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Satyam Computers Services Ltd. (SAY)

Q2 FY08 Earnings Call

October 23, 2007, 9:00 AM ET

Executives

V. Srinivas - CFO

B. Ramalinga Raju - Founder and Chairman

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Venkatesh Roddam - CEO, Nipuna

Analysts

Joe Foresi - Janney Montgomery Scott LLC

Bhavan Suri - William Blair & Company

Rod Bourgeois - Sanford Bernstein

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

Sandeep Shah - ICICI Securities Ltd.

Ashwin Mehta - Ambit Capital

Julio C. Quinteros - Goldman Sachs

Jamie Friedman - Susquehanna Financial Group

Anthony Miller - Arete Research

Pankaj Kapoor - ABN Amro

Ashish Thadani - Gilford Securities, Inc

Dipesh Mehta - Khandwala Securities

Mitali Ghosh - DSP Merrill Lynch Ltd.

Sumeet Budhiraja - First Global Securities

Harshad Deshpande - Religare Securities

Presentation

Operator

Ladies and gentlemen, good morning and good afternoon. This is the Chorus Call conference operator. Welcome to the Satyam Earnings Conference Call for the Second Quarter of 2007-2008. As a reminder, for the duration of this presentation, all participants' lines will be in the listen-only mode, and this conference is being recorded. After the presentation, there will be an opportunity for you to ask questions. [Operator Instructions].

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

V. Srinivas - Chief Financial Officer

Thank you. This is Srinivas. Good morning and good evening to all you, and thank you for joining us to discuss our second quarter results.

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

I now hand over the session to Raju.

B. Ramalinga Raju - Founder and Chairman

Thank you, Srinivas. Good morning and good evening. Thank you for joining us on the call today. Second quarter was exceptionally strong as we reported substantially better than expected revenues, broad-based across key verticals, services and regions. During Q2, Satyam recorded sequential revenue growth of 12.7% in US dollars. However, continued appreciation of the rupee against all major currencies during Q2 reduced the corresponding growth rate in rupees to 11%.

EPS for Q2 was rupees 6.12. We continue to be optimistic about our future on the back of a stellar Q2 performance. We are therefore increasing our revenue guidance to $2.07 billion to $2.08 billion, which translates to a growth rate of 41.5% to 42%. The earnings per ADS is also being raised to US$1.24, which translates to a growth rate of 36%.

We have seen strong demand across all our verticals, with TIMES and BFSI performance particularly... performing particularly well. TIMES continued its strong growth with a 20% increase sequentially, while BFSI grew by 12.4% sequentially.

The noteworthy growth rate of BFSI validates our belief that recent concerns in the market segment had little or no effect on our core business in this vertical. The demand for services in the Consulting and Enterprise Business Solutions space continues to be strong and led to a 14% sequential growth. Satyam's early adoption of strategic deals as an area of focus is resulting in larger and longer term engagements. We see this as a sustainable trend.

For instance, Q2 witnessed Satyam negotiate a 5-year engagement within a oil and gas major. We also signed a multi-year deal with Fujitsu Services for providing global outsourcing services to Reuters. Both these contracts are amongst the largest multi-year deals signed by Satyam. These wins reflect our growing maturity in emerging verticals that have been in focus in recent times.

We continued our global expansion during Q2. Revenue from Rest of World and Europe grew by 27% and 17% respectively in Q2. And this growth is supported by the diversified workforce across these regions. India in addition to being the competency hub is also emerging as an attractive market for Satyam.

A noteworthy event in Q2 was the inauguration of the Automotive Center of Excellence in Chennai. We continue to win and ramp up our engagements with strategic clients in our efforts to enable business transformation. In Q2, we added 8 more Fortune global firms to our customer list. We have also witnessed a significant increase from 190 to 213 in the number of customers with run rate of $1 million. We believe that both the aforementioned customer categories are indicative of our potential to sustain the broad-based growth momentum as we saw in Q2.

It is heartening to note that our efforts to stem attrition and develop leaders are bearing fruit and fulfilling an important market need. Attrition at 3.89% on a trailing 12-month basis for Q2 has been on the decline for the fifth consecutive quarter.

Satyam has been awarded the pride of place in American Society for Training and Development's best rankings with Number One ranking globally for the year 2007. Satyam is the first Asian company, the first non-US organization, in fact, to earn this honor.

We have reached a definitive agreement to acquire US-based Nitor Global Solutions for a consideration of up to GBP 2.76 million in an all-cash deal. Nitor is a niche infrastructure management services firm that helps clients design, implement and manage Microsoft technologies and will help us strengthen our growing IMS practice.

We are changing the name of our BPO subsidiary to Satyam BPO Limited from Nipuna Services Limited as a consequence of our decision to buyout external stakeholders. Customers are today much more positively inclined about being receiving the entire value chain of services from a single organization and in that context, this move would be in line with the market demand. The Board has approved an interim dividend of 50% for fiscal 2008.

I now request Srinivas to discuss the financial highlights for Q2.

V. Srinivas - Chief Financial Officer

Thank you Raju. Our detailed financials have been posted on the website and I assume that most of you would have got an opportunity to go through the same. As Raju was mentioning, the growth momentum witnessed in the past has continued in Q2 as well. In this quarter, our revenues grew 12.7% sequentially in US dollar terms and 11% in rupee terms. Sequential volume growth for the parent company was 9.1% with onsite volumes growing at 13%. Offshore billing rates were up by 1.34% and onsite rates increased by 2.21%. And also, onsite as a percentage of our export revenue after declining for a number of quarters increased by 155 basis points due to increase in the new project starts during the quarter.

The EBITDA margin for the quarter declined by 260 basis points sequentially under consolidated Indian GAAP. Salary increments of 5% for onsite and 16% of... for offshore impacted the margins by around 450 basis points. Rupee appreciation and onsite affected our margins by another 100 basis points. The total impact on margins during the quarter was 550 basis points, which was mitigated to a large extent by a strong operating performance.

Billing rates had a positive impact of 120 basis points on margins. SG&A came down by 110 basis points. Improved utilization and better subsidiary performance contributed another 60 basis points to the margins. Because of the continued rupee appreciation in Q2, we now expect the margins for the whole year to decline by around 170 basis points compared to last year.

In Q2, the gross man power addition in the parent company was 4380 and net addition was 3037, which included around 1889 freshers. The net addition for the group at a consolidated basis including subsidiaries was 3420. We know expect the gross man power addition for fiscal '08 for parent company alone to be around 16K to 17K and against 15K to 16K guided at the beginning of Q2.

Parent company's cash and bank balances decreased by $20.6 million during the quarter. In this quarter, the company incurred $51.3 million for buying out the minority shareholders in Nipuna. CapEx for the quarter was $20.6 million. CapEx for fiscal '08 is estimated to be around $80 million to $100 million.

Nipuna, our BPO subsidiary, reported revenues of US$15.12 million, a sequential growth of 26.8%. For fiscal '08, Nipuna is expected to achieve a revenue of US$61 million and be EBITDA positive.

