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Executives

Sandeep Mahindroo

S. D. Shibulal - Co-Founder, Managing Director, Chief Executive Officer, Director and Chairman of Infosys Technologies (Sweden) AB

V. Balakrishnan - Chief Financial Officer, Director and Chairperson of Infosys BPO Limited

B. G. Srinivas - Head of Europe, Global Head of Financial Services & Insurance, Director and Chairman of Infosys Technologies (Australia) Pty., Limited

Analysts

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

David Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Moshe Katri - Cowen and Company, LLC, Research Division

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Jesse Hulsing - Pacific Crest Securities, Inc., Research Division

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Mayank Tandon - Needham & Company, LLC, Research Division

George A. Price - BB&T Capital Markets, Research Division

Shankar AVSB

Infosys (INFY) Q1 2013 Earnings Call July 12, 2012 8:30 AM ET

Operator

Ladies and gentlemen, good day, and welcome to the Infosys Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Sandeep Mahindroo of Infosys. Thank you and over to you, sir.

Sandeep Mahindroo

Thanks, Marina. Good morning, everyone, and a very warm welcome to all of you to discuss Infosys' financial results for the quarter ended June 30, 2012. I'm Sandeep from the Investor Relations team in New York. Joining us today on this earnings call is CEO and MD, Mr. S.D. Shibulal; CFO, Mr. V. Balakrishnan; along with other members of the senior management. We'll start the proceedings with some remarks on the performance of the company for the recently concluded quarter, followed by the outlook for the year ending March 31, 2013. Subsequently, we'll open up the call for questions.

Before I pass it on to the management team, I would like to remind you that anything that we say which refers to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risks that the company faces. A full statement and explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov.

I'd now like to pass it on to Mr. S.D. Shibulal.

S. D. Shibulal

Thank you, Sandeep. This is Shibu. We have done fairly well in a challenging environment. On dollar terms on year-on-year, we have grown by 4.8%. We have achieved our EPS guidance for the quarter. We have added 51 new clients during this quarter. Our million-dollar clients have grossed 400. Top 10% grew by 2.4% and top 5 grew by 4% this quarter. Our quarterly guidance was $1.771 billion to $1.786 billion. Our revenue came at $1.80 billion, but there are 2 events which happened: number one was the currency impact, which is $13 million for the quarter; number two, we took a one-time reversal of revenue -- reversal of accrued revenue as a matter of prudence on a large transformation program, which got canceled during the quarter. This happened in Europe in the energy and utilities space. So we took a one-time reversal of $15 million. So that puts the revenue and in reported terms at $1.752 billion. That's a de-growth in constant currency terms of 0.4%.

Apart from these 2 events, we would have ended up in the middle of the guidance for the quarter. This is a one-time reversal, and we don't expect this to happen on a frequent basis in the future. Our client additions, as I said, has been quite strong. We are continuing to execute on our Infosys 3.0 strategy. We have completed the transformation. We have the new leadership in place. We are purely in the execution mode. The early signs of successes are clearly there. This quarter, we have closed 4 transformational deals, 4 large deals in the bid space, one of them more than $300 million, multiple deals in the Products & Platforms space. We added 10 new clients in the Products & Platforms space. We launched branded, a new platform along with fabric, in this quarter. Our SocialEdge platform has more than 10 clients today, and our book value in Products & Platforms has grossed $380 million. Our new areas are doing well. Cloud, we have 3,000 people working in Cloud, revenues growing above company average. We have 150 engagements in Cloud. Mobility, we have 1,200 people working. We have 60 clients. We have seen very good traction.

We are also seeing very good traction with our Building Tomorrow's Enterprise innovation framework with our clients. We had numerous conversations during the last 2 quarters, which are now converted into opportunities or deals for us. So as I started saying, we have done fairly well in a challenging environment. The environment continues to be challenging. We have high exposure to the financial services space. We also have high exposure to the discretionary spend because of our large percentage of revenue coming from consulting and system integration. That makes our ability to predict -- that challenges our ability to predict. We have given a guidance of 7% to 8%. Now we have revised it to at least 5% growth for the year. There are 3 factors which have gone into this division: number one is the currency impact, which is 1% to 2%; number two is the pricing decline, which we have seen in this quarter of 3.7%; and number three are business reasons. All of these have been factored into revising the guidance to at least minimum 5% for the year.

