Wipro Limited
Q1 2006 Earnings Call Transcript

Published: 19 Jul 2006

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Wipro Technologies first quarter results conference call for quarter ending June 2006. (Operator Instructions). At this time I’d like to turn the conference over to Sridhar Ramasubbu. Please go ahead, sir.

[Sridhar Ramasubbu:]

Thanks, Kent. Thanks everyone for joining us for Wipro’s first quarter results and earnings call for the quarter ended June 30, 2006. I have with me [Jatin] and [Rajesh] from the IR team who join me in conveying our very warm welcome to all of you. With us today, we have Mr. Azim Premji, Chairman; Mr. Suresh Senapaty, CFO; and other members of the senior management team, including the business unit heads. I hope all of you had an opportunity to review the press release we issued this morning under US GAAP. Let me give you quickly the agenda for today’s call. Azim Premji will share his thoughts on our performance and prospects, and Suresh will take you through the financial highlights of this quarter. As a reminder, when we discuss our results in today’s call, some of the issues we discuss may be forward-looking and I would like to advise you that these statements maybe subject to known and unknown risks and uncertainties that could cause actual results to vary materially. Such risks and uncertainties are discussed in detail in our filings with the SEC. Wipro assumes no obligation to update the information presented during today’s call. The call is scheduled for an hour, the entire earnings call proceedings are being archived and transcripts will be made available after the call at Wipro.com. As most of you are aware, I’m taking this call from India and have communicated both my India and US cell numbers. I am online on BlackBerry and if you have any specific questions which you are unable to ask, please send me a mail and we will address those questions as well at the end of the Q&A. So with that, let me turn the call over to Mr. Azim Premji, Chairman of Wipro.

[Azim Premji:]

Good morning to all of you. By now, you would have seen results for the quarter ended June 30, 2006. While the management team would be happy to answer your queries, I would like to take some time before that to share some of our thoughts on our performance and prospects. The results for the quarter is a reinforcement of our approach

[Suresh Senapaty:]

A very good morning to all of you, ladies and gentlemen. Good evening to those of you in Asia. I will touch upon the areas in our performance and financials that would be of interest to you all. Let me commence by highlighting the fact that for the convenience of the reader, our mid-year financial statements have been translated into dollars at the noon buying rate in New York City on the 20th of June, 2006 at [certified value by] the Bank of New York, which is $1 is equal to rupee 45.87. Accordingly, the revenue of our global IT services segment that was $539 million -- or in rupee terms, 24.5 billion rupees -- appears in our earnings release as $534 million, based on the [convenience] translation. Global IT services revenue for the quarter of $539 million included about $45.6 million from BPO services and $12 million from acquisitions. Acquisitions revenue includes $3.2 million from Enabler, which has been consummated effective June 1, 2006. We had sequential revenue growth of 5.3% in our global IT services business, driven by a 5.5% growth in the [Watimo] business, an increase of 0.8% in realization for work performed on site, and a 0.5% increase in price realization for offshore projects. On the forex front, our realized rate for the quarter was 45.43 rupees, versus the rate of 45.10 rupees realized for the quarter ended in March 2006. At our period end, after assigning to net foreign exchange denominated assets on the balance sheet, we had about $410 million of hedges at rates between 44.90 rupees to 46 rupees. This quarter, we made incremental investments in sales and marketing, and account management. The margins for the quarter were also impacted by lower profitability in acquisitions. However, the operational improvement in terms of high utilization and improved realization helped us mitigate some of these pressures. Continuing on its transformation journey, our BPO business expanded operating margins for the fifth consecutive quarter. For the quarter ending September, 2006 we expect volume-led growth with broadly stable price realization. In line with our plans, we have granted restricted stock units effective July 2006. This issue of these restricted stock units will result in a non-cash charge in our income statement of approximately 3.4 billion rupees over five years. In line with the earlier years, we plan to implement compensation increases in a staggered fashion starting from September 2006. These, combined with our lower profitability on acquisitions, will impact our operating margin for the quarter ended September 30, 2006. We will endeavor to maintain our operating margin in a narrow range, excluding foreign currency fluctuations, through positive levers like G&A, value improvement, productivity gains, et cetera. We will now be glad to take questions.

[Sridhar Ramasubbu:]

Kent, will you propose the Q&A.

[Operator:]

Okay, very good. (Operator Instructions) Our first question comes from the line of Moshe Katri – Cowen & Co.

[Moshe Katri:]

Hi, thanks. I wanted to congratulate you on some of the operational improvements on your BPO side of the business. I wanted to start first focusing on the six acquisitions that you have made so far. I am curious – what was the revenue generation for the quarter from those six acquisitions? Suresh, you have indicated that you have had a dilutive impact from these acquisitions on EBIT margins. It would be really helpful if you can quantify the impact on margins from these acquisitions.