Turning to US GAAP, revenue for the quarter grew 12.7% and net income for the quarter was US$101.9 million, a sequential growth of 9.4% after factoring in a stock compensation charge of US$6.3 million.

We have revised our growth guidance upwards. We now expect revenue to grow between 41.5% to 42% of fiscal '08 against our earlier guidance of 34% to 35.5%.

Thank you and now we open the session to Q&A.

Question And Answer

Operator

Thank you sir. Ladies and gentlemen, we will now begin the question and answer session. Please note that all participants who have logged into the call are allowed to ask questions and there is no specific priority for participants in India and the ones outside India. [Operator Instructions]. The first question comes from the line of Mr. Joseph Foresi from Janney Montgomery Scott. Please go ahead sir.

Joe Foresi - Janney Montgomery Scott LLC

Hi gentleman and good quarter here. I was wondering just in reference to your comments to the financial services spending, could you just tell us a little bit about how you are seeing discretionary spending in any of your products lines setting in to calendar 2008 and what you are seeing for demand in those areas?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Yes, good morning Joe. This is Ram Mynampati here. What we have been seeing, first of all, it's good to see a significant growth in BFSI sector this quarter, particularly good because of the concerns that were clearly evident in our interactions with you all in the past few months. What we are noticing from the customers is the following. Number one, it is too early for us to predict what would happen for the budgets as per as next stage is concerned, but one thing is coming across the air in our interactions is that there is a greater propensity on the part of the customers to do more from offshore regardless of what the budget reallocations might end up being for the next financial year. That's number one. Number two, the discretionary spending, the outlook on the discretionary spending is yet not clear to the decision makers, but all indications are that it would be no different than the situation was going in to this financial year. And the third thing is that there is a greater trust to generating greater operation efficiencies and thereby driving towards greater value from the dollar invested. So, in that sense, our services would be seen as far more attractive in a market that is somewhat uncertain related to which direction the market is headed. But from our business point of view, we see this as neutral to positive from our interactions, but the actual outlook will probably develop and emerge in the next one or two months as the budgets become clearer and as the budgets for the calendar '08 will get finalized in this particular market. So in that sense, we have nothing more to offer than to constantly remain in touch with our decision-makers and be prepared for dealing with any changes that might come our way. But at this point, we have reasons to believe that the situation will be neutral to positive.

Joe Foresi - Janney Montgomery Scott LLC

Okay. And just on the labor pool front, we've heard some of your competitors talk about there being a lack of talent in the SAP particular practice. How are you seeing the current labor pool in that particular practice and are you seeing any lack of talent out there?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Well, like anything else, as the complexity of the product and the breadth of services delivered by a product vendor is increasing, the maturity of the expertise available in the market probably would not be to the same extent as it would have been in the early part of the evolution. So there will always be areas in... product-specific areas where the expertise is not as much in abundance as we would like, but that is nothing new and unique to this time of the year, on this time on the market. So I don't read that as anything different than what we have been managing to. So I would not attribute that to anything extraordinary.

Joe Foresi - Janney Montgomery Scott LLC

Okay. And just lastly real quickly on the BPO business, you've obviously made a move here to take that completely over. Just any update on where we stand on profitability and any guidance going forward on what we can expect that to sort of turn the corner? Thanks.

Venkatesh Roddam - Chief Executive Officer, Nipuna

Hi, this is Venkatesh here. We've guided... revenue guided for the year at $61 million. We're sticking to that guidance. And we've also guided for the full year to be EBITDA positive. So at the half year milestone, we're sticking to that guidance at the moment.

Joe Foresi - Janney Montgomery Scott LLC

Great, thanks.

Operator

Thank you Mr. Foresi. The next question comes from the line of Bhavan Suri from William Blair & Company. Please go ahead.

Bhavan Suri - William Blair & Company

Good evening guys, great quarter. Just a couple of quick questions. Have you seen any changes in the competitive environment, specifically more Tier 2 players in the space? And any indication of... and I know you just finished this, but what wage increases might look like for the coming year?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Yes, this is Ram Mynampati here. Let me deal with the first question and Srinivas will deal with the latter one. As far as the competition is concerned, we have seen a gradual change in the competitive mix and preference of our customers. Clearly, the maturity for the service providers and the scale of the service providers is becoming a factor to contend with as we compete for larger deals and longer term deals. To that end, perhaps some of the Tier 2 and Tier 3 players that would otherwise have been considered for the deal probably are not being considered just because of the strength of the player that is desired. Other than that, there isn't a significant change in competitive dynamics. What we are seeing is may be the similar set of players being considered for similarly-sized deals as opposed to the entire universe of service. That's probably the only minor change that we see, otherwise there isn't a significant change in the competitive mix.

Bhavan Suri - William Blair & Company

Great.

V. Srinivas - Chief Financial Officer

Bhavan, this is Srinivas here. Yes, as you rightly mentioned, we've just got over the hump. So it is I think too early to talk about next year. Again, there are various things. We need to see how the competitive environment, probably the demand-supply, so many things. So it is too early to talk about it, but at least at this point in time, we are through for the current year.

Bhavan Suri - William Blair & Company

And was the 16% increase that you had in offshore in line with the industry or did you guys go above the industry?

V. Srinivas - Chief Financial Officer

We have... as we mentioned in the beginning of the year also, we are above the industry, 5% onsite, 16% offshore. The industry average works out anywhere between 3% to 4% onsite and 13% to 14% offshore.

Bhavan Suri - William Blair & Company

Okay, thanks.

Operator

Thank you Mr. Suri. The next question comes from the line of Rod Bourgeois from Bernstein. Please go ahead

Rod Bourgeois - Sanford Bernstein

Yes. I wanted to first talk about revenues and then a quick question about margin. You guys have been bullish about your revenue outlook over the last several quarters particularly. So may be you are not surprised with the fact that you are giving another major increase in your growth guidance as you did the same last quarter. But to the extent that you have seen some surprise in your revenue growth trajectory, can you articulate more specifically where this revenue upside surprise is coming from? Is it mostly the ERP business? The numbers actually suggested it may also be coming from the ADMS business as well. So any more specifics on that will be very helpful.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Sure Rod, this is Ram Mynampati here. Let me address this from a couple of different angles. First and foremost, the revenue upside is coming from the upside in pricing that we have reported, that I am sure you would have noticed that in this quarter. Second, the geographic distribution point of view, there is a greater growth rate that we are experiencing in other markets outside of North America. As Srinivas said in the early part of his remarks, what... the Rest of the World business grew about 20% quarter-on-quarter this quarter, and Europe is growing handsomely as well. So there is a greater growth coming from outside of North America. The third is specific verticals growing significantly in this quarter, giving us greater reason for optimism. BFSI is already talked about, telecom hasn't gone really well this quarter and so has the travel-transportation logistics. So there are markets that we have invested in that are clearly giving us a reason for optimism for growth.

