Wipro Limited
Q2 2006 Earnings Call Transcript

Published: 18 Oct 2006

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Wipro Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Rajesh. Please go ahead.

[Rajesh Ramaiah:]

Ladies and gentlemen, a very good morning to you in America and good day to you all in the other parts of the world. My name is Rajesh Ramaiah, and I’m based in Bangalore. Along with Sridhar in New Jersey and Jatin in Bangalore, we handle the investor interface for Wipro. We thank you for your interest in Wipro. It is with great pleasure I welcome you to Wipro’s teleconference for our results for the second fiscal quarter ended September 30, 2006. We have with us Mr. Azim Premji, Chairman and Managing Director; Mr. Suresh Senapaty, Chief Financial Officer, who will comment on the results of Wipro for the quarter ended September 30, 2006. They are joined by other members of the company’s senior management who will answer questions which you may have. The conference call will be archived and the transcripts will be available on our website wipro.com. Before Mr. Premji starts his address, let met draw your attention to the fact that during the call we might make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the 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 filing with the Security and Exchange Commission of the USA. Wipro does not under take any obligation to update forward-looking statements to reflect events or circumstances after the date of filing thereof. Ladies and gentlemen, Mr. Azim Premji, Chairman, Wipro.

[Azim Premji:]

Good morning to all of you. By now you would have seen results for the quarter ended September 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 thoughts on our performance and prospects. For the quarter ended September 30 2006, Wipro Limited recorded revenue growth of 41% and net income growth of 48%. We have seen a great momentum in all our businesses. The revenues from our global IT services at $589 million for the quarter were well ahead of our guidance of $577 million. Primarily driven by strong growth in our differentiate services and focused verticals. Financial solutions and testing services have delivered 50% year-on-year growth for the last eight quarters. In the quarter we had double-digit sequential growth from enterprise application services, technology infrastructure services, retail and TMTS verticals. We added 54 new clients, of which 11 were global 500 or Fortune 1000 clients. Our Business Process Outsourcing business delivered a strong revenue growth this quarter, and yet again expanded margins. Over the last couple of quarters BPO business has demonstrated consistent improvements in profitability and significant customer wins, reinforcing our confidence that it is moving in the right direction of delivering industry-leading growth rates. Our India, Middle East and AsiaPac IT business recorded strong year-on-year revenue growth of 28%, and profit before interest and tax of 30%. Wipro Consumer Care and Lighting business also grew well, with 38% year-on-year revenue growth and 29% year-on-year profit growth. On acquisitions, we are making good progress on the integration of each of the acquired entities. The growth rate of revenues in our acquisitions is significantly ahead of the company growth rate. Acquisitions in aggregate turned around to deliver a marginal profit during the quarter, as compared to a loss in the previous quarter. Overall, we believe that the demand environment is robust and we have the right strategy in place. The investments we made during the last 12 months are beginning to deliver value. As we moving into the second half of the year, we see good prospects ahead. I will now request Suresh Senapaty, our CFO, to comment on our financial results before we take questions.

[Suresh Senapaty:]

A very good morning to all of you in the United States, New York and good evening to all of you in Asia. Let me comment by highlighting the fact that for the convenience of the readers, our U.S. GAAP financial statements have been translated into dollars at the noon bank rate in New York City on 29 September 2006 as certified by the Federal Reserve Bank of New York, which is $1 is equal to Rupee 45.95. Accordingly, revenues of our Global IT Services segment, that was $588.9 million U.S. dollars or in rupee terms INR 27.17 billion appears in our earnings release as $591 million based on the convenience translation. Global IT Services revenues for the quarter of $588.9 million included $539.4 million of IT Services, and $49.5 million of BPO services. The sequential revenue growth of 9.2% in Global IT Services segment will comprise of 9.3% growth in revenues of IT Services and 8.5% growth in revenues of BPO services. Sequential revenue growth of 9.3% in IT services was primarily driven by volume growth of 7.9%, and blended realization improvement of 0.9%. Revenue growth of Global IT Services segment excluding revenues from acquisitions, consolidated during the quarter 6.9% sequentially. On foreign exchange funds, our realizing rate for the quarter was RS46.14, versus the rate of RS45.43 realized for quarter ended 30 June 2006. At that period end, after assigning to the assets on the balance sheet we have about $377 million of hedges at rate between RS45.10 and RS46.70. During the quarter we took a non-GAAP charge for restricted stock units, and affected wage hikes in September for some of our employees, which impacted our margin by approximately 100 basis points. The improvement in our employee mix offset a significant portion of the margin dilution due to wage hikes and RSU charge. We had an improvement in the margins of our BPO business by 470 basis points sequentially, driven by higher productivity and improved utilization. Our onsite mix increased by 1.5% on the account of acquisition renewals and initial ramp up for some of the large projects commenced during the quarter. For the quarter ending December 2006, we expect volume-led growth with price being impacted by lower billing dates. In line with our plans, we will affect offshore wage hikes for employees not covered in quarter 2. The combined impact of these wage hikes for quarter 3 06/07 would be around 200 basis points, which endeavor to offset a significant portion of the impact through factors like improved utilization and employee mix, better profitability on acquisitions and leverage on our G&A, and expect the margin to be in a narrow range, excluding the impact of exchange rate fluctuation. We will be glad to take questions now.

