Wipro F2Q08 (Qtr End 09/30/07) Earnings Call Transcript

Wipro Ltd. (WIT)

F2Q07 (Qtr End 09/30/07) Earnings Call

October 19, 2007 9:15 am ET

Executives

Azim Premji - Chairman

Suresh Senapaty - EVP, Finance and CFO

Ramesh Emani - President, Product Engineering Solutions Division

Girish Paranjpe - President, Finance Solutions SBU

T.K. Kurien - Chief Executive, Wipro BPO

Sridhar Ramasubbu - Investor Relations

Zach Lonstein - Chairman and CEO, Infocrossing

Analysts

Joseph Foresi - Janney Montgomery Scott

Mark Marostica - Piper Jaffray

Abhishek Gami - Banc of America

Trip Chowdhry - Global Equities Research

Ashish Thadani - Gilford Securities

Kanchana Vydianathan – Pacific Crest Securities

Bryan Kissinger - PriceWaterhouseCoopers

Rama Rao

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Wipro Q2 Results and Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions).

At this time, I'd like to turn the call over to your host Mr. Sridhar Ramasubbu. Sir, you may begin.

Sridhar Ramasubbu

Thanks everyone for joining us for Wipro's second quarter results and earnings call for the quarter ended September 30, 2007. Jatin, Lalit and Rajesh from the IR team join me in conveying our very warm welcome to all of you.

With us today, we have Mr. Azim Premji, Chairman; Mr. Suresh Senapaty, CFO and other members of senior management team, including the BU Heads. We also have Zach Lonstein from Wipro IFOX team. I hope you have had an opportunity to review the press release we issued today morning under U.S. GAAP.

Let me give you quickly the agenda for today's call. Azim Premji will share his thoughts on our performance and prospects, and Suresh will take you through the financial highlights of this quarter.

As a reminder when we discuss our results in today's call, some of the issues we discuss may be forward-looking. And I'd like to advise you that these statements may be subject to known and unknown risks and uncertainties that could cause actual results to vary materially.

Such risks and uncertainties are discussed in detail in our filings with SEC. Wipro assumes no obligation to update the information presented during today's call.

This call is scheduled for an hour. The entire earnings call proceedings are being archived and transcripts will be made available after the call at www.wipro.com.

I'm online on email, and if you have any specific questions which you are unable to ask, please send me a mail and we'll address those questions as well at the end of the Q&A.

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

Azim Premji

Good morning to all of you. By now, you would have seen our results for the quarter ended September 30, 2007. While the management team would be happy to answer your queries, I would like to take some time before that, to share some of our thoughts on our performance and our prospects.

The results for the quarter demonstrated strong execution by Wipro and Wipro Team's on all the fronts. Revenue growth, profitability management, large deal wins, inorganic initiatives, geographic expansion, alliances and partnerships, and finally Applied Innovation.

The revenues from our Global IT Services at $796.5 million for the quarter, including revenues of $6.4 million from Infocrossing were ahead of our guidance of $777 million. We saw broad-based growth across verticals, across service line, and across geographies. Notable among verticals were, Financial Solutions, Telecom Service Providers and TMTS, which grew double-digit sequentially.

Among our service lines, Technology Infrastructure Services, Testing and BPO clocked external growth rate. Among geographies; Europe and Japan posted 15% and 26% sequential growth respectively.

On profitability front, we not only fully absorbed the impact of offshore salary increases, but also expanded operating margins by 90 basis points. This demonstrates the resilience of our business model.

In fact, due to our relentless focus on [cost] improvement, our average offshore per person salary has remained in the very narrow range of last years levels, despite a 12% to 13% wage increase given this year. We will continue to drive this in the future also.

The large deal wins were the highlights of the quarter, yields across verticals and service lines, and demonstrate the resonance Wipro’s 360 degree engagement model has been finding in the marketplace.

Wipro signed an agreement, whereby all Radio Access R&D activities currently performed in Berlin by Nokia Siemens Networks are planned to be provided by Wipro in the future.