The third is in the service lines, the Enterprise Business Solutions continues to grow. That is clearly opening many doors for us as the clear leadership position that we enjoy in that market. And in addition to that, there are opportunities in ADMS space that we have reported growth in this quarter and more important is that there are more project starts that we have seen in this quarter. As you would have noticed, we have added about 37 customers in this quarter and the volume growth, particularly onset volume growth has gone up about 13% quarter-on-quarter, reflecting the new project starts. So the combination of factors, both on the regions and the market segments that give rise to the revised growth rate upwards for the year.

Rod Bourgeois - Sanford Bernstein

All right. So, the project starts, I mean, is it... are the project starts mostly coming from the segment you have mentioned, the non-US Consulting and Enterprise Business Solutions and kind of ADMS --?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

No, it includes US projects starts as well, Rod. It's not limited to only the non-US business. I am just giving you trends purely from a quarter-on-quarter change, but the project starts are not limited only to outside of US.

Rod Bourgeois - Sanford Bernstein

Right. I am just trying to figure out... I can see what was strong in the quarter. I am trying to figure out since you are upping your guidance, is the up guidance attributable to the strength that you saw in the quarter? Or there are things in your pipeline that reflects strength that are different than what you showed in September?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

A combination of things, clearly what we have been able to achieve to-date in this year as well as the pipeline that we are dealing with and the interactions with our customers and the near-term outlook, all put together is giving us that confidence.

Rod Bourgeois - Sanford Bernstein

Okay. A quick question on the margin. So, your margin in the September quarter was likely hurt by the increase on site mix, and clearly that's due to the project ramp ups. So can you clarify how this will play out in the next couple of quarters? Can you give us your expectation for the margins trajectory and may be even the onsite mix for the next couple of quarters? Did you also have some project ramp ups that are probably going to continue in the next two quarters?

V. Srinivas - Chief Financial Officer

Rod, this is Srinivas here. It is difficult to give a prediction about onsite offshore movement, but it is our endeavor to move as much work as possible to offshore. That endeavor will continue. That way this quarter may be a kind of an aberration to that. Yes, this has impacted margins this quarter by around 70 bps. Going forward for the entire year at... under US GAAP, at EBIT level, they are looking at a margin decline of around 50 basis points year-on-year. So that is where we are and this is after basically factoring in the... whatever growth we are seeing in the top line and rupee appreciation and various other things.

Rod Bourgeois - Sanford Bernstein

Okay, great. That's very helpful. Thanks guys, congratulations.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Thank you.

Operator

Thank you Mr. Bourgeois. The next question comes from the line of Mr. George Price from Stifel Nicolaus. Please go ahead sir.

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

Thanks very much and good numbers. First of all on the... can you talk a little bit about the receivables, particularly the unbilled, look like they picked up a little bit, what drove that and what are your expectations for the next quarter or two, how should we expect to see receivables both billed and unbilled trend?

V. Srinivas - Chief Financial Officer

Yes. This is Srinivas here. The receivables account for roughly around 93 days this quarter; it has gone up from 90 days the last quarter. So we will make all-out efforts to bring this down as we move forward. Basically as you know, we have brought in a lot of efficiencies and improvement here. So we will definitely try to bring this down. And on the unbilled part also, I think it is quarter-on-quarter there is a little bit of an increase there. But we are not basically seeing any kind of a secular trend here. It is just a quarter-on-quarter aberration and this will be in the range of around 50 million... 50 million to 60 million per quarter, but broadly it will settle down.

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

I mean, is any of this being driven by maybe some of the larger deals, the terms in those deals or project starts, I guess, is there anything more structural if you will driving it or is it simply a blocking and tackling issue of getting the bills out and getting them collected?

V. Srinivas - Chief Financial Officer

Yes, absolutely. There is no structural issue. There is just a... basically some of the procedural things that we need to comply with before actually we invoice the customer. So that way there is no secularity here, it is just a kind of a quarter-on-quarter event that happens. Otherwise, I think the steady state number could be around $50 million or so.

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

Okay. And again, so, what should we think about in terms of over the next few quarters when might we think about seeing some increased collection activity or what should we expect over the next couple of quarters on the receivable side?

V. Srinivas - Chief Financial Officer

While... we will not be able to give any number there, but definitely it will... we will endeavor to bring this number down as we move forward, it's one of the important things that we are working on and we are confident that we will be able to show some progress here.

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

Okay. Is the... can you tell us is there anything for the UK acquisition for Nitor, what's in the guidance for that in terms of revenue?

V. Srinivas - Chief Financial Officer

Yes. It is a $3 million company, which we have acquired and whatever guidance we have given factors in whatever comes out of this acquisition for the next 4-5 months, and it is basically a London-based company. It is in IMS space. There are roughly around 20 high-end consultants whom we will be acquiring. So, we expect that this particular acquisition will give us the required push in the Europe region in the IMS space, specifically.

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

Okay. And last question on the... in terms of the margins, I know you went through a couple of the puts and takes. Could you just review them quickly again and specifically I guess, what was the driver of the high sequential increase in SG&A? Thanks.

V. Srinivas - Chief Financial Officer

You are asking specific to Q2?

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

Yes.

V. Srinivas - Chief Financial Officer

Q2, there is a... SG&A has come down in fact by around 100 --

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

I am talking about on an absolute dollar basis.

V. Srinivas - Chief Financial Officer

Yes, absolute dollar basis it has gone up, but in... if you look it as a percentage of revenues, we have seen almost 100 basis points decline. This is primarily because of the visa expenses not being there in Q2. So that is the primary reason for the decline. Otherwise in absolute terms, you see an increase primarily because of the traveling expenses going up and some of the other things like legal and professional charges and other administrative expenses kind of going up. Otherwise as a percentage of revenue, which a right indicator, we have shown an improvement.

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

Okay. I will follow up with you offline. Thanks.

V. Srinivas - Chief Financial Officer

Thank you.

Operator

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

Sandeep Shah - ICICI Securities Ltd.

Yes, sir, recently one of our top North American capital goods client has shown some concern on the North America economy. So do you believe that it may lead to a project slowdown with that client?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

This is Ram Mynampati here. The projections, the implications of what might happen in market tend to be different across different market segments and within the same market segment it tends to be different for each significant player in the market segment. We are certainly aware of some of the movements that are visible in the market, but at least in those segments, there is some specific projections made about a slowdown. We have evaluated our exposure to the business. We don't believe that there would be any great negative impact to our business from those clients.

Sandeep Shah - ICICI Securities Ltd.

Okay. And just a follow-up like GE in this quarter has gone up by 15.4%, but despite that the manufacturing vertical has just grown by 3.1%. So is the non-GE within the manufacturing showing the lower growth, is it a trend or how should we read that?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

First of all, because the correction is in order, first of all, we don't want to talk specifically about any customer, but the growth rate that is attributed to is not to the customer that you mentioned. GE did not grow 15%. So there is some other reason why you've seen those numbers. But that's not an accurate statement. Second is GE just as a conglomerate of multiple businesses contributes to many different verticals in our organization, not just manufacturing. So a portion of GE's growth adds to manufacturing, not the entire thing even if GE were to grow at that rate.

