Infosys Limited
Q2 2014 Earnings Call Transcript

Published: 11 Oct 2013

[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 now hand the conference over to Mr. Sandeep Mahindroo of Infosys. Thank you, and over to you, sir.

[Sandeep Mahindroo:]

Thanks, Linda. Hello, everyone, and welcome to the Infosys Q2 FY '14 Earnings Call. I'm Sandeep from Investor Relations team in New York. Joining us today on this earnings call is CEO and MD, Mr. S. D. Shibulal; CFO, Mr. Rajiv Bansal, along with other members of the senior management team. We'll start the call with some remarks on the performance the company for the recently concluded quarter, followed by outlook for the year ending March 31, 2014. Subsequently, we'll open up the call for questions. Before I hand it over 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 risk 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 will now transfer the call to Mr. S. D. Shibulal.

[S. D. Shibulal:]

Thank you, Sandeep. Good evening, everyone. actually, good morning, everyone, and welcome to our earnings call. I will begin by giving an overview of our performance of Q2. We have done fairly well in Q2. We grew 3.8% in reported currency terms in Q2. In constant currency terms, we have grown 4.2%. Our volume growth has been 3.1% quarter-on-quarter in Q2. Onsite volume increased by 0.7% and the offshore volume increased by 4.3%. Our realization increased marginally by 0.6% in reported currency terms and 0.9% in constant currency terms. In constant currency terms, the offshore revenue productivity went up by 1.7%, and the onsite revenue productivity went up by 2.0%. Our utilization also has gone up. Our utilization, excluding trainees, is at 77.5% as of end of Q2. We have seen very strong client additions in Q2. We have added 68 new clients, taking the total to 873. The net additional clients during Q2 has been 37. More importantly, 5 of those clients are Fortune 500 -- Global Fortune 500, which is a very good sign. These are the clients which will give us growth in the coming years. We have added 12,000 employees during Q2. Our total employees is [ph] to date is at 160,000 -- 160,227. Our operating margin is 21.9% after the provisioning we have done of $35 million. Without the provision, our operating margin is flat from Q1 to Q2 at 23.5%. Let me give you some color in different verticals. Let me start with financial services. We have seen some increased momentum during the last 3 months, both in U.S. and Europe. It is predominantly driven by additional spend in the area of new products and channels. We're also seeing interest in cloud and mobility -- increased interest in cloud and mobility compared with a year back. The spending on compliance and related matters continue in financial services. At the same time, we have seen positive momentum towards managed services, social media, and business-facing platforms and products. However, in financial services, the overall discretionary spend continues to be muted with a flat to negative outlook. Clients continue to focus on savings and reducing their operational costs. Vendor consolidation, infrastructure modernization, digital transformation continued to be interest -- continued to be of interest to clients in financial services. In retail and CPG, we are seeing a new wave of vendor consolidation happening. [indiscernible] marketing continues to see strong investment. At the same time, we are seeing strong focus on reducing nondiscretionary spend, and this one is leading to creation of large legacy opportunities for us. We are seeing a slowdown in large transformational leads in retail and CPG. In the area of business intelligence and digital commerce, we are seeing better momentum compared with last year. In manufacturing, the momentum in high-tech remains positive even though the client spend is relatively stagnant due to sluggishness in PC markets and slower growth in Europe and the emerging economies. We are seeing spending in automotive, aerospace and other industries, driven by increased spend on technologies like digital, connected vehicles and analytics. Global expansion continues to be a priority to our manufacturing clients. The primary growth driver for manufacturing will continue to be Americas, with Europe expected to see some challenges as some large transformational programs are nearing completion for us. Energy and utilities continued to see -- energy and utilities and communication service provider space continued to see challenges, especially the wireline telecom space continues to be a challenging area for us. We have been focused on increasing our revenue in wireless and cable during the last couple of years. While our percentage of revenue from wireless and cable has gone up, the -- it is early stages for us to mitigate the risk of the wireline space. There is limited discretionary spend in this vertical, and these projects are driven by the business. We are focused on proactively creating large deals, and that has led to better pipeline compared with the last years in this industry vertical. Now let me give you some color on our service offerings. Let me start with business and IT services. Overall, most deals in this space are focused on vendor consolidation, end-to-end application management and application modernization. We have won 5 large deals in this quarter with a TCV of approximately $450 million. Three of these deals were in FSI, one each in RCL and manufacturing. Two deals were in Americas, 2 in Europe and one in rest of the world. Most of the pipeline, most of the large outsourcing pipeline is driven by clients looking at restructuring existing spend with a bias towards ADM and infrastructure management. We are focused on winning large opportunities in -- with new revenue streams. We continued to see traction in our consulting and system integration space. We continued to win large transformational deals in the consulting and system integration space. Products and platform has shown traction during this quarter. We have 15 new wins, 8 in products and 7 in platforms. This quarter, our TCV won was 50% more than our TCV win in Q1. Today, our products and platform touches 80 clients across the globe. We have seen increased adoption of SaaS cloud-based software development, liberating IP and contract-level solutions over the last 2 quarters. We have, today, 200 engagements in the cloud space with 4,500 experts and 35 partners. Before I conclude, let me give you a brief update on some of the organizational changes we have done recently. We -- to bring in renewed focus in growth markets, we have combined Australia, China, Japan, Middle East and Southeast Asia into a unit with different P&Ls for each of those countries. These countries will be headed by respective country heads who will be responsible for revenue and onsite delivery and operations for these countries. These 4 country heads will report to Rajiv who will report them to me. We have also created 3 new vertical units, utilities and resources, insurance and life sciences, and they will be headed by Stephen Pratt, Manish and Pravin. Both BITS and CSA offering heads will now report to Kakal. We have done these changes to sharpen our focus on growth markets, consolidate our delivery operations, improve utilization and productivity, increase client velocity and improve accountability. Before I conclude, let me touch upon the guidance. We have changed our guidance to 9% to 10%. In the beginning of the year, we have started out with 6% to 10% as the growth guidance for the year. End of this quarter, beginning of second quarter, we had stuck with 6% to 10%, which meant in constant currency terms, 7.7% to 10.7%. The 9% to 10% guidance which we have given today is 9.9% to 10.9% in constant currency terms. We have not changed the top end of the guidance since we remain watchful of multiple factors. Number one, Q3 and Q4 are soft quarters for us. There are holidays and furloughs during Q3. More importantly, we have started on a transformational journey, internal -- a number of internal changes focused on cost optimization, increase in productivity and quality, increased sales effectiveness and creating a new model of global delivery, what we call VIDDM [ph]. These initiatives are very much in the early stages, and it is too early to derive benefits from these initiatives. These initiatives will take time to deliver benefits. Hence, we remain cautious, and we have changed our guidance to 9% to 10%. With this, let me now conclude and pass on to Rajiv to give further details on financial highlights.