[Operator:]

Your first question comes from Moshe Katri - Cowen & Company.

[Moshe Katri:]

Thanks. Suresh, can you repeat some of the factors that benefited or impacted margins? I’m curious in terms of with currency, whether there is an impact from currency, the dilution from acquisitions, pricing and then wage hikes. Maybe you can give us feel in terms of the impact or the benefit in terms of basis points for the quarter?

[Suresh Senapaty:]

Right. If you look at the quarter 1 margins were 24.2%; this is for the IT services as well as BPO combined. We ended the current quarter, that is quarter 2, at 24.5%. So, just to give you an idea of what the minuses and what the pluses were. We had RSU and salary increase of about 1%. We had a utilization drop which impacted about 0.6%. We had a dilution on account of acquisitions of about 0.6%. Net-net, there was about 2.3% net minus. The pluses were, there was improvement of about 0.8%, visa expenses about 0.4%, margin expansion in BPO contributed to about 0.5% of the total level. ForEx realization is about 0.2%. With others at 0.2% it comes to a total positive impact of 2.5%. So, net-net that is a margin expansion by about 30 basis points under U.S. GAAP from 24.2% to 24.5%.

[Moshe Katri:]

Understood. Can you also comment -- maybe Mr. Premji can do that -- comment on the sequential increases in turnover rates during the past few quarters? I think for this quarter you are at 18% which is relatively high, what are we doing to bring down those levels?

[Azim Premji:]

We have Prateek, who heads our HR and he will respond to that.

[Prateek Kumar:]

The attrition rate is 17.5% which has been rounded off to 18%. In the previous quarter it was at 17.1%. So, we have not seen any noticeable change from what we experienced in the last quarter. As Suresh shared with you all, we had our grants kicking in in previous quarter and we also had the salary increase on for our employees which was effective from September, which covered almost two-thirds of our employees. The balance are going to get covered in November. We have already seen the early signs of declines from the time we affected some of these changes and we are hoping with all these actions which we are taking we should be able to see a southward trend from this quarter onward on attrition.

[Moshe Katri:]

If you look at your average wages or average comp are your comparable to some of your other peers? Are you 100% comparable, are you 70%,? Are you still playing catch up at this point?

[Prateek Kumar:]

It depends on who you have in mind but people whom we actually benchmark against we are quite comfortable.

[Azim Premji:]

Actually for the portion that we have given on 1st of September we are. The one which are likely to give on 1st of November we will match very well on 1st of November.

[Moshe Katri:]

Okay thanks.

[Operator:]

Thank you we do have question from the line of Trip Chowdhry – Global Equities Research.

[Trip Chowdhry:]

Thank you. Again congratulations on very good execution here. Two questions, first is on the acquisition front. You have made some small-sized acquisitions. Do you think the acquisitions size may increase moving forward?

[Azim Premji:]

We have talked about acquisition strategy in terms of a single [size] and that is not described in any kind of a size except that we have to have a minimum size because otherwise what are we acquiring? From that perspective it so happened that some of the opportunities that we look at and therefore the target that we found are of a smaller nature size, but given the six acquisitions that we have done and the kind of experience we have gained particularly in the last nine months, it gives us the confidence that we can go about for larger size. Size is not a constrain for us. It is the strategic value which is important for us and of course if there is a cultural and a financial strength we will go ahead and size will not hold us back.

[Trip Chowdhry:]

Very good. On the BPO front you executed very, very well. I was wondering if anybody in the BPO division can give some insights. How does your BPO division I think it’s the SpectraMind division basically, compared with Daksh of IBM? Both BPO units seem to be executing very well, but I am trying to get a sense like what are the key drivers and what are the key reasons the margin expansion occurred?

