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Executives

Sridhar Ramasubbu - IR

Azim H. Premji - Chairman

Suresh C. Senapaty - CFO, EVP of Finance

Girish S. Paranjpe - Joint CEO

Suresh Vaswani - Joint CEO

Sudip Nandy - Chief Executive, Telecom and Product Engineering Solutions

Analysts

Joseph Foresi - Janney Montgomery Scott

Trip Chowdhury - Global Equities Research

Arvind Ramnani - Bank of America Securities

Kanchana Vydianathan - Pacific Crest Securities

Ashish Thadani - Gilford Securities

Wipro Ltd. (WIT) Q1 FY08 Earnings Call July 18, 2008 8:15 AM ET

Operator

Good morning. My name is Stephanie and I will be the conference operator today. At this time, I'd like to welcome everyone to the Wipro First Quarter Earnings Conference Call. All lines are placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.

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

Sridhar Ramasubbu - Investor Relations

Thanks Stephanie. Good morning, ladies and gentlemen and good evening to the participants across the globe. Rajendra, Lalit, Aravind joining me from Bangalore, and extending a warm welcome to all the participants to Wipro's first quarter results and earnings call for the period ended June 30th, 2008.

Joining us today are Mr. Azim Premji, Chairman and Managing Director; Mr. Suresh Senapaty, CFO, who will comment on the U.S. GAAP results for the period ended June 30th, 2008. We are joined by Girish, Suresh Vaswani and other senior members of the Wipro management team, who will be happy to answer your questions.

During the call, we might make certain forward-looking statements within the meaning of the Private Securities Litigation Reforms Act 1995.

These statements are based on management's current expectations, and are associated with uncertainty and risk, which could cause the actual results to differ materially from those expected. These uncertainties and risk factors have been explained in detail in our filings with Securities Exchange Commission in the U.S.A.

Wipro does not undertake any obligations to update forward-looking statements to reflect events or circumstances after the date of filing thereof. This call is scheduled for one hour. The presentation of first quarter results will be followed by a question-and-answer session. The operator will walk you through the procedure for asking questions. The entire earnings call proceedings are being archived and transcripts will be made available after the call at our website.

I am available on e-mail and through mobile as well to take any questions and table it to the Wipro team, in case you are unable to ask questions for any technical reasons.

Ladies and gentlemen, over to Mr. Azim Premji, Chairman and Managing Director, Wipro.

Azim H. Premji - Chairman

Good morning to all of you. I'm sure you would have seen our results posted on our website. I would like to spend some time reflecting on our performance for the quarter. Following that, Suresh Senapaty, our CFO will share financial highlights, and the management team will be happy to take questions.

Let me start by sharing some of my thoughts on the environment. With the oil prices spiraling out of control, we continue to see a lot of uncertainty. Our focus is to retain close proximity with customers and partner with them in their business priorities. With the completion of our revised organization structure, we're in an excellent position to deliver better customer value.

Moving on to results, given the headwinds of macroeconomic uncertainty, our results for quarter one '08-'09 have been satisfying. Wipro Limited recorded revenue growth of 43% year-on-year, and net profit grew 15% year-on-year on a GAAP basis, and on a non-GAAP basis adjusted net income grew 25% year-on-year.

In our IT business, services revenue for the quarter was $1067 million with a year-on-year of 37%, as against the guidance of $1060 million. In rupee terms, the growth rate of our IT services business was 40% year-on-year.

Growth continues to be driven by differentiated service lines. TIS, Testing and BPO grew upwards of 40% year-on-year. Our financial services business continues to show resilience in the face of strong headwinds with another quarter of 47% year-on-year growth.

We've also grown well in the retail vertical. Our only investments in the India and Middle East emerging markets continue to pay rich dividends, with another quarter of 50% plus growth year-on-year. We have won a few multi-year, multi-million dollars deals in India and Middle East markets. And the deal pipeline is encouraging. We are seeing our investments in global programs, leadership with infrastructure services and enhanced sales footprint start to pay dividends in terms of large deal wins.

We announced seven multi-year multi-million dollar deals in services business during the quarter and the pipeline looks healthy. Our ability to provide end-to-end solutions on the infrastructure services, and our enhanced global footprint helped us win a large deal with a worldwide leader in the manufacture of high quality audio and electronic products for management of infrastructure across Americas, Europe and Asia Pac.

Our Products business grew 53% year-on-year, driven by system integration wins and our leadership in IT business in India and Middle East markets. Our strong presence in products, in addition to services in these geographies, gives us a unique leadership on end-to-end systems integration and total outsourcing opportunities and deals.

Wipro Consumer Care and Lighting business continues to see good momentum with industry leading growth rates. Our domestic business continued its robust revenue growth at 32% year-on-year, tenth consecutive quarter of 25% plus growth.

Unza continues to grow well in all the countries we operated. Going beyond business, we recently launched Eco Eye, a corporation wide initiative of ecological sustainability. It is a comprehensive program that drives increasing ecological sustainability in all our operations and also areas of our influence. The initiative attends to engage with increasing levels of intensity with all our stakeholders, Wipro's own employees, partners, suppliers, customers and immediate communities.

