Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Wipro Limited (NYSE:WIT)

Q3 FY07 Earnings Call

January 18, 2008, 8:15 AM ET

Executives

Sridhar Ramasubbu - IR

Azim H. Premji - Chairman

Suresh C. Senapaty - EVP of Finance and CFO

Girish S. Paranjpe - President, Finance Solutions

Pratik Kumar - EVP of Human Resources

Sudip Banerjee - President of Enterprise Solutions

Dr. A. L. Rao - COO

Suresh Vaswani - President of IT Practices

Zach Lonstein - CEO of Infocrossing

Analysts

Joseph Foresi - Janney Montgomery Scott

Moshe Katri - Cowen and Company

Anthony Miller - Arete Research

Ashish R. Thadhani - Gilford Securities, Inc.

Kanchana Vydianathan - Pacific Crest Securities

Abhi Gami - Bank of America

Julio Quinteros - Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Sridhar Ramasubbu. Please go ahead.

Sridhar Ramasubbu - Investor Relations

Thanks Linda and thanks everyone for joining us for Wipro's Third Quarter Results and Earnings Call for the quarter ended December 31, 2007. Arvind is a newcomer to our team in India. Then we have Lalit and Rajesh and Jatin, all of them from the IR team, join me in conveying our warm welcome to all of you and wishing you the very best in 2008.

With us today we have Mr. Azim Premji, Chairman and Managing Director; Mr. Suresh Senapaty, CFO and other members of senior management team including the BU heads and including Zach Lonstein from Wipro Infocrossing team.

I hope you have had an opportunity to review the press release we issued today morning under U.S. GAAP.

Let me give 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 would 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 have been... are discussed in detail in our filings with SEC. Wipro assumes no obligation to update this information presented during today's call.

The call is scheduled for an hour. The entire earnings call proceedings are being archived and transcripts will be made available after the call at our website wipro.com. I am online for the information on email and if you have any specific questions, which you are unable to ask, please send me an email and we will address those questions as well at the end of the call.

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

Azim H. Premji - Chairman

I wish you all a very happy New Year. You need to excuse my voice. I have a terrible cold, but I'll do my best.

You now have seen our results for the quarter ending December 31, '07. While the management team would be happy to answer you queries, I would like to take some time before that to share some of our thoughts on our performance and prospects.

The results for the quarter are satisfying and we continue to see good momentum in all our businesses. Revenues from our Global IT Services at $910 million for the quarter were ahead of our guidance of $905 million. Organically, our margins remained flat despite an appreciating rupee and increased costs on account of wages' hikes effected.

We continue to win large deals and have a healthy pipeline of these deals as we move into the new calendar year. Among our industry facing business units, Financial Services business grew nearly double digit sequentially during the quarter, despite this being challenging times for the sector.

We also had our Retail and Healthcare Verticals growing ahead of our company profit growth rate and sales growth rate. Among our service lines, we had strong growth in our BPO and Testing Services. Our top 10 customers grew at a healthy rate during the quarter and we won a good set of new clients with some mission-critical and transformational projects being awarded to us.

On the operational front, we are driving for higher productivity and have seen a 200 basis point increase in mix of revenues from fixed price projects this quarter. We are relentlessly driving for higher pricing for our services and have seen price increases from our customers in the range of 3% to 6% as our new customers are coming in at around 5% higher than the average. This has helped us in improving our realization during the quarter by about 50 basis points sequentially.

We continue to see accelerated momentum in our India, Middle East and Asia-Pac IT business. It recorded strong year-on-year revenue growth of 37% and profit before interest and tax growth of 40%.

We are pioneers in the Indian IT market with presence for over 25 years now. With our breadth of solutions and services, we are a partner of choice for most Indian corporates. We started investing early in the Indian market in solutions and new service lines like Total Outsourcing that has reflected in our growth rates and deal wins. Over the last 24 months, we have won more than 12 large Total Outsourcing deals in India, Middle East and Asia-Pac across various industry verticals, and deal sizes have consistently been going up. Our recent win India in the telecom sector is representative of the increasing size of deals in the market and of our abilities to offer transformational solutions to customers.

Leveraging our strength in the India market, we started investing in Middle East and Asia over the last three years and we are seeing very strong traction for our solutions and services in these markets as well. We have a healthy pipeline of large deals in these geographies and we are confident of establishing leadership positions in these geographies like in the Indian market.