[Rajiv Bansal:]

Thank you, Shibu. Good morning, everyone. As Mr. Shibulal was saying, our revenues for the quarter grew sequentially by 3.8% in dollar terms, which, on a constant-currency basis, is at 4.2% growth. EPS for the quarter is at $0.67. This includes a provision of $35 million for visa-related matters. EPS without this provision is at $0.70 [ph], which is the same as last quarter. Excluding the provision for visa-related issues, the margin for the quarter is at 23.5%, same as that of last quarter. We saw significant volatility in currencies during this quarter, with the rupee depreciating by 16% intra-quarter and are average by 11%. We have outstanding hedges worth $1.1 billion as of September-end. As we have mentioned in our July earnings call, we have given an 8% commission increase to our sales staff effective 1st of May, 8% increase to our offshore staff and a 3% increase to our onsite staff effective 1st July. This has impacted our margins for Q2 by approximately 300 basis points. The benefit of rupee depreciation has been offset primarily by salary hikes. Our net margin is at 18.5% for the quarter, primarily because of a charge that we have taken for the Visa-related matter. Excluding visa, margins are at 20.2% as against 21% previous quarter. The reduction is on account of lower interest income in dollar terms because of rupee depreciation and a change loss because of extreme currency volatility. Our cash and cash equivalents, including available-for-sale assets, is at $4.297 billion as against $4.054 billion last quarter. Our DSO is at 62 days as against 66 days in the previous quarter. As Mr. Shibulal was saying, we have revised our guidance to 9% to 10% for the full year. Our revised October guidance is restated based on last year average rate will be 9.9% to 10.9% for the full year. With this, I open the floor for questions.

[Operator:]

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

[Joseph D. Foresi:]

I wondered if you could give us some color -- I know you haven't given guidance on it, but if you talk a little bit about your thoughts on margins through the back half of this year and maybe heading into next year. It seems like the business is starting to stabilize so you may have maybe better visibility on what that profile might look like. So maybe we could start with the margins.