We work on the dimensions of carbon neutrality, water balance, waste management and biodiversity. I would now request Suresh Senapaty, our CFO, to comment on financial results, before we take questions.

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

Very good morning to all of you in the United States and good evening to those of you in Asia. I'll touch upon areas in our performance and financials that I believe would be of interest to you all.

Let me commence by highlighting the fact that for the convenience of the readers, the U.S. GAAP financial statements have been translated into dollars at the noon buying rate in the New York City on 30th of June 2008 for cable transfers Indian rupee well certified by the Federal Reserve Bank of New York, which was Rs. 42.93 to $1. Accordingly, revenues of our IT Services segment was $1067.5 million, which is in rupee terms 43.9 billion, which in our earnings release appear as $1023 million based on the convenience translation.

After given that clarification, let me proceed that our IT Services revenues for quarter was $1067 million against the... of $1060 million, a sequential --

Unidentified Company Representative

Excuse me, Pat Smith [ph], I apologize for the interruption. I did need to get a couple pieces of information from you please. Are you online?

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

Of our BPO and Infocrossing business with our IT Services business. And it makes more sense to view them as one rather than as separate businesses.

Considering that we in a transitory stage in reporting, we believe it would withheld analysts if we give an apple-to-apple number for quarter one, so as to compare with quarter four.

Our Global IT business stood at $996 million in quarter one, as against $960 million for quarter four, a sequential growth of 3.7%. Similarly on the margin front, our global IT margin was 20.1% for quarter one versus 20.2% for quarter four of last year under U.S. GAAP.

The margin for combined IT services was 20.1% in quarter one, that's up 20 basis points... I am sorry, on the margin front for global IT business, our margin was 21.1% for quarter one as against 21% for quarter four, a 10 basis points expansion. On a total IT services business; it is 20.1% in Q1 versus 20.2% in Q4. The sequential growth is driven by strong performance of financial services and retail, both growing 5.5% and 7.8% sequentially. Our differentiated service lines of testing [ph] grew 6.4% sequentially. The U.S. and Japan geographies grew above company average sequentially.

Infocrossing business continues to get well integrated and has a healthy pipeline of contracts. We closed contracts with TCB valued at $42 million during the last quarter.

During the quarter, we added 31 new customers, four of which were Fortune 1000, five Global 500 customers. The number of clients more than $50 million on a trailing 12 month basis has increased to 14 in Q1 from 9 in Q1 of last year.

In the current quarter, our realization improved by 3.9% for onsite and 3% for offshore sequentially. On a year-on-year basis, rates for onsite and offshore improved by 5.4% and 4.6% respectively. The improvement in rates were mainly due to improved realization in 6 months [ph] projects and a few of our non-linearity initiatives. During the quarter we are able to maintain our margin in spite of our issue, grants et cetera to improve realization and utilization.

On the foreign exchange front, our realized rate for the quarter was 41.16 versus the rate of 39.87 realized for the quarter ended March 31st, 2008. Our cost rate for foreign currency cost also went up during the quarter. On a quarter-on-quarter basis foreign exchange gave us a positive impact of margin of 0.1%.

As at period end up to the timing to be assessed on the balance sheet, we have about $2.6 billion of contracts, of rates between 39.5 to 45 rupees a dollar.

We raised an excellent commercial borrowing of $350 million in March 2008. This is an effect hedge for our overseas investment. The translation loss of Rs. 660 million has been recognized in translation reserves in our balance sheet, which offsets the gain on translating our overseas investment. However, in U.S. GAAP, the translation losses of external commercial borrowing are recognized in our P&L. Similarly there is a fringe benefit tax of Rs. 46 million on ESOPs recognized in our P&L account. This is reimbursed from employees, which show up in equity rather than as the P&L expense credit.

We believe that in the shorter term accounting principles sometimes do not completely reflect our effective economic results. We'll, effective this quarter, provide additional information in the form of an adjusted non-GAAP net income statement, excluding currency translation impact swap and India fringe benefit tax on ESOPs. We believe this will help our stakeholders to see our underlying business results even clearer.

In analyzing the adjusted non-GAAP net income for the quarter, we have excluded the translation loss of external commercial borrowings and we will take a fringe benefit tax on ESOP. Of course we will also continue to publish results as per GAAP and will also provide a detailed reconciliation between GAAP net income and adjusted net... non-GAAP net income.

For the quarter ended September 2008, we expect volume led growth with stable pricing. We will have the impact of salary increases of our offshore employees in the current quarter. We'll now be glad to take question from you.

Question And Answer

Sridhar Ramasubbu - Investor Relations

Stephanie?

Operator

Yes Sir.

Sridhar Ramasubbu - Investor Relations

Yes, we can go ahead with the Q&A.

Operator

[Operator Instructions]. Your first question is from Joseph Foresi from Janney Montgomery. Your line is open sir.