The third point is manufacturing. There are different submarket segments within manufacturing. There is a heavy manufacturing industry, there is a aerospace and defense industry, there is process manufacturing industry, there is a chemicals industry, various industries that we're very actively engaged in. And we believe that depending on the current state of the economy and the market dynamics, some of these segments will show greater growth than the others. For example, we see a greater traction in aerospace and defense today as opposed to heavy manufacturing. So overall, there might be some shifts that are taking place within these market segments in the broader manufacturing segment. But we don't at an aggregate level attribute any great slowdown to manufacturing as a vertical market at all.

Sandeep Shah - ICICI Securities Ltd.

Okay. And just on the employee addition, today morning we said that we will cross 52,000 by the year-end and that means that the second half net addition is likely to be higher than the first half. So does that mean that the utilization rates, which has gone up consistently may come down in the second half?

V. Srinivas - Chief Financial Officer

One connection here, this Q2, there is one clarification; this 52K which I spoke about is at the consolidated level, not at the standalone.

Sandeep Shah - ICICI Securities Ltd.

Yes, so sir, roughly in the first half we have added around 6000 and now we are looking at more than 6000 addition in the second half.

V. Srinivas - Chief Financial Officer

Correct.

Sandeep Shah - ICICI Securities Ltd.

So, does that mean that utilization will come down?

V. Srinivas - Chief Financial Officer

Yes, we need to see. This quarter also if you look at offshore utilization, the trainees kind of remained flattish, it came down a little bit, but not much. Yes, I mean, when we add people definitely it will have an impact on the utilization. But we are not concerned about it because definitely that will help us in our future growth and... but anyway, in terms of the margin management, whatever we kind of committed that 175 basis points decline in margins, I think that is after factoring in all these things.

Sandeep Shah - ICICI Securities Ltd.

Okay. And sir, typically this quarter we had more fresher employee, but this time the quarter employee addition doesn't seem that high. So is it the change in the strategy in terms of adding people quarter-on-quarter or just a staggered addition of freshers across the year?

V. Srinivas - Chief Financial Officer

Yes, basically we expect some more people joining in Q3 as well. So, based on the requirement, based on the business requirement, we will be controlling the intake. So accordingly we have planned it. Otherwise, I think overall on the people recruitment front, we are looking at a number of around 16K to 17K for the year.

Sandeep Shah - ICICI Securities Ltd.

Okay. And just the last question on FBT front, are we passing on that to the employee or it will be borne by the company?

V. Srinivas - Chief Financial Officer

We will be passing it on. I think today only the clarifications came.

Sandeep Shah - ICICI Securities Ltd.

Yes, so if you can quantify the impact?

V. Srinivas - Chief Financial Officer

We are yet to see the FBT impact, but whatever it is, I think it may be roughly around 10% or so. The idea here is to pass it on to the employees.

Sandeep Shah - ICICI Securities Ltd.

Okay. What is 10%? Can you just --

V. Srinivas - Chief Financial Officer

10% of the total thing, maybe the FBT. We are yet to see the clarifications.

Sandeep Shah - ICICI Securities Ltd.

Okay. But the total impact will be passed on to the employees.

V. Srinivas - Chief Financial Officer

Yes, absolutely.

Sandeep Shah - ICICI Securities Ltd.

Okay. Thanks and all the best.

V. Srinivas - Chief Financial Officer

Thank you.

Operator

Thank you Mr. Shah. [Operator Instructions]. The next question comes from the line of Ashwin Mehta from Ambit Capital. Please go ahead.

Ashwin Mehta - Ambit Capital

Just wanted to get a sense in terms of salary hikes being higher than the industry. Is it all across increase or are there one off bonus items which are there in the salary increase?

V. Srinivas - Chief Financial Officer

Basically this... whatever benefits we are giving to the employees is factored into this. We basically... even though the amount looks a little higher than the industry average, but the benefits of that are there to see. If the attrition, whatever attrition that has come down from almost 20% to now 13.9%, I mean, one of the primary drivers for that is the higher than the industry average wage hikes that we are giving for two years in a row that realty helped us. So, if you factor in the cost of attrition, I am sure that these numbers look that much more decent. So that way we are not really concerned about the wage hikes that we have given because that is definitely helping us in reaming in the attrition, which will definitely earn us back what we are giving away by this higher wage cost.

Ashwin Mehta - Ambit Capital

So basically in terms of this increase in wages is an all-across increase and there are no one off items which would not recur in the subsequent quarters?

V. Srinivas - Chief Financial Officer

No.

Ashwin Mehta - Ambit Capital

Okay, thank you.

Operator

Thank you Mr. Mehta. The next question comes from line of Julio Quinteros from Goldman Sachs. Please go ahead.

Julio C. Quinteros - Goldman Sachs

Great, thanks guys. Real quickly, I just wanted to confirm two things; first, the 175 basis point change in the EBIT, in the margins, that's for the local Indian EBITDA margin or I guess what we would consider to be more like the EBITDA margin here on the US GAAP basis, is that correct?

V. Srinivas - Chief Financial Officer

Yes, you are right.

Julio C. Quinteros - Goldman Sachs

Okay. And then the 50 to 60 bps that you are talking about; that is relevant to the US GAAP EBIT margin.

V. Srinivas - Chief Financial Officer

Yes, you are right.

Julio C. Quinteros - Goldman Sachs

Okay, got it. And then on the numbers that you gave for the margin pressure points, you cited a 260 basis point decline and you kind of went through all the factors, but after that you also added a 70 basis point drag from increased work in onsite. Was that factored into the quarter-to-quarter change or was this an incremental source of pressure?

V. Srinivas - Chief Financial Officer

No, we have factored that in... when I gave you the analysis for Q2. That 70 bps, I have already factored that in.

Julio C. Quinteros - Goldman Sachs

Okay. Because you said 450 negative for wages, 100 negative for the rupee, total of 5 --

V. Srinivas - Chief Financial Officer

No, no. Julio, here the 100 is including both roughly 70 bps because of onsite and roughly around 30-40 bps because of the rupee, because rupee appreciated only 1.3% this quarter. So the increase [ph] is only 40 bps.

Julio C. Quinteros - Goldman Sachs

Okay. So it's embedded in the 100 bps margin number that you mentioned?

V. Srinivas - Chief Financial Officer

Yes, absolutely.

Julio C. Quinteros - Goldman Sachs

Okay. Okay, great. And then can you just clarify there was some...I don't... may be 10, or one of you guys can clarify, the ABN Amro contracts that came across the wire, was that a confirmed contract? And if so can you also talk about the Reuters announcement, what are you guys doing correctly, especially on some of these large contracts that your peers might not be doing in terms of being able to close some of these larger deals at this point in time?