During the quarter, Wipro acquired Infocrossing Incorporated, a US-based provider of IT Infrastructure Management, Enterprise Application and Business Process Outsourcing services. The acquisition is very strategic to us, as it helps us to position ourselves as a strategic player in the next orbit of large total outsourcing deals.

Demonstrating its strength in Healthcare vertical, Infocrossing recently won a $275 million contract to provide fiscal agent services to Missouri HealthNet program into 2014.

Wipro also announced a strategic partnership with Oki Electric Company Limited, and signed a definitive agreement to acquire Oki Techno Centre Singapore Pte.

Ltd., including its own Intellectual property rights.

In line with our strategy of creating a seamless, global delivery footprint, we announced our plans to open a center in Atlanta, Georgia in the United States, and a near-shore center in Monterrey, Mexico. The Mexico center has already become operative.

Expanding our needs through alliances and partnerships, we signed up as one of the few global partners of SAP AG during the quarter. As part of the agreement, Wipro will establish a solutions lab in Bangalore to showcase the benefits of Enterprise SOA, industry best practices, and innovative service-delivery models.

Lockheed Martin, the world’s largest defense contractor and the United States governments’ number one information technology provider, announced the opening of its Network Centric Operations Centre in Gurgaon, India in partnership with Wipro, known as Ambar Jyoti.

Applied Innovation remains a core theme that binds our strategy and execution together. This quarter Wipro launched the first ever global awards that will recognize best practices in co-innovation and global sourcing.

12 innovations that have resulted in measurable business transformation through co-innovation or global sourcing will be honored at the awards night in end October in New York.

Wipro also launched its Applied Innovation Council, a high-level forum comprising of Wipro customers, industry experts, analysts and thought leaders.

We continue to see a solid traction in our India, Middle East and Asia-Pac IT business. It recorded strong year-on-year revenue growth of 76%, and EBIT growth of 41%. We continue to grow and significantly develop the industry growth rates, driven by our comprehensive service portfolio and the compelling value proposition delivered to customers.

Wipro Consumer Care and Lighting business also grew well with year-on-year growth and EBIT growth of 90% and 72% respectively, including the results of our acquisition of Unza.

We are driving multiple innovative initiatives to improve operational efficiency, and to non-linearity in our business model. We are investing in SOA, platform BPO, consulting and other such initiatives which would help us drive non-linear growth significantly.

The global environment continues to offer opportunities. We are preparing ourselves and investing ahead of time, to make the most of these opportunities.

I will now request Suresh Senapaty, our CFO, to comment on financial results before we take questions.

Suresh Senapaty

A very good morning to those of you in United States, and good evening to those of you in Asia. Let me comment by highlighting the fact that for the convenience of the readers our U.S., GAAP financial statements has been translated in to dollars at the noon buying rate in New York City on September 28, 2007, for cable transfers in Indian rupee, as certified by the Federal Reserve Bank of New York, which was US $1 is equal to INR39.75.

Accordingly revenues of our Global IT Services segment that was $796.5 million or in rupee terms INR32.4 billion, appears in our earnings release at $816 million based on the convenience translation.

I will now touch upon areas in our performance and financials that would be of interest to you all. Global IT Services revenue for the quarter of $796.5 million, included $720.1 million from IT services, $70 million from BPO services, and $6.4 million from Infocrossing,

Pursuant to successful completion of the tender offer, results of Infocrossing have been consolidated from 20th of September 2007. Excluding Infocrossing, a sequential revenue growth of 8.8% in Global IT Services segment comprised of 8.7% growth in revenues from IT services and 9.7% growth in revenues of BPO services.

We have achieved 8.7% sequential revenue growth in IT services, with 7.7% volume growth and 1.9% and 1.6% improvements in our Onsite and Offshore realization respectively, while year-on-year basis our volume growth is up 32% and our Onsite and Offshore realization are up 3.2% and 1.8% respectively.

During the first half of financial year 2008, we have added 9,660 employees on a net basis, 30% higher than the net addition in the same period last year.