Joseph Foresi - Janney Montgomery Scott

Has there been any change in the tone of what you are seeing in that environment over the last couple of weeks and maybe you could talk about any particular client specific issues both in your IT services or consumer products area that you're might be seeing some weakness.

Girish S. Paranjpe - Joint Chief Executive Officer

Hi, this is Girish Paranjpe here. There is no specific change of tone thereby we are seeing change of direction or change of desire for clients to do work with us or the type of work they would like to do with us.

However, having said that, there is no doubt that some of our clients who are in the financial services space and in retail space have witnessed a significant amount of turmoil and that has been a reason for caution for us.

Joseph Foresi - Janney Montgomery Scott

So I guess then, help us reconcile, if there has been no change in tone, why the... what seems to be conservative guidance for next quarter?

Girish S. Paranjpe - Joint Chief Executive Officer

That is, the conservative guidance for next quarter is a function of what we have seen as current deals that have been closed and what we see as potential billing for next quarter.

Joseph Foresi - Janney Montgomery Scott

Okay. And then just on the headcount side, I think there were some subtractions in some of the IT services business. I was wondering if you could tell us what you kind of feel? What the reason for that was? And have you... what are you doing with your campus offers at this point in time?

Girish S. Paranjpe - Joint Chief Executive Officer

So on campus offers, we typically make campus offers a year in advance and we made the campus offers for people to join this year a year ago. And we have a schedule by which people will join this year and that is in progress.

Apart from that, we continue to hire from the market both experienced people as well as we run special program for science grads which is outside the campus hires. So our talent pool is really a combination of these three streams. So that's what kind of makes up our talent pool.

In terms of the negative ad that we have had this quarter, it's a function of two things. One is that we had particularly lumpy joining at the end of last quarter and also that we think that we will be able to drive utilization and productivity strongly which is why there is this kind of aberration in our headcount.

Joseph Foresi - Janney Montgomery Scott

So just to clarify, there hasn't been any changes, you haven't delayed the taking on of the campus offers that were made last year?

Girish S. Paranjpe - Joint Chief Executive Officer

Could you repeat that?

Joseph Foresi - Janney Montgomery Scott

Yes, I am wondering if there is any change in the program as far as the campus offers that you had put out last year. Are you still taking the modest pace, is it the same amount of people?

Girish S. Paranjpe - Joint Chief Executive Officer

Yes. So we have not made any change so far we're that there is a schedule that we have for people joining. And people are joining as per that schedule.

Joseph Foresi - Janney Montgomery Scott

Okay. And any thoughts on the trajectory of growth just very quickly last year, any thoughts on that trajectory or growth this year. Do you expect September to be lower than the back half of the year? And thank you.

Girish S. Paranjpe - Joint Chief Executive Officer

If your question was, what do you see the outlook for the next half? Was that your question?

Joseph Foresi - Janney Montgomery Scott

That was it. Yes.

Girish S. Paranjpe - Joint Chief Executive Officer

Well, we certainly see a better outlook for the second half of the year, based on the pipelines that we have and on the deals that we've won in quarter one.

So, we did speak about earlier in the day about winning close to $0.5 billion worth of deals in terms of total contract value. And those deals in terms of revenue would kick in, in two or three quarters from now. So, net-net we certainly see a better outlook for the second half of the year based on our current deal pipeline and based on the sort of work that we are doing with customers in terms of building the deal pipeline.

Joseph Foresi - Janney Montgomery Scott

Okay. Thank you.

Operator

Your next question comes from... excuse me for mispronunciation, Mark Marostica [ph] with Piper Jaffray. Your line is open sir.

Unidentified Analyst

Hi, good evening. Just a couple of questions. First, with regards to BFSI, clearly hell lot much better than your peers this quarter. I'm just curious what your pipeline looks like here for the next six to 12 months and what your existing BFSI clients are communicating to you in terms of further commitments over the next six to 12 months or potential delays?

Girish S. Paranjpe - Joint Chief Executive Officer

Hi, Girish here. So as you would have seen our sequential growth in BFSI was fairly encouraging and probably better than what some of our peers have seen. As of now, what we see as business as usual from clients continues fairly uninterruptedly. There is clearly caution in terms of kicking up new programs and there is some amount of extension of timeline for negotiating larger kind of duration programs. So those are the two signs that we have as of now from clients in the financial services segment.

Unidentified Analyst

Okay. And then just one other question. In terms of your top ten clients, could you just remind us again where your concentrations are there in terms of just industry focus and secondly, sort of same question I guess, what they've been communicating to you in terms of commitments over the next six or 12 months and sort of what kind of visibility you have on that back part?

Girish S. Paranjpe - Joint Chief Executive Officer

Well, if you look at our top ten clients they are in multiple kind of verticals. They are in technology, they're in energy utilities, they are in financial services. So fairly across all kind of the chain, so actually so far as quarter one was concerned, we did well so far there. We're number one or on the top five or top ten. And our objective is to continue to make sure that we harvest this account to increase our market share of wallet by investing more and more into those accounts. And because we have multiple ranges of services, we continue to add more and more of the service offerings to equity so far as the customers are concerned.