V. Srinivas - Chief Financial Officer

Firstly let me clarify that I am completely misquoted. In fact when I saw the mail today, my name being put there and all that, yesterday I have not spoken to any one at all. So it appears to be yesterday's news item. So I don't know how that is circulating on the net. So let me completely disown that particular thing. So there is no truth to that.

Julio C. Quinteros - Goldman Sachs

But the Reuters contract is real?

V. Srinivas - Chief Financial Officer

Yes, of course, it is real.

Julio C. Quinteros - Goldman Sachs

Got it. Can you talk a little bit about the relationship there because look likes it's a subcontractor type work with Fujitsu?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Yes, it is, Julio, this is Ram Mynampati here. It is part of a much larger transformational outsourcing deal that Fujitsu has won with Reuters. We are one of the few players that are participating in this deal. So it would be delivered to Reuters through Fujitsu. Ultimately the service will be delivered to Reuters, but it will be under contract with Fujitsu.

Julio C. Quinteros - Goldman Sachs

Right. Okay. And typically when you have a structure like this, I think we saw this maybe even at General Motors. How do we think about the margin profile of kind of de-stature [ph] relationships?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

It would be no different than any other large deal that we would pursue. Each of them comes with its own characteristics on revenue front, as well cost structure. There would be no difference on the margin that you should look at.

Julio C. Quinteros - Goldman Sachs

Okay, great. Thanks guys.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Thank you.

Operator

Thank you Mr. Quinteros. The next question comes from the line of James Friedman from Susquehanna. Please go ahead.

Jamie Friedman - Susquehanna Financial Group

Hi, thank you. It's Jamie Friedman. I want to follow-up on a couple of the prior questions with regard to getting a sense about the origins of the growth. I realize that you grew faster than most of... pretty much everyone so far in the first half of fiscal '08. But I was trying to reconcile two data points. First of all, the percentage of work that came from the... can't remember how you phrase it, the percentage of work that comes from your installed base grew rather substantially, but meanwhile you have what seem like a lot of new project starts. So I guess my question is the growth coming from previously signed customers or new customers?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Jamie, it is combination of both. The fact that there are new project starts doesn't mean they are from new customer all the time. There are new project starts that are within existing customer base as well. In addition to the two things that you mentioned, we also have to factor in the ramp ups of the large deals that we have won both in this quarter as well as the previous quarters. There are multiple factors that contribute to the growth. Clearly, it is not any one factor influencing the growth at the cost of the other. We continue to see ramp ups from existing customers and that is a clearly reflected in the churn of the top ten customers as well as the contribution from the top ten customers being very strong. In addition, there is clear contribution from new customer adds and new project starts. So, I would not look at only one at cost of the others. It's a fairly broad-based and combination of multiple things.

Jamie Friedman - Susquehanna Financial Group

Was there an inordinate... because the magnitude of the acceleration in the growth for the guidance is significant... seems significant. Was there an inordinate amount of intra-quarter business signed, or is that for the recognition of previous activity?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Well, couple of factors that you should probably look at is, number one, there is a significant volume growth onsite that you should notice. We have seen a 13 point whatever number of volume growth coming from onsite that would clearly add to growth. And we have also seen the onsite and offshore price increases kicking in, 2.2% and 1.4% onsite and offshore respectively, in addition to the 9% volume growth at the organizational level. I think all of these would probably give you some of the answers about why the growth is... I mean, we are expecting that all of you would be happy that we are reporting significant growth.

Jamie Friedman - Susquehanna Financial Group

Yes, I think we certainly are. And then my last question is with regard to the rest of the world, with 21% of revenue; that's ex-North America and Europe. That is the highest level the company has had on my model and it's up about 500 basis points year-over-year. I assume that some of that is the Fujitsu contract. But what regions are these... I don't see that you break out India as a percentage and where do you anticipate that can go over time? One, what is India as a percentage of the rest of the world or percentage of anything? And then two, where should we think about rest of the world traveling? Thank you very much.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Yes. Let me just make some broad comments. First of all, I am not so sure whether the Fujitsu contract is a significant contributor to the rest of the world numbers. If you look at the numbers, there are three regions that we are seeing growth in rest of the world; those are Australia, Japan and India. Over and above, the traditional strongholds of growth for us in these markets, those are Asia-Pacific, Middle East and India is what we define as Rest of the World. For this particular quarter, the acceleration came from these three regions, Australia in particular, India and Japan. And there are significant ramp ups in different market segments, in embedded customers that has led to the accelerated growth from Rest of the World. It is difficult to put a number as to where the Rest of the World would go other than to say that in the last few quarters, we are seeing greater growth coming from regions outside of North America. And that is the trend that we believe that we will see for some time to come.

Jamie Friedman - Susquehanna Financial Group

Thank you.

Operator

Thank you Mr. Friedman. [Operator Instructions]. The next question comes from the line of Mr. Anthony Miller from Arete Research. Please go ahead.

Anthony Miller - Arete Research

Yes. A couple of questions. First to just to clarify on the utilization of the new hires, then your current utilization rates, offshore likely [ph] without trainees is pretty much at record level. So, there really can't be much flex, these numbers must come down. You say you are bringing on more recruits next quarter. Can you give us an idea of how many of the freshers that you made offers to last year, what percentage of those have already commenced?

V. Srinivas - Chief Financial Officer

Yes, this is Srinivas here. Between the two quarters, Q1 and Q2, I think we have majority of them joining us... already joined us.

Anthony Miller - Arete Research

Okay. So that means you're going to have to go out to the off-campus market now to bring in new freshers for the rest of the year?

V. Srinivas - Chief Financial Officer

We still have... while majority of them come, still there are some more people who are to join who will be joining in Q3. And the balance requirement will be, yes, off-campus or by way of lateral recruitment.

Anthony Miller - Arete Research

Okay. And can you just say how many fresher offers you've made for next year's staff please?

V. Srinivas - Chief Financial Officer

Yes, I mean, basically that is something which we may not be able to talk about. But keeping in view the I think overall growth requirements, we kind of give sufficient number of offers to the campuses.

Anthony Miller - Arete Research

Okay. And just coming on to enterprise application services and consulting, your do group both together. Can you give us some idea of what the split is between what you would call consulting and enterprise application services? I am interested in what your consulting revenues are, how many consultants you have, by consultant I am talking about domain and business consultants, not IT consultants?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Yes, this is Ram Mynampati here. If you look at the 45% contribution to our revenue from Consulting and Enterprise Business Solutions, the contribution from consulting is about 9%, the rest of it is coming from the enterprise business solutions that is outside of the consulting. Now that number includes the consulting revenue from different types of consulting engagements. Those are domain-centric consulting, process-centric consulting, product-centric consulting and the like. And the measure of success for us in the consulting engagements is not only what a price points at which we deliver these services, but what downstream revenue opportunities each of these engagements is giving rise to, not as much whether the consulting business is growing in absolute sense or not because clearly every consulting engagement's objective is to scale up downstream revenue opportunities. To that end, the objectives will tend to be different for consulting business as opposed to other businesses. But ballpark figure would be somewhere around 9% would be the... revenues from consulting business.