If you look at the volume growth, it has remained somewhat similar to what we have predicted. Because of the pricing decline, while the revenue is growing at 5%, the volume has to grow around somewhere between 8% to 9% for the year. Now the pricing decline came from 2 factors: number one is the portfolio change. We have seen a decline in percentage terms in consulting and systems integration that has impacted our revenue productivity. Number two, we have seen sporadic pricing renegotiations, pricing or discount demands predominantly in the FSA segment during this quarter. We are not seeing a secular trend, but we have seen sporadic instance of pricing renegotiations on these current demands. Both of them have contributed towards the pricing decline.

From a volume perspective, this quarter we have grown by 2.7%. With that, let me conclude and hand over to Bala.

V. Balakrishnan

Hi, it's Bala here. If you look at the gross margin, gross margin has slightly declined this quarter from 41.2 to 39.6. We have seen this almost same like last quarter. Operating profit has come down from 29.8 to 27.9. It is actually planned in the beginning of the quarter when we said the first quarter operating margins could decline by 200 basis points because we are making those investments both on hiring people on-site and also increased investment in visas.

Rupee has depreciated by around 9.7% this quarter that could have benefited the margin by around 3.9%, but we have seen the pricing decline by 3.7%, so more or less the rupee benefit has been offset by the pricing decline, and we had made those investment like what we planned in the beginning of the quarter. So the operating profit had seen a decline of something around 200 basis points.

If you look at effective tax rate, effective tax rate has come down this quarter to 26.7 from 28.8 also in Q4. It has come down because one, we have seen some increase in overseas operations; and number two, the overseas taxable income has come down during the quarter. Both had an impact. We added around 51 new clients. Our DSO days is 64 days as compared to 60 days last quarter. I think DSOs are under control, and we have hedging position of close to $1.1 billion. Last quarter, we had $88 million to $89 million. We continue to have hedging strategy of short term, looking at next 2 quarters at any point of time, not go beyond that. Our utilization has come down during the quarter. It's 69.5 as compared to 70.7, excluding trainees and including trainees around 64.7. So net-net, the EPS has come at $0.73. That is what we guided for. We're ending the quarter with $3.7 billion of cash. As I told you earlier, receivables have slightly gone up this quarter, but we don't see a trend there.

For the year, we have revised our guidance to 5% minimum growth for the full year. Our EPS growth for the full year is predicted to grow at 1%. Our pricing, we are assuming the first quarter pricing to continue for rest of the year. On currency, we are assuming that rupee-dollar rate to continue at INR 55 for rest of the year. And we are also assuming that we'll be adding some 35,000 employees gross for the full year. We added around 9,236 in the first quarter. And the CapEx estimated for the full year remains at the same at INR 2,000 crores, which is close to $400 million.

With this, I conclude. Now we can open up the floor for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Joseph Foresi from Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

My first question is just on the guidance. You've changed the methodology a couple of times over the last couple of quarters, maybe you could talk about why you changed it again this time. And also it seems like you're not giving quarterly guidance anymore, maybe why you decided not to give that guidance as well?

S. D. Shibulal

So the first principle of guidance is to remove estimative information. That is the basic principle on which we have always acted at and we have always done the guidance. We, in the beginning of the year, had visibility for 65% of the revenue for the year, and 94% in the beginning of the quarter for the current quarters. What we are noticing now is that while we have visibility for the client's budget, we understand some of the areas that they will spend. We are not able to predict some of the movements in large programs, which we are involved in. Because we have a dependency on the discretionary spend, 30% of the revenue comes from that space, that and predictability matters a lot. So at this point in time, when you look at all the facts we know, we are fairly confident that we can do a minimum of 5% growth for the year. We are not able to predict the quarterly revenue and it's actually what we used to do in the past, given the uncertainties that we are faced with. So we have communicated. We have started this principle to make sure that we communicate the information, the facts, as we know it and that is the yearly guidance. Given the volatile environment, given some of the challenges, which we are faced with, we decided that we will not give a quarterly guidance, at least at this point in time. We will revisit that decision once the environment stabilizes.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And moving on to pricing. I think you said in your prepared remarks that the pricing issue is not secular, but you seem to be pointing in your guidance that pricing is going to decline for the full year. Are you expecting more renegotiations as you go throughout the year? And if it's not secular, why would you include same pricing degradation for the full year?

