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Wipro Inc. (NYSE:WIT)

Goldman Sachs Technology and Internet Conference

Feb 14, 2012, 10:30 AM ET

Analysts

Julio Contreras - Goldman Sachs

Julio Contreras - Goldman Sachs

Okay, well we’re going to go ahead and continue. Sorry for the slight delay here. It’s a really intersecting day I think as we look across the whole IT services landscape here. We’ve gone from Canadian IP to Indian Offshore, some telecom IT specialists, and then a couple of other things along with the way with the whole broad IT services group and so it’s nice to kind of close out with you guys. Thank you for coming. This is the presentation opportunity for Wipro to kind of help us understand what you guys are doing and what you’re seeing in the space here. So just by my introduction, it’s (inaudible). You have responsibility for all the Americans or is it all.

Unidentified Company Representative

International.

Julio Contreras - Goldman Sachs

International, okay, great. So maybe just by way of background, can you just give us a couple of quick thoughts around Wipro, what your focus and then we can jump in to some simple questions.

Unidentified Company Representative

Yes, sure. Thanks Julio. So a little bit about Wipro. The key thing which differentiates Wipro from others is the broad based portfolio of services which we have. We are at present in about 14 verticals. Three of them, main the banking, the enterprise, and the technology piece. Our revenue is well balanced across geographies, across service lines and across verticals and we don’t have reliance too much on any single customer or top five customers or top 10 customers. They are very well balanced.

The second is our unique presence in India and middle east, a billion dollar business, where we are neck to neck with IBM and we are a very strong system integration solutions provider of theirs. We are leaders in RIM, the Remote Infrastructure Management, which differentiates us from many of you in the global consulting companies.

And the third one is our presence in R&D, $1 billion business. Each of those three areas, middle east, India Middle East, the infrastructure business and R&D business, they are close to $1 billion business which is not in same size or competency with our competition.

In terms of the last year and how it is there for future, last year we had a major organizational change. We had a CEO change. We moved from joint CEO structure to a single CEO structure and we had made changes on the GTM, the Go To Market piece. We made changes in leadership level one and two. We made changes in the back end, process fix and we think we have done what we need to do and we are looking towards realization of benefits of the actions, what we have taken so far.

I think there is a lot of stability in the company. The attrition has come down. We have tracked well on the sequential growth in revenues the last two quarters, above 4.5% on a constant currency basis, on a sequential basis. We are looking very positively towards the future and we know that this year, 2012 or fiscal 2013 is going to be more, on the GDP side we will desolation in GDP across the world. Europe is going to be flat. U.S. is going to be about 1.7%. China and India are going to come down from China from 9.3 to more like 8.4%, 8.5% and India from 8.5% to about 7.4%, 7.5%. Europe is about flat, like 0.3%, 0.4%.

So that is one perspective. The second perspective, of course the larger macro issues in Europe still remains a main issue which nobody has got a clue on that. Any which ways, it will go in terms of linkages to various economies and the banking part of it. As far as the budgets are concerned, the budgets are getting released and we’re not seeing a big discretionary spend at this point in time but what believe is the discretionary spend will come back and we’ll see more of 2011 discretionary spend as we move towards April, June and September quarter.

We think that we have the right organizational structure, the right leadership in place and in terms of the strengths what we have in several verticals and geographies continues to help us in terms of building on the benefits of what we got and with the new organizational we think that we’ll continue on our path in terms of growing above the industry average.

Julio Contreras - Goldman Sachs

Maybe just to help us frame a little bit about the sort of the current environment and what we’ve heard from a couple of the other guys compared to date, you sound a little bit more optimistic on just the state of things, not that things are accelerating dramatically but just that with the new budgets in place, decision making seems to be running its course. Obviously we did have that huge precipitous fall off that people might have been fearing, late last year and so kind of compare that against your comments I guess in terms of when you say the discretionary spending is delayed or it’s not going to include June quarter, is that kind of company specific or vertically specific for you guys or where would those areas of delay sort of be evident for you guys in the model?

Unidentified Company Representative

Yes, sure. So going back to the comments which we made last year, we said that we are not seeing any big changes in our customer behavior except for small aberrations in one or two securities, capital markets, customers in Europe; we saw a delay of four week signing in some of the contracts. Except for that we said that we are not seeing any untoward behavior from the customers. So to the extent, it is not what we are saying, it’s not a big change in terms of how the future is going to look actually.