Anthony Miller - Arete Research

And has that been growing or has that been pretty constant?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Again, as I said, the growth from consulting business, while it is experiencing growth marginally, but that's not the way we should look at as a success of consulting. While it will grow from a broader revenue at the organizational level, the growth rate may not be significant and that's probably not a driver for us. What we are looking for is if each consulting engagement giving rise to significant downstream revenue opportunities or not and those opportunities gets measured in different growth rates in enterprise business solutions in some cases, ADMS in some cases and the likes. So, that growth rate is not reflected in consulting growth. So while it would grow, that's not necessarily an indicator of how strong the consulting business is.

Anthony Miller - Arete Research

Okay. And just to finish off roughly how many consultants does that represent? How many bodies does that 9% represents?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Yes, I am afraid, we would not be in a position to give out those headcount numbers, we are not distributing those numbers. It's fairly sufficient for us to deal with the contribution to revenue.

Anthony Miller - Arete Research

Okay then. Thanks very much.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Okay.

Operator

Thank you Mr. Miller. The next question comes from the line of Pankaj Kapoor from ABN Amro. Please go ahead sir.

Pankaj Kapoor - ABN Amro

: Yes, hi. Srinivas, just a couple of questions on the guidance. Can you give a sense of what volume and pricing growth that you have factored in in the revised guidance? And second, when you are guiding for the 175 basis point correction in the margins, again what levers you are looking at in terms of especially utilization and what's outlook on various such levers? Thanks.

V. Srinivas - Chief Financial Officer

Yes, sure. We are saying that the prices will go up on an average to average basis by around 4%. So, to that extent it's reasonable to assume that out of the 42% roughly 4% comes from prices, balance comes from the volumes. So, that is a breakup there.

And in terms of the margin levers, we have basically for example, the offshore-onsite mix, this quarter onsite has gone up, but whereas it is our endeavor to increase offshore. So, that is one lever that is available to us. And while we continue to focus on the loading factor and try to keep it at the maximum level.

And also we have the fixed price contracts, roughly 33% of our revenues come from fixed price contracts and better management of the same should give us some elbow room to manage our margins. Then of course the pricing itself, the increase in pricing itself will give us some uptick for the margin management. And of course, some of the freshers whom we have recruited, they are getting billed and all that, because of that the average cost of delivery coming down. That also will also help us in the margin management. So, these are various things we factored in. Of course, we continue to focus on SG&A, controlling SG&A. So, these are the things. Of course the subsidiary performance is also improving. This quarter we had an impact of... positive impact of around 25 bps because of the subsidiary performance. So, these are the various things that we are --

Pankaj Kapoor - ABN Amro

Okay. Just a clarification, when you're talking about a 4% increase, that is basically at a blended pricing level?

V. Srinivas - Chief Financial Officer

No, I mean, basically it is for both offshore and onsite.

Pankaj Kapoor - ABN Amro

Okay, so like out of that 42, 4% would be onsite and offshore mix, weighted average of that?

V. Srinivas - Chief Financial Officer

Yes, more or less. Because now our offshore-onsite mix is 50-50, more or less.

Pankaj Kapoor - ABN Amro

So, are we looking at like from this quarter onwards, as you also mentioned like offshore is going to increase, which essentially means that the blended pricing actually may come down in the next couple of quarters, sequential basis?

V. Srinivas - Chief Financial Officer

Yes, we need to... I mean, these are some of the scenarios. So, we need to see how things actually pan out. For example, this quarter we were expecting that we will be able to increase offshore, but onsite has gone up. So these are various scenarios we are working with. So, we need to see how things actually pan out.

Pankaj Kapoor - ABN Amro

Okay. And just one final question on that DSOs. We have seen that taking up from last five, six quarters, it's been on a increasing trend. So, can you just look at the reasons behind it? Is increasing share fixed price contract a reason? And what's the level that you are targeting going forward? Thanks.

V. Srinivas - Chief Financial Officer

Yes, I mean while we... while I will not be able to give any specific number there, but definitely we want to bring this down as early as possible. And I am sure that in the next couple of quarters we will be able to show some improvement. Yes, and the fixed price contracts and the consequent to it, the unbilled revenues going up is to some extent contributing to this, but that may not be the only reason. So, overall I am sure that we need to bring in efficiencies in the overall thing and which we will do it. Because earlier once we proved it when it was almost 110 days, we brought it down to almost 80 days. And I agree that it is creeping up in the last three, four quarters. We will... I am sure that we will try to bring it down as we move forward.

Pankaj Kapoor - ABN Amro

Fair enough, thank you, all the best.

V. Srinivas - Chief Financial Officer

Thank you.

Operator

Thank you Mr. Kapoor. The next question comes from the line of Mr. Ashish Thadani from Gilford. Please go ahead.

Ashish Thadani - Gilford Securities, Inc

Yes, sir. Good evening, very nice quarter. In the CEBS segment, to what extent might supply constraints be holding back even faster growth? Are you in a position to provide some broad quantification on this?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Ashish, I am afraid, we will not be in a position to be more definitive other than to say that supply side constraints are no different for CEBS as opposed to any other business segment. But it's very difficult for us to provide any more quantification than that. It's no different.

Ashish Thadani - Gilford Securities, Inc

Is it a very meaningful limiting factor?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

I think anything I say might be subjective. So, I would probably not like to comment.

Ashish Thadani - Gilford Securities, Inc

Okay and then just switching subjects to currency in light of recent trends, has there be any reassessment of the hedging policy, perhaps a more aggressive posture extending over a longer time horizon?

V. Srinivas - Chief Financial Officer

Ashish, we have already started doing it, while our started policy continues to be hedging 60% of our expected dollar in flows. But if you look at our hedging as it stands as on 30th September of $783 million, that represents around 75%. So, it is basically while the strategy remains at 50, this is a tactical move we have made primarily keeping in view the way rupee is behaving, kind of a steep appreciation we have seen. So, we are already acting on that, and that is the reason why in fact we are able to protect ourselves and in this quarter we have a positive impact of almost around $10 million or so.

Ashish Thadani - Gilford Securities, Inc

Great. Thank you very much, very nice quarter.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Thank you.

Operator

Thank you Mr. Thadani. The next question comes from the line of Weddell Joyce from Edelweiss [ph]. Please go ahead.

Unidentified Analyst

Yes, hi congratulations to the management on great set of numbers. I basically have two questions. One, it seems to me that I am not able to reconcile 450 basis points decline in margins due to the stated salary hikes that you given because I just try and compare this with what your peers have reported and it seems to be just in the range of half of that in terms of margin decline.

V. Srinivas - Chief Financial Officer

No, the 450 basis points which we spoke about is for the quarter. And for the year the impact will be 350 basis points for us because of the... whatever the... higher than industry average wage hikes we have given. If you are comparing the impact for the year, that is FY08, then it is roughly 350 bps, whereas for this quarter, because we have given the increments in this quarter, the impact is higher.