Wipro Consumer Care and Lighting also grew well with both revenue and PBIT growing by 25% each on an organic basis. Our Consumer Care and Lighting business has reached a quarterly revenue run rate in excess of $100 million and we continue to see strong demand for our products in India and Asia.

We have made two large acquisitions during the year: Unza in our Consumer Care and Lighting business and Infocrossing in our Global IT business. Both these acquisitions are very strategic in nature. The integration of these acquisitions is on track.

We constantly look at challenges and opportunities thrown at us and evolve strategies that will help us maximize growth and enhance value creation. We are increasing investments and accelerating momentum in some of the strategic initiatives we kicked off last year while we initiate a few new ones this year.

The key areas that we are focusing now are: one, driving growth through mega and gamma accounts; two, enhancing non-linearity through a set of identified initiatives; three, creation of global programs team to manage large deals and a higher focus on Total Outsourcing deals; supply chain initiatives to improve employability, building global capability and optimizing mix; five, game changing initiatives like 360 degree partnerships with large technology players such as Cisco, EMC, SAP, Microsoft et cetera; increased focus on consulting by consolidation under Wipro Consulting; accelerating investment in geographies like Middle East, Germany and Canada, which we see as major growth markets; and eight, continue to look at inorganic initiative to bridge the identified strategic gaps.

Many specific actions have been initiated in each of these areas and more in the rollout stage. While we are aware that the journey is not complete, we are encouraged by the progress made so far.

Finally, in terms of business environment, the U.S. economy in general and the financial services sector worldwide in particular are facing challenges. However, we have not seen any impact on our business so far. We continue to see good demand for our services and believe that the value of global delivery model offers is enduring.

Further, Asia and Middle East markets continue to expand at a healthy pace. Having said that, we continue to watch the environment carefully and are driving multiple initiatives to derisk our business model.

I will now require Suresh Senapaty, our CFO, to comment on financial results before we start taking questions.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

A very good morning and... to people in the U.S. and good evening to some of you in Asia. Wish you all a very, very Happy New Year. I will touch upon areas in our performance in financials that will be of interest to you all.

Let me commence by highlighting the fact that for the convenience of the readers, our U.S. GAAP financial statements have been translated into dollars at the noon buying rate in New York City on December 31, 2007 for cable transfers in Indian rupees as certified by the Federal Reserve Bank of New York which was 39.41 rupees a U.S. dollar.

Accordingly, revenues of our Global IT Services segment that was $910.1 million or in rupee terms 36.14 billion rupees appears in our earnings release as $917 million based on the convenience translation. Global IT Services revenue for the quarter of $910.1 million included $772.2 million for IT Services, $76.5 million from BPO Services and $61.4 million from two acquisitions. We had an organic revenue growth of 7.4% in Global IT Services with revenues of IT Services growing 7.2% sequentially while revenues of BPO Services grew 9.3% sequentially. Revenue growth of 7.2% in IT Services was driven by volume growth of 6.4% while blended pricing increased by 50 basis points on a quarter-on-quarter.

On the foreign exchange front, our realized rate for the quarter was about 39.70 rupees a dollar versus the rate of 40.75 rupees a dollar realized for the quarter ended 30th September, 2007. As at period end, after assigning to the assets on the balance sheet, we had about 200 and... $2.11 billion, I repeat, $2.11 billion of contract, and on a gross basis $2.45 billion contract at the rate between 39.50 and 43 rupees.

During the quarter, we added 39 new customers, 10 of which were Fortune 1000 Global 500 customers. We have our first $100 million client this quarter and the number of clients more than $50 million has increased from 9 to 12. Our price realization in the IT Services business went up by 5% for onsite work and 2.2% for offshore on a YoY basis.

We had an adverse impact of 50 basis points on our margin due to exchange rates, which was offset by pricing and other operational improvements. We effected a wage hike for employees in our BPO business from 1st October by about 12%, and this had an impact of about on our BPO margins by 250 basis points. The drop, however, in operating margin for BPO business has been contained at 130 basis points despite foreign exchange impact and wage hikes. Overall, our operating margin dropped by 150 basis points versus previous quarter, primarily on account of acquisitions.

For the quarter ending March 2008, we expect volume led growth with stable price realization. We will have impact on margins due to the wage hikes given for our onsite workforce effective for January 2008. We expect margins of Global IT business to be in a narrow range excluding impact on foreign exchange fluctuations.

We'll now be glad to take questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. Our first question will come from the line of Joseph Foresi from Janney Montgomery. Please go ahead.