[Suresh Senapaty:]

I think the dilution we had on the EBIT margin on the account of acquisitions for the quarter was, on a sequentially basis, it would be about 50 basis points. If I take it on a year-over-year basis it would be about 100 basis points. Your other question was?

[Moshe Katri:]

The revenue contributing from those acquisitions?

[Suresh Senapaty:]

That is about $12 million, it is a little under $12 million.

[Moshe Katri:]

Then for the September quarter that’s coming up, on a sequentially basis, what’s sort of an impact could we expect from these acquisitions? Do you think we are going to be flat, or we are going to be higher?

[Suresh Senapaty:]

For the quarter ending September it will be higher. Let me explain it. This is the total revenues coming from the acquisition. So the total revenue that will come from the acquisitions bucket that we show separately would be higher in the quarter ending September, because (a) there are two more acquisitions to be consummated; plus, we expect better revenue in Q2 from the existing acquisitions than we have had in Q1. Basically, out of the six acquisitions four have been consummated and two more are to be consummated in September.

[Moshe Katri:]

Understood.

[Suresh Senapaty:]

As far as the margins are concerned, yes we have posted a loss so far with as all of these acquisitions are prepared, but as of now in terms of the overall integration process, we are on target. We are, let’s say on track, is the word I would use. There is an acquisition that we did which was a [positive] impact on the IT sales. That will take a little more time in terms of getting into a period of breakeven, I think it will take about another one to two quarters. But that gives us hope for getting into some [that are non-linear]. But if you adjust for that acquisition on operating margins in the acquisition is in excess of [15%]. So while the overall bucket of acquisitions turns out to be negative, but for that the operating margins would be an excess of 15%. I thought I would give you this data point also.

[Moshe Katri:]

Okay. Moving over to different topic of wage hikes, can you remind us, on an annual basis, which quarter? When do you actually go through the wage hikes? In that context, at what magnitude are we expecting to see these this year?

[Azim Premji:]

I will request Prateek to answer this question.

[Prateek Kumar:]

The wage hike cycle for offshore employees was typically the third quarter; and for onsite employees it is the beginning of the fourth quarter. What Mr. Senapaty, in his initial remarks, what he commented is that we will be staggering the increase which means that we will be identifying a section of employees who we think need to be considered for a hike, perhaps a month earlier than the start of Q3. That is for offshore employees.

[Moshe Katri:]

What sort of magnitude that we are talking about do you think, in terms of wage hikes?

[Suresh Senapaty:]

We have not put out or articulated the exact increase that is to be given, but I can give you a possible impact in Q2 because of the restricted stock unit that has been granted for 6.8 million units; like we said, [3.4 billion rupees] that we have taken charge of over a [60-month period], totaling about 3,200 employees. Also, the comp increase that we will give September 30, the combined impact of that will be about 1.5% in the Q2 operating profit.

[Moshe Katri:]

150 basis points. Then moving over to the currency impact, did you have a currency benefit on the EBIT margin this quarter?

[Suresh Senapaty:]

[No, we had an EBIT benefit in the margin last quarter. ]

[Moshe Katri:]

Finally, can we talk briefly about pricing? I think there has been some concern about pricing or some comments that you made in your earlier conference call about pricing?

[Suresh Senapaty:]

Yes, that is when I communicated to you about on a blended basis, we had an uptick on pricing about 1.4%; onsite 0.8% and offshore 0.5%. I will ask P. R. Chandrasekar, who heads our international business, to comment about the pricing also.

[P. R. Chandrasekar:]

In terms of pricing for the new business that we are getting, we continue to get increased prices. But the overall impact will still remain in the range that we have had in the past. This is true for both the US and the European pricing.

[Moshe Katri:]

Great. Thanks very much.

[Operator:]

Our next question comes from Joe Foresi - Janney Montgomery Scott.

[Joe Foresi:]

Hi, gentlemen. My first question here, I know you talked about margins in the last quarter. Could you give us some idea where you expect them ending up in the back half of the year? In other words, in 3Q and 4Q do you expect them to increase and do you expect year-over-year to be flat?

[Suresh Senapaty:]

Yes, actually our own position has been that given the kind of scenario, given the kind of areas on which there could be pressures and there are multiple other levers based on which we could achieve certain efficiencies. On a medium term to long term, we think these are sustainable margins on a quarter-to-quarter basis, depending on some big projects, depending upon the compensation increases that are given, it could move in [narrow margin]. For example, if you look at our last quarter, the positive levers that we think are there is in terms of utilization, in terms of our [project] mix, in terms of our offshore/onsite mix, and also trying to get better profitably out of our acquisition which we have posted a loss. Perhaps even looking at improving other operational parameters. So the pressures are there; the pressures are there with respect to compensation; that is just for [inaudible].