S. D. Shibulal

So we have seen a pricing decrease this quarter because of the portfolio change, as well as the sporadic pricing renegotiations, which we have experienced during this quarter. See, when you prepare the guidance for the rest of the year, we take the current revenue productivity, right, at the end of this quarter because that is where the revenue productivity is today. So we have to factor in the new current revenue productivity for the rest of the year on the -- for the guidance purpose. It is in a sense very similar to the currency. We have taken the current currency for the rest of the year, right? That is the information which we have, and that is the information we need to use for the rest of the year. It is a reflection of where we are today. There is no other secular trend. We have a new revenue productivity. We have used that to compute our guidance for the next 3 quarters. Did I answer that?

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Just as a follow-up, I mean, do you expect -- I understand it's a snapshot of the quarter, but do you expect more renegotiations throughout the year?

S. D. Shibulal

We are not seeing a widespread demand for renegotiations or a widespread demand for the renegotiations at this point. We have seen only sporadic ones in the financial services space. We have seen some sporadic discount demands in the financial services space, but times are going through a tough time, but at this point in time, we are not seeing it as widespread or secular.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. One last quick question. In the past, when business has slowed, you've moved utilization higher, pushed off hiring and kind of protected the margins. What can we expect this time around? Will that pattern repeat itself?

S. D. Shibulal

So we model our recruitment to the demand, definitely. At the same time, a lot of the recruitment which we do, which is the freshers in the colleges, are done earlier on. So the cycle time is about 18 months. So we had already given offers to 26,000 people last year to join this year, starting now, starting July, right? And as our principle is to honor all the commitments which we have given, we are going ahead with joining of those employees. They will be in training for the first 6 months. We have spaced it out in a way which is relevant to us. The conversion rate is usually about 80%, which means that we'll have about 18,000 to 20,000 people join between now and the next 12 months. And they'll be in training for 6 months. We will continue to recruit laterals to enhance our niche capabilities or to fill-in any areas where we have shortage.

Operator

The next question is from David Grossman from Stifel, Nicolaus.

David Grossman - Stifel, Nicolaus & Co., Inc., Research Division

I think in the last call, we talked about hiring in the local markets, I guess, primarily in U.S. and in Europe as well. Can you -- I may have missed it in the release, but can you tell us what your plans are for that year, as well as what you hired locally in the quarter?

S. D. Shibulal

So hiring in the local markets is very much in line with the push which we are doing with consulting and system integration. If you want to put the revenues in that space, that means if you want to build capacity, we have to hire in the local markets. There are actually people who understand the local business practices and have local demand expertise. We hired 600 people last quarter. We hired 600 people the quarter before. I think this quarter, we will hire 550 people. This is the local hires, and that is the plan right now. The rest of the year also, we will hire as we go ahead.

David Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And, Shibu, let me ask you just about the dynamic about the rupee and pricing. So if the rupee starts appreciating relative to the dollar and pricing stays relatively flat or revenue realization stays flat, how should we think about the margin outcome for this year under that scenario?

S. D. Shibulal

So if I look at the past, if the change in rupee is gradual, then we will manage. So we have operated the business at 54 and at 44. So in the past, we have been able to manage our business across the rupee rates. As long as the appreciation or the depreciation is gradual, as long as it doesn't happen at the end of the quarter, in fact, we have seen it once before at the end of the quarter, that makes it very tough to adjust. We have multiple levers also being done. So if you look at the volume growth this quarter, it was 2.7%. If that volume continues to grow and the utilization go up, there is a lever right there. You have the onset-offshore ratio, which is another lever. You have the threshold joining into the system. That means the payment structure changes, so the average compensation comes down. We have deferred the compensation -- I mean, we have postponed the compensation increase this quarter. We just rolled out the current margin factors in the 20,000 promotions and the progressions, which we just sold out. So there are multiple levers to margin. It is not rupee alone, and we have operated at different spectrum of the rupee rate. So I believe that as long as it is not a cliff, which happens at the end of the quarter, we should be able to manage within a small range and make sure that our margin aspirations are met.

David Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Right, so -- but historically, I don't think you've been going through the same investment cycle that you are right now. So do you have that same point of view that you can manage it and continue the investment trajectory that you're on right now?