Unidentified Analyst

And could you just provide maybe a little bit more granularity in terms of just... what your visibility is on just specifically those top ten clients over the next six to 12 months. Obviously, difficult times here to get visibility, but maybe just put some parameters on that.

Suresh Vaswani - Joint Chief Executive Officer

This is Suresh Vaswani here. If your question is to do with visibility in so far as the top ten clients is concerned going forward, we've shown a sequential growth in terms of revenues from top ten clients. And we do believe that we can continue with that trend given the fact that we have a strong program addressing our top customers and given the fact that we are also working on putting together proactive opportunities in context of our large mega accounts. So we can't sit to bases, we see the top ten accounts... the top accounts of Wipro, clearly leading the growth.

Girish S. Paranjpe - Joint Chief Executive Officer

Also just to clarify the top account is just about 2.7% of our revenue. So we are not having any one particular customer going very high level of overdependence.

Unidentified Analyst

Great, that's very helpful. Thank you.

Operator

Your next question is from Trip Chowdhury from Global Equities. Your line is open sir.

Trip Chowdhury - Global Equities Research

I was just wondering since the market conditions are not so good, probably the acquisitions you are looking last year could be this year pretty much on sale. Have you thought about acquiring some companies, because our research is showing like some of the companies who were trying to be shopped around, today they are willing to be sold at least 60% lesser value than last year. Have you thought about maybe taking this slowdown as an advantage and going shopping at probably much better prices because now the ball is in your court versus other person's court. Thank you.

Azim H. Premji - Chairman

Yes. Trip, I think our strategy has been to be able to string our pearls and that has to be first we setup actually that there has to strategic need for that. There has to be a fulfillment like we said whether it is the skill set or whether it is geography. There has be a strategic need and then follows the financial aspects of grid and multiple other stuff. Just because financially it becomes more viable or economical and it does not make a strategic fit, we wouldn't want to jump the gun there. It has to be match... meeting our pre-filters if you talk about strategic, cultural as well as financial. So just because the market is good in terms of from an acquisition perspective, we would not like to jump in.

Operator

Your next question is from Arvind Ramnani from Bank of America Securities. Your line is open.

Arvind Ramnani - Bank of America Securities

Can you provide us some color on the existing deal pipeline for IFOX as well as... I mean IFOX related contracts as well as margin for that business?

Suresh Vaswani - Joint Chief Executive Officer

This is a Suresh Vasvani here. IFOX has won last quarter roughly $42 million worth of contracts in terms of TCV, purely for IFOX related services. So we see the good momentum in terms of sales build up in IFOX. We see a good healthy pipeline building up for IFOX and we also see a strong pipeline building up for integrated deals between Wipro's infrastructure services and IFOX. So all in all, we are fairly excited by the opportunity our Infrastructure Services business presents along with the IFOX acquisition.

Arvind Ramnani - Bank of America Securities

And can you comment on the margins?

Suresh Vaswani - Joint Chief Executive Officer

We have integrated the IFOX business into Wipro's Infrastructure Services business. So we are no longer talking about specific margins in context of IFOX because a lot of deals are really integrated. But to just give you a broad perspective, the IFOX business is very strongly driven by the revenue build up. So certainly going forward, we see the Infrastructure Services business and IFOX businesses merging in terms of operating margin over the next few quarters... merging or being very similar in terms of margins over the next few quarters.

Arvind Ramnani - Bank of America Securities

Great. Now you booked a ForEx loss pertaining to an external commercial borrowing to the tune of Rs. 660 million under the U.S. GAAP. Can you just provide some color on this?

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

Like we do investments in the foreign currencies, whenever rupee depreciate or appreciate, we tend to account for the difference between the rate at which we purchased versus the float rate and guide them into books and the balance sheet as a translation capital reserve.

Just to make sure that we do not lose out on that, we have taken an external commercial borrowing of about $350 million against that investment and from that investment, it does work on a counter which means on the capital account, you lose on the borrowing you gain and the vice versa.

So from an economic standpoint, it is exactly a hedge. But under the U.S. GAAP because the currencies are different in terms of the borrowing and investment, it does not quantify the hedge counting, while on the international accounting standard and in Indian account standard it does qualify. So consequently, the Rs. 660 million which is the exchange difference from the 1st of April to 30th of June of Rs. 660 million has been taken as a hit to the P&L account.

And to make sure that we have a proper understanding of the business operations, there are two items which we have tried to give an adjustment to give a non-GAAP number, which is one of this is Rs. 660 million and the other one is the fringe benefit tax on ESOP because after the ESOPs were granted there is a law in India, we started taxing the fringe benefit tax including on the existing grants.

And consequently, we have decided to recover the fringe benefit tax to get from the employees, which in the economic point of view what the company pays versus what the company recovers to that loss. Yes, from a U.S. GAAP perspective, the recovery from the employee is treated into the capital account and payment out of the company is treated as a charge to the P&L. So these are the two items where we are capturing that separately and giving an adjusted GAAP number so as to read our financial reports more appropriately.