[Joe Foresi:]

Sticking with that theme there, what lever do you see as having maybe the biggest impact? Are you planning on maybe shifting work from onsite to offshore? Does utilization look attractive to you, SG&A leverage? Where do you see those levers moving and which one do you look to pull in the back half of the year?

[Suresh Senapaty:]

I think we look all the levers. For example, last quarter we did improve the operational efficiencies on utilization. We did get it on the offshore/onsite ratio. Like we said, we took the hit on the acquisition. So going forward, we will look at opportunities to be able to get a better mix because many more routine hirings will be done in the third quarter. Also, we would expect in some form the mix on the offshore/onsite to improve over the next two or three quarters. So I think all the areas we would look for opportunities to be able to get benefits to be able to counter the pressures and the competition increase that we have in hand.

[Joe Foresi:]

Just two more really quick questions, one on the BPO front. Obviously it has become a little bit more profitable, but going through the back half of the year do you see growth of the business sequentially or is there some lumpiness in the back half? What could we maybe model in on the revenue side of things?

[Azim Premji:]

Well from a guidance perspective, what we have committed is the mix – from BPO?

[Joe Foresi:]

Yes.

[Azim Premji:]

From a guidance perspective what we have given is the fact that in the current quarter we are going to see growth. In terms of our business last quarter, we churned our portfolio a bit, in terms of moving out some of the services that were not that profitable and that really reflected a part in our profitability improvement. Going forward our focus will be profitability and growth. So I guess you would see some of it coming up in the future quarters.

[Joe Foresi:]

Just one last question on the labor front; are you seeing any wage inflation at the fresher level? What are you doing on that level?

[Prateek Kumar:]

Is your question specific to BPO or on the IT services?

[Joe Foresi:]

It is more of a general question, but if you guys want to break it out, that would be great too.

[Prateek Kumar:]

At the fresher, there was more immediate pressure, but you must know the context that for the last three years, we have seen virtually no wage inflation on the campuses where we do the bulk of our fresher hirings. We have announced a salary hike for the campus recruits in the range of about 10% to 15% which will depend on the kind of colleges they come from. This is for the people who will be joining Wipro next year, in the year 2007/2008. Typically they join in Q3 of the year.

[Joe Foresi:]

Thanks.

[Operator:]

Our next question comes from Bryan Keane – Prudential.

[Bryan Keane:]

Hi. I noticed that the attrition rate jumped up a point to 17%. I guess I would have thought that that would have come back down. Can you comment on what happened there, and what we should expect going forward?

[Prateek Kumar:]

The attrition rate of 17%, almost 2 percentage points of attrition is accounted for in voluntary separation. As we have shared in the last quarter, some of it was part of the clean-up which we were doing on the issue of the fake resumes that we had shared last time. Some of the residual clean-up continued in the last quarter as well. Last quarter was also the quarter where we finished with our annual appraisal cycles and therefore people who are belonging to the lower quartile performance, some of them exited because of that as well. Outside of that, the voluntary attrition has moved up by about 2 percentage points and some of the things which we shared earlier in terms of the measures which we have taken on account of our issue, our on account of the salary increases which we have advanced slightly for a section of employees, should help us in addressing it in the coming quarter and going forward.

[Bryan Keane:]

Is the targeted range still in the lower double-digits? Is that where you’re trying to get that attrition down to?

[Prateek Kumar:]

That’s true.

[Bryan Keane:]

I also saw that active customers really jumped off the page at 565. Was there anything, any one-timers in that number that helped increase it? It just seemed like a bigger sequential increase than we’ve seen in the past.

[Suresh Senapaty:]

One was we had, because of these acquisitions that we had, there were 42 customer adds that happened because of the acquisition. But otherwise the new customer adds has been about 60. Yes, some of them have been in our [Emanual] or in the New Logic as well as in our engineering services which has [inaudible]. They tend to be one-time and may not necessarily be -- but still, even if we were to nullify that, the customer acquisition numbers are better than the experience we have had in the past third quarter. Investments that we’ve done over the last two quarters has been decent in terms of sales and marketing. We had basically four major activities on the sales and marketing investment. We had a good customer event in the US; we had a big analyst event in the US. We had a sales conference, again outside of India, where we had the entire sales team and the marketing team interacting along with all the [delivery guys]. Similarly, we have added in the sales front about 50 people over the last two quarters in the salesforce. All that has strengthened our base and that’s why we see some of the customer adds that we are seeing. It is bearing fruit out of the investment we have made and are making.