The second part is that when we are saying discretionary spend will open we’re not discretionary spend has gone to zero. What we are saying is that the level of discretionary spend, what we have seen in the last three or four quarters, we think it is dormant, it will come back but the spend is not visible because the focus is more on the budget recess.

So today the focus, particularly in the banking sector is more for budget releases and the budgets are flat to marginally negative. So at this point in time talking about discretionary spend, if second ward focus. The primary focus is how the budget is there or the budget is getting released or its going to be like 2010 where they will release on a quarterly basis.

What we see is that the budgets are getting released and the fundamental change in behavior or the fundamental change in expectations from the CIOs across the world is that the focus in the past during recession and also otherwise used to be looking at offshore vendors for more cost containment.

Today with the consulting building up, with the domain knowledge build up, the focus is on how the offshore vendors can help us in generating more revenues which is basically the growth and how can transform our IT services group and also the cost containment. So the moment we add two blocks to the overall objective, we should be ready with our competencies, that is one part, which is internal part which we are and the second part is that that will throw more opportunities for us to grab and that will be market share gain of a large scale. That’s what we feel.

Julio Contreras - Goldman Sachs

Okay. When we started doing the work in the space here a couple of years ago and it seems like we are in 2002 - 2003 there was this huge sort of sentiment that the tide was rising, every was growing together and sort of fast forward to where we are now, we’ve had the cycle obviously run its course in some ways but it feels like off shore still has effective environment so at that at least we think it doesn’t, the way that it should continue to grow. So that might not be 20% plus but still double digits. I don’t know what (inaudible) number. I think….

Unidentified Company Representative

11% to 14% is what we are seeing.

Julio Contreras - Goldman Sachs

10% plus is what I was going to say.

Unidentified Company Representative

10% plus yeah.

Julio Contreras - Goldman Sachs

In that kind of a world though when you think about what you guys have to do to grow versus TCS, versus Infosys, has game become more (inaudible) between you guys in terms of competition very directly or is there still enough in house to sort of address directly.

Unidentified Company Representative

Very interesting question. So we were actually discussing this part in terms of, instead of comparing with the competition how we are looking at the future, what will determine, what will change the business, what the customers will look for in terms of services. Largely if you are to ask an honest question on the differentiation today what is happening is that several of the services what many of us are providing are falling into the commoditized bracket.

When you have commoditized services you have stability in the pricing but you don’t have additional pricing strength. If you are looking beyond commodity services, then you you’ve got to prepare the organization which means that you have to have a very strong front end differentiation and you have to still deliver on those efficiencies of the off shore in terms of having more and more standardization in the back end. So that we are focused.

The way we are looking on one of our competitors is looking at platform as a way to sort of bring in more growth opportunities. We look slightly differently. What we think is that there are momentum verticals. For us it is energy and natural resources in terms of both geography expansion, in terms of upstream revenue augmentation, we think that’s a very promising area. It’s a high investment, high return vertical and we are very focused in terms of leveraging that market.

One of the steps, what we did was the SAIC Oil and Gas Acquisition which has given us excellent talent which can adverse the upstream revenues. The second vertical is the healthcare where we think it’s a long term investment but it will give us long term benefits in terms of leveraging that sector.

Retail, there is a explosion online and that’s giving rise to a lot of analytics which will indirectly help them in revenue generating opportunities and we’re very focused on that. We already helped. Some are one of the best, the biggest retail guys in the U.S. and we are ready to build on that but that sector is more of short term and midterm view in terms of newer opportunities, long term view, it’s promising but it’s not quantified in terms of how that will go.

In terms of banking, from banking, securities, insurance, we are really hopefully that again a momentum vertical for us, part of that will come through a regulatory and compliance activities, part of them will come through new solutions but whichever way it is, those seven technology trends which we mapped in terms of four of them being the immediate thing which will impact the market is analytics, mobility, cloud computing and to some extent on a more solid basis, gradual basis green technologies. In those four verticals which I mentioned, the momentum verticals we have done differential investment and we think that that will pay us long term. We have also looked at the solutions in those technology.

This is the fourth technology which we have talked about. We have built solutions in those areas and if I had to combine this momentum verticals and look at the solutions, we tend to believe that more than the platform which we drive, it will be the domain led solutions which will drive the market opportunities and are prepared for that and we think that there could be even consolidation of verticals and more horizontal solutions which will drive the market solutions and growth opportunities that’s a three to five year game plan. We are very focused on that in terms of building those competencies in those areas.