[T.K. Kurien:]

Let me answer that. On the BPO front there are two things that we did. One is if you go back five quarters ago when our margin was running at around 9% our top line was primarily wide centric and we were basically selling wedges to customers. So, if people wanted call center solutions we were selling call center solutions, if they want e-mail solutions we sell them e-mail solutions. Over the past years we have made a transition as far as the top line is concerned. We have moved the mix more into transaction processing. So, today we work in the financial services area. We work in the back office area and also what we have done is that we are selling integrated end-to-end solutions back to customers. The minute you sell integrated solutions back to customers, then what happens is obviously what you see is that the power of customer to unbundle a sales and negotiate price goes down considerably. That help us in terms of getting better realization in the top line. On the operational front, primarily it has been driven by a couple of factors number one is higher utilization, and you can see that in our numbers and the second is the fact that we’ve kept our cost structures except SG&A pretty much under control. That’s really what has driven it.

[Trip Chowdhry:]

Also I was wondering with the upcoming release of Microsoft Vista, I am understanding you have worked very closely with Microsoft in a way to also help them develop Vista with driver development and other stuff. I was wondering at a very macro big picture, do you think your business will have some tailwind because of some migrations that may occur on Vista from current systems? Or some infrastructure management business may see some pick-up because of this platform change that maybe occurring within the next six to eight months?

[Ramesh Emani:]

Yeah, let me just restate the question that you have asked to make sure that I have understood it clearly. You were talking about the Vista migration opportunity?

[Trip Chowdhry:]

Yes.

[Ramesh Emani:]

Vista migration opportunities can come from two aspects

[Trip Chowdhry:]

Yes it was very good. Again congratulations on phenomenal execution.

[Operator:]

Thank you. We have a question from the line of Joe Foresi - Janney Montgomery Scott.

[Joe Foresi:]

Hi gentlemen and again congratulations on some nice execution here. I was just wondering if I could first get some clarity on some numbers here. I think it was $6 million gain in operational, other gain underneath the operational expenses. Can you just maybe break that down from me, is that a hedge or where is that $6 million coming from?

[Suresh Senapaty:]

This is primarily a change to some of the accounts receivables on certain projects and since they are reimbursement of certain type of projects they cannot be taken on the top line as per GAAP. Similarly they do not fit into one particular set of products, it is put into other. For practical purposes, this is a part of processing.

[Joe Foresi:]

Suresh, switching gears, I know you guys explained on your earlier call what you’re seeing in the pricing environment. Maybe you could just give us your own thoughts on why pricing is going up and how that process is being accepted by the clients?

[Girish Paranjpe:]

Hi, Girish here. I am going to answer this in two parts. One is how do we see the bill rates go up and how is that reflected in the realization? These two things are reflected in the bill rates that we have with our clients have begun a revision upwards both for existing clients, maybe we have been able to do some negotiated upward increase, a modest one; but we have been able to do that on a case-to-case basis as contracts fall due for renewal. Also new clients have come in at slightly better rates than what have been the prevalent rates. Now all of that doesn’t automatically get into the realization as we report in our financials and the reason why it doesn’t get reflected as debt automatically is because the bill rates that we agree with our clients are by skill, by experience, sometimes even by geography and the mix this translates into realized rates can be slightly different. That’s why you may not see one-to-one comparison between how the bill rates have moved versus how the realization is. But having said that, the overall environment is positive from a client side about having modest price increases, as far as we can see it, as long as we can demonstrate to them that we are not just going for price increase without doing any corresponding productivity gains for them.

[Joe Foresi:]

Switching gears, you obviously did a larger percentage of onsite work this quarter. Can we expect for modeling purposes that to continue next quarter or should we see maybe a switch more to the offshore work? Is that a ramp up on a new project?

[Suresh Senapaty:]

Let me just go back to the previous point that you are making. I think three or four things are driving the case for an increase. One is the superior execution that we have demonstrated over the last few months and that is giving us the confidence to be able to go back and ask our customers for an increase in the existing contracts. The second is that there is a shortage that we are seeing all around in the marketplace for key talent, particularly at the specialized service areas, whether it is the enterprise applications space or the infrastructure management space or the data warehousing space et cetera. The third, which is driving the case for the relatively better pricing is the fact that in the local markets, the costs of such talent is increasing even faster. So, from the customers point of view it’s still that we have those skills, the increase is still modest compared to what they would have to pay in the local market, They are seeing that that there is a significant improvement in execution by people working out of here in this offshore/onsite models. That’s why they are willing to have this conversations with us and that is why over the course of the previous quarter, wherever we have been able to come up with the renewals which were due, in the majority of the cases we’ve been able to get modest increases.

[Unidentified Corporate Representative:]

I think you ask a second question about onsite/offshore ratio and you should expect the onsite ratio to continue to decline. Our view is that there may not be any significant increase, the reason why we have higher onshore percentage is because of the acquisitions that we made, which you are necessarily to do with more people in the local markets.