[Rajiv Bansal:]

This is Rajiv. If you look at the margins, margin of the company for the last 3 quarters, it has -- it is at 23.5% operating margins. We have seen couple of good quarters in the last couple of -- in the last 8 quarters. We have seen some bad quarters. So I think one of the primary focus that we have is to ensure that we invest back in the business, we get the good momentum and we see the productivity in our revenues. Now what we are doing is we are investing into our sales engine. We are getting the -- we are working on the sales effectiveness. We are investing the money back into the employees. We gave a wage hike to employees, considering that employee morale is one of the issues that we need to tackle. Attrition is one thing that we need to focus on. We have increased available pay. We have changed our commission structure to increased more of fixed component. We have increased available pay and that bonuses for the employees and the provisions we made for that. So I think what we are doing is trying to create a growth engine, which will give us sustainable growth at superior margins in the future. And that's the reason -- anything that we are seeing more than 23.5% in the last 3 quarters have been put back into business to make this investment. Some of these investments will give us returns in the medium to long term. We still have levers to improve our margins, the utilization. Utilization is at 77.5%, excluding trainees. I would like it to go up to 82%, which is another 4.5%, which should give us a production in the margin. Our onsite effort makes us still at 30.2%. One of the initiatives that we are running is to bring it down, which will give us, again, further levers in the margin. So there are many levers that we have on the margin. But I think the primary focus is right now in this year has been to ensure that we invest back in the business. We create a good momentum. We have a good pipeline. We ensure that we are -- we have a very efficient delivery engine, and we invest in quality and productivity, in the tools, in the products, in the platforms, which should give us sustainable growth -- superior growth at superior margins. I think, for this year, I would say that our margins would remain in this narrow range with plus/minus 1% to what we have today. I think the exits [ph] of the margin for this year is very important. Some of the initiatives we will take on the cost optimization will start easing benefits towards the end of this year. And I think if we are able to exit this year at good margins, that will set the flow for the next year.

[Joseph D. Foresi:]

Got it. So just to be clear, your -- the margin or holding the margin at this 23.5%, that's due to reinvestment, not due to any kind of changes in the pricing methodology.

[Rajiv Bansal:]

No. If you look at the last 3 quarters, the reported revenue per employee that we have reported has been almost stable. The last 2 quarters, it was down by 0.7%, and this quarter, it's up by 0.6%. On a constant-currency basis, up by 0.9%. So we are seeing the pricing environment to be stable. We are not seeing a very volatile pricing environment. So I think that is a good sign. So the margin that we're seeing is primarily because of initiatives we have taken to focus on making the investment, which will give us returns in the long run.

[Joseph D. Foresi:]

Sure, okay, and the last question for me. There's been an exit of a number of different managers. Maybe you could talk about quiet reaction to that and any color you could provide on the visa issues. So any color you can provide on the managers that you see leave the organization, the client reaction and anything you can say about the visa reserve?

[S. D. Shibulal:]

So I think we have seen exit of 2 or 3 people, not many, 2 or 3 people. It is an organization with 160,000 people with a very, very deep leadership pool. Over the last 12 years, as early as 2002, we have started investing in leadership development. We have 45 people in Tier 1 leadership, 150 people in Tier 2 leadership and close to 300-plus people in Tier 3 leadership, which means we have large number of leadership -- large number of people in the leadership pool with very deep experience. Our people are some of the best in the industry. It is quite natural for them to look at other opportunities. Some of them will find aspirational opportunities outside. It is part of our life. Our relationship with our -- and the more importantly, the fact that we have the deep leadership pool allows us to transition almost seamlessly. For example, Ashok Vemuri's portfolio has been taken over by Sanjay Jalona who has been waiting for this for more than 13 years. And now more importantly, our current client relationships are definitely multilevel. We have relationships at multiple levels with the client. So I will have relationship with the clients, Chris [ph] will have, the industry vertical head will have, the regional head will we have and because of that one person's change, one change. And it could be because the person has taken up a new responsibility within the organization or a person who is looking to moving out of the organization, we are able to manage it almost seamless. There are other relationships. There are multiple relation touch points with the clients, and that's exactly what we have done in the recent cases, also. So that is the one question. The second was on the visa. See, we are engaged in discussions with the U.S. Attorneys' office and that the government department regarding a civil resolution of the government investigation into the company's compliance [Technical Difficulty] and form requirements and past use of given [ph] reserves. Based on the status of these decisions, we have set aside a reserve of $35 million, including legal costs. Because these discussions are ongoing, we are unable to provide additional details at this point in time.