[Azim Premji:]

The addition to the field force, the [30 people] which Mr. Senapaty mentioned, happened during the course of last quarter.

[Bryan Keane:]

Right. So just to be clear, did you say 42 of that total is from the acquisitions that got put into the quarter?

[Suresh Senapaty:]

Yes.

[Bryan Keane:]

Great.

[Suresh Senapaty:]

That was added to the total active customer base that we have given, which is about 555. We had an opening active customer base of 494; we had 60 new customers added; we had 42 customers through acquisition; with the net of attrition, we have 555 closing active customers.

[Bryan Keane:]

Great, that is helpful. Finally, if you back out the $12 million in acquisitions this quarter and then the $3 million last quarter, I get a sequential growth rate in the IT services segment of 2%. I just want to make sure that is right. If so, it looks like a little bit of a slower growth sequentially that we have seen in the past, especially with, some of the positive commentary that we are hearing in India. I am just trying to make some sense of that.

[Suresh Senapaty:]

I don’t think the reading is right, because $12 million is our total revenue from acquisitions is correct; and acquisition here has been defined as the acquisitions that we have consummated effective Q3 of last year. So from a quarter-over-quarter basis it was there and it continues to be there. There is only one deal that we have taken that has $3.2 million of revenues from [Enablers] which wasn’t part of the guidance we had give of $533 million. So, in addition to the guidance we have given on $533 million for last quarter the incremental revenue that has come out in the acquisition is [Enabler], which is $3.2 million. Which means if we had posted $539 million, $536 million is the number comparable to our guidance of $533 million.

[Bryan Keane:]

Great. That’s very helpful. Thank you very much.

[Operator:]

Our next question comes from Trip Chowdhry – Global Equities Research.

[Trip Chowdhry:]

Thank you again, and congratulations on good execution in a very difficult global environment. A few question here and probably, it could be for the head of your BPO unit. I was thinking, if you can help us understand how the market is shaping? Let me comment what we are seeing and I would like to see how we, as analysts, should think about it. We see there are three types of BPO companies which are evolving. One is a company that have their own BPO operations in India; and now they are spinning off. For example, WNS, [Genpact] and maybe [GE] also had a BPO unit which they have independently spun off. Then other sets of BPO units are something which are IT services led BPO companies, in which you are a player with Spectramind, Progeon -- and [TCS] has its own. The last one is still a captive BPO, like HP, runs its own back office for their customers in India. I was wondering, from your experience and your professional wisdom, what are the positives and negatives of these various models that are evolving and why do you think your model is the better model?

[TK Kurien:]

Well, let me start with the last question first. Why do we think our model is the world’s best? There are two reasons behind that. The first is that if you look at the model that we go to market to customers with, it is basically a combined IT and BPO proposition. So not only do we tell customers that we will take over their process, but fundamentally at the end of the day if you have process improvement, that has to be embedded in the systems that drives the process itself. To that extent, it is just extremely critical for you to have an integrated IT and BPO play to get a long-term sustained advantage. I think that’s the space that we are playing, that was the space where some of our competition is playing and I think that’s the space that’s clearly evolving and growing in terms of new deals, if you actively look at the pipeline. So that’s, that’s the second piece. The third piece is as far as captives are concerned who have now become third party providers too; you’ve seen the recent filings of some of the companies that are in the space. I would suggest you have a look at the operating margin that those companies have and compare them with what we have and you will get a fair sense of what their business model is like. I don’t want to name the companies but they are pretty much, its one of the companies that you have named. I think those companies would primarily have scale today, and they use that scale and the expertise to grow in space that they are in. It’s a model that’s primarily a wedge, it’s a model that still has some more runway in front of . But, unless those companies integrate with IT players at some point in time, that play, in our view, is going to get commodized.

[Trip Chowdhry:]

The other question I have for Premji is regarding the acquisitions. I would say from a strategic perspective they are very insightful, especially the companies that have a very good customer base. I was wondering, when you go for acquisitions are you also thinking of acquisitions from human capital point of view and seeing if the acquirer company has a good enough inventory of H1 visas also? Because it has capped out? Or probably that is not any criteria that you think about?

[Azim Premji:]

No, we do not do acquisitions from the point of view of H1 visas. I think it would be absurd to do that. We certainly look at it from the point of view of the quality of the people, we certainly look at that from the core point of view; of the quality of their culture and the ability to integrate with our culture. We certainly look at acquisitions particularly in Europe, so we can get good front-end people both in architecture and domain knowledge to give us a good foot on the ground in Europe of very high category of people. But certainly not in terms of trying to hire H1B visas. It would be simple to do that in India.