S. D. Shibulal

We have invested continuously in our business, but it has been in different parts of the business. That is an important distinction to make. So for the last many years, we have been investing in building our consulting and system integration practice. We created Infosys Consulting. We hired local talent. We have some of the best people in the industry join us. And now that investment have yielded results in many ways. So we have a -- our revenue from that space is 30%. It is at about 15% to 20% revenue productivity, higher than the rest of our business. So we do some of the most interesting work. So the point I'm trying to make is we have always invested in our business. Now the focus has shifted. The focus has shifted to a new area, Product & Platform, cloud and enterprise mobility and sustainability. These are new areas, so I've -- we are able to shift part of the investment which we do -- which we did in some of the maturing parts of the organization to the newer areas. It is true that in Products & Platforms, you invest upfront and you reap benefits over a long period of time later on. We are already investing into it. It is all factored into the current guidance. So I don't expect it to drastically go up overnight. I also expect the revenues from some of our new investments to pick up.

David Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then let me just ask you about the revenue guidance. If my math is right, it would seem to imply a little over 3% sequential growth on average if you straight line it through the balance of the year. Can you help us understand how much visibility you have on that based on -- it sounds like you've got 10% unit volume baked into your guidance. How much visibility do you have on that now versus what you would typically have at this point of the year?

S. D. Shibulal

So beginning of the year, we have 65% of visibility for our revenue. Now we are into the second quarter, which should be approximately somewhere between 75% to

[Audio Gap]

for the quarter, usually, we have 95% visibility. This time, we have not given a guidance. So we have -- with all the information which we have, we are quite fairly confident about the minimum 5% growth for the year. There are a couple of wildcards, like if you get a huge pricing change, then that will have an impact. But with all the information which we have today, we are fairly confident about the 5% minimum growth, which we have predicted for the year.

Operator

The next question is from Moshe Katri from Cowen and Company.

Moshe Katri - Cowen and Company, LLC, Research Division

I have 3 specific questions and maybe the first one is a clarification. There are some people out there coming out with a call, saying that Infosys is starting a pricing war. And at this point, this is going to be hugely disruptive to the sector. What would your comment be on that statement?

V. Balakrishnan

Well, it is a reality that we do deal pricing covers for the offshore industry, but we are not in the game. We always want to have balanced growth. We have not seen any across-the-board price reduction in any of our portfolio. There could be some sporadic price reductions, depending on customer situation, and most of the price change is due to portfolio change in the services to our customers. So we are not seeing any across-the-board price reduction at this point of time.

Moshe Katri - Cowen and Company, LLC, Research Division

And at this point, this is not your strategy to try to kind of

[Audio Gap]

impact of currency, what you're factoring there, the impact of pricing? Maybe a lower blended bill rate. And then on top of that, the impact from the macro, whether it's cancellations or project deferrals, et cetera?

S. D. Shibulal

So if you look at the 8% to 10% on where we are today, there are 3 factors which are going into it. Number one is the currency impact. It's somewhere around 1.5%. Number two is the pricing impact. For the same volume growth, when there's a pricing decline of 3.7%, that impacts your revenue. So even though we don't change our volume growth, we are seeing impact on our revenue. Number three is the business environment in which we operate. We are definitely seeing unpredictability and lack of visibility in the deal closures. We are also seeing delays in deals closures and postponement of ramp-ups. So all of these 3 factors have gone into that 8% to 10% detriment, minimum 5%.

Moshe Katri - Cowen and Company, LLC, Research Division

Right. And then final question, I think Europe was down about 8% sequentially. Is there a way to kind of get the actual number in constant currency and then also x the contract cancellation that you mentioned during the call?

V. Balakrishnan

Yes, see, in Europe, overall, currently, we are seeing the business environment recently stable even though we had a challenge in last quarter. One was, of course, about the cancellation of a large program. And also in U.K., one of our large clients, there was ramp-downs in a couple of programs. So that was the reason. It is definitely, again, which impacted the quarter. But overall, if you look at the current pipeline in the last 3 to 4 months, there's no significant change. The macro environment uncertainty has continued. However, in our client environment, we continue to see a fair degree of stable -- the fact that clients continue to spend, continue to invest, there's no change to that. There is definitely a little slowness in the decision making, so that's the reason why we are saying for the full year, we continue to invest in Europe. We continue to see business growth in line with the guidance we have given. What happened last quarter was a one-time.

S. D. Shibulal

Let me give you some color on the numbers which you asked. Last quarter, the revenue from Europe was 480 -- $408 million. This quarter the revenue is $375 million -- $375.7 million to $376 million. $15 million of that difference came from the one-time revenue rollout that we did. So that is $15 million. There is a currency impact afterwards. So it's mostly these 2 and the pricing, there is nothing else. Because if you look at the constant currency revenue, as I said, for the company, we are in the middle of the guidance. We are at $1.780 billion, right? So the -- in constant currency terms, if I remove the $15 million impact, the revenues have gone up from $1.771 billion to $1.780 billion. So that, in essence, reflects everywhere. So here, also, you will see the impact of the currency and the impact of the $15 million directly in Europe.