Julio Contreras - Goldman Sachs

So it sounds like a little bit more focused on the vertical differentiation in terms of core competencies? So can you just back to the efforts a little bit. It seems like a couple of years ago, like every industry that you guys could touch you would go after but this feels like you’ve found some niches or maybe some areas where past experience and continues our growth in retail banking, oil, this is much more cost (inaudible) in some ways. Would that be correct?

Unidentified Company Representative

The fundamental philosophy has not changed. We are not saying the GMT which is the global media technology is going to be, we are shying away from that area, nor on the manufacturing and high tech, which grew 4.2% sequential last quarter which is giving strength. But out of the six large verticals we are seeing more momentum which calls for differential investments in a one to two year frame.

Now technology is lagging behind the corporate growth but we are not leaving the technology behind. We think that it’s a good strategy to have a offering which will take dollars out of the earning services which nobody, including the global consulting companies are doing it today. So this question was asked to us in ’91. This question is asked to us when we listen in New York stock exchange, at the time we are $200 million and we said and you could have put all your eggs in enterprise. It’s growing at like 40% while the technology is growing at 30%. Where do you want to put all this sales force and the resources here, put everything in enterprise and you will grow as fast as Infosys or during that time whatever is the darling of the masses at the time.

But we stuck to our stand. We said no the dollar has to flow from all the verticals, part of which we just said and the $200 million is $600 million today. So that is not a small, it’s a very gradual way of taking market share and having a presence and in that R&D we have built a $1 billion. Then when we offer the remote infrastructure management in 2001, all the competition was thinking that this is nothing like a cable, it’s some low scale business. Today everybody has got a PPT and we have the competencies and we have $1 billion business we built and including the Infocrossing data center business which is helping us in managed hosting.

So every step what we have taken is built on a long term view and we thought beyond the current industry, then the whole industry was more focused on ADM, Application Development and Maintenance. We are the first guys to come and float new service offering in remote infrastructure management. We have brought a unit in BPO and made to a transaction processing today that is giving us 10% of our business. We floated testing when it was not known as a separate service offering, brought SAP article implementation off shore.

So there are several initiatives which we have done, including the acquisition in 2003. We said if there is a way to build domain competencies, we have to keep on acquiring companies and to build that and we have done that in about seven years, 15 acquisitions all successfully integrated and the latest one being the Oil and Gas unit from SAIC. So the current thinking is that if the management have the same dollar and I have to pay between verticals and we see that there is a short term to mid term, that is this year to next two years, we see lot of opportunities coming up in these four verticals.

So what we are saying is that this dollar is well spent. We will focus on those verticals and at the same time the horizontal solutions which are talking about will across all verticals, including manufacturing new technology which we will not shy away from. We will still invest that dollar in those solutions.

So what we believe is that we have to prioritize, number one and we have to build this market facing solutions which will be the future of the market and that is what will give the differential revenues for the people. So the moment I talk about the horizontal solutions, then it is also going to lead to less dependency on people. Today if you are going to have 1:1 ratio in terms of every $1 you need to get every additional person.

So we are trying to cut that cord and part of that is through the non-linear (inaudible) which we have successfully done. About 14% of revenues come from there. That is not a 1:1 ratio. The second is we are saying if I keep investing on these market facing solutions and domain led solutions, that dependency will reduce by 20% or more actually. Our internal targets are much aggressive. So we think that that is the way to happen. So while we cannot fundamentally change the people dependency models but a portion of that can be reduced through this domain and through other initiatives which we have embarked on.

Julio Contreras - Goldman Sachs

If you can comment about your competitive landscape at this point of time because it’s no more top three player game. There are players who are becoming meaningful over the last two years. So what is the differentiation in terms of what they offer versus you offer and are you facing any kind of pressure in terms of them undercutting the bigger players in pricing?

Unidentified Company Representative

See I think you partly answered that question in the beginning of our conversation. I said that if you look at the commoditized services which is a large portion of many of us, the differentiation is not that very heavy. So the switching cost is low. You can choose between the four typically and you can get similar high quality service. But the point comes is how do you, and part of that is slightly in that because of the competencies which we’ve built in technology, the competencies which we’ve built in remote infrastructure management, our very strong system integration process in India and Middle East. So that, I don’t think, none of the competition has got what we have. So that’s a definite plus for us. So to the extent that our services, our offerings in those areas, in those horizontals or verticals helps us to differentiate from the customers and customers give us value for that.