[Trip Chowdhry:]

A question on the testing business – this is very detailed, if you don’t have a person online that’s fine, I will ask offline. Testing business is growing phenomenally, while the testing vendors business themselves are not doing well. I was wondering, is it because of two things

[Suresh Vaswani:]

Typically testing lends itself very naturally to a lot of outsourcing and offshoring, and the customers tend to see a lot advantage by offshoring in terms of cost. We tend to use our own frameworks. We tend to use our own point solutions and we also work through with the licenses of customers. So, we are basically using customers’ license but using a global delivery model to execute the test cases for customers.

[Trip Chowdhry:]

Last question I had is on package implementations. Very good traction; all my contacts are saying you guys do a phenomenal job on both SAP implementations as well as Oracle implementations. Now I was wondering, are these maintenance projects or incomplete projects that are getting completed? What level of depth of implementations are you currently involved in and what do you think happening six or eight months in the future? Thanks again and really good execution in a very, very difficult environment.

[Suresh Vaswani:]

As far as our package implementation business is concerned -- and we call that EAS -- we do both package implementation and do application management and support, or package support. We do pretty complex implementations in terms of SAP and Oracle. We are actually coming out today globally, in terms of Indian offshore vendors, as one of the best implementers when it comes to SAP implementations, SAP rollouts. We come out pretty strong when it comes to new generation products like CRM and supply chain management. So, the answer is we are doing both pretty complex implementation rollouts as well as application support.

[Trip Chowdhry:]

Thank you.

[Operator:]

Our next question comes from Julio Quinteros - Goldman Sachs.

[Julio Quinteros:]

Good morning, guys. I wanted to go back to the question with regard to BPO, in particular around competition. I understand some of the points that you try to make about the scale issues on some of the competitors. I’m wondering, as you look at the landscape with the companies like Genpact, DXL and WNS and your own requirements to grow your business and to improve your profitability, how does the landscape evolution with more competitors increase the pressure for you? How do you think you will be able to tackle an increased competitive environment?

[TK Kurien:]

In the BPO space, our view is that ultimately the BPO space will evolve into very sharply focused verticals and very sharply focused horizontal services which different companies would specialize in. So, if you look at us as a company, what we have done is that we have chosen eight different spaces on the vertical area and five different horizontal offerings that we believe that we can productize and we can sell more effectively to customers and deliver more or less of a standard platform. So, that’s the way we’re going in our business. We believe that the labor arbitrage game as far as BPO is concerned, is a game that soon will die out at least out of India -- I mean it would continue of course, but over a period of time, after the first year of benefit the customers typically ask in terms of what they are going to get in year two. At that stage the IT division, the pieces have to kick in. The proficiency pieces have to kick in. That’s why we believe that if you were looking for long-term sustainable advantage in this market, the IT division is a key component of the overall solution.

[Julio Quinteros:]

Understood. Anybody in this space right now in terms of the pricing on BPO, do you feel that the pricing approach is generally stable or are there guys out there that are being more aggressive on the pricing front?

[TK Kurien:]

I think there are always going to be, if the entry barriers for BPO aren’t too high, if you are a small shop. I guess the problem is getting a repeat customer for the same kind of service. So, we’re going to find a bunch of people coming in with specific point solutions. We are always going to be very, very competitive. From our perspective, what we are doing is that we are trying to bundle more in, trying to look at end-to-end processes, and thus at least keep it at rather than selling slivers and having your pricing exposed, we are trying to move into a pricing model where more and more gets bundled and thus you are able to get higher pricing. That’s the approach we are taking.

[Julio Quinteros:]

Headcount plans for the rest of the year, do you guys provide the gross and net headcount plans for the remainder of fiscal year?

[Suresh Senapaty:]

No, well we give guidance quarter-to-quarter in terms of our revenue in dollar terms; typically the approach has been to hide the requirements and consequently we have not so far shared our headcount additions in the remaining period.

[Julio Quinteros:]

Thank you. Then Mr. Senapaty, if you can just go back to the question about the impact expected in the next quarter from the acquisitions. Just looking back on the notes, I wasn’t sure if you actually answered the question specifically about how many basis points of margin impact acquisitions are expected to have in the current quarter? Related to that, can you walk through the related margin impact that you expect to have from wage increases in the current September quarter?

[Suresh Senapaty:]

Right. The impact of the acquisitions was already felt last quarter and consequently we do not expect a significant difference in the current quarter because it is a dilution on the acquisition, like I said; but for the one acquisition which is a higher component of IT sales, the acquisitions would have an operating margin in excess of 15%. So, we expect in the next two quarters to be able to breakeven on the acquisitions we did as a component of IT. Eventually we will see an uptick in the operating margin and the acquisition on a going-forward basis. In the current quarter, we wouldn’t be expecting significant difference with respect to what we have seen the margins on the acquisition. We talked about the restricted stock unit grant that we gave in July and also the compensation increase that will happen on a staggered basis starting September 1st. A combination of both these factors will -- and also on specialized skills -- and that will impact about 152 to 160 basis points in the current quarter. We think there are other levers based on which we should be able to -- but for the exchange -- be able to manage or maintain this margin in a narrow range. Have I been able to clarify?