Joseph Foresi - Janney Montgomery Scott

Hi gentlemen. I was wondering if you could comment on the financial services spending environment in North America. Are the budget cycles complete and how did it look compared to last year?

Girish S. Paranjpe - President, Finance Solutions

Hi. This is Girish Paranjpe. When we talk to our clients in financial services, most clients are still holding budgets at same levels as 2007 with a few clients expecting a cut in their budgets for 2008. However, how that budget will be allocated among various elements from hardware to software to internal services to external service providers is still getting worked out. And we expect that to become clearer by the end of this quarter.

Joseph Foresi - Janney Montgomery Scott

Okay. So you are saying that spending is essentially flat with a slight downtick, correct?

Girish S. Paranjpe - President, Finance Solutions

I think there are two categories of people. One category of clients for whom it is flat, flattish in terms of the budget. There are certain few other clients for whom there is a budget cut. And... but irrespective of either situation, how that budget will get distributed across various elements is something that we will know by the end of this quarter.

Joseph Foresi - Janney Montgomery Scott

And has there been a hold up on any of the discretionary spending options and do you expect that you would see a flush of that in maybe the September quarter if the worries went away?

Girish S. Paranjpe - President, Finance Solutions

Yes, maybe that, but as I said, nothing... no project has been held off so far. And I think only when they decide the spends and the project gets kicked off, then we'll get a better picture of what's being held back and what's not being held back.

Joseph Foresi - Janney Montgomery Scott

Okay. And then just lastly here on the BPO side, I know that the headcount sort of pulled back a little bit. I was wondering if you could give us an update of the trajectory of that business and how are you seeing demand also in relation to North America. Thanks.

Unidentified Company Representative

Let me answer this. There are two parts to the question there. One I believe is in the headcount. So let me answer that. If you looked at our financials and if you looked at our headcount data starting from March of '07, you would notice that from March to December of '07, our headcount has probably gone up by 8%. Yet, on the other hand, if you look at our year-on-year growth, it's probably gone up by about 44%. So really, we have tried to break the linearity that headcount of... between headcount and revenue for the past two years. I wouldn't say we are completely successful at doing it, but I think we have made a beginning and... because, by any parameters that you look at, you could see that we have kind of today our revenue growth has kind of delineated from our headcount growth. There are three things that we have done for that, one is bundling more services. So really if you go back and look at it, today end-to-end services account for almost 41% of our total top line. The second thing is selling more high value services and the third is around our Platform BPO initiative, for which right now we have filed a few patents. We are in the process of filing a lot more. But that has still not completely kicked in. That's the third component. So that's why you really shouldn't bother too much about the headcount addition right now vis-à-vis revenue.

From a demand environment perspective, we are finding North America fairly robust. I would say on the financial services side, we are seeing opportunities. How much of those opportunities actually translate into large outsourcing contracts at this time, it's a little uncertain. It's more or less going to be for most people, from what we've been seeing and hearing, the volumes have remained more or less constant or they have been going up. To that extent, they cannot cut back on their day-to-day activities. So outsourcing becomes a key imperative for them. So we see the outsourcing market actually growing in the next couple of quarters, but we'll have a clearer picture of that maybe at the end of quarter one. As far as other segments are concerned, we see the same demand that we saw last year for our services, especially across horizontal service lines and we see that continuing.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

And also if I can supplement, and look at the financial solutions have grown sequentially 9.8%, look at our North America. We have sequentially grown between quarter two to three at about 7.2%. And the third is about against the 39 customer adds that we have got in quarter three, 25 of them are from North America.

Joseph Foresi - Janney Montgomery Scott

Okay, thank you.

Operator

We will now go to the line of Moshe Katri from Cowen and Company. Please go ahead.

Moshe Katri - Cowen and Company

Hey thanks. I wanted to focus briefly on Infocrossing. Suresh, maybe you can tell us what sort of dilution that you have from Infocrossing during the quarter. And then when do you think we'll going to get to a neutral impact on EBIT margins as well as earnings? Thanks.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Right. I think as we had anticipated, the results have been in similar lines so far as the current quarter... the quarter ending December is concerned. There are multiple activities on in terms of trying to expand margin through more offshoring. There are activities on in terms of getting synergy in the go to market to be able to win large deals as well as getting into cross selling between remote [ph] customers of Infocrossing in terms of Wipro Services and their vice versa. So in all these deductions, progress is being made and we think and we should be able to see much higher visibility in the number one or two quarters. So far as the current quarter is concerned, we would be seeing a sort of fairly stable sequential kind of top line. And we will see real uplift in growth so far as revenue and margins are concerned in two quarters time.