But having said that, we have to look at the future, right? How the future is going to unfold and how prepared are we in terms of addressing that issue. One of the points I mentioned in the initial stages is the CIOs are not looking at the offshore vendors who are in only for cost containment. So it is a growth issue. It is the can you help me in getting my revenues better, can you help me in transforming my IT services group? Can you also help me in cost containment. The moment you add those two blocks, then what you need to be internally prepared as to be fundamentally different and then how I do my front end relationship has to be fundamentally different and that is what exactly we are focusing on.

To put it in a very succinct way is that we are looking at running the business, changing the business and growing the business in three different buckets and then we are saying that okay, you have the strategic accounts, you’ve got to sustain the run rate, you’ve got penetrate better, (inaudible) on the top 10 accounts last quarter. So we are doing in several ways to address that and that should be essential to other sets.

How do you change things in how we sell and how we execute, that’s a separate focus. How we grow the business overall in terms of hunting, that’s a separate structure. So we’re looking at having figured out the GTM and the technology investments and the leadership level and finalization of the back end. Our focus today is how the market is going to look in the next three years, how well prepared I am? Is that what the customer, for example the CIOs that people want and developing the competencies which is both organic and inorganic way how we are doing it. I think definitely it will give us an edge as compared to others.

In terms of two or three, I am thinking really it’s more of an event, if you want to establish a trend you have to be in the position for mixed ideas. If you can do one quarter or two quarters, two or three, it doesn’t matter because we are talking about a 20 year period and there where you are maintaining the top four leadership position. And it’s been built from scratch to this $6 billion plus organization. So it’s got a lot of depth in management incentives, it’s got a lot of depth in services. Obviously the challenges are more and we need to keep focusing on it and improving upon it which we are doing.

Julio Contreras - Goldman Sachs

And no, you have been the pioneers in the infrastructure management space when we talk about the Indian offshore vendors. However…..

Unidentified Company Representative

Including global consulting companies

Julio Contreras - Goldman Sachs

Yeah and suddenly everyone has started looking at that vertical as well because there is a lot of growth that everyone has started looking at whereas you have been number one in there for quite a long time. So how are things changing wherein you would like to maintain that leadership position and seize that comparative in terms of diesel, what are the strategies affecting that?

Unidentified Company Representative

Yes, I think if you look at the growth in infrastructure management services, the remote infrastructure management services, I think it has been stacking very well for us. If you look at the last two years the large deals door opener have come either through BPO or through infrastructure management services and our win ratio in that has been quite substantial.

Having said that, do we have the solutions where the market is requiring and how are we ready for that. One step we did is Infocrossing where we said that, that portion, if you look at the infrastructure, it's inverted, yes and we were more on the right side of the S in the last five years and we have slowly moved towards through acquisition and through in house competencies and also through Infocrossing to more of the left side of this curve.

Today the Infocrossing thing, which still we have to make it more integrated, our immediate task it to bring it under one leadership, which was under two different dealership and we brought it under our Wipro Infotech data infrastructure portion and we think that integrated solution will be itself as a differentiator with managed hosting, managed services and turn based consulting and infrastructure.

On it's own standalone basis it has been doing very well but there are lots of things which we need to do, lot's of solutions which needs to be done because Infocrossing was more addressing the midmarket area, which we need to make more aligned towards the WT, the Wipro Technology side. So the efforts are going on in terms of providing an integrated solution. That itself should make a big difference in our mind.

Julio Contreras - Goldman Sachs

And in infrastructure, just staying on that, it seems like the competition has really evolved as well because even of the previous (inaudible) companies, EVS, system side of HP, IBM obviously is still there, Dell acquired, they were able to get some assets, Xerox by HCS, HCS had a little bit of (inaudible) out sourcing. CST is kind of the only man out there that's sort of still traditional data center outsourcing model. Is that something that you guys sort of see as the only opportunity because the Infocrossing asset gives you some capability there but I guess in some ways it's more, correct me if I'm wrong, but they feel to me like it's more the kind of competition that you would see with the rack spaces and the (inaudible) of the world in terms of sort of data center hosting and if you essentially get to the big sort of data center outsourcing or maybe not.