Arvind Ramnani - Bank of America Securities

That was very helpful. I also wanted to find out what is your outlook on pricing?

Suresh Vaswani - Joint Chief Executive Officer

Okay. This is Suresh Vaswani here. I think our outlook for pricing is, pricing will continue to be stable. We have seen a better price realization this quarter and that was thanks to some of the price pickups we had been able to negotiate with our customers over the last couple of quarters and of course we were able to drive productivity a lot more in some of our fixed price contracts, which is the reason why you're seeing the price realization being up in quarter one. But going forward, we see a steady sort of environment in terms of pricing. We do believe that new contracts will come in at higher pricing than our existing contracts.

Arvind Ramnani - Bank of America Securities

Great. And how is the... your new joint CEO structure working out and how does Mr. Premji's role kind of change or get enhanced through this?

Suresh Vaswani - Joint Chief Executive Officer

So, I am going to first talk about how is that joint CEO structure working and then of course Mr. Premji will speak. I think it's working wonderfully. We've had a great first three months. Results are in line with what we expected to deliver to the market. We are teaming up together strongly. And we clearly believe in the power of two CEOs to deliver stronger strategic first to our business as well as stronger operational first to our business. So, I think it's working wonderfully well.

Azim H. Premji - Chairman

So far as I am concerned; this is Azim Premji speaking. I see my role going back to being a Chairman of Wipro Limited versus being the Chief Executive Officer running Wipro Technologies and Wipro Infotech. So I am very comfortable in terms of the job which I've got settled back into.

Arvind Ramnani - Bank of America Securities

Great. Just one last question. How is the sales being organized? I mean it is... you guys having some one new or what... how is really sales being organized?

Suresh Vaswani - Joint Chief Executive Officer

How is sales--

Azim H. Premji - Chairman

Sales organized.

Girish S. Paranjpe - Joint Chief Executive Officer

The sales are... Girish here. Sales is organized by geographies and there... all the sales people are also aligned to industry verticals and practices. We have geo heads for North America, for Europe, for Japan and China as well as of our Asia Pac. India and Middle East is of course is kind of run separately and all the geo heads actually report to me and Suresh, Also the people in that territories, or the sales people also report to their respective verticals and to service lines.

Arvind Ramnani - Bank of America Securities

Great. Thank you.

Operator

Your next question and please excuse pronunciation, is from Kanchana Vydianathan from Pacific Crest Securities. Your line is open.

Kanchana Vydianathan - Pacific Crest Securities

Hi, thank you. I guess my first question is, looking at the revenue from the various industries, it's interesting that you mentioned that financial services and retail is where... I mean if you look at the clients, the ones that are having the issues but that's where you seem to have posted the strongest growth. Can you help us reconcile that and also help us understand what's happening in the technology and the communication service provider space because that seems to be weak?

Girish S. Paranjpe - Joint Chief Executive Officer

Hi, Girish here. Let me talk about financial services and retail and I'll request my colleague Sudip Nandy to talk about technology and media. So, you are right that if you look at sequential growth in financial services, it was kind of bucked the trend and it has been ahead of what some of our peers have done. And I think it's largely due to the strength of our relationship with clients and also the quality and depth of work that we do there.

I think in retail also, it has been the consequence of some large deals that we have won; they are more managed services type of deals. And we have even in the last quarter some of the big deals have been in that sector. So, we are quite confident that especially in the retail we'll be able to continue to see the momentum going forward.

Financial services, there is a note of caution given the significant turmoil that we see in that space. But what we have seen so far is that what was business as usual to keep the business running that part of work has not got affected. There is little bit of concern about large programs and funding and also extended cycles for again significant price being kicked up. Let me turn it to Sudip to talk about the technology segment.

Sudip Nandy - Chief Executive, Telecom and Product Engineering Solutions

Hi, this is Sudip. In the last quarter, we have significantly reorganized our technology business because we saw a couple of trends in the market and took the opportunity of the reorganization to take advantage to position us even better. So we moved the media and entertainment business from elsewhere in the organization to combine with the telecom service provider business and it's now called the communications and media vertical.

We also moved the IT services and the BPO business for the telecom companies and technology companies and combined this to offer an end-to-end service as a genuine industry vertical, offering tech solutions, IT and BPO. So there are two additional verticals, one is called hi-tech, the other is called telecom equipment.

And then last thing we did was, we converted the embedded systems and the VLSI design and the mechanical design part of the business as a horizontal, which allows us now to go and offer the same services to customers in the manufacturing space, in the medical devices space, in the retail automation space, in the energy utility space and so on. But this has been a quarter of change on all those fronts. But we have now got the ducts aligned properly. We have... we are now seeing a very good funnel in the... and help liquate wins in the communication service provider business and some wins in the technology business.