Moshe Katri - Cowen and Company

So in about two quarters, you should see improving EBIT margins coming out from Infocrossing?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

That is correct.

Moshe Katri - Cowen and Company

Okay. And then considering some of the points that you raised about the budget cycle or what clients are doing right now in terms of their budget, do you feel that there could be some sort of an unusual impact on the March quarter given the fact that budgets are being finalized about... I don't know... a month, maybe five, six weeks later than usual?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Well I think we have done our own surveys and we have got into the order books we have and what we are seeing. So from that perspective, the March quarter guidance that we have given of about $955 million, we are pretty comfortable that we should be able to deliver those numbers for this quarter.

Moshe Katri - Cowen and Company

All right, thanks.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Thank you.

Operator

Our next question will come from the line of Anthony Miller from Arete Research. Please go ahead.

Anthony Miller - Arete Research

Yes. This is Anthony Miller from Arete Research. A couple of things. You mentioned that you had your first customer burst through the $100 million mark. Can you give us a bit of an idea as to what prompted that? In other words, was it, for example, one big new contract or was it a gradual build up of revenues in different service lines?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Yes, that's an existing customer where we have been providing application development, maintenance, infrastructure services, BPO services. So a combination of all that. I think the kind of range of services we have been offering into that particular client, it has grown over the quarters. And this quarter, that is quarter ending December, we touched 100 of... annualized $100 million. We exceeded it in [indiscernible].

Anthony Miller - Arete Research

Okay. So they are the top customer now. Were they the top customer last quarter?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

I am sorry?

Anthony Miller - Arete Research

They were obviously your top customer now, but were they your top customer last quarter as well?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

That is true, that is correct. The same customer was the top customer last quarter also.

Anthony Miller - Arete Research

Okay. And my second one is on more on the supply front and on attrition. In the call earlier this morning, early this morning my time, you alluded to the fact that the reason that attrition was up was because of involuntary attrition. You said you were letting go freshers who had come out of training and weren't up to par. Now, does that mean you are kind of recruiting the wrong type of people? I mean do you... is there something that's gone adrift with your sort of triage process when you are doing the interviews?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Before that, Anthony, I just want to... this is Suresh Senapaty... I want to clarify once again, and I am sorry I... the customer... the top customer in quarter two is not the same as the top customer in quarter three.

Anthony Miller - Arete Research

Okay, thank you.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Yes, Pratik.

Pratik Kumar - Executive Vice President of Human Resources

Yes, Anthony this is Pratik here. You are referring to the question in our morning call on attrition. And what I had shared was while on voluntary attrition basis we have seen that coming down compared to quarter two by about a percentage point, the involuntary attrition inched up slightly. And the reason which I had stated there, and I would like to once again elaborate on it, is that we do hire, and this is a season when we take all engineering graduates and they go through 12 week training program. Right through the training program, they have to go through multiple filters to be able to clear it. And as we expect, when we hire in such large numbers, there is always a 1% to 2% dropout. That 1% to 2% dropout on the size of about 3000, 3500 freshers we take every quarter can actually have an impact on the overall attrition rate. It's nothing which is very unusual from what we encounter previously. It's just that that was the quarter where we had all these filters being... making them go through those filters and some of them dropped out, not being able to cross the thresholds which we have set.

Anthony Miller - Arete Research

Okay, I'll take that offline. Just going to slip in one quick one. You said that the proportion of fixed price has risen again, in fact, the second quarter by a couple of hundred basis points. Can you just let us know what impact on margin that that has when the fixed price mix goes up and what was driving that increase in fixed prices? Was it a particular service line or a particular class of customer?

Sudip Banerjee - President of Enterprise Solutions

Yes, Anthony, Sudip Banerjee here. I think the fixed price last quarter or even in the previous quarter has not led to any drop in margins. In fact, it has led to a slightly improved margin for those fixed price contracts. As far as the composition of those fixed price projects are concerned, they include development projects, they include maintenance projects, they include infrastructure projects, they include package implementation projects. So there are all types of fixed price projects that we are doing. And the number of fixed price projects, particularly in large multiyear contracts, has gone up. That's driven the percentage increase in fixed price projects.

Anthony Miller - Arete Research

Great. Thank you very much.