[Julio Quinteros:]

I just want to make sure I’m understanding on my side. In the current quarter, looking at the Indian GAAP statements, it looks like the acquisition impact on a PBIT basis was something like 96 million rupees. So, are you saying that in the next quarter the impact is again 96 million rupees or in the September quarter, or are you saying that it’s supposed to be breakeven?

[Suresh Senapaty:]

I think we would perhaps have around a similar range in relation to the total profit that technology would deliver.

[Julio Quinteros:]

Okay, got it. Thank you.

[Operator:]

Our next question comes from Allen Hellawell - Lehman Brothers.

[Allen Hellawell:]

Thank you very much. Congratulations on the quarter, guys. I was hoping you might entertain just a few more questions on your R&D segment. I believe if I am not mistaken you reported maybe 100 basis point decline in the Company’s R&D business. I was just wondering, are there any unique factors behind this decline?

[Azim Premji:]

I am sorry. I didn’t get your point. You are saying there is a decline in respect of what?

[Allen Hellawell:]

A 100 basis point decline in the margins on R&D. I am wondering whether you could add a little color as to what may have been behind that?

[Azim Premji:]

I am not too sure where you picked that up, because I don’t think we have ever communicated that model or that result ever. We have always given the result for Wipro Technology software services as a whole and BPO. But we haven’t ever displayed the overall back into R&D, enterprise at all. So, that is actually not correct that we have any kind of, in relation to the overall operating margins, any significant drop in the operating margins of the R&D business.

[Allen Hellawell:]

I am probably should tighten up my nomenclature. I was I guess referring more to telecom and product engineering services.

[Azim Premji:]

I appreciate that, in that also we haven’t given the operating margins separately. So, I am not sure how you picked that up.

[Allen Hellawell:]

I am sorry.

[Azim Premji:]

That is actually incorrect.

[Allen Hellawell:]

I am actually referring to revenues. I apologize for that.

[Suresh Senapaty:]

So you were talking share of revenue from the R&D services to the total revenue of Wipro Technologies?

[Allen Hellawell:]

Yes.

[Suresh Senapaty:]

We had in comparative terms, on a sequential basis, yes, your observation is right, but if you look at on a year-over-year basis, the R&D business has delivered 40% growth. So, if Wipro Technologies has grown year-over-year 42%, the R&D business has grown 40% year-over-year. That’s not significantly different than what the Wipro Technologies averages are.

[Allen Hellawell:]

Okay. And if I’m not mistaken -- and do correct me if I’m wrong -- we have heard messaging from senior leadership that there is an aspirational target for R&D revenues of 50% over the longer term. Could you maybe add a little more color in terms of how we get from here to there?

[Azim Premji:]

I don’t think we have communicated any information on any kind of a number; we have only guided for the current quarter which is about $577 million, which includes BPO, which includes R&D, which includes enterprise solutions as well as financial services in all geographies

[Allen Hellawell:]

Okay I am awfully sorry, clearly the news flow on the company from the Indian press is about as reliable as meteorological forecasts in the New York City area these days. One last question. We have talked with the Company about new initiatives in R&D, such as aviation and other areas. Are they any particular new segments within R&D that you are seeing a nice take-off in business?

[Azim Premji:]

We are seeing an interesting opportunity in being a party to satisfying the offset requirements of particularly defense companies of the US, which are selling into India. The government has formulated an offset policy on that and we are quite active in our discussion with those companies.

[Suresh Senapaty:]

The other area where [inaudible] and the other area is a result of the recent acquisition of [Quantech], we have opportunities in the CAD, engineering and the PLM space, which we hope will also provide us new avenues for growth in the existing customers as well as a new service offering that we get more aggressively targeted new customers. So, all these initiatives begin and more initiatives will come forth too.

[Allen Hellawell:]

Excellent. Thank you very much, gentlemen.

[Operator:]

Our next question comes from Rama Rao - RR Capital Management.

[Rama Rao:]

Thank you guys for taking the call. It's very impressive revenue growth you have. Can you breakdown what percentage came from the volume growth and what percentage came from the price increase and the contribution, any contribution on the forex?

[Suresh Senapaty:]

There was no contribution from forex. There was a volume growth of 5.5% in the IT Office Services, in the pricing as I’ve said blended we have around a 1.4% increase on a sequential basis; in the Business Process Outsourcing we have about a flattish growth, so net-net it translated into $539 million.