[Azim Premji:]

But the way we go about that onsite/offshore increase as a mix, I think each and every SDU drives that, every vertical drives that. But when you look at the mix of growth in the sense that all of the practices have higher onsite centricity and that grows faster, it definitely takes overall onsite up. But if you ask us, each factor vertical whether the onshore/offsite has improved? Yes it has improved in favor of offshore. But when you look at the mix of business, in cumulative terms it has gone up.

[Joe Foresi:]

Okay, great, thanks for both those explanations. Just one last questions here, I don’t you if you guys have the numbers available. But I was curious if you could give me a rough idea what the attrition rates are at the middle manager level and maybe some rough idea what the average salary currently is at that level?

[Azim Premji:]

No, we’ve not shared the attritions at various levels, but like it was explained just before two questions in terms of our overall approach to attrition and how we’ve dealt with it and how we are feeling because of the comp increase we gave in September, and what we are planning to give in November, where it will have an impact versus what we’ve achieved last quarter. Just to without sharing the data point, we are fairly comfortable in terms of what attritions we have seen in the middle management level.

[Joe Foresi:]

Great, thank you guys and nice execution this quarter.

[Operator:]

Thank you. We also have a question from the line of Bryan Keane - Prudential.

[Bryan Keane:]

Yeah. Hi, I think you guys gave some numbers, but I just couldn’t get it for the amount of acquisitions. How much revenue did acquisitions contribute in the quarter?

[Suresh Senapaty:]

It was around $30 million. In rupee terms, it is 1324 million.

[Bryan Keane:]

It was $30 million in U.S.?

[Suresh Senapaty:]

The rough number, but the actual number really reflected in the books are INR 1324 million for the quarter.

[Bryan Keane:]

Right. Did all the acquisitions that you guys have made over the last 6 or 12 months, are all those closed, or are there still a few out there that close or need to close? I’m thinking about next quarter and how much new acquisition revenue goes in there?

[Azim Premji:]

So far as whatever announcements we have done in the IT segment, it has always all been consummated by September 30th and has been reflected in the quarter 2 results for the full quarter and consequently the guidance that we are giving which is $633 million, which is about 7.5% sequential will be on an apple-to-apple comparison for quarter 2 versus quarter 3. And if we were to announce any more acquisitions, it will be an add-on.

[Bryan Keane:]

Right. If you just looked I guess sequentially, the growth was almost what 10.7% in the IT services space, now, with that guidance, it’s around 7% sequentially. Is that mostly the difference there, is the difference in acquisitions, the ramp up, obviously now that you have most of the acquisitions in the numbers that you’ll see a little bit of drop there? Or is that also some seasonality why there is a slight downtick from that that almost 11 number to 7?

[Suresh Senapaty:]

But there are two things there, one was last quarter our dollar sequential growth was 9.3%. This quarter, there is an impact of the lower number of working days, and that is being factored into the guidance as we have said.

[Azim Premji:]

First, we have to see that on the last quarter we had given a guidance of about 7%. This quarter it will be 7.5%, a fully apple-to-apple comparisons of the organic and acquisitions completed in quarter 2, whereas last quarter we had some of the acquisitions which got consummated during the quarter which are not reflected in the quarter 1 revenue.

[Bryan Keane:]

A last question on people, can you talk to us a little bit on the hiring environment? we’re hearing kind of mixed things coming out of India about recruitment for freshers. Can you talk about what Wipro is doing in kind of what you see going forward for hiring?

[Prateek Kumar:]

Our hiring strategies will continue to be two-prong. We’ll continue to hire from the engineering schools of which comprises roughly about 50% of our total hiring effort. We’ll continue to look for good talent to come in from the experienced talent pool which we referred to as lateral hiring. The one thing which we have done consciously this year is that we have shifted to a more even spread of rookie joining into the company instead of all of them coming in at one point, at one time of the year and that we have been able to make that transition fairly comfortably. What we are also doing in addition is that we are experimenting with the non-engineering talent pool as well. So, these are the Bachelor of Science graduates and this year just to help you understand, we will be taking in between 1,700 to 2,000 people in our software business. Taking them through intensive training program and get them ready to be deployed on our assignments within the organization. So, we are quite comfortable, the way we look at our opportunities for bringing in the right kind of talent and with the investment which we have made in our training capability we think we should be able to manage this.

[Bryan Keane:]

What percentage in new hires or freshers now?

[Prateek Kumar:]

Its roughly 50%.

[Bryan Keane:]

Okay. Thank you very much.

[Operator:]

We also have a question from the line of Alan Hellawell - Lehman Brothers.