[Operator:]

Our next question is from Rod Bourgeois of Bernstein.

[Rod Bourgeois:]

Okay, great. So it sounds like you're implying you're essentially capping your operating margin at around 23.5% in the near-term despite the big boost that you're receiving from rupee depreciation even over the last 3 months. So if it's accurate that you're essentially pegging your operating margin in that 23.5% range in the near-term? What do you see as your long-term aspiration for operating margin, recognizing that you're pursuing some pretty important cost optimization initiatives? It sounds like you're maybe having an aspiration to get margins back to a higher level, but I just wanted to probe on that some.

[Rajiv Bansal:]

Absolutely, we have an aspiration to have superior margins better than anybody else in this industry. And that has always been our aspiration, and that continues to be our aspiration. See, what we are seeing now is that we planned to give wage hike to our employees even when we didn't know about the rupee depreciation this quarter. We announced wage hike in the middle of June when there was no signs of rupee depreciating the way it did. So I think the important message is that we are making investments even if it shows up on the margins or it results in lower margins in the current quarter or the subsequent quarter. I think the important part for us is to ensure that we create the momentum. We invest in all the right things. We invest in our employees, we invest in the sales, we invest in delivery, we invest in quality productivity. And if you do all the right things, definitely, the growth will come back. And if the growth comes back, the margin will automatically come back. So I think my -- in all the earlier interaction that I had with the investors and analysts, I've been saying that, "Don't look at margins this year on a quarter-to-quarter basis. Please look at what our exit margins are going to be for this year because that will set the flow for the next year." On our aspirations, our aspirations are to have the best margins in the industry, and that will obviously remain so.

[Rod Bourgeois:]

Okay, great. And then last quarter, we asked some about any new high-level strategic plans and you guys emphasized that you're going to be more focused on winning large outsourcing deals. Can you give us a further update on any additional modifications to your strategic direction? And in particular, can you address whether you're moving towards more centralized decision-making and leadership?

[S. D. Shibulal:]

So on the large outsourcing deals, we have been focused on the large outsourcing deals over the last 18 months. If you look at the second half of last year, we won close to $1 billion of large outsourcing deals. Given that these deals are multiyear deals, they give about 4% of the revenue in the first year and about 20% next year. In fact, it takes a couple of quarters for these deals to ramp up. And you have seen in the last 2 quarters, those deals which we won last year second half delivering some revenue. This half, the first half of this year also, we have won to close to $1 billion of large outsourcing deals. I expect that in the next couple of quarters, not in the next quarter, in the next couple of quarters, these deals will deliver revenue and that will allow us to grow. At the same time, these deals are extremely price sensitive. They're very competitive, and sometimes, very difficult to differentiate in these deals. So our focus is to execute them effectively. That is where are one of our major initiatives on productivity and quality improvement come into picture. It is about increasing productivity. It is about increasing efficiency and making sure that while these deals may be obtained at a lower than our margin -- lower than our average margin, we can achieve our average margin during the lifetime of these programs. So that is what we are trying to do in that space. You had a second question?

[Rod Bourgeois:]

Yes. I was wondering if you're doing anything organizationally to centralize decision-making in leadership, such as moving some of your senior staff back to India to have more centralized decision-making?

[S. D. Shibulal:]

No, we are not. In fact, we continue to focus on -- differently. And hence, in fact, each of the industry vertical operate as P&Ls. We have now created a new P&L for the growth markets. So we are continuing on our journey of enabling leaders at the next level to own a P&L and take decisions.

[Rod Bourgeois:]

And are you tightening the reins on pricing or are you still in an environment where you need discretion on pricing in order to drive the growth that you need right now?

[S. D. Shibulal:]

We will always make discretion on pricing at whatever level it is. Whether it is at my level, next level, next, next level, I think we will always need to balance growth and pricing. It is very, very important that we win our deals at our aspiration margins. If we don't, we make sure that we achieve our aspiration margins during the life of those deals by multiple interventions. So whether the decision is made at my level, which it is not, or any other level, pricing will continue to be something which we need to watch out for.

[Operator:]

Our next question is from Edward Caso of Wells Fargo.