Unidentified Analyst

Okay. Just as a follow-up to that, are there any other elements in employee expenses, some sort of increases that have happened this quarter apart from wage hikes that might have contributed to such a sequential increase, which might not repeat going forward?

V. Srinivas - Chief Financial Officer

No, not really. I mean, whatever increases we have seen, they fall into the category of E&B [ph] and that is what accounts for roughly 450 bps.

Unidentified Analyst

Okay, fine. Just as another question if I may, it seems to me that it becomes difficult for you at the beginning of a quarter to predict the extent of the onsite-offshore mix that happens in the quarter planning forward, because you did indicate that the onsite-offshore mix actually turned towards onsite and there is probably something you had in bargain for when you look back last quarter, is that true?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Yes it is true. It is difficult to predict at the beginning of the quarter how the ramp up would take place using the quarter. While there are some broad indicators as to how we plan to do things, the project starts and the new wins and the customer behavior is very difficult to predict three months hence. So I guess you would expect that be the case.

Unidentified Analyst

Okay, fine, thanks. Great set of numbers once again, thank you.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Okay.

Operator

Thank you Mr. Joyce. The next question comes from the line Dipesh Mehta from Khandwala Securities. Please go ahead.

Dipesh Mehta - Khandwala Securities

Our ADMS business is growing at around 10% to 15% volume growth, which seems to be very muted growth, any comment on this?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

No specific observation other than that ADMS continues to be a significant component of the industries business and including Satyam's business and you would see that it is clearly a growth... a stabilizer I guess for our business. Clearly we are seeing growth in enterprise business solutions space and other areas where we have invested in, in infrastructure, engineering services and the like. But clearly ADMS has been a stable contributor to our growth and we would expect that to remains so. We may, may not see the same growth rates every quarter in every segment of our business. But suffice it to say ADMS clearly is a critical component of our overall business.

Dipesh Mehta - Khandwala Securities

And we've received around $510 million [indiscernible] did around $480 million. What's surprised us specifically during the quarter? Hello?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Yes. Well, as we have talked about this in the previous... answer to previous question, there are three, four things that contributed to this accelerated growth.

Dipesh Mehta - Khandwala Securities

I just want to... because that I heard. So, I just want to clarify whatever employee hiring plan we have, whether the hiring plan was not to maintain situation of this kind of this growth, or we have already settled that kind of hiring plan in Q2?

B. Ramalinga Raju - Founder and Chairman

This is Raju here. Whatever planning we are doing, one thing that you would notice is the fact that there is greater rigidity when it comes to onsite manpower because we generally tend to keep it at 97% or 98% loading levels. Whereas offshore generally one breeds in much greater cushion so that we can absorb any unexpected growth that may come our way.

Dipesh Mehta - Khandwala Securities

Okay.

B. Ramalinga Raju - Founder and Chairman

And in that sense, the hiring plan has some buffer built in bringing the offshore resources that we come to have. And I think we have adequately provided for that last quarter.

Dipesh Mehta - Khandwala Securities

So, because there were... beside the wage hike and the utilization level from 81.5 offshore utilization level, there is very little cushion to move it up, it would be much lower in next two quarters. So, their margin level would be not I think up [ph] for next half. So, I just want to understand whether our hiring plan is already fixing these kinds of intakes?

B. Ramalinga Raju - Founder and Chairman

We have to number one, we are not to conclude that whatever be the offshore loading factors that we have been able to establish, they have touched the boundaries of maximum possible, number one. And number two, while we constantly give guidance, at the ground level depending on the change in circumstances, we constantly course-correct and that's the reason why you would find that the guided numbers vary somewhat quarter-to-quarter, not only in our company but in every company that we can... we would look at. Therefore these are many times indicative numbers. And on the ground level depending on the demand that we are seeing on an ongoing basis, we continue to course correct.

Dipesh Mehta - Khandwala Securities

Thank you. That's all from my side.

Operator

Thank you Mr. Mehta. The next question comes from the line of Mitali Ghosh from Merrill Lynch. Please go ahead.

Mitali Ghosh - DSP Merrill Lynch Ltd.

Good evening, impressive quarter. I had two questions, firstly, on the pricing. You have shown some good increase in pricing this quarter. If you could give us some color in terms of trying to sort of decompose the pricing, how much are you seeing on a like-to-like basis, particularly in the recent contract discussions that you may have had and how much of this would be more mix led or productivity led? I am not looking more numbers, but just any sort of qualitative color you can give us on the pricing environment.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Yes Mitali, this is Ram Mynampati here. Clearly, there are two reasons why pricing has gone up and just to make sure that we are on the same page, what the reporting is improvements in realized prices in the quarter. So, that has come about due to two things; one, our ability to negotiate at higher level prices with existing customers and thereby realizing greater prices in existing contracts. Second is our ability to sign new contracts at higher prices. And those contracts contributing to the growth in this quarter and thereby improving average prices. It's very difficult to put percentages as to which one contributed more to the improvement in prices. Suffice it to say that definitely there is a relatively more positive environment for pricing that we are operating in. Customers are clearly in the know of the supply-demand situations and thereby we are able to present our case much more effectively and be in a position to negotiate for better prices in both existing and new customer situations. I am not so sure whether I can give any more color than that without having to bring the numbers out. But I would say that is the primary reason for improvement in prices. And in addition to the fact that fixed bid contribution to our revenue is improving and that also contributes to better realized prices, as you would expect.

Mitali Ghosh - DSP Merrill Lynch Ltd.

Thanks. Just a follow-up to that, on new contracts or rather from new clients and then from existing clients, what is the kind of pricing increase that you are seeing more recently... in the more recent contracts concluded, and how do they differ?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

We have said earlier that we are seeing about 4% to 5% improvement on prices in both cases. And there is nothing different today than what we've said earlier.

Mitali Ghosh - DSP Merrill Lynch Ltd.

Sure. And secondly, just if you could give us a sense of where you are in the employee pyramid in terms of experienced mix?

V. Srinivas - Chief Financial Officer

Madam, this is Srinivas here. The number is 0 to 3 years, roughly around 48%, 49% of the population. The balance is about 3 years.

Mitali Ghosh - DSP Merrill Lynch Ltd.

Okay. Thanks a lot.

Operator

Thank you Ms. Ghosh. The next question comes from the line of George Price from Stifel Nicolaus. Please go ahead.

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

Thanks very much. Just want to follow up with a couple of things. First, just looking at what you're guiding to in December quarter, can you... it seems like some of the other companies out there got a little... their guidance has been a little, maybe more conservative or a little bit more muted on a quarter-over-quarter basis going from September. Given the strength that you saw this quarter and presumably the strength should persist at least near term, no negative demand indicators. What's behind I guess the sequential deceleration going into December?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Well, we have taken multiple factors in to account as far as guiding for the next quarter is concerned. The ramp ups can use [ph] that we have seen in the market, the new client additions and large deal ramp ups. And we have also taken into account the number of workdays in a quarter. All the things that one would expect to take into account for guidance, we have looked at that. And just to make sure that we are on the same page, the guidance that we have given for the quarter is percentage-wise the same as what we have given at the end of Q1, except that the absolute might be different given the basis change at the end of Q2. We have given a guidance for the quarter of 5.5% to 6.1% for Q3. And that hasn't changed in percentage terms.