[Alan Hellawell:]

Yes, thank you very much. This question I guess would be probably focused at Mr. Emani. I hope you are doing well. I was just hoping to get some insights about the discussions we have had about possible softness in spending from your telecoms equipment customers, given the precedence of Alcatel Lucent combination and the cooperation between Nokia and Siemens and what not. Have you started to see that and if so, given your experience, when would you expect some kind of a recovery in spending there?

[Ramesh Emani:]

Sure. So, I think from the time we met I think we met about a month back. I don’t think things have really changed much. One change is the Alcatel Lucent merger has got the regulatory approval and Nokia Siemens JV is proceeding as per the earlier plans. So, I do not, at this stage, there is no big change, we think we should start seeing some results maybe in Q4, but I cannot say anything as of now.

[Alan Hellawell:]

Okay, well thank you very much.

[Azim Premji:]

That has been embedded into the guidance that we have given for quarter 3.

[Alan Hellawell:]

Understand. I appreciate that, thank you.

[Operator:]

We have a question from the line of Julio Quinteros - Goldman Sachs.

[Julio Quinteros:]

Can you just walk us through the changes, as you look at the large clients versus the smaller clients, just talk a little bit about the penetration that you are seeing amongst your top clients. Whether that’s new service line expansion, or is it just growth of the same kind of work? I just want to get a sense for whether you guys are actually succeeding on penetrating with your new services. Thanks.

[Girish Paranjpe:]

I think we are seeing significant traction with our existing clients on selling new service lines. The fact that we have long heritage in some of the newer service lines like remote infrastructure management as well as business process outsourcing, our ability to cross-sell new service lines is really the key to our account growth.

[Julio Quinteros:]

Okay. On your top clients I just want to confirm, is that the same client from last quarter or has that changed this quarter?

[Girish Paranjpe:]

Top five, there has been no change.

[Julio Quinteros:]

Top client?

[Girish Paranjpe:]

Top five clients, there has been no change; top client, no change.

[Julio Quinteros:]

Okay, great. Thanks.

[Operator:]

We have a question from the line of Abhi Gami - Banc of America.

[Abhishek Gami:]

First, your BPO headcount was down sequentially again, although you had good productivity to get the revenue gain. Can you talk about the mix of the employee base within BPO? How many are still doing call center-related work versus non-call center-related work, and what are your headcount goals for that business for year-end?

[Prateek Kumar:]

On the headcount itself, I think I’ve touched upon it a little earlier in the conversation that I had. Number one is the mix of business is clearly changing for us. So, what’s happening is that as we churn out some of the businesses that are low value-added, low margin for us and we bring in new skill sets, the overall headcount would not change. But having said that, as we go across the next couple of quarters, we see some change happening as far as headcount is concerned, we see headcount going up. In terms of the total, in terms of the number of people who are doing voice and non-voice business, we have stopped measuring it in that form. So typically what we do is that we look at integrated services, and what we call simple venues that we sell. As far as integrated services are concerned, integrated services today are around 21% of our revenue. You could derive your own numbers in terms of the headcount deployed, because clearly integrated services gives you higher realization.

[Abhishek Gami:]

Okay great. Another question, the wage hike you are going to be putting through this quarter, is that primarily on-site wage hikes? Were any of the two-thirds of the people who received wage hike in the September quarter --

[Azim Premji:]

It’s only the offshore hike. The two-thirds have been already covered as of September, and the balance will get covered on 1st of November.

[Abhishek Gami:]

When will the onsite hikes go through?

[Azim Premji:]

The expectation is it would be reviewed in the fourth quarter.

[Abhishek Gami:]

Finally, you mentioned earlier that you are increasing, you are experimenting with Bachelor of Science hiring. Can you talk about what differences there might be in their training, whether it is duration or type of training? And if you have any early data on their take-up rate? Are you hiring them in, or if you retain them at similar levels to other employees, or are you rejecting them at a faster pace? What’s happening there so far? Thank you.

[Azim Premji:]

Let me just try and capture your question; it is about the B.Sc science graduates and how we take them through our own training program internally. We have a fairly well institutionalized program, we call it Wipro Academy for Software Excellence. Through this program we bring in bright Bachelor of Science graduates. We put them on a program which has a tie in with one of the leading engineering schools in the country. This program actually runs for a duration of four years. At the end of fourth year, if they clear the program successfully, they will get a Masters in Software Engineering. The interesting thing about this program is that the entire fee is getting reimbursed by the company. We also pay a scholarship to these B.Sc science graduates, who are coming in. They attend classrooms, classroom sessions on Fridays and Saturdays and the remaining part of the week, they are working in our in-house projects and as well as customer projects. Post-completion of the program they have choice to be observed in the company full-time and because of the investments, which we have made, there is an obligation for them to stay on in the organization for another additional 15 months. By the way, this program has now been running in Wipro for the last 10 years, it has been found to be extremely good, the feedback which we get from our customers as well as from our leaders and managers internally is very, very positive, which has given us the confidence to scale up the program. We were taking in numbers like 400 or 500 every year, this year we are actually bringing it up to 2,000. Just in terms of the kind of projects where all we can actually deploy them, we find that we can actually deploy them with the kind of training they go through pretty much in all kinds of projects which where we would employ otherwise our engineering population. Cost-wise, it’s a huge advantage as well.