Operator

We will now go to the line of Ashish Thadhani from Gilford Securities. Please go ahead.

Ashish R. Thadhani - Gilford Securities, Inc.

Yes, good evening. When one looks at the offshore price realizations, specifically year-on-year growth trends, Wipro appears to have lagged slightly its closest peers. What can one expect in the coming periods on this front?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Well I think the very fact that we have lagged only means that there is tremendous headspace and our objective is to seek an uplift in that.

Ashish R. Thadhani - Gilford Securities, Inc.

Are there any specific areas that you might have identified as to why this is happening and how specifically it might be addressed?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

There are... Ashish, I cannot say that. We don't have actions planned on that. I think there are actions planned from a practices perspective, from a verticals perspective and from a geography perspective. So I think... and also some action has been taken over the last three to four months in terms of the price book. Some actions are and will be taken with respect to some of the incentives being much more strongly linked with respect to realization and margin and a combination of factors. So I don't think it will be fair for me to lay out the operational details. But yes, there are specific action plans with respect to seeking uplift in the offshore pricing.

Ashish R. Thadhani - Gilford Securities, Inc.

Okay. And then would it be possible for you to offer any details on the size of the Aircel win as well as your revenue expectations from the Cisco partnership?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

I think the Aircel win is a large one, perhaps amongst the largest so far Wipro have ever won. I mean, and I take into account the $400 million plus deal we announced in the last quarter. And there are certain statements made by the customers in that respect. And so I will not try to put a number again. But reports [ph] are available in the public domain. And so far as kicking in on the revenue is concerned and mind you, that particular deal is a system integration, total outsourcing kind of deal, which would have products and services together. And that will be, at this point in time, will be for the India piece. Of course, we are looking at similar such deals even outside of India too. And the revenues would kick in partly in the current quarter and mostly in the next quarter next year onwards. This is a nine year contract.

Ashish R. Thadhani - Gilford Securities, Inc.

Nine years, okay. And Cisco has made some representations about their expectations from the partnership. Would you be able to add to that?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Yes. It is a statement which is jointly being endorsed by Wipro and Cisco. So from that perspective, we will not have a perspective which is different.

Ashish R. Thadhani - Gilford Securities, Inc.

Okay. And then finally, does Wipro have any overtime or onsite wage issues that could necessitate a charge in coming quarters?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Well, at this stage, Ashish, I can tell you that whatever exposure we could have I think has been effectively taken care of in the books as we have understood and we believe.

Ashish R. Thadhani - Gilford Securities, Inc.

Okay, excellent. Thank you very much and good luck for the future.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Thank you.

Operator

We will now go to the line of Kanchana Vydianathan from Pacific Crest Securities. Please go ahead.

Kanchana Vydianathan - Pacific Crest Securities

Hi, thank you. I was wondering if you could speak a little bit about the technology budget. I mean looking at your Product Engineering Services, can you break it down just looking at your client in the semiconductor business in the telecom OEM space. What are you seeing at this point? Are you seeing any sluggishness or any softness in their budgets and what is your expectation for 2008?

Dr. A. L. Rao - Chief Operating Officer

Yes, this is Lakshman Rao here. In the technology business, as I said, this quarter we have done well. We have posted a sequential growth of 7.7%. What we saw is the growth coming definitely from the service provider space and also the embedded segment. In the telecom OEM segment, what we found is that there has been some amount of product restructuring and consolidation which we have faced in the last couple of quarters, last three, four quarters, resulting in some sort of product ramp downs et cetera. That has not happened this quarter. We have found there is some stable growth and stable business from the OEM segment and a slight recovery. So we expect that this business will grow slowly, but on a stable platform. While the service provider business, we have been growing quite significantly.

Kanchana Vydianathan - Pacific Crest Securities

And if you were to look at your semiconductor clients, are you seeing any softness in that area?

Dr. A. L. Rao - Chief Operating Officer

Semiconductor clients also more in the design space, yes, because the number of new designs that are getting funded or initiated are still not so significant. So from that point of view, the new design opportunities are still not significant. We are seeing some softness. However, we have diversified our VLSI practice into testing, inspection as well as automation. So in that space, we've got good growth this quarter, the related services in the semiconductor industry other than the main design service.

Kanchana Vydianathan - Pacific Crest Securities

So I guess with respect to the growth, would you expect the growth to continue, I mean to be in line with what we have see this quarter?

Dr. A. L. Rao - Chief Operating Officer

Yes, overall technology business, we expect this same growth to continue.