[Edward S. Caso:]

I was curious to dig in a little bit more on the impact of the larger transactions that you've been chasing of late, just sort of what percentage revenue contribution they may be offering. And also, you talked about price realization being roughly flat, but that -- it benefits from an improving utilization. So I was curious what the -- sort of the apples-to-apples pricing component of realization was?

[S. D. Shibulal:]

So on the large deals, as I said, if we win about $1 billion of large deals this year. It will be approximately 20%, that is $200 million next year. We need to continue to win. I actually said it multiple times during the day that we have not won enough. For a company of our size, with $8 billion of revenue, we need to win a large -- more large deals, and that is what we are focused on. We have a pretty good pipeline, but these deals are highly competitive and also price-sensitive. The winning mostly happens based on the single dissolution. So everything we have done creating business in IT operations, consulting and system integration, our ability to build multi-tower deals, senior people being involved in creating solutions, all of that -- and all of that is contributing toward these wins. Regarding the pricing, it is apples-to-apples because the pricing, which is the revenue realization which we talked about, is billed revenue realization. It is not gross revenue realization, it is billed revenue realization, so there is no impact of utilization on the revenue realization which we talked about. Our revenue productivity per billed employee went up by 0.6% in reported currency terms and 0.9% in constant currency terms.

[Rajiv Bansal:]

Just to answer your question on utilization improvement. Yes, we did see 2.4% improvement in utilization during the quarter, which does give us a benefit on the margins. But as I said, we had a gain of 250 basis point because of rupee depreciation during the quarter, our rate impact was 300 basis points to -- for that margin, should have come down to 50 basis points. Some of that was offset by implementing revenue productivity and utilization.

[Edward S. Caso:]

Can you talk a little bit about the Indian market? We are continuing to hear that, that domestic market is -- has sort of gotten quiet for everybody or maybe so price-sensitive that service providers are being more reluctant to pursue it.

[S. D. Shibulal:]

Let me request Raghu to respond to that question.

[Raghupathi C. N.:]

The Indian market, of course, is price-sensitive, but there is a lot of opportunity over here because India as a country -- the entire subcontinent is under-invested in IT. The challenge for all of us service providers is to find new ways of delivering services like cloud, mobility, et cetera. 2 or 3 things that come to mind, one is the last-mile connectivity is the biggest problem. We are executing some exciting projects over here. Of course, being an election year, there's a little bit of quiet in the central government or in this -- the central government spending. The states, of course, continue to spend, and the private sector continues to spend. It's an exciting market but has its own challenges in terms of the way people buy and the price sensitivity.

[Operator:]

Our next question is from Dave Koning of Baird.

[David J. Koning:]

I just wanted to start out, Q1 and Q2 sequential growth were quite good, and it looked a lot like the average of the last 5 years. When you put together all the last 5 years together, it looked a lot like the average of that. But the way that you're guiding the Q3 and Q4 would kind of imply the worst quarters of the last 5 years. And it doesn't feel like the environment is kind of back where we were 3 years ago or so when -- or 4 years ago when things were really slow. It feels more like things are at least decent. So I'm just wondering why we're kind of looking at growth going forward that's more like the worst of the last 5 years?

[S. D. Shibulal:]

So as you look at the last 5 quarters, almost -- every quarter, not almost, every quarter we have grown. But if you look at the last 8 quarters, you can clearly see that we have faced some volatility. Even in the last 5 quarters, where we have grown every quarter, there has been difference in growth rates. So we remain cautious, number one. Number two, Q3 and Q4 are traditionally weak quarters for us. It has nothing to do with the environment. Traditionally, Q3 and Q4 are competitively weak quarters for us. In the last quarter -- or last year, slightly different. But if you look at the last many years, you will see that Q3 and Q4 are traditionally weak quarters. And there are a number of reasons. Number one, Q3 has more holidays, furloughs. It is at the end of the year, the budgets are coming to an end. So if there is no budget flush then the spending will taper off. And Q1 is a quarter in which new budgets come online. We have to win those budgets, and then start delivering to those. So those are the external factors but, more importantly, there are internal factors. While we have seen growth in Q3 and then Q1 and Q2, we have started these new initiatives that have -- we have started a number of new initiatives inside. We have started to introduce some cost management on sales force effectiveness, increasing productivity and quality and increasing our offshore through VIDDM [ph]. All of these are in nascent stages. If will take a few quarters before the benefits will start flowing in. Because of these factors and because of the fact that we have seen volatility in the last 8 quarters, we are entering soft quarters. The internal changes are to yield material benefits. We have to remain cautious. We are reviewing the guidance, we have changed our guidance to 9% to 10%, which is 9.9% to 10.9% in constant currency terms. As we have said in the past, our guidance is a statement of fact as we see it today. We have looked at our pipeline. We have looked at our wins. We have looked at our clients. We have looked at our client furloughs during the quarter. We have looked at all of those, and we feel that this is the right guidance at this point in time. We are cautious.