[Rama Rao:]

How does the total revenue and its growth breaks down in terms of the various geographical region like North America, Europe, Japan and Asia?

[Suresh Senapaty:]

North America, about 52.7% is North America; 32.6% is Europe and the balance is Japan and rest of the world.

[Rama Rao:]

If US economy slows down, how are you strategically positioning yourselves to counter-react if US slows down?

[Girish Paranjpe:]

We have made investments for addressing the European markets as well as we are renewing ourselves in the non-traditional markets. What we have seen is that the outsourcing doesn’t slowdown even if there is a slowdown in the US economy. We only worry if there is uncertainty because that’s when everything comes to a halt or kind of slows down significantly. So, either when there is a boom or whether there is a slowdown, I think outsourcing has been fairly perennial. It’s only in the uncertain environment that we need to worry about.

[Rama Rao:]

Thank you.

[Operator:]

Our next question comes from Abhi Gami - Banc of America.

[Abhi Gami:]

Yes, thanks. Can you breakout how much of the $11.1 million of other income was related to foreign exchange, either losses on hedges or gains from mark-to-market?

[Jatin Dalal:]

Can you just repeat your question in terms of number?

[Abhi Gami:]

Sure, I’m looking at the $11.1 million of other income and I assume that within that number there might be some impact from FX?

[Jatin Dalal:]

It’s negative 37 million which forex loss, which is embedded there.

[Abhi Gami:]

I’m sorry was that negative 37 million dollars or rupees?

[Jatin Dalal:]

No rupees.

[Abhi Gami:]

Rupees, okay.

[Jatin Dalal:]

Yes.

[Abhi Gami:]

That’s the net impact of mark-to-market plus any forwards or options?

[Jatin Dalal:]

Absolutely it encompasses both the forward gains or losses during the quarter as well as the mark-to-market advantage cost.

[Abhi Gami:]

Okay, great. Can you break those two components out?

[Lance:]

Considering the fact that we use cash accounting under FAS 123, we do not have a large component of mark-to-market. The hedges we have, there are a few related to the outstandings we have and therefore what we have is sequentially, on account of what is there in the absence of the [inaudible], because there aren’t too many derivative instruments on BPO mark-to-market.

[Abhi Gami:]

Okay, great. Was there any impact above the line within your expenses from the currency moving during the quarter?

[Lance:]

In quarter one, the currency-related losses translated to 0.4% negative impact on the operating margin, in Q1 versus Q4, I’m sorry.

[Abhi Gami:]

There was a 40 basis point reduction in margins or improvement in margins?

[Lance:]

Reduction in the margin, that’s correct.

[Abhi Gami:]

Okay, great. One more question, did you incur any additional Visa application costs during the quarter? If so, how much?

[Lance:]

There was a visa as normal and we incorporate that in as part of our normal business expenses; we really do not have any --

[Azim Premji:]

There was another additional 41 million rupees on account of the ESOP expensing, because of the ESOPs that were granted in the previous years, because that is the new law under FAS 123R under the US GAAP. So about 41 million rupees can be related to the P&L under US GAAP, but not under Indian GAAP. Indian GAAP is only with respect to the restricted stock unit which is almost similar to what is there under US GAAP, it is only the ESOPs and market price which was granted in the previous years, which would go into the P&L under the US GAAP, 41 million rupees.

[Abhi Gami:]

That’s actually useful to us. I was asking about Visa application expenses, as I understand that the June quarter would the period in which you would make the bulk of any H1 applications?

[Azim Premji:]

Visa expenses, I think there has been a hit in the P&L in the quarter ending in March as well as in June, therefore we based our [inaudible].

[Abhi Gami:]

Okay, great. Thank you.

[Azim Premji:]

Thank you.

[Operator:]

Our next question comes from Ashish Thadhani - Gilford Securities.

[Ashish Thadhani:]

Yes, good evening, nice quarter. Just on the last question, the impact of quarter-on-quarter rupee depreciation above the line on the operating income, why is it a negative impact? I didn’t quite understand.

[Suresh Senapaty:]

Ashish, the way we went through this the basic uptick in the sense that, as you know we do cash flow hedging off the net foreign exchange. So, we have done a rate on that basis; but while the rupee has depreciated, let’s say we take $100 as our revenue, $45 as our net inflow to the extent of $55 it broadens out in the revenue as well as in the cost of goods sold. So the revenue number goes up. Consequently, from an opex perspective, it does hurt the operating margin, so while you realize the $45 as the rate which was similar to the Q4 rate, but because of the denominated change it does impact the overall operating margin.