On the ForEx front, our realized rates for the quarter was $14.75 versus rate of $14.51 realized for the quarter ended June 30, 2007. As that period end, after assigning to the assets on the balance sheet, we have about $750 million of hedges, and on a gross basis approximately $1.1 billion.

During the quarter, we added 59 new customers, 6 of which were Fortune 1000 customers. We improved the mix of services vendors from offshore by 100 basis points.

We improved our gross realization, gross utilization by about 20 basis points inspite of adding more than 2800 employees in campus. Approximately 80% of the organic net additions for the quarter were from campus. Attrition dropped by about 220 basis points during the quarter.

Our BPO business delivered an EBIT margin of 22.4%, driven by strong operational improvement and reduced attrition. We affected a wage hike of all our offshore base employees from August 1, by about 12% to 13%, and this had an impact on our operating margin by about 160 basis points.

Improved price realization, utilization, benefits of proactive hedging, and greater corporation of younger employees in the organization parameter has not only mitigated adverse impact, but also improved the margin by 90 basis points.

During the quarter, we have used up to $850 million of cash for acquisitions. This will reduce our other income in future quarters. As of September 30, 2007, with approximately $735 million of debt on the balance sheet, of this approximately $125 million debt is assumed from our acquisition. The rest are short-term working capital loans that we had taken.

Retaining cash on the balance sheet provides us better flexibility to meet strategic needs. For the quarter ending December 2007, we expect volume led growth with stable price realization. We will have one month impact on margins, due to the wage hikes affected in quarter two in IT services and salary increases in BPOs from October 1.

We will also have lower number of billing days and dilution on account of Infocrossing consolidation. On an organic basis, we expect margins of Global IT business to be in a narrow range, excluding impact on account of exchange fluctuation.

We'll now be glad to take your questions.

Sridhar Ramasubbu

Derum?

Operator

Thank you, sir.

Sridhar Ramasubbu

Yeah, we can take that Q&A now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Joseph Foresi. Question, sir.

Joseph Foresi - Janney Montgomery Scott

Hi guys, I know you talked about this on the earlier call, but so I wondered if you could briefly discuss the demand environment heading in to 2008, specifically in reference to discretionary spending and what you are seeing on that front?

Girish Paranjpe

Hi, Girish here. With most of our clients, the budgeting process is currently on. But we have some sense based on what has gone in so far in to the first proposal for budget making, and some feedback on that. So, broadly we are seeing a neutral budget for 2008, which is in some ways remarkable, given the growth in IT budget that has taken place over the last two years for many of our clients.

So, given the fact that there is no major change in the IT spend level, I would imagine that the level of discretionary spend would remain more or less similar, but we'll get a better sense, maybe a month or two down the line, once the budget have been signed off.

Joseph Foresi - Janney Montgomery Scott

By neutral, do you mean flat, with what you saw last year?

Girish Paranjpe

Yeah. Flat as compared to last year.

Joseph Foresi - Janney Montgomery Scott

And just sort of switching gears, I know obviously with the Infocrossing acquisition, that you are doing sort of an asset intensive approach to infrastructure services. Some of your competitors do asset [Light]. I wonder, if you could give us a little more color on why you decided to take that type of path?

Zach Lonstein

If you don’t mind, this is Zach Lonstein. I would like just to take that question. As a matter of fact, [you and I have been listening to all this], In fact it's just the opposite. We have five data --

Sridhar Ramasubbu

Rajesh, I think Zach's voice is not clear, maybe he has to pickup the phone, but it is in a conference room, we are not able to hear very clearly.

Zach Lonstein

Can you hear me now?

Sridhar Ramasubbu

Little better, but still your voice is little bit echoing.

Zach Lonstein

How about on this line?

Sridhar Ramasubbu

Slightly better.

Zach Lonstein

We have a very asset light business model. We have two main lines of business within our data center. One is of (inaudible), in which variably, we bring our client servers into our data centers, we do not provide the servers. And the other, it is that Mainframe systems, in which while we do provide the Mainframes. Mainframe is their sheer existence. So the CapEx component is very [tiny].