[David J. Koning:]

Great, great. And secondly, just when you look for that M&A opportunity -- Lodestone was a nice add late last year and helped this year, are there other things you look to do just given your big cash balance? It seems like a lot of your competitors are making acquisitions, too.

[S. D. Shibulal:]

So we have just announced a 400% dividend, INR 20 per share. We have always given cash back to investors as Infosys [ph] felt that it is better utilizing our investors' hand and we are not using it. We have aspirations to do acquisitions, something in the products and platforms space, something in -- probably, in the life sciences space, something in public service. But these are critical investments for us. Last year, we have done the Lodestone acquisition. The integration with Venturi is complete. We are going to market with them and we are starting to see some benefits. We have to make the right decision when it comes to acquisition. So we are looking for opportunities, at the same time, they are very, very strategic, and to be done with a lot of thought, and that is what we are trying to do.

[David J. Koning:]

Great, okay. Finally, just tax rate, just to make sure we're clear on this. Year-to-date, you're at about 26.5% tax rate. Is that pretty stable probably the rest of the year? I guess that's a lot like last year as well?

[Rajiv Bansal:]

No. I think tax rate has been between 26% and 27%. Effective tax rate has been in that range and it will continue to be in that range of -- I think in this financial year and probably in the next financial year, too.

[Operator:]

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

[Moshe Katri:]

Looking into Europe which was pretty solid during the quarter, can we kind of dive a bit more into what we're seeing in terms of growth out of the U.K. versus Continental Europe, and then, which regions in Continental Europe are showing the most promise?

[S. D. Shibulal:]

So let me request B.G. to respond to that.

[B. G. Srinivas:]

With respect to Europe, again, in the macro, we have definitely seen a fair degree of stabilization. We have seen, even in the last quarter, all indicators turning to be slightly positive, including the economic sentiment indicator. If you look at what it has as an impact on our clients across sectors, the deal actively has [indiscernible] in terms of sectors, we see retail, energy utilities, telco and the financial services pick up in U.K., which is the most mature market in Europe. Particularly in the continent, the Germany -- German market is opening up for sure. We have participated in several large deal opportunities, 2 in manufacturing and 1 in retail, which we have won in the last 2 quarters. So this is a market where we have invested significantly in building our local presence in nearshore centers as well as our acquisition of Lodestone, which has a significant presence in Germany, has helped us both participate and win opportunities in Germany. Switzerland and Benelux region has always been more mature, though they are small markets. We have good traction in financial services and manufacturing in these 2 geographies as well as in life sciences. Beyond this, we see in the last 6 months, Nordics also opening up, though Nordics is a fragmented market. But there again, energy, financial services, manufacturing are sectors where we are seeing deal activity and we are increasing our presence in Nordics to capture these opportunities as well. France is a market while it's large, it's still slow at this point in time. However, we also have certain opportunities which will mature for the fiscal year '14, and we are actively pursuing them. But amongst the constant markets, Germany, Nordics, Benelux and Switzerland are the markets which are opening much more than France.

[Moshe Katri:]

Okay. And then is it possible to get sequential growth rates in Europe by the U.K. and then by Continental Europe? And then, is it also possible to get the sequential growth out of Europe, excluding Lodestone?

[S. D. Shibulal:]

Today, if you look at the overall revenue share, U.K. has about 48 to 50 queries on a quarterly basis, so about roughly close to 50% of the market come -- is from U.K. Rest is distributed across the continent. However, we do not share the country-specific numbers at this point in time. It's not in the public domain.

[Moshe Katri:]

Okay. And then if you exclude Lodestone, sequential in Europe?

