in the cloud and just be plugged together and it's all going to work seamlessly and it will be perfect. What's your sort of view of FAS and is it more risk, is it opportunity, what are you guys seeing from your clients as the rates to sort of SAS as an option currently?

Steve Pratt

Yes, the thing that you were talking about, that also goes in the clouds also magically takes care of itself. It doesn’t work that way. There, there need to be people in that cloud fixing it, right and maintaining it and so it's not like going to cloud will magically eliminate huge amounts of work. So I don’t see that and if you ask a lot of people their definition of cloud, you get a lot of different answers and so I think to me, understanding the architecture from a technology perspective, the differences in architecture, if things are remote to your location uh, is important right? Understanding different pricing mechanisms is important. So you can buy by the drink or by per transaction or per trouble ticket or per sales leader, per whatever, that understanding those pricing mechanisms and the economics of those pricing decisions is really important and so we're doing all of those things. We have a cloud group. We have quite a few things where we're getting paid per transaction but I think the notion that when things go to the cloud, and a lot of things are already on the cloud. They just haven’t been labeled on the cloud. If probably most of your companies have their stuff in the cloud, even though it's a near server. I doubt if you have it all sitting on your notebooks. I look around and a lot of you have….

Julio Contreras - Goldman Sachs

We'll almost all virtualized now.

Steve Pratt

Yes, everything is virtual, so you say, you are already on the cloud and so anyway, certainly we're looking at it very closely and we have a lot of interest in it but as a pure technology there are only a few things that are that interesting about it.

Unidentified Analyst

Yes, maybe if you can just talk about, there are many regulations that are going to get implemented over the next one or two years globally, especially in the banking and financial services space. So what part can Infosys play in that particular space and how meaningful do you think it can become, especially starting from a consulting point of view and then towards the implementation.

Steve Pratt

Yes, there is no doubt that regulations drive consulting work, for good or for bad and so if there is a new requirement that comes out that banks in other companies need to comply, they are forced to comply, therefore they need to do something to fix it and so I've been in consulting for a very, very long time and it is true, whenever there is a wave of regulations, there is a wave of consulting that goes with it because people need to create basically a temporary workforce that has a lot of expertise in that area to go make that change happen and then leave and that's what consultants do and so regulations obviously a double edged sword but from up here it's good for business perspective, it's generally good for our business, of course unless it kills the bank and then we don’t have any business.

Unidentified Analyst

Have you already started seeing a preemptive spends towards consulting on those regulations because there's still uncertainty about the implementation of the regulations coming out?

Steve Pratt

Yes, I'm not sure exactly what regulation which you are referring.

Unidentified Analyst

So for example if I give an example of Dodd-Frank, or workalod (ph) which are going to be implemented in…..

Steve Pratt

Yes, yes. We have seen some in those areas. We also have seen quite a bit in a lot of fraud protection and so we've done a lot of things and certainly back in when there was know your customer and you're up that we had a lot of work there. So yes, it's not a huge amount of work that we've seen yet in those areas but yes I'm sure we'll see something. That's probably going to be the key driver of our business but there will be some work, yes.

Julio Contreras - Goldman Sachs

One of the interesting things that happened I guess a couple of years ago with sort of the breakup of the accountancies from their accounting, kind of consulting counterparts, KPMG, (inaudible) et cetera, et cetera but we've also seen kind of a resurgence in some of the accounting consulting arm. So Deloitte, the PWCs, these guys have some pretty big accounting arms obviously but the systems integration practice inside of this seem to also have kind of reemerged a little bit. How do they sort of pose either a challenge to you guys or what would you say would be the differences in the way that you would approach the market versus a traditional kind of accounting consultancy, trying to get into (inaudible)?

Steve Pratt

Yes, well I actually think they're trying to figure it out. The one that’s different in that pack was Deloitte because Deloitte actually never spun off their consulting. It was going to spin off as Braxton the bank that cancelled at the last minute but if you look at PWC and IBM and Ernst & Young went to Capgemini and KPMG became bearing point but now I think their non-compete is over and they've I think probably reread Sarbanes–Oxley and said that they are going to reenter the consulting business. Essentially I think it's still in early days and they are certainly hiring a lot of people. So we are seeing that in the labor markets but I think they are trying to figure out do we get into the business that we were doing before which is a mix of consulting and technology and more on the systems integration side or are they going to go with more advisory business that is more closely linked to the audit and tax business.