In fact our CapEx budget for 2007 was between $6 million and $8 million on revenues of $235 million to $230 million. So, it's not across the TDS model, where we would engage an asset and engage in a drill. We would buy our client equipment, re-batch it or replace and so forth. By no means, we would not (inaudible) do not buy the equipment. It will be very CapEx like environment.

Joseph Foresi - Janney Montgomery Scott

Okay, thanks. And just real quickly, a last question here on telecom. I know you guys talked about this again on the earlier call. I wonder if you could just give us some feel for what you are seeing there with the mergers that have taken place, and how you expect the trajectory of that business to grow in the upcoming quarters. Thanks.

Operator

Thank you. Our next question comes from Mark Marostica. Your question please.

Mark Marostica - Piper Jaffray

Yeah, I am Mark Marostica with Piper Jaffray. Thanks. Question regarding your R&D mix. I noticed that this quarter was close to 25% of revenue compared to about 30% a year-ago. And I am curious as you think about the business, where you expect that mix to bottom out.

And tied to that, does the Nokia agreement basically baseline that or help baseline that mix shift? In other words do you expect to continue to position your self to get more business in that vertical of handset manufacturers?

And then lastly just tied to the revenue mix, perhaps your relative margins on the R&D business versus your average margins?

Ramesh Emani

Hi Mark, this is Ramesh Emani. Coming to your first question, you asked me, is the ratio of engineering business in the overall global markets business is down, the answer is yes.

It is in line if you ask me, in the line with the worldwide markets. So the market for IT services is about 10 times the market for the product engineering services, and so in that respect I do expect in the long run 25% of our business and the product engineering business to go down. Maybe it will go to 15% I don't know. It depends much more on how much ITs investors grow, rather than how less the product engineering business grows.

In terms of the margins, the margins in the product engineering business traditionally has been higher, mainly because we have much higher offshore content, and that has not changed in the last as many years. So we still maintain relatively higher margins in the product engineering business.

Coming to the third question, in terms of will the Nokia Siemens, the agreement what we find in term of taking over the people from Berlin. It is a small center for investment; relatively will it have a very high impact? I don't know.

But definitely we do see the impact in terms of our relationship with Nokia Siemens, as well as in term of our ability to take up more complex projects. So, if there is anything else I need to offer.

Mark Marostica - Piper Jaffray

Just switching gears a bit, your fixed price mix has moved up modestly this quarter and certainly year-over-year. Can you help us understand, perhaps what the impact on your margins were this quarter relative to the uptick fixed price percentage?

Unidentified Company Representative:

Hi Mark, this is [Mack] can you hear me.

Mark Marostica - Piper Jaffray

Yes.

Unidentified Company Representative:

Okay. Yes there's been increase in our quarter fixed price (inaudible) salaries have increased. Those lines of businesses we have to believe as (inaudible) significantly additional gains of productivity.

At this point of time we do not have the great [divestures] and profitability between fixed price project and the other projects. But the potential is there, and (inaudible) clear that we can realize the potential as we go forward and we think that as we go ahead and we build more non-linearity to the business, we will get the value of the goods [swinging] in future periods of time. But that is there to last part to this quarter, even though we've had [3.2%] installed base of material business [towards] the profitability for the quarter

Mark Marostica - Piper Jaffray

Great. And last question. I will turn it over. What are your hiring plans for the remainder of this year? And maybe if you could talk about the mix of people with less experience versus more experienced lateral hires? Thanks.

Unidentified Company Representative

Can you repeat that?

Mark Marostica - Piper Jaffray

Excuse me; I will repeat that one more time. Curious about your hiring plans for the remainder of the year, and then perhaps if you could qualify that in terms of mix of people coming in as newer hires with less experience versus the lateral hires? Thank you.

Unidentified Company Representative

Okay, I think I will take that. (inaudible) here again.