Moshe Katri - Cowen and Company, LLC, Research Division

So excluding these factors, Europe would have been flat, would have been up?

S. D. Shibulal

It would have been right in the middle of the guidance or the upper end of the guidance. In fact, that's very important to remember because our guidance -- last quarter, our revenue was $1.771 billion. This quarter, if I look at the revenue in constant-currency terms, without considering the $15 million one-time impact, our revenue would have been $1.780 billion. Out of that, we lost $13 million because of currency, $15 million because of the one-time -- the loss of revenue, and we ended up at $1.752 billion. So if you eliminate those 2, we will end up at somewhere in the mid-to-upper end of the -- mid of the guidance.

Operator

The next question is from Rod Bourgeois from Bernstein.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

So you explained on the earlier conference call that the pricing decline that you experienced was mostly due to business mix changes. As I look at the margin change in the quarter, it seems the quarter-to-quarter drop in your margin by 190 basis points, it seems to imply that something more fundamental besides mix hurt your margins versus your guidance. You probably received about 260 basis points of margin boost from the rupee depreciation. So is it accurate that your margin was hurt by the low expected pricing on like-for-like deals?

V. Balakrishnan

Not really. If you look at the operating margin, the decline was something around 190 basis points. In the beginning of the quarter, we clearly said we are hiring more people outside India to localize our operations, and we intended to hire some 600 -- 500 people in the year in the U.S. -- United States. And actually, we hired 700 employees in the first quarter, and we also said there could be a bunching up of visa costs in the first quarter as we need to apply when the window opens. Both of that had an impact of something around 160 basis points on the margin in the first quarter. To some extent, the pricing decline in the first quarter has been offset by the benefit of the currency regarding the first quarter. So that has not impacted the margin. The margins are impacted because of planned investments on hiring employees in the United States and also the bunching up of visa costs.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

So but, Bala, let me just clarify, so your guidance assumed a 200 basis point decline and your actual decline was 190, so almost in line with guidance, but you received an unexpected rupee benefit of probably 260 basis points. And it seems that your investments onshore were expected and already planned in your guidance. So it seems that there's another fundamental factor that wasn't assumed in your guidance that occurred in the quarter. And I guess I'm wondering, is that additional fundamental factor, is that the impact of effective utilization? Or is it the impact of a pricing effect on like-for-like deals? I guess, the reason I focused on that is if it was a business mix change that caused the pricing decline, then it seems the impact on the margins would not have been so significant.

V. Balakrishnan

No, it's like this. Rupee up -- depreciated by around 9.7%. That means there's a benefit of around 3.9% on the margin side. On a full-year basis, the pricing declined by something around 3.7%. So to some extent, the benefit we got from currency, which was not planned in the beginning of the quarter, was offset by a pricing decline we saw, which is also not planned in the beginning of the quarter. So the impact we are seeing on operating margin is due to planned investment of hiring people on-site in the U.S. and also because of the bunching up of visa costs. See, our pricing declined because of portfolio mix change. But at the end of the day, the blend of pricing is what matters. And if that declines, it has got an impact on the revenue and it has got an impact on the margins. So to some extent, the offset happened because of the currency.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

All right. So I'll move on to another margin-related question. It seems like you're going to make a decision on the wage inflation in the month of October. What are you assuming in your latest EPS guidance related to wage inflation? Are you -- is your guidance subject to change later in the year if you decide to move forward with salary hikes?

V. Balakrishnan

No, we have not decided on the wage increase as of now. We will review it whenever we have a comfort on the environment, whenever we see some uptick in our -- in the revenue growth. Right now, we have not taken a view on that, and that is not part of the guidance.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Okay. So, I mean, how are you evaluating that? I mean, are you intent on trying to provide a salary hike -- sorry, my voice keeps cutting out. I've got a cough. But are you trying to provide a salary hike if there's any way possible in your financial plan? Or are you feeling like you can make it through the next year competitively and in terms of a morale issue without actually following through with a salary hike?

V. Balakrishnan

I think we'll take a view. I think, particularly, if you look at the whole offshore industry, our per capita average employee cost is the highest both offshore and on-site. So there's no pressure on us to do even if some of the competition do some increase. That could be more like a catch-up. So we will review the situation. We'll see how the environment spans out. We'll see how the revenue growth kicks in. If we have greater comfort on that, probably we'll look at that. Otherwise, we can wait. I don't think there's a hurry to do it.