[Abhishek Gami:]

Thank you.

[Operator:]

We have a question from the line of Rama Rao - RR Capital Management.

[Rama Rao:]

Good morning gentlemen, very good growth. If you have to break down this revenue growth in terms of the geographical region like North America, Europe, and Japan and Asia, how does it break down?

[Suresh Senapaty:]

Well, we had a very good growth from Japan, the last quarter from a sequential as well as the year-over-year perspective, but otherwise, the growth in US and Europe have been fairly different in a similar scale.

[Rama Rao:]

You won’t be able to quantify the growth in different regions?

[Suresh Senapaty:]

The US was about 8.9% sequentially, and Europe was about 7.5%, Japan was about 22.7%.

[Rama Rao:]

Very good. How does the net profit margin in these different geographical regions compare?

[Suresh Senapaty:]

Well, we strictly don’t look at it that way, because multiple customers that we have operate from multiple geographies. So, from that perspective, we address one customer, it could be in North America as well as Europe, as well as Japan. Hence the way we look at it is a customer approach as opposed to geographical terms.

[Rama Rao:]

The last question, if I can ask you a bigger picture question. How do you see the global economy, and in particular, the U.S. economy unfolding in the near future, and its impact on your growth on a going-forward basis?

[Azim Premji:]

Well, if you look at a report on the US economy, I mean, I don’t think we are an expert. They are fairly a mixed bag in terms of a lot of optimism, and a lot of skepticism in terms of the growth/slowdown et cetera, et cetera. Net-net, one feels there could be some amount of softness in the real estate or housing area. Therefore perhaps in the retail, but not so much in the financial services, and many other technology and so on and so forth. However, so far as the Indian IT industry is concerned, we really do not get impacted whether the US economy does well or does not do well. We do get impacted favorably because if the economy does well, then the IT spend goes up, and when the IT spend goes up, then they need more services, and India is the right place from a scaling perspective to be able to provide that kind of skill set. When the economy doesn’t do well, the IT budget tends to be frozen or tends to be much restricted and the companies seek to have higher deployment of IT, because the customers are seeking more and more differentiated services, employees are seeking more and more IT deployment because less number of people have to do that particular work. Therefore, higher IT deployment, and for that, we have to look for higher bang for the buck. That is where again the Indian IT companies will benefit out of it. So generally, Indian IT companies are benefited on both situations. It is only when there is a complete uncertainty where some amount of holdback does happen. But otherwise that is how our experience has been and we think going forward also we will not get impacted adversely.

[Rama Rao:]

Great. Thank you.

[Operator:]

We have a question from the line of Ashish Thadhani - Gilford Securities.

[Ashish Thadhani:]

Yes, good evening, a great quarter. One or two questions, is there any overriding reason why your outlook is somewhat subdued in comparison to lets say Infosys, which has guided towards more than 40% growth in the next quarter? I think yours translates to about 30% year-on-year; maybe a little less on an organic basis?

[Suresh Senapaty:]

Ashish, if you look at the sequential growth we’ve guided 7.5% and of the guidance that I have seen so far it seems to be much, much better including our own guidance in the last quarter and the previous two quarters. Plus we have to also look at the guidance of 7.5% that we have given is pretty different than the last quarter because there are no new acquisitions that are being added on. All the acquisitions that we’ve done have been completed reflected in quarter 2 and also in quarter 3, if there were to be any new announcement it will be an add-on. Also we have to factor for the [revenues] being lower in quarter 3 compared to quarter 2. All of that is significantly better guidance than what we did last time.

[Ashish Thadhani:]

Okay. But on a year-on-year basis which would iron out all of these acquisitions to some extent as well as the seasonality, we are looking for roughly about 30% or slightly less right?

[Suresh Senapaty:]

Well, Ashish, an IT services company that does quarter-on-quarter much more than the past year-over-year has gone, and also to look at last time, we had a very, very good quarter 3. From that perspective the YoY in terms of actual versus the guidance is not reflective.

[Ashish Thadhani:]

Correct. Because I think last year, if I’m not mistaken you had 13% quarter-on-quarter growth.

[Suresh Senapaty:]

That’s correct.