Sridhar Ramasubbu

[Len] one minute. See, whenever you people are speaking, a lot of echo is coming, speak 50% slower and give some pause because the people are not able to hear, please.

Unidentified Company Representative

Okay, thanks.

Sridhar Ramasubbu

Thank you.

Unidentified Company Representative

Okay. First of all, as far as our hiring plans are concerned, we've said that we've made 14,000 offers on campuses in the coming year, that's what we expect to hire as far as [strict guidance are concerned]

The balance, which is a [natural beauty] option of the business growth and a mix of macros versus special that we need, and that’s how something that we'll be guiding on in the past as well. So that will continue.

As far as the proportion of people, less than three years, the business is concerned. We had 45%, this is pretty similar to the number we had at the end of last quarter. Hello?

Mark Marostica - Piper Jaffray

Hello.

Unidentified Company Representative

Yes, can you hear me?

Mark Marostica - Piper Jaffray

Yeah.

Unidentified Company Representative

Yeah, the only one that I just want to also add that, this 45% has been maintained, despite the fact that every quarter you have to shift some people who [form] less than three years to more than three year, and get close to 1500 people to move from less than three years to more than three years, in spite of that we maintain the 45%. We think it actually improved the ratio (inaudible). And we will continue to focus to improve that further as we go along.

Sridhar Ramasubbu

Can we have the next question operator?

Operator

Thank you. Our next question comes from Abhishek Gami, question please.

Abhishek Gami - Banc of America

Hi, it's Abhi Gami, Banc of America. A quick follow up on commentary from earlier. You mentioned that your conversations with clients indicate flat IT budget. Is that, their overall IT spend that they are talking about? Or is that the amount that they expect to spend on outsourcing or more specifically offshore outsourcing?

Girish Paranjpe

You know what? Hi. Girish here. I just wanted to say that the flat IT budget is the overall IT budget, and at 15% is all the indication that we have. As we have finalized the budget, we'll get a better sense of which programs are being run, what’s the mix between hardware and software and services. So that kind of feel, is [I don’t think] it's still a couple of weeks [later].

Abhishek Gami - Banc of America

Okay. Great, thanks. And then, another follow up on the offshore wage hikes. I think I believe you said earlier that during the quarter you affected 12% to 13% increase. First that number's a little bit lower than what we have seen across the industry or what you've paid in the past. Is that the full picture or are there are additional wages increases coming off shore that have not yet been affected?

Suresh Senapaty

No, that's the entire increase of 12% that is effective August 1st. And while I am saying average is 12%, the range goes as high as 25% to 30% on the upper side.

Abhishek Gami - Banc of America

Great. Do you have any indication or any thought yet on the direction of that figure in to next year?

Suresh Senapaty

Yeah, I think while we have experienced revenue streams over the last few years, an increase of about 12% to 13%. It is expected going forward that there will some amount of moderation that will take place because a lot of investment are taking place to be able to conclude [may be positively] of the people coming out from the campus.

More and more engineering students are coming out. This year, we expect about 5000 engineers coming out. And the amount of investment that certain companies are making to be able to improve the (inaudible), the supply is going to be better. And we think as we go forward, there would be moderation that we would be seeing.

Abhishek Gami - Banc of America

Great. Thank you very much.

Operator

Thank you. Our next question comes from Trip Chowdhry. Question please.

Trip Chowdhry - Global Equities Research

Thank you. First regarding the large deal size you guys are being very successful at, I was wondering, what are the key components of those large deal sizes? And also what should we be thinking in terms of the ramp up of a large deal and the margin impact it may have? Then I have a follow-up question.

T.K. Kurien

Can you just repeat the question once again?

Suresh Senapaty

Trip?

Trip Chowdhry - Global Equities Research

Yes.

Suresh Senapaty

Could you repeat the question for Kurien again?

Trip Chowdhry - Global Equities Research

Sure. What my question was like, when suppose you win a $100 million kind of a deal, what is the project ramp up like in terms of people and the components of a project like, what service you provide. And as the time of, like suppose it's a three years project, and as the project is ramping, how do you see the margin dynamics being played out?