In the telecom infrastructure business, we are seeing a lot of activity but not... the funnel is not as strong and we are having equal number of ramp downs as ramp ups. But the good news is that there is activity and there is not frozen in the track syndrome that we've observed for the last four or six quarters. So after the consolidation in that space, we have found people. They are rationalizing product, introducing new products. With the rationalizing, we having ramped down, so they are introducing new products, to having new activities. And I think the rationalization will be over in a quarter or two and we'll see an uptick in the telecom equipments and the space also.

So all in all, I think we have made significant changes. We are organizing in a very unique way now and I think the future should be good.

Kanchana Vydianathan - Pacific Crest Securities

Okay. So that means if I understand it correctly, that means... then looking at your September quarter and for the rest of fiscal 2009, you're expecting a pickup in the technology space and I guess with respect to ... if you look at the retail space and you're excepting the trend to continue or else the strength to continue? And I guess the uncertainty is the financial services?

Sudip Nandy - Chief Executive, Telecom and Product Engineering Solutions

That's right.

Kanchana Vydianathan - Pacific Crest Securities

Okay. Are you seeing a weakness in financial services only in North America or even in Europe?

Girish S. Paranjpe - Joint Chief Executive Officer

This is more I think more to North America. Europe, we still have to see.

Kanchana Vydianathan - Pacific Crest Securities

Okay. One question with respect to your pricing. It's actually interesting that... your pricing has significantly improved this quarter. I was wondering, are you running into any situations where clients are coming back and you are seeing sporadic renegotiation on your pricing contracts, anything of note?

Suresh Vaswani - Joint Chief Executive Officer

Well nothing substantial off note. So there is the odd customer who talks about pricing negotiation. But it is very, very marginal I would say. The customers are not really coming back to us for any substantial price negotiation.

Kanchana Vydianathan - Pacific Crest Securities

Got it. And one final question. Just looking at your OCI, I was wondering if you could help us understand... walk us through your hedging, as to what is remaining at the end of the June quarter and whatever loss that you have right now in the OCI, how that would play out, depending on if the rupee appreciates or depreciates?

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

Beyond whatever the hedges has been applied to the exposes on the balance sheet. It is about $2.6 billion and the OCI is about 934... Rs. 9340 million. And about one-third of that were put into to the current fiscal and the balance would be over a period of two to three years.

Kanchana Vydianathan - Pacific Crest Securities

And it---

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

It will go towards the current spot of 15 year spot and 15 year hold. If the rupee appreciates, this amount will come down; and rupee depreciates this amount will go up. And we have been following this strategy since 2004 trying to seek certainties opposed to trying to be opportunistic because these are against underlying transactions, and not speculative in nature. And they are clear forward contracts or options if you take forward options, which meets the FAS 133. From that perspective, there has been many quarters that we've looked smart, quite a few where you don't look smart.

Kanchana Vydianathan - Pacific Crest Securities

Okay. Thank you very much, this is helpful.

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

Yes, thank you.

Operator

[Operator Instructions]. The next question is from Ashish Thadani of Gilford Securities. Your line is open.

Ashish Thadani - Gilford Securities

Yes, good evening. Just want to go back to Europe. Are you sensing any signs at all of certain economic slowdown in that region? And could that threaten the adoption trend witnessed in recent quarters?

Suresh Vaswani - Joint Chief Executive Officer

Well, broadly from an IT services perspective, we... okay, so this quarter the sequential growth of ours in Europe has been marginally lower than what is in the U.S., but in terms of market potential, funnel build up and the opportunity, I do believe it is pretty similar to what we see in the US. So we are not seeing drying up of the funnel, we are seeing quite a lot of openness when it comes to Continental Europe geographies looking at outsourcing. And we are seeing a fairly healthy funnel build up in so far as Europe is concerned, so nothing peculiar about Europe in terms of market trend.

Ashish Thadani - Gilford Securities

Okay and --

Suresh Vaswani - Joint Chief Executive Officer

If anything, there is more openness for some of the Continental Europe customers to look at outsourcing more aggressively.

Ashish Thadani - Gilford Securities

Great. And you earlier referred to business as usual, work versus new projects. Could you break down the relative size of these two components for you?

Azim H. Premji - Chairman

Business as usual work is about 55%-60%, new projects tend to be actually about 20% or so and then there is consulting work which is... and some smaller project which are there.

Ashish Thadani - Gilford Securities

Okay, that's very helpful. And on the margin front, over the last year or so the IT operating margin has drifted down from about 24% to 20% or 21%, due primarily to I guess currency and acquisitions. Is it reasonable to expect a return to prior levels or has the margin philosophy changed since that time?

Suresh Vaswani - Joint Chief Executive Officer

Okay, this is Suresh Vaswani here. I think it's reasonable to expect a positive trend in so far as operating margins are concerned going forward. I think there are levers that we have for productivity which we plan to drive. There are levers that we have in terms of pricing when it comes to new customers. So the broad outlook would be an operating margin... broad outlook would be a positive operating margin outlook.

Ashish Thadani - Gilford Securities

Okay. And finally the tax rate appeared to be a little higher than what we had anticipated for the quarter. What is that? What is the outlook for that for the rest of the year and beyond?