Operator

The next question is from Jesse Hulsing from Pacific Crest Securities.

Jesse Hulsing - Pacific Crest Securities, Inc., Research Division

Can you talk a little bit about the mechanics of the deal delays that you're seeing? Are these push-outs primarily driven by more levels of sign-off and diligence required on the client side? Or are you seeing a pause in spending while clients try to figure out what is occurring on a macro level? And when do you see these deals, as they're being pushed out, finally coming back in and being executed?

S. D. Shibulal

So let me request B.G. to answer this. He's handling the financial services segment, where the impacts are much higher.

B. G. Srinivas

Thank you, Shibu. The financial services industry as such across capital markets, banking and insurance is definitely under cost pressure. In the current environment, we see mix of decisions being taken. On one hand, there is a relook at the operating model with respect to further vendor consolidation initiatives within our client environment, again, to consolidate the business, drive up volumes for the partners and look for discounts. So that is definitely happening in today's environment. Number two, in terms of other actions being taken in terms of reducing costs, if we relook at the programs, which can be put-off, and then we have seen some of the existing programs being further thought through before the deal is taken. They have not really clearly said no. But at the same time, they are not thinking of issuing yes as well. Number two, they are also looking at infra, in fact, in the last 3 to 4 months, we have seen more opportunities, which are being put out in terms of outsourcing on the infrastructure management services side. The third element, which we see a little bit of slowdown is on the investments which were being planned on the regulatory and compliance. There are still investments being made, but at the same time, decisions are not being taken that quickly. These are some of the elements we are seeing. In Europe, particularly, again, a mixed reaction. In the Nordics, we have seen some of the banks looking at offshore initiatives, which was not there in the past. We have seen at least 2 of the large banks putting out bids for off-shoring. These are generic trend across all the banks, but we see it for the first time this sector in Nordics opening up. In Australia, particularly, we are seeing more efforts to drive work offshore as compared to the traditional model of doing more work on-site. So these are some of the activities we are observing in the financial services sector.

Jesse Hulsing - Pacific Crest Securities, Inc., Research Division

Thanks, B.G. And just to dive a little bit deeper, I mean, if you look at financial services' growth for the Tier 1 outsourcing group over the last few quarters, it's been on fairly steep decline. Do you feel like the pie has shrunk to an extent because of secular challenges within the financial services industry? Or is this just a short-term blip in your view? I mean, what -- is growth going to come back? Or has it gotten much tougher for a multi-year cycle?

B. G. Srinivas

I would say in the near term, there are challenges the sector is going through. So I would not say there will be a reversal of this trend unless the macro environment stabilizes and then we see any kind of top line growth. If you take the capital markets, both trading volumes are down, M&A activity's down, so top line under pressure. The commercial wholesale banks, similar challenges on the top line. So we do not see a significant shift. There is definitely cut in spending. There's been a relook at the IT budget even midway during the year. So I would definitely agree to the fact that, yes, the overall pie is a bit shrunk. Question is, again, as the company goes through further optimization initiatives, there will be opportunities. It's not that there's no opportunities. But, yes, the overall size of the pie has definitely shrunk in the -- and that is something we'll continue to see in the next 2 quarters.

Jesse Hulsing - Pacific Crest Securities, Inc., Research Division

And with the pie shrinking, are you seeing competitors get more aggressive with their pricing and getting more aggressive with terms to win business and stretching out deal links and lowering profit after tax? I mean, what's the competitive dynamic in an environment where there's really -- it sounds like there's not very much from a low-hanging fruit perspective?

B. G. Srinivas

Yes, on the traditional application development, maintenance, infrastructure, these are the areas competitive pressure is definitely high. And we are also making efforts to make sure our solution, which we provided, is equally competitive. In other words, we are trying to drive down effort to deliver the same programs. So that is definitely becoming much more acute in the current environment. At the same time, in the areas where there is still some spend in business analytics in areas where our clients are relooking at some of the applications to a more cloud digital ecosystem, there is investment happening. These are areas where because of the very nature of the work, there is a little bit of pricing premium even in today's environment.