T.K. Kurien

Okay. Maybe what I can I do is that maybe talk with especially Zach. And Zach if you could just talk about the Infocrossing deal on behalf (inaudible). How does the profitability of that, how do the people ramp up in the course of the project?

Zach Lonstein

Yeah. Well in all kind of projects, our models are the kind of revenue models. So clients typically sign agreements with us that are three to five years in length. Although, those terms have been increasing, so now we are seeing [time-to-time] for six and seven years.

Initially the projects of restructured and get more profitable as we go on, as we continue to process our clients work because we become better at. We automate as much as we can, and so the profitability each year on a typical engagement increases in profitability and margin.

Girish Paranjpe

Hi, this is Girish. Let me add some color, as far as typical application type of large deal is concerned. And what we see there is differences evident there. The model is similar as you would have on the traditional [offshore deal].

There is a period of about three to six months where the ramp up happens. Only the scale of ramp up is much higher. What also happens is that we have to be extra careful about handling some of the onshore teams, and creating some contingency plans to make sure that there is no business interruption of any sort.

So there is much more detailed planning and contingency planning that goes on, and much more skill planning that goes on. But other than that, we see the process is very much the same as the regular project.

As per the margins are concerned, I wouldn't say that they are [naturally] diluted. Our experience over the last six months have been that some of the large deals have come roughly at the same margins that we are used in our regular business.

Trip Chowdhry- Global Equities Research

Okay, another question I had was regarding various activities that various IT shops are doing. Are you seeing any trends or shifts, like certain pieces of technology was very important, very critical, say last year, and this year you are seeing some shifts in that? Thank you.

Girish Paranjpe

Yeah. Hi, Trip. Girish here, again. Most of the application development type of work is shifting to the newer technologies on EBIT, so we are seeing much more use of SOA technologies, much more work around business intelligence and data warehousing, because it’s ultimately coming to the point about, either integrating disparate systems or getting value out of all the data that is stored in client systems, and very often these are [filed] load or in [stuffed] files.

And clients want to use the data and use it for even cross selling or getting more knowledge out of it, than letting it to remain in the current model. So we feel a lot of interest around work in business intelligence area, as well as of the SOA.

Trip Chowdhry- Global Equities Research

Thank you.

Operator

Thank you. Our next question comes from Ashish Thadani. Question please.

Ashish Thadani - Gilford Securities

Yes, good evening. At Infocrossing, what sort of operating margin expansion are you envisioning over the next couple of years or so, from the roughly 9% in the stub period?

Suresh Senapaty

Yeah. Ashish, so far as Infocrossing is concerned, like we said that, we are looking at the synergy with respect to doing, getting more and more big together, but looking at increasing the capacity, what it is today.

The utilizations are [around] on 50%, but looking at as the business goes up, trying to do some of the managed services offshore. So, a combination of this has some of this (inaudible). We will be seeing expansion in margin. So, we would expect it to be at least four to six quarters before it gets into north of 20.

And as you know, they have been delivering a (inaudible) of about 12%, so we expect in the shorter term, it to be in those ranges soon.

Ashish Thadani - Gilford Securities

Thank you, that’s very helpful. And one quick question on another subject on pricing. What kind of year-on-year increase in price realization can we expect Wipro to sustain as a result of higher service mix and other items? Specifically, do you envision a period where price utilization can neutralize annual wage pressures, because this is beginning to occur or at least trap one of your peers?

Suresh Senapaty

Absolutely, Ashish. If you look at, we are trying to mitigate the cost distillation on account of wages in to two ways; A, price increase and B, is the [budget] mix. So as of now, as stated, we are at about 45%, though we had been (inaudible) as compared to quarter one, there has been a 1600 people who have moved into the bucket of less than three years to more than three years, and yet we were able to maintain it.

In the current quarter, we will see more number of new kids joining, and we would expect that the bulge to therefore improve. And therefore we will continue to drive the mix of people which would help us retain the cost per person offshore in a narrow range.