Kanchana Vydianathan - Pacific Crest Securities

Okay. My other question is in the morning call, you discussed a little about the fringe benefit tax. I was wondering if you could go over that a little bit again and how that's different between the Indian GAAP and the U.S. GAAP and where it actually gets impacted.

Unidentified Company Representative

Yes, Kanchana, the taxes between the India and the U.S. GAAP is primarily different from the perspective of the intangibles amortization. And with respect to the SVT impact which we have, while in the India GAAP, the fringe benefit tax goes as a part of the tax line; while in the U.S., it goes as a part of the operating expense line.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

And let me add one more. Some of the... there is a change in the Indian law where the ESOPs are subjected to fringe benefit tax effective 1st of April '07. And what it says is henceforth, FBT would be payable and the employer will pay it as required under the law in India. We have decided that that FBT would be recovered from the employees. And therefore in Indian GAAP, whatever FBT we pay, we recover the same and we are P&L neutral. However, under the U.S. GAAP, the situation is a little different. What it does is the payout is treated as a payout under the... within the operating margin if it is above the line and the recovery of the FBT is considered as a capital... induction to the capital account and not to the P&L credit. So to that extent, the unvested options that are there as of today will be going through this kind of an accounting treatment for the next four years as and when they get vested and exercised.

However, the treatment of accounting vis-à-vis the future grants are much better in terms of... because the fair value assessment of that happens at the time of the grant, therefore, the past grants we can't do anything, hence this treatment of... this is the differential treatment that happens despite the fact that cash flow point of view we are completely neutral. And from that perspective, in the quarter ending December, we had a hit of about 43 million rupees in the U.S. GAAP account. So we have done the recovery of the same amount, but it is treated into the capital account.

Kanchana Vydianathan - Pacific Crest Securities

And what would be a fair assumption going forward, say, in the March quarter? Would that about the same amount of impact that one can assume?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

It is difficult to project that because it gets triggered only when the employee decides to exercise it. So a, it vests and b, when does the employee decides to exercise. The moment he exercises this, the tax gets triggered. But all we'll do is that every time we communicate about the U.S. GAAP results, we will tell you this particular amount. You can take this away in terms of... on the basis that it is cash neutral.

Kanchana Vydianathan - Pacific Crest Securities

Okay. Thank you. That was helpful.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Thank you.

Operator

[Operator Instructions]. We will now go to the line of Abhi Gami from Bank of America. Please go ahead.

Abhi Gami - Bank of America

Hi, thanks. Abhi Gami, Bank of America. I apologize if you already said this earlier if I missed it. What was the organic growth rate in North America and financial services?

Unidentified Company Representative

7.2. 7.2 is the North America growth rate, 9.8 is the financial service growth rate; both these are organic.

Abhi Gami - Bank of America

Great, thank you. And then can you explain or describe the financial characteristics of your total outsourcing deals and how that compares to your average deal? And if you could touch upon margin structure, your payback period and duration of contract,that would be helpful.

Suresh Vaswani - President of IT Practices

This is Suresh Vaswani here. Let me speak about our typical total outsourcing contracts. I think the flavor is a little different in India and the flavor is different in the U.S. In the U.S., they tend to be more services-oriented, less technology-oriented. So they tend to have a richer mix in terms of application and infrastructure services with every [ph] products. While in context of India, they tend to be more technology-oriented, but also having a good mix terms of... in terms of services and solutions. So, typically, when we are talking about some of the deals that we have already done in India, they tended to be around 60%, 55% products and the rest services; while globally, it's in the other direction.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

So if I can supplement. In India, the margins are about 8% to 10%, and therefore any deal that we take in India would be similar to what Wipro Infotech margins are. And similarly, so far as the global business is concerned, we will be taking the deals on the basis that they are in line with the global technology business kind of realization. But in the initial stage, it could be dilutive, but over a three year or five years or ten year perspective, they would be expected to be making margin from that particular account in similar manner.

Abhi Gami - Bank of America

Great, that's helpful. Do you have a target or an idea of how long you're willing to wait for a contract to become non-dilutive, any such guideline like less than one year or less than six months?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Exactly, but this is little dynamic, so I think, and the case has to be looked at on an individual merit, and I don't think we could sort of describe it, if that's a fair term to that. But yes, we overall look at it in a manner saying that how overall in a shorter term versus longer term, how does it... we have a balance between the two.