Unidentified Company Representative

Yes, a good question. So there are two, three steps to the infrastructure growth strategies. The first portion is that the market is divided in two. Those contracts or those customers who are keen for the vendors to take over the capital assets and it's also bring in a good amount of (inaudible) of people, whether it is Europe or U.S.

So U.S. is more business friendly in terms of polices and having the people and dealing with them whereas in Europe it's much more complicated. It can lead up to 24%, 24 months of civil which you need to do in terms of addressing that. So it's not very there.

So we are really consciously away from the capital assets acquisition taken into our books because if you look at the exams that you had given, barring to some extent IBM, the new CEO's target is to rationalize data centers and have high level dealers because I want to make it 20. Why, because it's all messing up their balance sheet. We don’t have that issue. We don’t take the customer assets into our books. So that's a fundamental differentiation. It also excludes us from almost 60% of the market potential, what we can address.

So that is one portion as we have consciously moved away from that capital assets acquisition and thereby keeping our services revenue intact. Re-advising our services, we are very selective. We are very open in terms of U.S. We are very selective in other countries, particularly Europe and some of the London (ph) countries where we think we have to assess the risk and then do that. But we have done some good re advising of service in Europe and we burnt our fingers in a couple of them but overall our data I would say is better.

Now we got the data center. Now it comes to the second stage. So the questions I just mentioned, just before this question for Rishi's question, are we adding solutions too, by getting the Infocrossing and how did we do that? We did that but we also sought of did not see that the market, what they address is slightly different from what we wanted. So to the extent that the data is in space, we are not fully there. So we are there but we are not fully there. So we have partially added the solutions but we have a long way to go on that.

The third thing is what rag space other people do, the question is whether we want to do that offering or not. At this point in time we are not thinking of being a full service data center solution provider, whether that gels with our philosophy and our direction and also in terms of volume and also in terms of volumes and profitability. It's a completely different business and also it's very capital intensive. Those businesses are very capital intensive. There maybe merit in looking at that but we are not in that business at this point in time.

So in our space, we are comfortable with what we are doing, in Infocrossing, in adding the data center hosting ability and some of those things where they are doing in ITO is helping us but the key thing for us is to combine it nicely and present it to the market in terms of integrated solution. I that's just one for us, of having RIM competency, of having content competency to the Infocrossing ITO, how do we combine that and go to market with a very strong value prop.

We will leave that, and then we will not do, that's capital assets acquisition part of it and we will leave that rack space type of offerings at this point in time and at the right time we will look at it, whether it makes sense for us, both in revenue and profitability side, whether we should do that or not. That's the way we're looking at the market today.

Julio Contreras - Goldman Sachs

You have over the last three, four years have a strategy of acquiring smaller assets globally and based on the domain expertise and everything and SAIC was the latest one which has started reaping benefits. Which all areas do you still think that you still lack wherein you would like to acquire domain expertise or there are loopholes in the pocket?

Unidentified Company Representative

See are we using our M&A strategy to look at single poll strategy. So we're looking at small assets, manageable size, lets say $40 million to $100 million and then take it to the sub verticals and then build the competency in each area. There is no stopping of adding that pulse at various stages. It could be in telecom service provider, it could be in healthcare, it could be in BPO. It would various, even banking niche areas in retail banking where we don’t have that much strength.

So the opportunities are plenty. So at any point in time we are scouting for targets. 10 to 12 targets we'll be talking, we'll chose. So when you said that small assets, the size really doesn't matter for us because we have enough cash and we have enough leverage. So for example when we got this BPO which is almost like a 200 million final lead, so we went for it. Then we add this $100 million city, $150 million for this one, we went for it. Then we had a $615 million for Infocrossing. We didn’t try, we went for it. So size really does not matter though fundamentally we want to do a single pull strategy.

The thing is new expansion and the third is to build solutions. So we are looking at these three areas and how the targets can help us do it. For example, if you are in Lat Am (ph), are you in Germany how do I develop that market? Do I need a local front end or a local company to help us leverage the market. These are some of the ideas what we have. So constantly the first objective is never ending because we have so many verticals and there are so many niche areas. Even retail itself we've got areas of eight or seven solutions where we are looking at potentially what can help us. So the opportunities are multifold and plenty. That’s what we think.

Julio Contreras - Goldman Sachs

With that we're going to go ahead and stop there and continue in the break out session in the Enapo (ph) Room. Thank you guys very much. Appreciate it.

Unidentified Company Representative

Thank you.

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