And so as price increase is concerned, we have been getting decent price increases with the customer on renewal. The new customer are coming at better prices, of course when particularly found the pricing gets linked to the experience [profile] of the people, and when you are increasing the bulge, it is not reflecting in exactly the similar way to the realization.

Over a period of time when you see the bulge being at its optimum level, we will be able to see the price increase that we get completely reflecting in the realization and operating margin.

Girish Paranjpe

Hi, this is Girish. Quick to add, that if you look at our performance this quarter, I think we've been able to utilize the entire wage increase through a combination of operating efficiency and price realization improvements.

Ashish Thadani - Gilford Securities

Excellent, that’s most helpful. And one quick housekeeping clarification. Could you just describe for us what your different utilization categories are, because I think you've inserted one more, so the difference between gross and net?

Suresh Senapaty

Yeah, one is the gross utilization, which would mean the total headcount bend versus the total headcount being paid for. And so far as the mix is concerned, it excludes the support staff including, and third is excluding the change.

Ashish Thadani - Gilford Securities

Got it. Thank you very much.

Operator

Thank you. Our next question comes from [Rama Rao]. Question please.

Rama Rao

Good morning guys, and thank you for taking the call. How do you characterize the macroeconomic condition in terms of the future growth prospect for your company?

Suresh Senapaty

Well, as you have seen the Indian IT services industry has been growing pretty well. There is a track record of growth in excess of 30% on a combined basis of the IT service and the BPO.

There are several estimates that are available through McKinsey, NASSCOM study which says Indian IT industry would be about $60 billion pretty soon. The delivery that Indian IT industry has been doing over the last 10 years has been completely on line with that, and we see no reason why that $60 billion target wouldn’t be achieved.

So, from that perspective; and you have seen over the last two quarters the growth that the industry has been posting has been very good, and that has been reflected in our own growth. We had [target], for $777 million, we've delivered $797 million. And also if you look at Q3 guidance of $905 million.

If you take out the acquisitions of about $60 million, it's still a sequential organic growth of about 7%.

Rama Rao

Very good. Thank you. There are two factors which are putting lot of pressure on the stock, one is the US Mortgage Industry; how this is going to impact the IT outsourcing companies in India, and other is the currency devaluation.

You cannot do much for the currency factor, but how much in terms of the subprime and other things, and how is this going to impact your future growth?

Girish Paranjpe

Hi, Girish here. I head Wipro's Financial Services section. Let me try and answer that question. The subprime has affected two sectors of the financial services industry. It has affected mortgage processes, people who do originations, loan servicing and so on. That is the most vulnerable sector and they have been most seriously affected.

The other sectors which has got affected are investment banks, who typically package the loans which have been originated and then resale them to investors.

As far as the first sector is concerned, our exposure is very limited. And I think, we have stated that in other public documents as well that we have less than 1% exposure to the subprime segment, when you look at mortgage processors.

If you look at investment banks, we have significant results with them, but most of them have seen it as financial exposure and have taken action in terms of writing down their reserves and it is really not affected operations.

So, I would say that if you look impact of subprime on our business and our results, it has been very, very small.

Rama Rao

Thank you.

Suresh Senapaty

Yeah.

Operator

Our next question comes from Kanchana Vydianathan. Question, please.

Kanchana Vydianathan – Pacific Crest Securities

Hi, thank you. My first question is with respect to, I guess if you were to look at your deal pipeline, could you help us understand what kind of deals are you seeing right now, where is the strength in terms of service offerings, and also in terms of verticals, as to where the strength is?

Girish Paranjpe

Hi, Girish here, and I will try to answer that question about where we see business coming. Actually we’ve seen both large deals and regular deals coming across the industry verticals.

There are deals that we see in international services, there are deals that we've seen in telecom service provider area, we've have seen deals in manufacturing. So, it’s kind of across the broad (inaudible) industry. So, I really see no reasons for me to fix one particular radius.