[Ashish Thadhani:]

Okay, that is helpful. Also there have been occasional tax write-backs from time to time. So keeping what happened in this quarter and a year-ago quarter in mind, what would be the normalized tax rates let’s say for the next year or two?

[Suresh Senapaty:]

The effective tax rate that we have taken in the current quarter -- that is quarter one -- is about 14.5% and that’s the normalized rate without any write-back, which we had in the previous year including quarter one. So this year quarter one 14.5% is a normalized rate.

[Ashish Thadhani:]

You expect that would hold for the next few quarters or so?

[Suresh Senapaty:]

That is correct.

[Ashish Thadhani:]

And then one question on the environment. As you are aware IBM indicated recently that India revenue growth had exceeded 55% since the beginning of last year. Based on your benchmarking insights, can you offer clarity on whether you believed this is IT services revenue, which would then imply that IBM might be gaining market share?

[Suresh Senapaty:]

I’m sorry could you repeat that please, I missed the question.

[Ashish Thadhani:]

Right. it appears that IBM’s India revenue growth has exceeded 55% over the last four or five quarters. I was just wondering if you’ve done any benchmarking studies to see whether there is, if there is an overlap between Wipro and IBM on this revenue growth, which would then imply that they might be growing faster than the industry and perhaps gaining market share?

[Suresh Senapaty:]

No, it has not been material enough, but I don’t think we can comment upon specifically for any specific company, I think the best answer you can hear is from them. But we think our growth rate has been decent. It has been ahead of the industry, plus when you do comparisons of the growth, you have to look at organic and inorganic differently. I’m sure there has been some inorganic activities that has happened, but I’m not too sure; I think you will need to check with the company to get the right statistics.

[Ashish Thadhani:]

Okay, thank you.

[Operator:]

Our next question comes from Anthony Miller - Arete Research.

[Anthony Miller:]

Hello again, gentlemen. I would like to ask about utilization. For the past few quarters it’s been broadly around the low 70, even dipping below that a couple of quarters ago. Your competitors are talking about the utilizations in the high 70s. In effect the TCS just approached 80. If I look back in time over your own utilization, if we go back a couple of years and your net utilization was also in the high 70s. Can you give us a view as to whether you think you can rebuild your utilization up to those sorts of levels? Or is it really capped at the low 70s now because this is just what it is for a fast-growing company?

[Prateek Kumar:]

This has been an area of focus for us and we are trying to do a couple of things. One is of course, as you know, our utilization goes through certain peaks and thrusts depending on the campus joining timing. One of the things which we are trying to address is making it more even spread right through the year which gives us a better predictability on how the loading would be. The truth is that typically from our own previous estimate it takes about anywhere close to about 14 weeks by that time we actually get a new person joining from campus, go through the induction training and before they get deployed. We have put certain measures in place to see how we can get the deployment time reduced by a couple of weeks. Third is just to focus on the people’s supply chain and be able to see that as we grow and the way we are organized across multiple service lines, multiple business lines, that we always have a view of people where they would be getting certain skills which could deployable. These are the resources which could be deployable wherever the opportunity arises. That’s one area where we an opportunity to do more and our top teams which are working on that are trying to make sure that we get the maximum gain out of that.

[Azim Premji:]

Our utilizations are broadly comparable with Infosys and they are probably about 3 to 3.5 percentage points below TCS. So, there is an opportunity for us to raise them to more efficient levels.

[Anthony Miller:]

Okay, because there is previous comment about freshers, I understand, but I was talking about net utilization which excludes the effect of trainees, and that has been, as I said pretty much in the --

[Azim Premji:]

Both TCS as well as Infosys are reporting numbers which includes trainees now.

[Prateek Kumar:]

As far as the number which we report, it is also including the people who are undergoing training, so people who are freshers joining from campuses.

[Anthony Miller:]

Okay, I can see there may be a slight difference in the way they measure, but both the other companies report both, for example. So you are saying that there is an opportunity to come up towards the Infosys, if not the [TCS] levels?

[Prateek Kumar:]

We think there is an opportunity to raise our utilization, yes.

[Anthony Miller:]

Okay, thank you very much.

[Operator:]

Thank you, and at this time, I am seeing no further questions in the queue.

[Azim Premji:]

We will close the call, make an announcement for the last questions; otherwise, just close it.

[Operator:]

All right and very good, thank you. Ladies and gentlemen, today's conference will be available for replay, starting today, Wednesday July 19 at 9.45 am Pacific U.S Time and will be available through Thursday August 3 at Midnight Pacific Time. You may access the AT&T Executive playback service by dialing 1-800-475-6701 from within the United States or Canada, or from outside of the United States or Canada, please dial 320-365-3844 and then enter the access code of 835825. That does conclude our conference for today.