Operator

The next question is from Dave Koning from Baird.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

You guys talked a lot about margins already and when we do look at it though, margins this quarter were the lowest of the last 4 quarters despite the rupee being by far the most attractive in the last 4 quarters. And I guess I'm just wondering as we look out longer term, 2, 3, 4 years out, do you think margins are biased lower? Or do you think they can stay in this 28%, 29% range?

V. Balakrishnan

Well, see, on the margin front, a lot of things play out. One is the currency. But you also have other factors, other levers on the cost side, whether utilization or on-site-offshore mix or the business portfolio itself. So they all play out. You'll see how it evolves. Right now, we had a benefit. I think to some extent, the benefits are offset because of the pricing moment. I think over a period of time, if the currency changes, we have to see how to utilize some of the other levers to make sure the margin is not impacted. And if we look at the past few years, we have seen that we are able to maintain the margins at different currency levels. So I think we have enough flexibility in the model to manage that in case the currency appreciates.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay. So it wouldn't be out of the question to think that margins could be stable going forward from here?

V. Balakrishnan

Even if you look the current year, we are talking about stable operating margin, which is a band of 50 to 100 basis points.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Yes, okay. And then the other thing, there's some comments in the press about you potentially looking at bigger acquisitions. I'm just wondering if you would make an acquisition, is it something that we could expect to be accretive for the near term. I know the interest rates you get on the cash are so attractive. You're getting 9%, 10% type interest rate. That makes it a little harder for deals to be accretive. So I'm just wondering if that is a threshold for the acquisition.

V. Balakrishnan

Well, it depends on the kind of company we acquire. Our intention is to make sure any acquisition we do, it becomes EPS accretive at least one year down the line. And maybe cash EPS accretive at least a couple of quarters down the line. So we'll see. I mean, we are pursuing certain targets. We don't know whether it'll happen or not. It depends on the targets which we pursue and do actually.

Operator

The next question is from Mayank Tandon from Needham.

Mayank Tandon - Needham & Company, LLC, Research Division

I just had one quick question. This is for Shibu and Bala. The -- looking at to your portfolio of services, I think one area that you're missing relative to your peers is the health care segment just in terms of scale and capabilities. Maybe you could talk a little bit about what the initiatives are in terms of expanding that vertical over time? Do you build or do you buy, or is it some form of combination?

B. G. Srinivas

This is B.G. again. The health care sector, again, we have formed a separate group, headed by Eric Paternoster, looking into the sector. A couple of things here, I mean, is one is we are also looking at specific platforms to offer to the sector in terms of entering. We are expanding current relationships in this sector. We are also actively looking at options for an organic growth in this sector. Currently, our footprint is relatively smaller compared to competition, but we are exploring on all the 3 dimensions in terms of expanding our footprint.

Mayank Tandon - Needham & Company, LLC, Research Division

In terms of some of the regulatory changes that are going on and impacting business, can you talk about what are some of the key areas that you're focused on? And is that starting to help your growth? Or are you just too small right now to really benefit from some of these changes?

B. G. Srinivas

On the regulatory challenges our clients are facing, particularly in financial services, there's always a challenge for our clients to fund some of these investments, which are required, and then the clients are definitely doing 2 things. One is they're trying to take costs out on the routines on the bank businesses and so that they will be in a better position to fund. On the other hand, we, at Infosys, we are looking at specific areas within regulatory frameworks where we have built accelerators to help our clients to implement these controls as well as specific systems. We have formed solutions for most of the current frameworks, the Basel III, Solvency II, in all of these areas. We are actually engaged working with several clients both in capital markets and in the banking industry, helping clients do this. At the same time, we have been able to help reduce the total cost of implementing these systems and frameworks because of the accelerators and, of course, because we are able to deliver this with our offshore model. So on both those fronts, we are actively engaged. Yes, in terms of volume of business from services engaged in this particular area, it's not that material yet compared to the big volumes in the traditional application outsourcing. But definitely the traction is picking up. And we have specific practices with capability to understand not only our sectors' business, but more importantly, the regulations themselves, so that we can add value to our client business. So we are pretty active in this area.

Mayank Tandon - Needham & Company, LLC, Research Division

That's helpful. But I was actually referring to also the health care side, especially the conversion from ICD-9 to ICD-10, if you have exposure on the payor side of health care insurance and is that going to be an incremental driver?

B. G. Srinivas

Our overall footprint in health care is small, while we are definitely investing in capability to address the regulatory as well. It is still too early to say how much of that we'll capitalize in the short term.

Operator

The next question is from George Price from BB&T Capital Markets.