[S. D. Shibulal:]

See, the Lodestone integration is a very tight integration. It is not like a -- it may look like a subsidiary, but it's no more a subsidiary from an integration perspective. What we have done is, in Europe, we have moved our consulting folks into Lodestone, so these are not the ones still in Lodestone. So by taking out Lodestone, we will actually take out a lot of our revenue, old revenue which we had. So we will not be able to give you segregated growth. What is the growth in...

[Rajiv Bansal:]

Europe had seen a 5.2% growth quarter-on-quarter, this quarter. But there has been some currency -- cross-currency benefits on Europe. If you exclude that, it is in line with the company growth this quarter.

[Operator:]

Our next question is from Keith Bachman of Bank of Montréal.

[Keith F. Bachman:]

I have a couple as well, too. The first one is, if you could just talk about, at a minimum, directionally, your contracted backlog today at this time versus last year and/or pipeline in a dollar value basis today versus last year? And are you seeing any difference in that pipeline and backlog in terms of yield or duration of how that will unfold into revenue?

[S. D. Shibulal:]

So the pipeline, I would consider similar to what we had last year. We have a pretty -- I wouldn't say it's strong, but robust pipeline for large outsourcing deals. We have added a number of clients, so the clients that is in there have been pretty strong. And that also is a reflection of our pipeline. We have added 67 new clients out of the 37 net additions. We have won large outsourcing deals, 5 of them, adding up to $450 million. So our pipeline today is quite similar to what we had last year this time, and it includes also a large outsourcing deal as well as transformational deals.

[Keith F. Bachman:]

So you're suggesting that the dollar amount of that pipeline is roughly flat with what it was last year?

[S. D. Shibulal:]

It is -- approximately, same. I wouldn't say it is materially different.

[Keith F. Bachman:]

Okay. And are you expecting a different yield of that pipeline? In other words, how that pipeline may transition to revenue?

[S. D. Shibulal:]

Our yield has gone up because, as you look at our large outsourcing deal wins over the last few quarters, it has gone up. Compared with what it was 2 years back, it has gone up. Transformational deals, the yield has not changed but the velocity has come down, right, because of the discretionary spend tightened and the velocity has come down.

[Keith F. Bachman:]

Okay. Then the second question for me is, on your calls, you mentioned what your utilization rate is, it's up for both. Including trainees and excluding trainees, it's been up sequentially for about 6 straight quarters, 7 straight quarters. Would you anticipate that continuing to go up as we -- for the next couple of quarters? And is there any targets that you're thinking about for your utilization levels?

[S. D. Shibulal:]

So these are 2 different numbers. Including trainees, will go up and down, right, because I can get in -- I can get that 5,000 people to join tomorrow morning, my utilization is up, including trainees. So that's all a number to look at from a long-term perspective because there are seasonalities, just simple seasonalities on that number. And there were a large number of people joining the Mysore campus. Our utilization, including trainees, will come down. So I really don't track it in that sense. I track the utilization, excluding trainees. Now the excluding trainee utilization is 77.5%. With our scale, we should be able to achieve somewhere in between 80% to 82%, so there is still headroom to improve utilization.

[Keith F. Bachman:]

Okay, okay, fair enough. And then the final one for me is you've provided some guidance for the top line, and I was just wondering if you care to make any comments on how you think free -- your cash flow is up about 11% for the year in the first 2 quarters, would you anticipate that your growth of cash flow would follow the current trend or near the growth that you're anticipating in revenues?

[S. D. Shibulal:]

I think this quarter, we have done exceeding well to collect our receivables. Our days of sales outstanding has fallen from 66 days to 62 days. We have collected almost about $2.12 billion this quarter alone. So I think that said, it also shows the quality of revenues and our focus on collections. And I think we'll have to -- I will not predict the cash flows going forward because it depends on a lot of factors in terms of billings and the collections and investments, but I would say that we are a very focused company in terms of having a very, very healthy cash flow. And we track the cash flow as a percent of the operating profit and the net profit and use it as a measure to -- as a parameter to measure our performance.

[Operator:]

Our next question is from David Grossman of Stifel.

[David M. Grossman:]

I was wondering if we could go back to some of the momentum that you have in the large contract market, and some of your commentary about that these are cost-competitive deals but you're focused on cost optimization on these contracts to realize the target margin. Can you help us better understand how these contracts are structured and what the profitability of these contracts look over their life cycle?