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

Ashish, this is Suresh Senapaty. We will be within 100 basis points so far as the whole year is concerned regarding what we have in quarter one. Quarter one to quarter one of last year was big difference because Q1 of last year we had a big write back for pertaining to past period, which nothing of that nature we had in quarter one and that's why... and we have always stated that to be about 14% to 15% will be our ADRs and we hope it will be the same in the current year.

Ashish Thadani - Gilford Securities

Okay, thank you very much.

Operator

The next question is from Rachel Lenoff [ph] your line is open.

Unidentified Analyst

Thank you. Congratulations on a good quarter for fifteen years as a vertical. Could you give some light please on to India and the Middle East region? About where the head count growth is coming from? For a period of time do you see before you getting major money services contracts out of that region? This is my first question. My second question is about the long-term high plan in terms of service lines where are you seeing any opportunities coming through?

Suresh Vaswani - Joint Chief Executive Officer

I haven't understood your first question, but I'll answer your second question and may be you could repeat your first question later for me.

Unidentified Analyst

Okay

Suresh Vaswani - Joint Chief Executive Officer

So if you are... this is Suresh Vaswani here. So if the question is in terms of service lines, where are we seeing the funnel build up?

Unidentified Analyst

Yes.

Suresh Vaswani - Joint Chief Executive Officer

I would say, not only we have four service lines and we've just added one more service line and I'll speak about that as well. The first service line is Infrastructure Services. With the combined proposition of Infocrossing, Infrastructure Services and the strong presence that we have in India, we see a fairly positive outlook for that service line across global geographies. We've had a good quarter last quarter in terms of our year-on-year growth, which is roughly 75%. So that is on Infrastructure Services.

On Package Implementation, here again, we are seeing good traction building up for both the application support type of projects as well as some key strategic implementation projects. So we have a healthy pipeline for that.

Testing Services has always been a strong differentiator for Wipro and that again has come up with a strong performance in quarter one in terms of our year-on-year growth of 40% and we see a fairly strong outlook for that business.

BPO is the other major service line. Here again we see strong traction building up for our transaction processing and our national transaction processing business has continuously increased over the last couple of quarters and now it accounts to 39% off of our BPO business. We see a lot of opportunities at the intersection of application and BPO, and which is what we are trying to do to make sure that our sales fields and practice fields are more aligned together to create the opportunities at the intersection.

We have repositioned our Product Engineering Services business, which was largely focused on the technology sector to address all our verticals and here we see strong opportunities in the manufacturing sector, in the aerospace sector, particularly. In addition, to of course, the traditional sectors that we were focusing on, in terms of technology and telecom.

So that was the perspective on service lines. We do believe that service lines will continue to be very strong growth drivers for Wipro and differentiators for Wipro. Would want also to add one... you all would have heard about the repositioning that we've had of our Consulting business. We've got ... put together all our Consulting business which was a part of our various verticals and service lines in the past into one integrated consulting business.

So there are two objectives of doing that. One is obviously to build some traction with customers, deliver better value to customers in terms of integrating all our various service lines together. And secondly, we're also beginning to now look at consulting as a service line, pretty much like Packaging Implementation is or Infrastructure Services is. So you got now actually six service line within the Wipro fold which works through the various verticals in terms of driving customer proposition. So that was the answer to your question two, if you could please repeat your question one.

Unidentified Analyst

Thank you very much. It's about the India, Middle East business where there is a growth in head count. When do you... what kind of times having invested in the area before you're seeing major outsourcing business coming out?

Suresh Vaswani - Joint Chief Executive Officer

Well, we have made strategic investments in India and Middle East over the last many years. India, we have a very, very large presence and you're familiar with that. Middle East is again a fairly strong opportunity for us. We've been early in that marketplace. We've invested over the last five years. We have a joint venture there in Saudi Arabia called Wipro Arabia Limited. But clearly, long story short, I think we have a very powerful proposition addressing both these markets. It's timed across consulting, services, application as well as technology.

We have strong partnerships in terms of system integration partnerships to address these markets and these partnerships as Cisco, EMC, Microsoft, SAP, and Oracle to just mention a few of them. And we are very strongly positioned in large outsourcing opportunities both in the Middle East and India, both in terms of what we call as transactional outsourcing opportunities as well as transformational outsourcing opportunities.

One of the biggest wins out there... really the biggest wins that Wipro has had was in India I think last quarter from an organization called Aircel which is in the telecom service provider space. Well, we are completely responsible for both their IT operations currently as well as transforming their IT as they go ahead expanding the number of circles that they operate in and as they launch new services.

Girish S. Paranjpe - Joint Chief Executive Officer

And also just as a supplement, over the last two quarters, we've had very good wins particularly from Saudi Arabia. One is more than a $50 million deal and other one more than $100 million deal in the Saudi Arabia. So... and the funnel continues to be looking good in terms of bidding for more projects in Saudi, because kinds of investment that is coming up is... Did we answer your question now?

Unidentified Analyst

Yes, you did. Thank you very much. Okay.