[Ashish Thadhani:]

Okay. So, maybe that explains it. Also the magnitude of wage hikes could you throw some light on that, what the year-on-year number might be?

[Suresh Senapaty:]

They are similar in terms of what we gave 1st of September and we expect it to be in the similar lines what we will do on 1st of November, which is around 12% for offshore.

[Ashish Thadhani:]

Okay. And for onsite, is there are a number?

[Suresh Senapaty:]

Onsite, we will be able to communicate a number next time when we talk on this in the January because it is due for a revision where we will come to grips with overhead by the end of this quarter.

[Ashish Thadhani:]

Okay, terrific and final question. Could you put the current SEC debate into context; specifically, do you envision any scenario that could impact the sector unfavorably?

[Azim Premji:]

I think multiple statements have come apart from what has been there in the written act and the guidelines by the Finance Minister, Prime Minister, Commerce Minister, all have been reinforcing the SEC and the progress has been generally good. I think all it requires is a little amount of further clarification on some of the regulatory environment so that the kind of restrictions out there can be little more relaxed whereby productivities that can been achieved, the cycle time that can be achieved and the transitions can be much more smoother. But, otherwise we think the government is continuing to support to achieve that. They have a request on the IT industry and multiple other industries that the current regime of technology parts will get extended which is also seeming to be getting more and more favorable support. In fact, if that was to happen that will also be good and in fact, the government should do it.

[Ashish Thadhani:]

When might that happen, the latter mentioned, the extension, one way or the other?

[Azim Premji:]

Indication we can get is perhaps in the budget speech of Finance Minister in case it were to be considered favorably.

[Ashish Thadhani:]

Terrific, good luck, thank you.

[Operator:]

We have a question from the line of Anthony Miller -Arete Research.

[Anthony Miller -Arete Research:]

Hello, again, gentlemen. My questions are around BPO, three things. Just a bit of clarification, please. Firstly, how come the number of customers goes up as the number of processes goes down? Secondly, your headcount went down, but the occupied seats went up and the available seats went down. Finally, just on the margin of which you obviously jumped quite considerably, nearly 24%. Can I just reconfirm what you said on the earlier call, that you’re expecting BPO margins generally between 18% and 22% , therefore we might expect the margin now to come down to that level?

[T.K. Kurien:]

Okay. Let me, let me, this is TK Kurien, let me answer that question, all the questions asked, in the order that you asked us. First is, why are the number of processes come down despite the fact that customers come down? The reason is very simple, it’s actually only one process that comes down. The reason is very simple, increasingly what we are trying to do is we look for standardization between processes. It’s the only way you can get scale. That’s what we are doing in our business. So, that’s the first answer.

[Anthony Miller -Arete Research:]

Basically it’s a shared service.

[T.K. Kurien:]

Exactly. I think it’s the only way the business can ever be scaled, because if you can’t, you really have to pick your spots in business and play them hard. On the second question in terms of why has headcount come down? I think I kind of answered that in the previous, I had given an answer in the previous question that was asked. Which is, what we are doing if mix is changing and because of that headcount is going to come down, it has come down last quarter. We expect to see a bump-up and some decrease in headcount in the next couple of quarters going forward.

[Anthony Miller -Arete Research:]

Yes, my question was actually, how come the occupied seats went up even though the headcount went down?

[T.K. Kurien:]

The occupied seats went up primarily because what we do is that we allocate seats by process. So, once the seat is allocated by process, automatically what would happen is that depending upon -- assuming that we have a process of 300 people that has come in, we would allocate 300 seats to be processed. The utilization of seats, we may have only 100 people actually occupying the seats. That’s why the utilization has actually dropped margins.

[Anthony Miller -Arete Research:]

Okay, all right.

[T.K. Kurien:]

Okay, any other questions?

[Anthony Miller -Arete Research:]

Well, yes, the first question was just on the margin. Is it the case that the margins will now drop back to that 18% to 22% range?

[T.K. Kurien:]

What we have always guided has been that our margins would remain in a band of between 20% and 22%. If you would like to speak on that guidance.

[Suresh Senapaty:]

So, it is not necessary of being able to drop down to 18%, because we have already achieved 22% plus, but if we could stay in that range and there is a hope that we will be around those numbers. Like we said that quarter 2, quarter 3 we expect our margins to be in the narrow range and consequently, BPO would also follow within that package.

[Anthony Miller -Arete Research:]

Okay, thank you very much.

[Operator:]

Thank you. We have a follow-up question from Moshe Katri. Please go ahead.

[Moshe Katri:]

Just to clarify, you did have an impact from the dilution from some of the acquisitions that you have made recently. When do you think that impact goes away? How long will that take, do you think?