Kanchana Vydianathan – Pacific Crest Securities

Okay.

Girish Paranjpe

This is where I see the mix.

Kanchana Vydianathan – Pacific Crest Securities

Okay. One question with respect to North America. It seems that your sequential growth in this quarter was only 5.5%. Any reason as to why it's below the company average?

Girish Paranjpe

This kind of going through a [positive] variations. Some quarter it's strong in one geography and in other quarters it is slightly weak. But, if I look at the overall picture, North America is still pretty strong for us. In fact, if we look at the customer adds that we have had in North America, they are just pretty strong, almost 60% of new customer adds that we have had this quarter has come from North America.

Kanchana Vydianathan – Pacific Crest Securities

Okay, that is helpful. And one final question. I guess with respect to your operating margin in the Wipro Infotech business and the Consumer Care and Lighting. It seems that it has been declining in the past two quarters.

Could you help us understand as to where do you think that it could possibly be sustainable for fiscal '08. In the next two quarter, should we expect that it should go back up, or is it going to remain as to where it is right now. Thank you.

Girish Paranjpe

Yeah. So as far as Consumer Care is concerned, I think that (inaudible) payable operating margin. The last quarter, we had this acquisition of Unza, which had a marginally lower operating margin. And that is the reason why you are seeing overall a little lower operating margin on a combined basis. Without the addition the margins have been stable.

And so far as the Wipro Infotech is concerned, it has little bit of cyclicality particularly in the quarter two, [where as] for us business tends to be little higher. And otherwise if you look at the Service lines or service businesses, the operating margin (inaudible) continues to expand, and depending upon the product and services needs on quarter, there's a little bit of aberration that happens. But otherwise, profitability that is there on the Service line and on the product side are fairly stable.

Kanchana Vydianathan – Pacific Crest Securities.

It's very helpful. Thank you.

Operator

Thank you. Our next question comes from Bryan Kissinger. Question please.

Bryan Kissinger - PriceWaterhouseCoopers

Yeah. Hi, good evening, guys. I was little bit confused about, it sounds right now like Financial Services isn’t hurting your business right now, the spending from there. I am curious over the next two to three quarters, how you think the trend there might change, or as right now they might not be impacting you?

Girish Paranjpe

Hi, Girish here. Let me try and answer that question. As you've seen our track record over the previous few quarters, we did back a (inaudible) study, and this quarter has been particularly good. How the next two quarters will go out is difficult to predict at this moment, but the current quarter is looking fairly strong, so I am not too worried about that.

And as I mentioned in an earlier question that a lot depends on how 2008 budget gets worked out. The initial indications are that most my clients are looking at the flat 2008 budget or 2007 [spend]. So, unless something drastically changes between now and the beginning of next year, we should expect to see similar growth going forward as well.

Bryan Kissinger - PriceWaterhouseCoopers

As a follow-up, if you take a look at the subset of your customers that are financial services related, are those budgets expected to be down or those are also expected to be flat?

Girish Paranjpe

Yeah. I have three segments in Financial Services, they are insurance companies, they are banks and they are capital markets players. So as far as the insurance companies and capital markets players are concerned, for them its smoothly business as usual.

On to the bank, there are one or two clients who have a little bit of the challenge because of the credit impact. But even then I am not seeing any significant impact on their budget so their spend at least to the extent it affects us.

Bryan Kissinger - PriceWaterhouseCoopers

Okay. Thank you.

Operator

Thank you. (Operator Instructions).

Suresh Senapaty

Okay, if we don’t have any questions, we can wrap it up. Operator?

Operator

Okay, I show no further questions in queue, sir. You many continue.

Sridhar Ramasubbu

Yeah, if there is no question then we can wind off. Is there a question now, any pending questions.

Operator

No sir. I show no questions in queue.

Sridhar Ramasubbu

Okay, then we can first to call now. Make the announcement.

Operator

Thank you, ladies and gentlemen for attending today's conference. This concludes the program. You may now disconnect. Good day.

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