Girish S. Paranjpe - Joint Chief Executive Officer

Great.

Operator

Your next question comes again from Arvind Ramnani from Bank of America Securities. Your line is reopened.

Arvind Ramnani - Bank of America Securities

Hi. Just wanted to get an update on your operations in Atlanta and Mexico?

Unidentified Company Representative

This is Dave [ph] here. We have a number of centers in Mexico and as of today, it has got a number of people billing out of that and we are seeing certain expansions that are happening there based on the type of business that is coming in there. We also hope to expand BPO services there if we get that.

Arvind Ramnani - Bank of America Securities

And can you provide us some color with your revenue outlook for IFOX.

Suresh Vaswani - Joint Chief Executive Officer

Well, I think THE IFOX business is ticking along pretty well. They have finalized close to $42 million in TCV last quarter of very specific IFOX business. So I am not talking about the total business that we have got on account of that, but I am specifically talking about the IFOX business. We see good traction building up for the IFOX business, we see good traction building up for the integrated offerings of the IFOX business into the traditional Wipro base and we see good traction building up for integrated outsourcing deals thanks to the IFOX proposition that we have. So we have a very positive outlook on IFOX and we have a very positive outlook on our overall infrastructure services business.

Arvind Ramnani - Bank of America Securities

More specifically, when you all did that IFOX integration last year, you had talked about making it a $1 billion business few years out and now you have a chance to kind of take a closer look at that business. Are you kind of more comfortable or less comfortable with that few year outlook?

Suresh Vaswani - Joint Chief Executive Officer

Well, first of all, our infrastructure services business today accounts for 18% of our total revenue. So that's a fairly large business for us. IFOX, particularly in the U.S. is a very key part of our infrastructure services business and I have no doubt... so this billion dollar reference, I am not so familiar with in terms of what context you speak, but certainly we see our infrastructure services business combined with the IFOX business driving stronger growth for us in the U.S. market. So I don't think it's going to be too far down into the future when that business will reach that scale.

Arvind Ramnani - Bank of America Securities

Okay, thank you.

Operator

Your next question comes again from Mark Marostica [ph] from Piper Jaffray. Your line is reopened.

Azim H. Premji - Chairman

Can we have the last question operator.

Sridhar Ramasubbu - Investor Relations

This will be the last question. Yes Mark?

Unidentified Analyst

Okay, great. Thanks. Actually just two quick ones. On the consulting business, I am just curious you had a nice uptick sequentially and year-over-year there. Is that all organic? I know you were taking small numbers here on a relative scale, but is that all organic? And secondly, is that sort of a precursor to may be better business trends in the U.S. over some period of time? Maybe if you could provide some color on that. And then just another related question, are you continuing to look at acquisitions more aggressively in this area, specifically in the U.S.?

Girish S. Paranjpe - Joint Chief Executive Officer

Hi, this is Girish here. There has been no acquisition in the consulting business. It's all organic. And we continue to be optimistic about being able to make an impact to clients and build kind of leveraging consulting not only for revenue growth, but deeper client relationship, more value added perception about what we can do, as well as hopefully downstream revenue.

Unidentified Analyst

And in terms of acquisitions in this area in the U.S., is that something you are looking at just given as an earlier person pointed out, just prices of companies in this area?

Girish S. Paranjpe - Joint Chief Executive Officer

At this moment, we are not very bullish on making acquisitions in consulting because it's not only a matter valuation as Senapaty said earlier, it's about cultural fit and about kind of making the two organizations work together. And I think there we continue to have concerns on how well that works.

Unidentified Analyst

Okay. And I guess --.

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

We never say no.

Unidentified Analyst

Go ahead. If I could squeeze just one last one in unrelated, just in terms of how you're looking at balancing utilization trends with having the appropriate headcount for the earlier [ph] pipeline. How are you looking at brining on new heads? I mean, if you could provide some rough outlook in terms of how you are looking at bringing on new bodies and what sort of way this look like as well?

Girish S. Paranjpe - Joint Chief Executive Officer

Hi, Girish here. We have and I had mentioned earlier, we have people coming in from three talent pools. One is campus hires, whom we kind of offer a year in advance. We have experienced people who are required for us to fill out the pyramid and then we also run science grads programs where we bring in people as apprentices and get them to complete an engineering degree over a four-year period. So those are three streams by which we fill our talent pool.

And it is based on our creation of a global delivery organization now, we are seeing the advantage of greater fungibility and mobility of people and we really hope to see a uptick in the utilization rate that we have in the organization. We have seen steady improvement overall last year and we think that we will be able to pull it up further.

Unidentified Analyst

Okay, great. Thanks very much.

Girish S. Paranjpe - Joint Chief Executive Officer

Thank you.

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

Thank you very much for your participation. We are available offline for any questions. Rajendra, Lalit, Arvind and myself and there is a archived facility available. Thank you very much once again. Over to Stephanie.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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Source: Wipro Ltd. F1Q09 (Qtr. End 06/30/08) Earnings Call Transcript
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