[Suresh Senapaty:]

Actually just on the Indian GAAP, we had a total loss in quarter 1 for all the acquisitions if you add up the EBIT that is not generated. Of about six, we have two are losses, four are profitable and will be profitable. We expect in the current quarter one of those loss continue to be breaking even, and perhaps in the next quarter, the other one also will get break even. So we are expecting the profit margin to go up quarter-after-quarter. And over results of six quarters or so, we expect them to normalize in terms of what we had expected them to be delivering including the synergies.

[Moshe Katri:]

In terms of your M&A pipeline, I think someone asked the question here, should we still expect a potential dilutive impact for future acquisitions? Is this something that you guys focused on? Are you willing to take dilution from future acquisitions as well? Should we expect that to happen?

[Suresh Senapaty:]

No, if you look at the acquisition and dilution that we saw in quarter 2 was about 1.3% on the Indian GAAP, and a little more, about 1.6% on the US GAAP. Since this is already an investment baked in our overall 24.5% operating margin. Eventually, in following quarters, we will see improvement in this which means this dilution will come down. That will give us after-tax something more. So overall, we think that the operating margin of around 25% is something which we should be able to maintain, including acquisitions.

[Moshe Katri:]

Thanks.

[Operator:]

We have a question from the line of Sandra Notardonato - Baird.

[Sandra Notardonato -Robert W. Baird:]

Thank you for taking my question. I was wondering if you have a sense of what percentage of your business that comes from multi-year contracts of renews in 2006, and what that number is going to look like in 2007.

[Azim Premji:]

If you look at the profile of our contracts, typically they are customer for the last five years, six years, ten years continuing. While the contract may not be structured as multi-year contracts they are master sales agreement that we have and on an ongoing basis the execution and requirements of the customers keeps coming and it and gets executed. So, they are not structured as multi-million multi-year contracts but they are in this form. Over the past about one or two years we have started getting multi-million dollar, larger contracts as we have also seen in the last quarter too but as a percentage of total revenue it is still the small component. In the next two years, three years will it change significantly? I would say there will be some uptick that we expect but it will not make a significant change in the overall mix of the revenue because of the way it is structured as to how much is on an ongoing basis versus how much is that three-year or five-year contract.

[Sandra Notardonato -Robert W. Baird:]

Okay and then my follow up question is on a separate topic. Do you have, by any chance, what the acceptance rate is for freshers in terms of offers that have been officially made to them and then how many of those actually show up for work?

[Azim Premji:]

Yes, our offer to joining ratio is running currently at 80%.

[Sandra Notardonato -Robert W. Baird:]

80% and then how many of that 80% actually comes in?

[Azim Premji:]

The data which I provided to you was offer to joining.

[Sandra Notardonato -Robert W. Baird:]

I understand that, but I am wondering if after a fresher has accepted a position, is there a percentage of the people that have accepted that actually do not show up for work?

[Azim Premji:]

I know, but he has not given the intermediate data point, he is saying out of 100 people that we offer 80 join and do work.

[Sandra Notardonato -Robert W. Baird:]

Okay, all right, great. Thank you.

[Azim Premji:]

And it has not changed over the last few years.

[Operator:]

We have a question from Daniel Xu - Lucite Research. Please go ahead.

[Daniel Xu:]

Earlier, you guys were talking about your BPO services, the margins increasing steadily; actually very fast. Speaking now for the IT services, I was looking at the gross margins from five quarters ago I see the gross margin has been slowly drifting down. Do you expect the current trend to continue? What are your expectations over next quarter for the gross margin for IT services?

[Suresh Senapaty:]

Like I said that, we have said that so far operating margin for the current quarter, the quarter 3 is concerned, it will be in the narrow range of what achieved in quarter 2.

[Daniel Xu:]

Okay. So, next quarter you would be expecting to stay around higher at 33%, is that correct?

[Suresh Senapaty:]

What is the percentage you said? In the US GAAP we have posted a rate of 24.5%, and yes corresponding gross margin within a range, a narrow range.

[Operator:]

We have no other questions at this time. Please continue.

[Rajesh Ramaiah:]

Thank you ladies and gentlemen for participating in the call. Should you have missed anything during the call, the audio archive of this call will be available after two hours from now, and we will also be putting up a transcript of this call very soon. Of course, should you need any clarification, the Investor Relations team would be delighted to talk to you. We look forward to talking to you again next quarter, and have a nice day. I would also like to make a comment that due to family bereavements, Sridhar is in India, and will be back in the U.S. next week. So, you could contact him probably early next week. Thanks.

[Operator:]

Thank you. Ladies and gentlemen, this conference will be available for replay after 12