[S. D. Shibulal:]

So these contracts are multiyear contracts. There will be some productivity gains guaranteed. There may or may not be, but there are -- more often than not, there are productivity gains guaranteed within the contract. These will -- some of them would be managed services contract, whereas -- which means that their [indiscernible] we hand contract. And there are stringent SLAs in these contracts. These are large outsourcing contracts. We are not talking about interest -- we are not talking about how to hardware or [indiscernible], we are talking about services. They are price-sensitive. They are highly competitive. And they generally come below our average margins when we bill [ph] them. That is why we have to focus on these large outsourcing contracts, improve their margins through multiple levers. Number one is productivity improvement. Number two is around tools and automation. Number three is adjusting the on-site, offshore ratio. Number four is making sure that the right set of people are around these programs, with the right sector of the pyramid. So there are multiple levers which we have which we can use over the period of the contract to make it closer to our average -- more than closer, equal to our average margins. And that is what we do. But when you are in a ramp-up phase with all of these contracts, you have to get to steady state to start doing some of these improvements. When you start up a number of them simultaneously, you may see a short-term impact on the margins.

[David M. Grossman:]

So in a typical contract, these like a 3- to 5-year kind of deal, is it the first year or 2 where you're below your target and as you get into years, let's say 3 or so, you hit your target, or is it a different trajectory?

[S. D. Shibulal:]

That's what it is. Somewhat similar to what you said.

[David M. Grossman:]

Okay. And then second, Shibu, as you look at the change in your business mix, the change in the pricing structure of some of the more mature segments of the industry, can you help us better understand how you are thinking about the on-site, offshore mix? And any plans that you may have to increase your on-site hiring? And this is totally independent of the immigration bill but really more focused on business mix and where you see the market going.

[S. D. Shibulal:]

So we have 2 -- actually, 2 distinct answers to this. Number one, we are focused on reducing our on-site effort. Our on-site effort is comparatively higher now compared with our past. I have seen of around 30% as below -- as low as -- somewhere between 27% to 28% in the past. And today, we are at 32%. Quarter-on-quarter, it has come down by 0.8%, so we have come down to 31.2%. You see now reducing on-site is a good way for us to provide better value to our clients, to create scale for ourselves because we can scale much faster offshore. And then clients are also very interested in reducing on-site and doing more work offshore. The immigration bill is definitely a driving force in this thought process, there's no doubt. But irrespective of the bill, it makes sense for us to implement new methodologies, new technologies, which can reduce our on-site effort. Now recruitment on-site, that's a completely different aspect. We shall -- maybe look -- we will have people on-site. We will have effort on-site. Now today, we use local recruits and the purities. We are looking forward to recruiting more and more local and even some qualities locally to create local talent. As we do more and more transformation programs, as we do more and more mission-critical programs with our clients, it makes perfect sense to have local talent in the countries in which we operate.

[David M. Grossman:]

So is one way to offset, for example, the impact of more local hiring for those types of projects by increasing -- you offset that with increasing offsite mix, if you will, in the core business?

[S. D. Shibulal:]

That is true because our different businesses will operate with a different on-site, offshore ratio. BPO operates at 10%. Infrastructures then probably operate at 20%. Consulting and system integration will operate at 40%. At the end of the day, it is about lowering -- it is about managing the portfolio and lowering the mix.

[David M. Grossman:]

I see, okay. And then just one last question. I think this may have come up a little bit earlier, but I mean I think we're all looking at this massive move in currency and just wondering how do you manage? If the rupee regains some momentum and normalizes kind of at a much higher level relative to the dollar, I mean how do we think about kind of your ability to navigate through that if, in fact, you have the rupee returning to more historic levels versus the dollar?

[S. D. Shibulal:]

We have operated when rupee was $46 a rupee -- we are operating at INR 46 to $1. Now we are operating at INR 61, it was INR 66. We're operating in this volatile environment for a very long period of time, as long as the rupee is not drastically volatile during the end of the quarter. If the rupee moves drastically at the end of the quarter, the last month of the quarter, there's inability for us further to do anything about it. But if it is a gradual shift, we will be able to manage and that's what we have done in the past.

[Operator:]

[Operator Instructions] As there are no further questions from the participants, I now hand the conference back to Mr. Sandeep Mahindroo for closing comments.

[Sandeep Mahindroo:]

Thanks, everyone, for joining us on this call and spending time with us. We look forward to talking to you again in future. Thanks, and have a good day. Bye.

[Operator:]

Thank you very much, members of the management team. Ladies and gentlemen, on behalf of Infosys, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.