So I think it's early days. My guess is overtime that the market will drag them into systems integration because the programs tend to be bigger and more complex and more leverage but there are restrictions on which clients they can serve because they can't serve their audit clients or their tax clients and so they have a somewhat limited market and I think that there are big cultural differences between audit, tax and consulting. Audit and tax tend to much more risk averse and consulting tends to be more accepting of risk or demanding of risk.

Rishi Jhunjhunwala - Goldman Sachs

If you could just elaborate a bit on the kind of client behavior you are seeing in a U.S. client versus European client, especially on the discretionary side, considering the fact that Europe still has a lot of uncertainty behind it versus U.S. which is kind of a moderate growth?

Steve Pratt

Yes, so I think that we are in this strange situation now, where actually companies tend to be in better situations than their surrounding economies and so although I think there is a lot of uncertainty and like I said before, I think in the U.S. the future seems to be more clear than it's been in recent months or even years and so I think that um, issue that we're in from this study, fairly slow, fairly steady, rise of the economy going forward and companies are acting that way.

In Europe, even though there is a lot more to macro-economic uncertainty that individual companies are still committing to things and making decisions although it will probably be a lot more lumpy than in the U.S. Also the fact that for us, especially continental Europe is a relatively percentage of our business right now. So when it's a relatively small percentage of our business wining one big deal can make a big difference in your revenues and margins and you will probably see a lot more lumpiness and Europe would be guess, as between continental Europe. But I think our strategies are paying off in continental Europe. If you look at France and Germany have been big success stories for us. I think we got the right leaders in place. We got the right teams behind them and we've taken a very local flavor to it and Germany, we have a great German team and in France we have a great French team and that strategy seems to be paying off.

Julio Contreras - Goldman Sachs

Why don’t we go ahead and open up for some questions? There's also going to be a little bit of transition here? Any quick questions please?

Unidentified Analyst

You were talking about decision making process early on in the discussion and you were saying that you had seen things stabilize. I was wondering was that consulting or was that on a consolidated level?

Steve Pratt

Yes, I think the decision making is probably across the board. I think that the decision making is, during really good times decision making is really fast and then it went to this point where it was slowing down and I think it's stable at this point and we like for it to be faster but I think on really all three sides of the business it seems to be taking the same relative trajectory.

Unidentified Analyst

(inaudible).

Steve Pratt

Yes, I think what changed in the last month or so is that like I said before, we didn’t die in the economy. Greece didn’t completely blow up and the Eurozone didn’t implode and they cotangent spread and I think so the macroeconomic environment, although certainly not rosy doesn’t look like doom and gloom. So I think obviously if you think that you are going to have a really bad road head, that being cautious and conserving capital is a good road and I think there is a little, I think the general consensus is that the probability of anything catastrophic happening is pretty low.

Unidentified Analyst

In terms of hosting cloud solutions, are you building any of your own data centers? Are you partnering with other firms or customers are just doing that on their own and you're advising them on who did you use?

Steve Pratt

Yes, we are generally partnering. We're not planning on building giant data center firms.

Unidentified Analyst

Hi, I'm (inaudible) from Goldman Sachs. What is your strategy for Latin America in terms of IT services?

Steve Pratt

Yes, so Latin America, we have actually talked a lot about Latin America. We actually see there is a big expansion area for us. We are starting to see a lot more client activity in Latin America and one of the nice parts about being us is that things like extending Latin America is sort of new territory for us and so we have a lot of avenues for growth, simply from geographic expansion whereas a lot of companies that are everywhere can't do that, so.

Julio Contreras - Goldman Sachs

Yes, we'll take one last one and then it's breakout from here.

Unidentified Analyst

Hi I'm Jim (inaudible) Capital. Can you talk about the scale of your business in China and whether the competition for talent is more fierce than elsewhere?

Steve Pratt

Yes, I'm not sure I know all the numbers from China but I said on some of the Infosys China board meeting last quarter, Sandeep, do you want to address them?

Sandeep Mahindroo

3,400 people in China presented. It formed just under 2% of our revenues. We are setting up our development center in China in Shanghai which should be ready in the next couple of years and that will have a capacity to accommodate about 10,000 people. Presently we are present in five cities in China and we have five centers and two of the centers have been opened up in the last 12 months or so. We've seen a fairly strong response in China in the last 18 to 24 months.

Steve Pratt

Yes, obviously expanding in to China is a long term strategy for us which is very important to tap into the resources coming out of China.

Julio Contreras - Goldman Sachs

Okay. Great, with that there is breakout. From here we're going to go, no breakout. Okay, sorry about that. The man says no break out.

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