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

Okay, I guess is there...where going into the December quarter, would you expect to see the strength in particular coming from?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

I am not sure whether you are looking for a specific area. But clearly what we have seen in this quarter is if you compare it to previous quarters, there are always going to be some market segments that outpace others and some geographies that outpace other geographies in any given quarter. So, it is very difficult to predict how the distribution would exactly result in the numbers that we are expecting for December other than to say that the broad indicators that we have in the business mix that we are seeing seem to give us the confidence, or the guidance is very difficult to break that down at this stage in the quarter as to which market segments and which levers would come to give us the growth. It would be very, very difficult.

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

Okay. And just in terms of hiring kind of seemed seasonally weak at least on a net basis for the IT business. Is there any... is that just the timing issue? Obviously you are raising the guidance, the gross adds guidance for the year, so that presumably would suggest it's a timing issue. But is there anything else behind it?

V. Srinivas - Chief Financial Officer

This is Srinivas here. Yes, there is basically as earlier also we were mentioning, we will be taking in people based on the business needs and also based on our manpower planning requirements. So, accordingly we have taken this... we have added around 4000 plus gross additions in the quarter. And going forward, looking at the overall growth requirements and we are basically giving the early numbers, guidance of around 16K to 17K.

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

Okay, thank you.

Operator

Thank you Mr. Price. The next comes from the line of Mr. Sumeet Budhiraja from First Global Securities. Please go ahead.

Sumeet Budhiraja - First Global Securities

Thank you and congratulations to the Satyam management for a great set of numbers. Sir, my question is on the BFSI growth that we saw was very good in this quarter. Was it because of this new partnership with Temenos or any particular partnership which has worked very well for you, I mean, and you would like to highlight?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

No, I am afraid we would not be in a position to highlight any one reason. The partnership that you are referring to is one of the few things that we form in servicing the broader financial solutions market. I would not attribute it to any one partnership. This is clearly coming out of client ramp ups, opening up of new opportunities and acceleration in the established clients as well. So, I would not attribute it to any one alliance partnership or technology.

Sumeet Budhiraja - First Global Securities

So, do we have that particular lever, which some of our other IT services major are talking about, let's say, things like reusable components or product-based services or are those levers also available to us?

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

There are levers available to everyone in the industry and there is nothing unique in service delivery models in this industry anyway. For us to have the advantage of those levers, you've got to operate in a controllable environment. Number one, you should have the control over what you are delivering. That puts us back to a fixed price or deterministic environment. So, on a time and material basis, there isn't a whole lot that you would derive out of the usable components. It has to be in a controllable environment, you should be in a position to determine the entire methodology of those service deliveries. To the extent that you are able to that, the IP that you would have created, the components that are reusable can be deployed to drive towards grater levels of productivity that would clearly improve your margins. And it will also enable you to grow faster in some cases to the extent that you are able to aggressively estimate efforts leading to such developments.

But these are all things that we have been at for number of years. And there is nothing new in the market as far as reusable components is concerned. And this is not... this is not new to the industry per se and it hasn't reached the level of maturity that industry had expected a few years ago, it is one of the many things that we do.

Sumeet Budhiraja - First Global Securities

Yes, thank you sir. And congratulations once again.

Ram Mynampati - Member of the Board and President, Commercial & Healthcare Businesses, Satyam, Chairman of Citisoft Inc.

Thank you.

Operator

Thank you Mr. Budhiraja. The next question comes from the line of Mr. Abhishek Shendarkar [ph] from SIT. Please go ahead.

Unidentified Analyst

I just have a one question for Srinivas. Srinivas, can you just comment on how the operating margins would shape up in Q3 as per the US GAAP? Thanks.

V. Srinivas - Chief Financial Officer

Yes, Srinivas here. We will not be giving margins guidance at the quarterly level. We are giving the top line and the EPS. But as I was mentioning earlier, under US GAAP for the year, that is FY08, at the EBITDA level, the margins are going to decline by around 50 to 60 bps. So, that is what we are giving the guidance. The quarter-on-quarter operating margin guidance we are not giving. While having said it, but it is reasonable to assume that the margins will improve in Q3 quite significantly. This is because the increments are behind us and the operational efficiencies and the base effect will kick in in Q3. So that basically will... we will see some smart recovery in the margins.

Unidentified Analyst

Thanks, Srinivas.

Operator

Thank you Mr. Shendarkar. The last question comes from the line of Mr. Harshad Deshpande from Religare Securities. Please go ahead Mr. Deshpande.

Harshad Deshpande - Religare Securities

Hello sir. Congratulation on a wonderful quarter. I just had one question, your domestic employee strength is declining over a period and moreover you've stopped giving change in billing rate for domestic revenue. So, what's actually happening there?

V. Srinivas - Chief Financial Officer

Sorry, the question is the associates --

Harshad Deshpande - Religare Securities

Yes, yes, associate strength is declining.

V. Srinivas - Chief Financial Officer

Okay.

Harshad Deshpande - Religare Securities

In the domestic... what you categorize as domestic.

V. Srinivas - Chief Financial Officer

Okay

Harshad Deshpande - Religare Securities

And moreover since last few quarters you have stopped giving sequential and year-on-year growth in domestic billing rates. So, what's happening on that front?

V. Srinivas - Chief Financial Officer

Yes, I mean, for the domestic billing rates, there is a small improvement in the rate. But otherwise more or less it is a flattish kind of thing.

Harshad Deshpande - Religare Securities

Okay

V. Srinivas - Chief Financial Officer

And although it is domestic, we will also basically use it for competency development as well. So... and also the number which you are seeing is the quarter-end number. May be during the quarter the number would have been higher and maybe at the end, it would have come down. So, other than that, as you see the domestic revenue, as you see quarter-on-quarter has gone up by almost 10 crores.

Harshad Deshpande - Religare Securities

Yes, yes, yes. But can you explain what kind of this domestic business is, I mean is it to cater to Indian clients or is it something different?

V. Srinivas - Chief Financial Officer

It is still cater to Indian clients as well as to our some of our multinational clients who got their Indian operations here.

Harshad Deshpande - Religare Securities

Okay. Thanks a lot.

Operator

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

V. Srinivas - Chief Financial Officer

Yes, this is Srinivas. I would... yes, this is Srinivas. On behalf of the management team here, I would like to thank every one of you for your active participation. If you have any further questions please write to us at investorrelations@satyam.com. Thank you, good day and good evening.

Operator

Thank you sir. Ladies and gentlemen, thank you for choosing the Chorus Call Conferencing facility. Thank you for your participation and you may now disconnect your lines. Thank you.

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Source: Satyam Computers Services Ltd. F2Q08 (Qtr End 9/30/07f) Earnings Call Transcript
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