Abhi Gami - Bank of America

Great. And then one more quick follow up against that is to what extent do you find your Asia-Pac IT products business drives your services business, or is that typically something you bring in after you have attracted the services contracts?

Unidentified Company Representative

In Asia... okay, you have to really split the Asia-Pac product business. So we have a PC business line which is basically a product line. And a big drive there is to make sure that we wrap around our PC sales with as much services as we can, and we've made some solid steady progress there. And the other part of our product businesses really are system integration business. So we do a lot of network integration, we do a lot of platform integration, we do a lot of security integration. So it is... so it's more of a system integration business, it's more our value adding services with a product drag in [ph].

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

But this is what is explained vis-à-vis India market. But if you look at outside of India in terms of the Asia-Pac and Middle East, it is similar to what we do on a global business, which has a very, very high service simplicity.

Unidentified Company Representative

Let me just elaborate further in context of our product business. So we are a system integrator as against a product distributor. So all our large system integration projects will have a significant component of services with a product becoming a natural corollary of the wholesale.

Abhi Gami - Bank of America

That's great.

Unidentified Company Representative

So let me do network integration here.

Abhi Gami - Bank of America

No, that's great. Thank you very much.

Operator

We will now go to the line of Julio Quinteros from Goldman Sachs. Please go ahead.

Julio Quinteros - Goldman Sachs

Great, thank you. I was wondering if we could actually go back to the comments that you made about Infocrossing. In particular on the margins front, can you just give us, first of all, your expectations for margins on that business? It appears that the margins did slip from where we were last quarter. Can you walk us through what your expectations are for margins as we kind of go forward and what the improvements will be to those margins? What will actually drive that?

Zach Lonstein - Chief Executive Officer of Infocrossing

This is Zach Lonstein, and I am CEO of Infocrossing. We expect the margins to return to historical levels.

Julio Quinteros - Goldman Sachs

What are the historical levels --

Zach Lonstein - Chief Executive Officer of Infocrossing

Excuse me?

Julio Quinteros - Goldman Sachs

What are the historical levels?

Zach Lonstein - Chief Executive Officer of Infocrossing

Well from a gross margin point of view, it was 31% and --

Julio Quinteros - Goldman Sachs

Andfrom an EBIT margin?

Zach Lonstein - Chief Executive Officer of Infocrossing

EBIT margins was typically about 11%.

Julio Quinteros - Goldman Sachs

Okay.

Zach Lonstein - Chief Executive Officer of Infocrossing

And there is an inevitable cost impact initially of an acquisition. But over time, as the synergies... incremental costs come out, the synergies kick in. We expect the margins, as I said, to return to historical levels. And that should happen within this year.

Julio Quinteros - Goldman Sachs

And this quarter's margin was... I'm calculating about 4.8%, is that correct?

Zach Lonstein - Chief Executive Officer of Infocrossing

That is correct.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

But also when Zach talked about the gross margin component that is before amortization, so if you look at a Wipro format, we talk about gross margin after the depreciation and amortization.

Julio Quinteros - Goldman Sachs

Okay. And just --

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

From a gross margin, they are pretty comparable before and after.

Julio Quinteros - Goldman Sachs

Got it. And... but why did it go... I'm sorry, can you just explain why it went down this quarter versus last quarter? Because I think we were looking at 8.7% last quarter.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Yes, but, Julio, last quarter was just seven days operation. So it wasn't really a comparable because it was a listed company and we went through the tender process and it got consummated on the 17th, 18th of September. From that perspective, we had to consolidate for some 10 days kind of a thing. So it was --

Julio Quinteros - Goldman Sachs

So it's just timing.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Yes. So that's actually... exactly. So, actually, the first thing, we take this as a base going forward.

Julio Quinteros - Goldman Sachs

Got it, timing. Okay.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

But what we are saying, Julio, is that initial stages, a, because of amortization and b, because of some of the integration-related expenses, it will tend to be little dilutive. And as we saw in the last quarter and perhaps we will see part of it again in the current quarter. But eventually, we will see an uptick in margin and growth starting from the next financial year.

Julio Quinteros - Goldman Sachs

And how variable is this business? I guess in some regards, if we end up hitting a recessionary pocket and growth slows for the industry, how variable is this business if you were to actually see revenue actually slow or actually go negative or go below expectation? So I'm just worried because of the fixed cost nature of this business. Can you just give us a sense on the variability to margins if we were to actually see some slowdown in revenue growth?