George A. Price - BB&T Capital Markets, Research Division

Just a couple of things I wanted to follow up on. You mentioned the delays and closures, postponement of ramp-ups. And I wanted to ask more specifically, what did you see with respect to these as the quarter progressed? I mean did they accelerate as the quarter went on? Were they fairly even? Have we seen pick up of this toward the end of the quarter? And maybe you could comment on that from a geographic and vertical basis as well.

S. D. Shibulal

So this is Shibu. As the quarter went on, we have seen a deterioration in the environment due to multiple events which happened, which we didn't see -- which we could not have predicted in the beginning of the quarter. So that has led to further lack of confidence, especially in the financial services segment during the quarter. And these events are all public events, so it has led to further lack of confidence in the financial sector. The large deals, if you look at some of the reports which came out, for example, if you look at the TPI Index, the number of large deals have come down quarter-on-quarter, number of billion-dollar-plus deals have come down drastically quarter-on-quarter. So the number of deals in the market, especially the large ones, which will give you large growth also have come down according to the reports. So both have happened during the quarter.

George A. Price - BB&T Capital Markets, Research Division

Okay, okay. And I know you commented on trends in the quarter in BFSI. And I know health care and Life Sciences are both relatively small parts of the business. But at least on a quarter-over-quarter basis they seem to be relatively weak versus other parts of the business. And I was just curious if you could comment was there any trend behind that, that you could comment on?

S. D. Shibulal

Life Sciences and health care both very much -- in Life Sciences, I think we have added numerous clients over the last few quarters, but we have large dependency on a few clients. Some of them are going through challenges due to patent case and other related issues, but we are investing more and more into Life Sciences. When I look at the future, I believe we should be fine. The same thing applies to health care. It is a smaller portfolio for us. So any change will drastically show up in that portfolio. The verticals which are doing good for us and number one is manufacturing; number two is retail, which is stable and doing well for us. Financial services and health care, financial services is weak, and the energy and communications space, the ECS space are also competitively weak for us at this point in time.

George A. Price - BB&T Capital Markets, Research Division

Okay, okay. And then last question I know you've talked a little bit about the pricing decline impact, the main factors there, the portfolio shift and then the renegotiation impact. If I missed it, I apologize, but did you quantify the 2 of those? Or could you quantify that 2 of those, or at least give a rough kind of sizing of which one is having the bigger impact?

S. D. Shibulal

I would tend to believe that the portfolio shift is having a bigger impact because the pricing renegotiations which we are seeing are more sporadic than anything else. So I -- we do not quantify it, but I tend to believe that the portfolio shift has a bigger impact.

Operator

Ladies and gentlemen, due to time constraints, we will take one last question from Shankar AB (sic) [Shankar AVSB] from MarketStar Capital.

Shankar AVSB

My question is how does Infosys planning to use the $3.7 billion cash assets as a weapon for getting back growth even when the economy improves, say, 4 to 8 quarters from now? What I would like from you is you -- to understand what gives you the confidence that Infosys is fully ready to go on the offensive when the opportunities arise? Like you've seen pie shrinking, but when the pie expands, how will you ensure that you won't get choked out by competition?

V. Balakrishnan

No, no, look. We don't want to play more and more on the commodity space. It is very easy for us to use the cash to buy large services firm, but it could be commoditizing more of the business. The whole game is to look more on the product platform solutions space, which will give us a nonlinearity in the revenues and also help us to have better portfolio business. So the whole acquisition focus is to look at companies in the product platform solution space. If we find the right fit, we'll definitely do it. But again, we are not going to be in a hurry and do a wrong acquisition. We are very careful in our acquisition, and we'll do it only if it makes strategic sense for us to do it.

Shankar AVSB

A quick part 2 of the question would be how much revenue percentage or net profit percentage would you expect, let's say, 8 quarters from now from the products and platforms business that you're alluding to?

V. Balakrishnan

We have clearly laid out the medium- to long-term strategy of getting 1/3 of our revenues from that. We can't precisely tell you how much it will be 4 quarters down the line, 3 quarters down the line.

Operator

Thank you. Ladies and gentlemen, that was the last question. I now hand over the conference back to Mr. Sandeep Mahindroo for closing comments.

Sandeep Mahindroo

So I'd like to thank everyone for joining us on this call and spending time with us. So we look forward to talking to you again over the next few days. Thanks, and have a good day.

Operator

Thank you very much, members of the management team. Ladies and gentlemen, with that, we conclude this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.

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