Zach Lonstein - Chief Executive Officer of Infocrossing

You're talking about Infocrossing in particular?

Julio Quinteros - Goldman Sachs

Yes, exactly.

Zach Lonstein - Chief Executive Officer of Infocrossing

Yes, okay. Well, as a practical matter, the Infocrossing revenues are annuity based. There will all based on long-term fixed cost... fixed revenue contracts. And so whether there is a slowdown in the economy or not, it really wouldn't have any impact on the existing business.

Julio Quinteros - Goldman Sachs

Including volume declines?

Zach Lonstein - Chief Executive Officer of Infocrossing

Including what?

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Volume declines.

Julio Quinteros - Goldman Sachs

Yes.

Zach Lonstein - Chief Executive Officer of Infocrossing

The contracts are typically not volume based; they are infrastructure requirement based. And so the volume really doesn't have an impact. And there is no provision for the contracts to go down based on transactions or to go up based on transactions for that matter.

Julio Quinteros - Goldman Sachs

Okay. So the risk is if you start... if you see clients shutting physical assets down or shutting the requirement for physical infrastructure down potentially?

Zach Lonstein - Chief Executive Officer of Infocrossing

Again, it would have to be at the end of a contract period. They can't do it in the interim because the contracts we have allocated resources to those contracts and the contract prices are based on the allocations of resources to those customers.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Yes, except the bankruptcy cases kind of things.

Julio Quinteros - Goldman Sachs

Right.

Zach Lonstein - Chief Executive Officer of Infocrossing

Well, we haven't seen that.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

I know, I would appreciate that in particular to [ph] India. They are in those kind of extreme situations only, yes.

Julio Quinteros - Goldman Sachs

Yes, okay.

Zach Lonstein - Chief Executive Officer of Infocrossing

Yes, we do not have bankruptcies here [ph] and we typically haven't seen bankruptcies in the history of the company. Doesn't mean it won't happen. The economy, I guess, is changing the way we haven't seen before. But we haven't had any experience with that whatsoever.

Julio Quinteros - Goldman Sachs

Okay, great. Thank you.

Operator

We will now go to the line again from Anthony Miller from Arete Research. Please go ahead.

Anthony Miller - Arete Research

Yes. Thanks again gentlemen. On a completely different topic, Mr. Premji, in your opening statements, you alluded to what sounded like an integration of your consulting practices or something similar. Could you just expand on what that is and generally give us an update on how you were progressing with development of your consulting practice?

Azim H. Premji - Chairman

Let me request Girish Paranjpe who is our President who is responsible effective April 1 for our consulting practice to elaborate it for you.

Anthony Miller - Arete Research

Thank you.

Girish S. Paranjpe - President, Finance Solutions

Hi, Girish here. We had consulting practices in many of our service lines as well as standalone units. And our endeavor is to kind of bring it together as one integrated consulting practice, which is really structured by geographies and by practices. And we are in the process of doing that integration and we hope to roll it out by April 1st.

Anthony Miller - Arete Research

And how many people will be in that practice?

Girish S. Paranjpe - President, Finance Solutions

As of now, close to 1000 people.

Anthony Miller - Arete Research

And what percentage of those roughly would you say would be sort of the business style consultants of the Accenture mode?

Girish S. Paranjpe - President, Finance Solutions

Actually, Accenture does lots of different type of consulting. It includes management consulting, it includes technology consulting, it includes consulting around governance and processes. And much of the work that we do falls into similar mode. So I think apart from some high-end work that Accenture does, it's more a matter of scale than skill.

Anthony Miller - Arete Research

Okay then. I'll come back to that offline. Thanks very much.

Suresh C. Senapaty - Executive Vice President of Finance and Chief Financial Officer

Can we have the last question, operator?

Operator

There are no further questions at this time.

Sridhar Ramasubbu - Investor Relations

Okay, Linda, we will close the call. Thank you very much for your participation. The IR team, Rajesh, Arvind, Lalit and myself, will be available offline to answer any further questions you may have. The digitized replay will be made available from 12 noon Pacific at the dial-in numbers communicated in our press release as well as email. Thank you and good luck.

Operator

And ladies and gentlemen, this conference will be available for replay after 10:15 AM Eastern Time today through midnight on January 28th of 2008. You may access the AT&T Executive Playback service at any time by dialing 1-800-475-6701 and entering the access code 905047. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 905047. That does conclude our conference for today. We thank you for your participation and for using the AT&T Executive TeleConference Service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts