Infosys Tech. Q4 2010 Earnings Call Transcript

123jump.com Staff
20 Apr, 2010
New York City

Revenues rose 8.3% to $1.3 billion & net income up 8.7% to $349 million or 61 cents a share. During the quarter the margin has fell 100 basis points as per IFRS. The last quarter margin that is the Q3 margin was 31.1%, Q4 is 30.1%. Effective tax rate has come down in Q4 to 21.6% versus 22.6% in Q3.

Infosys Technologies Ltd. ((INFY))
Q4 2010 Earnings Call Transcript
April 13, 2010 8:30 a.m. ET

Executives

Sandeep Mahindroo - Investor Relations Manager
S. D. Shibulal - Chief Operating Officer
Kris Gopalakrishnan - Chief Executive Officer and Managing Director
Vibin Balakrishnan - Chief Financial Officer
B. G. Srinivas - Senior Vice President, Head, Manufacturing, Product Engineering and Product Lifecycle and Engineering Solutions
Subhash Dhar - Senior Vice President, Head, Communication, Media and Entertainment and Corporate Marketing
Ashok Vemuri - Senior Vice President, Head, Banking and Capital Markets
T. V. Mohandas Pai - Head, Administration, Education and Research, Finance, HR Division
Chandrasekhar Kakal - Senior Vice President, Head, Enterprise Solutions

Analysts

Moshe Katri - Cowen & Company
George Price - Stifel Nicolaus
Joseph Foresi - Janney Montgomery Scott
Rod Bourgeois - Sanford C. Bernstein & Company
Edward Caso - Wells Fargo Securities
David Grossman - Thomas Weisel Partners
Bhavan Suri - William Blair & Company, LLC

Presentation

Operator

Ladies and gentlemen, good morning, good afternoon, good evening, and welcome to the Infosys Fourth Quarter Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode for the duration of this presentation. There will be an opportunity for you to ask questions at the end of today’s opening remarks. Should you need assistance during this conference call, please signal an operator by pressing star and then zero on your touchtone telephone. Please note that this conference is being recorded.

I would now like to hand over to Mr. Sandeep Mahindroo of Infosys Technologies Limited. Thank you, and over to you, Mr. Mahindroo.

Sandeep Mahindroo

Thanks, Rochelle. Good morning, everyone, and welcome to this call to discuss Infosys’ financial results for the quarter and year ended March 31, 2010. I’m Sandeep from the Investor Relations team in New York. Joining us today on this earnings call from Bangalore is our management team.

We’ll start the proceedings with a brief statement on the performance of the company for the recently concluded quarter, followed by the outlook for the quarter ending June 2010 and year ending March 2011. Subsequently, we’ll open up the call for Q&A.

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

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

S. D. Shibulal

Good morning, everyone. This is Shibulal. I’m waiting for Kris and Bala who will be joining us shortly. In the meanwhile I’ll give you an overview and I’m hoping that before the Q&A starts both Kris and Bala will be here to give their remarks.

This has been an excellent quarter for us. We have exceeded the higher end of our guidance. Our guidance for the quarter was $1.24 billion to $1.25 billion. In constant currency terms it is $1.231 to $1.241 billion. Revenue for the quarter is $1.296 billion. So we have exceeded the upper end of the guidance.

Revenue increased sequentially by 5.2% in constant currency terms -- and in constant currency terms it increased by 6.1%. The volume increase also is 5.2% sequentially. The offshore volume increased by 5.3%.

Pricing has declined during this quarter 1.5% blended. Utilization has gone up of course because the demand has picked up. So what we are seeing in the market is that most of our clients have closed their budgets. Their budgets are flat or marginally up. At the same time, the majority of our clients are clear that they spend in offshore will go up through the year. We are seeing increased velocity in decision making. We are seeing the start of discretionary spend.

Our clients, their business priorities continue to be in two areas. One is fulfilling the demands for their clients. Second is to manage cost. To align with that the IT departments are also focused on investments which are relevant for the future of our clients at the same time managing costs.

On the margin front our -- during the quarter the margin has decreased by 100 basis points, as per IFRS. The last quarter margin that is the Q3 margin was 31.1%, Q4 is 30.1%. Our effective tax rate has come down in Q4 to 21.6% versus 22.6% in Q3.

On the employee side we have added 9300 people this quarter, as against a planned addition of 6000. That was the original plan. The net addition is close to 4,000 people. For the year, we started out the year by a plan of adding 18000 people for the year. We have added 27000 people as of right now. During the guidance we have said that we will be adding 30000 people next year.

Our EPS including exceptional items was $0.61 for this quarter. This is as against a guidance of $0.56. If you exclude the exceptional items the Q4 EPS was $0.59, which is better than the guidance which we gave.

The pricing environment at Infosys remains stable. We are not seeing too many pricing renegotiations. There are sporadic renegotiations which are going on but that we consider as part of our regular business.

As far as the business environment goes the global economic environment remains challenging. There are still fundamentals which are yet to correct. Unemployment rate and other issues are weighing on the minds of our clients but the businesses, the clients, our clients are starting to invest in their growth and to -- and looking at ways to emerge stronger when the downturn is over and we are seeing that in terms of discretionary spend.

Our revenue from the transformational space, which is consulting, enterprise solutions, system integration has gone up this quarter from 23% last quarter to 26% this quarter. As I mentioned, as far as the budgets are concerned, most of the budgets are closed, flat or marginally up, offshore outsourcing continues to be a strong theme in their budgets.

Q4 was an excellent quarter for us as far as client additions are concerned. We have added 47 new clients. This is probably the highest over the last many quarters. Our top 25 clients grew by 7.5% and the remaining clients grew by 3.4%. Number of $1 million clients have gone up to 338. 26 clients give us more than $50 million this -- in the LTM basis right now.

So overall the performance has been very good. We started out the year by giving a guidance of negative 2.5% to 3% growth. We have completed the year with a growth of 3% positive. Given the year, given the situation we believe this is excellent performance. Today we have about 126 Fortune 500 clients.

So, with that, actually, Kris is here. And with that now let me hand it over to Kris to add additional remarks and probably I can come back to give you a color on the operational highlights.

Kris Gopalakrishnan

Thanks, Shibu. And good morning, good afternoon, good evening to every one of you. Sorry I’m a little late. It’s one of those days where you’re rushing from one meeting to another meeting or one interview to another interview.

Overall when you look at the year, I think the bottom line is we have emerged stronger out of this downturn. Our growth is back, our customers, our clients are trusting Infosys to help them build a better future for their organizations. They’re investing into the relationship. They’re growing with Infosys. We have been able to continue to recruit. We’ve been able to continue to build capacity and capability, new solutions, new IP and things like that.

We’ve managed to go through a year where the rupee appreciation is almost 6% and still we’ve been able to sustain our margins. In fact, our margins have improved by about -- operating margin has improved by about 90 basis points from the beginning of the year and without sacrificing the future, without sacrificing growth.

So clearly we have shown that the model is resilient. The model is a strong model for future, for the company. We began the year with about a 3% to 7% decline in revenues and we ended with 3% increase in revenues. And growth actually helps us manage the business better, manage the growth better, manage margins better and we’ve again proved that this year also.

Our guidance is for 16% to 18% growth for next year because of the appreciation of rupee, because of compensation increase, et cetera. We are looking at EPS growth of 5.3% to 9.6%, excluding the extraordinary items and we have again demonstrated that we have the capacity to grow. We have the bench to grow. If an opportunity presents we can grab that and grow faster.

So we’ll continue to focus on building the capacity, building the capability, building the resilience, building the solutions, the services, the relationships, the employee base and we will be able to sustain what has made this company successful till now.

Now let me hand it over to Shibu to continue his discussion on the details on the numbers.

S. D. Shibulal

Thank you, Kris. Just to give you color on the numbers, our Consulting and Package Implementation revenue went up this quarter. This is a reflection of the discretionary spend from our clients. 23.3% last quarter versus 26% in this quarter.

We are also seeing good traction in the infrastructure management space and the system integration space. As a percentage of revenue application development and maintenance has come down this quarter.

Fixed price is marginally up, Europe up from last quarter by about 0.6%. This is in line with our investments. We are investing in Continental Europe. The growth in Europe is mostly in the Continent. We have now two country heads in Europe, one for France and one for Germany. We are hoping that our investments in Continental Europe will further allow us to expand and grow our business in Europe.

Almost all verticals have shown good growth other than Telecom. Telecom as a percentage has come down and this is more related to a single client rather than an industry-wide phenomena. If I remove that one client, the rest of the clients have grown this quarter.

As I mentioned, our revenue productivity has decreased this quarter by 1.5% and for the year by 4%. This is a tailwind effect of the pricing renegotiations we did over the last 18 months. For the guidance purposes we have assumed the revenue productivity to be flat or the pricing to be flat for the coming year. Total number of employees is 113,000. Our utilization is in a healthy area 77%. We are quite comfortable with high 70s, low 80s.

So I have covered most of it. Now let me hand it over to Bala for the financial highlights.

Vibin Balakrishnan

Good morning, everybody. This quarter has been an extremely good quarter. We have done $1,296 million of revenues, which is 5.2% growth. In constant currency it’s more than 6%. Volumes grew by 5.2%. Pricing came down by 1.5% on a blended basis. In constant currency terms pricing came down by 0.7%. If you take the full year, the volume grew by 6.7% and the pricing declined by 4%.

If you remember, in the beginning of the year we said the revenues could decline somewhere between 3% to 7%. We’ve actually grown the revenues by 3%. We said the pricing could decline by around 5%. The actual decline is only 4%. We also said the operating margin could decline by 300 basis points, but when we completed the year the operating margin actually went up by 100 basis points.

In the current quarter the currency movement has been drastic. We have seen around 1.5% appreciation in the rupee which impacted the margin by close to 1%. That is the impact on operating margin you see in the current quarter.

We had some exceptional revenue this quarter. We sold our investment in OnMobile Systems, Inc. We liquidated around 60% of our holdings because it’s a financial investment we felt it’s the right time to in cash that investment. We have balance 40% which we will in cash whenever the liquidity opportunity emerges.

On the tax front, our effective tax rate is 21% for the full year. In the current quarter we have two significant impacts on the tax front. One is the reversal of provision we made for the SEZ units because a clarification has come in the current budget before the parliament. So we reversed around $69 million which pertains to previous year.

And we also set up the deferred tax liability for the branch profits which we have outside India in our overseas branches, because we believe there is a branch profit liability which could get triggered and we have set up a deferred tax liability of $52 million.

Net-net, the effective tax rate for the full year is around 21%. We had given a guidance of $0.56 on EPS. We have done $0.61. Excluding the income from OnMobile, the sale of investments, it is $0.59, similar to what we have seen in the last quarter.

For the next year we are giving a guidance of 16% to 18% growth in dollar terms, around 5.3% to 9.6% growth in earnings per share, excluding the one-time investment gain we got in fiscal 2010. So we are assuming the pricing to remain stable, so we have not assumed any change in pricing for next year. We are assuming an addition of 30000 employees next year. We announced a wage hike effective April 1.

On an average offshore wages could go up by around 14%, on-site by around 2% to 3%. It will have an impact on the margins in the first quarter but over the year, when more people join, the pyramid effect will make sure the impact of wages is minimized on the margins.

We assume the rupee/dollar of 44.50 for the next full year, which means a rupee appreciation of around 6.2%, because the average rupee/dollar rate in fiscal 2010 is 47.43. So the currency will have an impact of around 250 basis points on the margins. We’ll have the wage increases which could impact the margin by around 3%. Of course the utilization could go up and then we have the other levers on the cost side.

So, net-net, the operating margin for next year could decline by around 1.5%, that is factored in the guidance. The impact could be more in the first quarter when the full impact of wage increase is felt on the margins but for the full year the decline is only 150 basis points.

We are ending the year with $3.5 billion of cash. Our account receivable is 59 days. It’s one of the best in the industry. We have hardly 4% of our accounts receivable is more than 60 days.

So, net-net, we have done well this year. This is one of the toughest years because the economic environment was against us. Currency volatility was very high. In spite of all these odds, we delivered good numbers, we held on to our margins and we believe next year we have given a realistic guidance based on what we see in the market at this point of time. And hopefully the growth comes better than what we expected then we’ll have more leverage on the margin front.

Thank you. Now I can open the floor for questions.

Question-and-Answer Session

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. At this time, participants who would like to ask a question, simply press star and one on their touchtone telephone. If your question has been answered and you wish to withdraw a question from the queue, please press star followed by two. You are requested to use your handsets while asking a question. Participants with question, simply press star and one at this time.

Our first question is from the line of Joseph Foresi of Janney Montgomery Scott. Please go ahead. Mr. Foresi, your line has been un-muted. If you have a question please go ahead now.

Sandeep Mahindroo

[Multiple speakers] folks are getting (inaudible) for whatever reason. Can we move to the next question?

Operator

Sure, we’ll move on to the next question. The next question is from the line of Mr. Rod Bourgeois of Bernstein. Please go ahead. Mr. Bourgeois, your line has been un-muted. Please go ahead with your question. Sir, may we go on to the next question?

Sandeep Mahindroo

Yeah.

Operator

There seems to be no response from this line either. The next question is from the line of Ed Caso. Please go ahead. I apologize. The next question is from the line of Moshe Katri of Cowen & Company. Please go ahead.

Moshe Katri - Cowen & Company

Hey. Thanks. And a nice quarter. Bala, could you talk a bit more in details about the delta between revenue growth guidance and EPS growth guidance, maybe go through some of the various moving parts that will be impacting EBIT margins in fiscal year 2011 and maybe quantify the impact per that factor? Thanks.

Vibin Balakrishnan

So basically we are talking about a revenue growth of 16% to 18% and an EPS growth of 5.3% to 9.6%. This is excluding the one-time gain of $11 million we have seen in fiscal 2010 because of our sale of investment; it’s a one-time event.

We are assuming that the margins could decline next year, on year-on-year basis, by around 150 basis points, one, because we are assuming currency at 44.50. That means a rupee appreciation of 6%, which will have an impact on the margins by around 250 basis points.

We’ve announced wage increases effective April 1st of 14% average in offshore and 2% to 3% on-site, which could impact the margin by around 300 basis points. But over the year, since we are adding 30000 employees and most of them will come in the bottom of the pyramid, the pyramid structure will make sure the impact of the wages is not 300 basis points. It will be much, much lesser.

And we also assume that the utilization could go up by 2% next year because we have enough people. All the people who would join the company will be in training. Not many will become productive. So that could positively impact our margin by 100 basis points and we’ll have the scale benefits and other cost initiatives which will come and buffer the margin to make sure the overall impact on the margin is only 150 basis points for next year.

Moshe Katri - Cowen & Company

Thank you. And so you have enough leverage here to offset -- to potentially offset the volatile currency. But then if revenue growth comes out a bit stronger than expected the margin compression probably even becomes a bit more minor, am I correct?

Vibin Balakrishnan

Yeah. You’re right. If you look at, for example, fiscal 2010, when we started the year, we said revenues could decline by 3% to 7% and the margins could decline by 300 basis points. But when we ended the year we have seen revenues growing by 3% and the margin growing by 100 basis points. So it’s all in the growth. At the end of the day growth is the biggest lever we have. If the growth comes better than what we expect that will help us to minimize some of this impact and make sure the margins are maintained.

Moshe Katri - Cowen & Company

Okay. And then a final question. Looking at some of the revenue metrics, you had a pretty significant pickup in Software Package Implementation, SI. The more discretionary stuff during the quarter, is that a trend, based on what you’re seeing out there in terms of maybe your pipeline and the conversion rates, should we assume this is a sustainable trend for fiscal year 2011?

And then maybe this is also a question for Kris. Do you think we are headed towards a multi-year growth cycle similar to the one experienced by many of the offshore companies from ‘03 to ‘07? Thanks.

S. D. Shibulal

So what I mentioned was that if you look at our aspiration, our aspiration is to increase our revenues from transformational projects. What we call transformational projects are those projects which are business oriented, which is changing the clients’ business, which is sponsored by the clients’ business where they are willing to give a reference saying that we were part of changing -- fundamentally changing their business processes.

Now those projects usually come through when there is discretionary spend and today clients are focusing on building their tomorrow’s enterprise. They are thinking that when the downturn is over how do you handle -- how do you build the enterprise which will last for the twenty-first century. And our transformational projects are focused on those areas.

Now you will always have two kinds of revenues. The transformational revenue is in general transactional in nature. That means they are not annuity based. They don’t last for the next 20 years. But at the same time, so we need to balance that kind of revenue with the annuity revenue or the long-term revenues.

In that space, when you look at the long-term or the annuity revenue space, we have large deals, large wins. For example, this quarter we have five different wins, five wins in the large deal space by SGS, our Strategic Global Sourcing group. Two of them are more than $150 million of size.

We have growth in the Infrastructure Management space. We have growth in the Independent Validation space. Our Engineering Service, we are hoping that will grow faster next year. So, after all, at the end of the day it is a portfolio which we need to manage. Our guidance reflects our viewpoint -- our consolidated viewpoint. The guidance is the reflection of our consolidated viewpoint.

Kris Gopalakrishnan

Moshe, Kris here. Your question about are we looking at 2003 to 2007, not yet. I strongly believe that the global economy is not completely out of the woods yet and we don’t have a bubble economy back. 2003 to 2007 was probably a bubble. So we are not back there.

What we are seeing is that even though businesses are cautious they are investing into building the future, as Shibu said. There’s only so much you can get out of cost cutting. You have to think about your future, you have to invest in technology, you have to invest in new products, new markets etc and all of those investments will require technology change and that’s where growth is coming for us right now.

Moshe Katri - Cowen & Company

Thanks.

Operator

Thank you, Mr. Katri. Our next question is from the line of George Price of Stifel Nicolaus. Please go ahead.

George Price - Stifel Nicolaus

Hi. Thanks very much. I wondered if, just, I wanted to ask one question about Europe. Can you talk about where demand is stronger in Europe and maybe in the context of both the U.K. and the Continent and specifically in types of services? For example, is demand stronger on the Continent in the more discretionary areas, like Application Development and Systems Integration due to restrictions around outsourcing?

B.G. Srinivas

Hello.

George Price - Stifel Nicolaus

Yeah.

B.G. Srinivas

This is B.G. Srinivas. With respect to Europe, again, there are two parts to it. In the last quarter we have seen growth coming both from U.K. and also growth coming from the Continent. The sectors which have contributed to the growth include manufacturing, to some degree banking and capital markets primarily coming from the U.K., energy utilities and retail and CPG. These are the sectors which have contributed to growth.

Going forward as I see it, there is a fair degree of stabilization in the client environment both in the Continent and in U.K. across sectors. The budgets have been finalized and the IT investment decisions are being taken. I still, however, foresee a delay in the way the large outsourcing programs would happen, so there will be more short-term projects in the near-term. And but the traction is across sectors and also the traction is sweeping across the Continent, including Germany, France, Switzerland and in the U.K.

George Price - Stifel Nicolaus

Okay. Just so I’m clear on that larger portion, so it is more on the short-term project side?

B.G. Srinivas

No. We are not seeing any difference in the onshore/on-site mix or offshore/onsite mix with respect to the programs delivered for our clients in Europe. However, in the Continent it is in some programs you’ll require the local capability and, to that extent, there’s a percentage of local mix in the onsite component. The ratios, however, remain unaffected.

George Price - Stifel Nicolaus

Okay. Okay. Second question, sales and marketing, I think we’ve talked about the fact that sales and marketing spend for Infosys has been, as a percentage of revenue has been declining over the past several years. And as you come out of the downturn I’m just wondering is the nature of the demand that you’re seeing and the deals that you’re seeing, is that supportive of an overall lower sales and marketing spend as a percentage of revenue? Or do you think for some reason this component will need to ramp back up as a percentage of revenue so you can capture more of the growth?

Subhash Dhar

Hi. This is Subhash Dhar. I’ll take that question. I think one of the things about sales and marketing expenses going down as a percentage of revenues is probably not so bad a thing, because it shows some scale benefits that we get as we grow.

Having said that, I think there is also various kinds of models floating around in the industry on what you call sales and marketing. We have pure sales and then there is a whole bunch of sales support activities in the company which we don’t actually classify under sales costs because they are also part of the delivery capabilities.

So, but really to talk about your point on correlation between the percentage of sales and marketing costs to the deal flow, given that our sales model is largely relationship oriented, we’re relationship based and that reflects in the repeat business that we get from our clients. Most of the selling actually happens at the time of delivery of the project, where we get extensions to the projects, where we get the next project because we did the upstream work very well and so on.

So this is a very different model. This is not a products kind of model where you go and secure every project independent of what you may have done in the past. So I don’t know if I have answered your question, but there are a couple of post points. One is that it’s the relationship-based model and second, there is a whole bunch of sales support activities that we don’t really account for in our sales costs.

George Price - Stifel Nicolaus

Okay. Fair enough. Last question, if I could. Could you talk a little bit more about or talk a little bit about maybe Infosys Consulting and where you stand on your efforts in moving up the value chain in consulting services, particularly as you’re accentuating the rise in the mix of more transformational types of work? Where does that business stand and have you made any changes to the organizational structure of the Infosys consulting in the broader company? Thanks.

Ashok Vemuri

Yeah. Hi. This is Ashok Vemuri. Let me try and take that question or the part that I heard. Our journey on the transformational services, on providing business transformation product lines is actually progressing fairly robustly.

Our Consulting business is actually doing pretty well in terms of both the spread that they have, the kind of deals that they are doing. Most of these deals are being done in conjunction with our vertical and horizontal units. And we’ve seen the traction in the market for transformational deals actually going up both in our large units like manufacturing, or BFSI or in other smaller ones.

This is both across the U.S. as well as Europe. We are seeing good traction. We’re seeing good -- we are actually at this point of time doing a lot more of the strategic work which will translate into technology work for us as we progress these transactions.

George Price - Stifel Nicolaus

Okay. Great. Thank you.

Operator

Thank you, Mr. Price. Our next question is from the line of Joseph Foresi of Janney Montgomery Scott. Please go ahead.

Joseph Foresi - Janney Montgomery Scott

Hi, guys. My question here is have we returned, a couple of different questions. But have we returned to a normal budgeting cycle and should we think of this as more of a, maybe a 2000, back to 2000 when the budgets get set? And in the past we’ve seen the budgets be set and you guys exceed that from your original guidance. I’m just wondering how we should think about the budgeting process?

Ashok Vemuri

Well, I think the good news this time is that unlike last year the budgets did come on time. The process was much more streamlined, very similar to the years in the past. Clearly, the commentary that accompanied the budgets did indicate to us that the budgets have been locked in but the disbursements, if you will, against those budgets will happen in a short cycle manner. That does indicate to us that even though there may be dollars available, there will continue to be a little bit of caution as the expense in terms of expending those particular dollars.

The other thing that’s actually interesting from a BFSI perspective specifically and I’ll address that part as well, is that we’ve seen more of the budgets actually being handed over to the business people. So now the core strategic transformational type of transactions are being led from a technology dollar spend also with the business people.

So I think that’s an interesting thing that we are seeing. But overall, on an average, I would say that the budgets that we are looking at from a quantum perspective have typically been flat to slightly positive.

Joseph Foresi - Janney Montgomery Scott

And you talked about a shorter cycle. What would cause the cycles to return to a normal level? If the market stays stable, does that elongate the spending cycles?

Kris Gopalakrishnan

Yeah. That is one. And the second one is based on the tenor of the transactions that we are engaging with. Right now, coming out of the recession, they are still, in terms of their tenor, short in the six to nine-month timeframe. But increasingly we are seeing the tenor of the transactions or the programs extend a year, some cases two years.

And I think whenever there is a value-added strategic transformation deal which is separate from a commodity or a run of the mill technology program we see that they are willing to take on slightly longer tenors. But obviously these transactions are much more complex and the contractual agreements that go with that are also much more sophisticated and complex.

So, I guess, with the passage of time, as we see a lot more of these transactions come up there’s a little more confidence in wanting to make the expenses decisions, get finalized as to what and where the spends will happen, we’ll see a return back to some of these commitments, as it were in the budget expand to more than a short-term to hopefully medium to long-term.

Joseph Foresi - Janney Montgomery Scott

It looks like maybe wage increases came in a little bit higher than what people were expecting. I wonder if you could talk about what you think about the labor market at this particular point in time, what your expectations are for attrition rates maybe going forward and any thoughts on wage increases that you’re seeing out there in the market from some of your competitors?

T. V. Mohandas Pai

Well, I’m Mohan. I would look at this as an inflection point for the labor markets here at offshore, because so far industry was delivery-driven in the sense that most companies had to build up capacity, the businesses to come, the market was growing.

From now on the market is going to be sales-driven, solution-driven, where you have to go and prove your worth and compete more aggressively and deliver greater business value. It means you have to re-architect your entire labor force and come with a clear architecture process which meets the new needs and we have exactly done that over the last 18 months and transformed all this.

So our clear architecture, which is rolled out in October, means that we will build deeper domain and technology competence. We will honor people and reward them for being more competent in the domain area rather than having people with management skills becoming project managers. We need project managers, of course.

And that means that our ability to go up the ladder and become people managers will become slower. But at the same time we have to have a compensation structure which reflects the value that they add and pay them much better so they don’t look for a promotion every two or three years just to get a compensation hike and we have done that in this first quarter.

We’re coming now to the compensation plan which pays an average of 14%, in the range of 13% to 17%, for up to 54000 of our people, so that this layer, which is a technology layer, will see better payment and stick around longer. For the senior people projects managers it’s paying 10% because we are at market.

And we believe, having paid this, we will create a layer of people who will look at creating greater business value, will make poaching from us much more expensive for the rest of the industry and we will set new benchmarks and we will make sure that we transform ourselves. It has set the cat among the pigeons for the competition because they have commit on this structure and isolate the trend towards greater concentration of industry in certain areas.

So when the bottom layer of the pillar, bottom layer of the pyramid gets commoditized because people compete on price, we will be right there in the middle and competing for the top. So we will vacate space in the middle and at the bottom, because the race may not be worth it the next two or three years and deliver greater value.

It’s part of the master strategy. And will it reduce the attrition, yes. We believe it will reduce attrition starting not this quarter but next quarter because this quarter people leave for higher studies. Will it set off a race for higher competition in industry, possibly? It means that people who can afford to do things better and have better sales will possibly pay better and it’ll give us an unfair advantage. What about compensation hike for next year? Too premature to say what will happen. We have to wait and see. But certainly among all companies, with this one hike we’ll be well placed.

Joseph Foresi - Janney Montgomery Scott

So, just to be clear, it sounds like you’re paying better than industry rates but they’re associated with performance, is that correct?

T. V. Mohandas Pai

I didn’t catch the question. What is that?

Joseph Foresi - Janney Montgomery Scott

It sounds like you’re paying better than industry rates but they’re associated with performance, is that correct?

T. V. Mohandas Pai

Absolutely. Absolutely. Performance has become more sharply defined. For example, we had the first layer with about 38% to 40% people, now we may be 25%, so that higher performance will get paid more. But the challenge in this industry is correlating high performance to billing rates and that has not happened. We have to come out of the next one or two years to correlate higher payment and higher performance to higher billing rates. And that correlation is something that needs to be addressed for the industry to become more competitive, to become more of a consulting industry where companies can depend upon your billing. We are working on a strategy for that.

Joseph Foresi - Janney Montgomery Scott

Okay. Thank you.

Operator

Thank you, Mr. Foresi. Our next question is from the line of Rod Bourgeois of Bernstein. Please go ahead.

Rod Bourgeois - Sanford C. Bernstein & Company

Hi, guys. I wanted to enquire about the demand outlook over the next year and what’s in your plan. So your revenue growth guidance is 16% to 18%, and seemingly that’s above what most investors were expecting your initial guidance to look like.

So as you set this guidance, can you give us an idea what you’re assuming about the discretionary IT services demand environment particularly in the back half of your fiscal year? You clearly saw an up-tick in discretionary services demand in the recent quarter. And I’m wondering if you’re assuming that that rebound continues over the course of the fiscal year or if you’re assuming more conservatively that that moves more sideways from here?

Vibin Balakrishnan

So, if you look at last two quarters, we have grown 6.7% in Q3, 5.2% in Q4, and we’ve guided for about 3.2% growth in Q1 of this fiscal and 16% to 18% for the year. And discretionary spend is back. This quarter we have won four transformational projects, two of them more than $50 million. We won five large deals $50 million plus, two of those deals are $150 million plus.

So our guidance is based on our polling of our customers, the data we have about their budgets, how much they’re going to spend with offshore providers like Infosys. So it’s based on data we have, the model we have created over the years and the information we have about how this is going to pan out and things like that. So that’s what this is based on and definitely, we believe that the discretionary spending will continue this year.

Rod Bourgeois - Sanford C. Bernstein & Company

All right. Are you assuming it gets better as the year progresses or that it stays roughly at the level that it was when you ended the March quarter, when you look at discretionary demand?

Vibin Balakrishnan

It depends. Right now we believe that it will become better, confidence will continue to improve and businesses are starting to do better. So clearly we believe that it’ll improve over the year. Now, having said that, the global economy is still not out of the woods and there are concerns about Europe, some countries in Europe, the concerns about unemployment, et cetera, so it’s a cautious optimism at this point.

Rod Bourgeois - Sanford C. Bernstein & Company

Okay. And when you say you believe it will get better, which I think all the evidence would suggest that it probably will at this point. Are you assuming that it will get better in the guidance that you’ve set or are you leaving some buffer in your guidance in the back half of the year in case things move more sideways instead of up?

Vibin Balakrishnan

You know, we have a model for giving guidance and we have followed that model. We have used the data we have and given the guidance. If we look at the guidance this year versus last year we are in a better place today. We have better visibility. We have had two good quarters. We have all our clients confirming that they’re going to increase offshore. So our guidance is based on that.

So last year we said minus 3% to minus 7% decline or 3% decline. This year we are saying 16% to 18%. So we are in a better position than we were 12 months back and that’s reflected in the guidance. Is there a buffer et cetera? It’s the model. We have a model and we use that model and that model has not changed.

Rod Bourgeois - Sanford C. Bernstein & Company

Okay. Got it. And then one related question. When you look at the improvement in growth that you’ve achieved in your systems integration and package implementation segments in particular, can you dimension how much of that improved growth is coming from the market rebounding versus share gains that may be accelerating for you at this point? Is it mostly the market rebound that’s helping the growth or are you seeing more pronounced share gains in recent history there?

Chandrasekhar Kakal

Yeah. Kakal here, Chandrasekhar Kakal. If you look at -- if we go back 12 months ago when the downturn started, most of the discretionary spending was held back and the focus was on doing the maintenance support like we saw better in the package implementation space, but that has changed in the last two quarters. So we have continuously seen in the last two quarters that easing out. Uncertainty has eased out and stability has returned in some sense.

It’s a mix of both. It is the market rebounding and clients starting to spend, starting to invest in the business, not just focusing on cutting costs but starting to focus on investing in the business for the future and also a gain of the market shares from others. So we have had both in the last quarter to increase our revenue from Package Implementation and consulting.

Rod Bourgeois - Sanford C. Bernstein & Company

Is your win rate improving in the systems integration and package implementation space or has the win rate stayed relatively constant in the last couple of quarters?

Chandrasekhar Kakal

In the last couple of quarters our win rate also has increased, pipeline has become better. Previous to the last two quarters the pipeline itself was not so good because the clients were not spending and they were holding back and the programs really were not really taking off.

All that was eased out and clients also started expanding on their current programs. So the ramp up of the programs that we have won in the first half of the year and also the new start that happened in the second half of the year helped us to really get better revenues in the last quarter.

Rod Bourgeois - Sanford C. Bernstein & Company

Specifically, when you say that win rate has improved, does that suggest that you feel like you’re gaining share from the traditional firms in those segments at a more rapid rate?

Chandrasekhar Kakal

Most of our transformation program win is against the traditional global SIs. We have been getting into the last two or three most of the transformation program that we started to bid and we are winning against the global SIs.

Rod Bourgeois - Sanford C. Bernstein & Company

All right, guys. Thanks.

Operator

Thank you, Mr. Bourgeois. Our next question is from the line of Edward Caso of Wells Fargo. Please go ahead.

Edward Caso - Wells Fargo Securities

Hi. Just curious what your CapEx assumption was for F ‘11 and is this an effort to ramp up the SEZs as you try to rebuild capacity?

T. V. Mohandas Pai

We will spend something like about $240 million this year against something like about $130 million in 2010, and essentially go towards investment in the SEZs. We have no investment in the STPs. All incremental growth will go towards especially that. The investments SEZ in capacity increases suitably to a lower tax that we have to see because it normally takes one or two years for the impact to be felt.

But we are expanding in the Pune SEZ. We are expanding in the Chennai SEZ, the Hyderabad SEZ, the Thiruvananthapuram SEZ, Bangalore SEZ, Mysore SEZ, et cetera. So it’s only SEZ -- in SEZ where we’re investing right now.

Edward Caso - Wells Fargo Securities

I just want to follow up here on the employee turnover. If we try to convert the number to quarterly annualized, it’s a fairly big increase here. And you mentioned that it’s really the June quarter which is the historically large quarter. So and I understand the re-architecting argument but are the employees struggling with this new concept? Is it a cultural issue where they’re just -- they’re not used to this and you’re going to have a turnover remain high for a while as people sort of try to move to this more targeted model?

T. V. Mohandas Pai

Well, you’re partially right. We have gone through a gut-wrenching change which is felt as very essential. It was done in an open, consensual manner and everybody signs off till it actually gets done and then they’ll understand what it means. So we’ve gone through that.

But if we look at quarter four, we had 3500 people leaving the technology services part of the business. Out of it 3000 were people who were not trainees. 500 trainees were not confirmed and they had to leave because they did not give the requisite marks to pass the end of training.

In this quarter we could see a small pick-up from the previous quarter because it’s typically the quarter when people leave to do their MBAs or MTechs and every year we have maybe 2000, 2500 people doing that. That’s why we said that it could be an uptick.

For the compensation hike and the fact that we have got so much exciting promotion opportunities mean we believe the second quarter, that is, the July, August quarter, the attrition rate would come down. In the January, February quarter we also saw some targeted poaching by some companies to our staff. They hired some of our people, then asked them to talk to their buddies and increased the incentives and there was some targeted poaching, except that they’re now feeling the consequence of that because their own people are asking for more money as they hired laterals at a higher rate but that is behind us.

There were some challenges with the high rates and we have addressed most of it. We’ve set up working groups and working groups have worked out. And when we rolled out this compensation plan, when the senior leadership spoke to people, they’re extremely happy with what we have done.

So I think the change has come about and the change is here and we are prepared for the future. And I do believe after this compensation hike we have an unfair advantage against competitors.

Edward Caso - Wells Fargo Securities

Have you done any customer satisfaction surveys lately to check to see if this re-architecting may have spilt over to some challenges on the customer satisfaction side?

T. V. Mohandas Pai

No. I don’t think we’ve had an impact on (inaudible) side. We do an annual customer satisfaction, so ours will be annual. It will actually happen later on. But we do keep a pulse with our clients. There has not been an impact as a result of the limited attrition that we’ve had.

Edward Caso - Wells Fargo Securities

Thank you. Congrats.

Operator

Thank you, Mr. Caso. Our next question is from the line of David Grossman of Thomas Weisel. Please go ahead.

David Grossman - Thomas Weisel Partners

Hi. Thank you. You know, I got dropped from the call, so I apologize if this was addressed earlier. But I’m wondering if you could help me understand the dynamic among the top 10 accounts. It looks like their growth sequentially was lower than the balance of the business?

And then does that have any relationship to the change in pricing that you saw on the offshore business sequentially, which on a constant currency basis, it looked like that was down sequentially as well?

S. D. Shibulal

So, actually, this is seasonal in nature. If you look at our last quarter results you will see that our top 10 grew faster than the rest of the company. This quarter the top 10 has declined by 1.2%, which is actually not, it’s a very seasonal thing. While that is true, our top 25 grew faster than the company. The top 25 grew by 7.6% while the company grew by 5.2%. So there is no circular trend. Depending on the quarter-to-quarter either it is the top 10 which is driving the growth or the top 25, or the rest of the company.

David Grossman - Thomas Weisel Partners

And in terms of the revenue productivity, Shibu, on the offshore side, was that mix or was there anything in particular driving that down sequentially on a constant currency basis?

S. D. Shibulal

Right. The revenue gradually driving down is purely a pricing issue. There is a tailwind impact of all the pricing renegotiations which we did over the last 18 months. We are no more seeing that kind of pricing renegotiations. There are sporadic renegotiations going on even today, which I will consider as part of our normal business.

For the next year’s guidance we have assumed the revenue productivity to be flat. One other point, when we started the year we had predicted a revenue productivity drop of 5% for the year and we have ended the year with the 4% revenue productivity drop, which is better than what we expected in the beginning of the year.

David Grossman - Thomas Weisel Partners

Okay. So should we assume the revenue productivity that we’re seeing on the offshore side to be relatively flat with the fourth quarter then? So the adjustments that came in the March quarter then would persist into next year, so the $54,900 on the offshore side would be a good number to use for next year?

S. D. Shibulal

Yeah. So in the blended level I would expect it to persist through the year maybe with a marginal decrease between onsite and offshore revenue productivity, depending on the kind of service mix. For example, if our transformational work goes up maybe the offshore revenue productivity will go up a little bit.

But from a blended revenue productivity perspective, at this point in time we are expecting that revenue productivity will remain flat through the next fiscal year. That is the assumption we have made for guidance.

David Grossman - Thomas Weisel Partners

Okay. And then, Mohan, you talked about the changes in the compensation and the workforce and some of your policies on promotions. Is there any reason to think that we would depart from annual wage hikes which have been historical practice, with the exception of last year which was an anomaly or do you think we may be faced with compensation increases that may happen more than once during the course of the fiscal year?

T. V. Mohandas Pai

David, I think annual compensation is here to stay. There’s no move anywhere in the industry for half-yearly alternatives, annual is here to stay. We must remember that last year was a very tough year and people had to adjust to the new paradigm in the industry. So annual is here to stay but we’ll have differential comp across the industry.

It’ll impact different companies in very different ways, depending upon the ability to pay, depending upon what rates they charge and command in the marketplace. And I do believe it will be a bulwark against some large companies trying to commoditize their services. So I think what’s happening is a very good thing, but it’ll be annual as far as we see.

David Grossman - Thomas Weisel Partners

Okay. And then, just lastly on currency, in terms of the structure of the contracts that have been signed over the last 12 months, is there any trend or propensity to share some of the FX volatility with the customers or are you still bearing the majority of the fluctuations in currency on the new deals?

Vibin Balakrishnan

Well, it’s Bala here. We’ll try that because the cross-currency volatility is too high now. In some of the contracts we have clauses to protect us for a movement of plus or minus 5% on the currency trend. But not all customers agree to it because currently it’s something which we have to manage. So we do try that. Wherever clients agree we try to incorporate that but most of our clients want us to take the currency risk.

David Grossman - Thomas Weisel Partners

Okay. Great. Thank you.

Operator

Thank you, Mr. Grossman. Our next question is from the line of Bhavan Suri of William Blair & Company. Please go ahead.

Bhavan Suri - William Blair & Company, LLC

Hi, guys. Nice quarter. Just a couple of quick housekeeping questions here. Out of the 47 new accounts how many were in financial services and if you could break down the manufacturing and retail numbers too?

Kris Gopalakrishnan

Out of the 47 in financial services, 14, excuse me, are in financial services.

S. D. Shibulal

And in Europe.

Bhavan Suri - William Blair & Company, LLC

All right. Great. And then just, I think someone was alluding to this earlier, but I’m just trying to understand this. With the increase in discretionary spend, especially package implementation, are you seeing folks come back and actually start doing SAP Oracle Package Implementations? What sort of work is that and is that larger scale stuff, or is larger scale stuff still to happen and this is more like upgrades and adding bells and whistles and modules? How should we think of that?

Chandrasekhar Kakal

When we talk of Package Implementation and business transformation kind of program and all that, it is mostly the global rollout kind of unfinished agenda of large global corporations, where they have enterprise licenses available with them and have not really rolled it out completely to their entire organization, not all the modules, not all the subsidiaries, not all the geographies. The rollout is happening now.

It’s also the instant consolidation kind of work where they had maybe 25 different agencies in the past, they’re trying to consolidate into maybe one or two or three agencies. Upgrades have started appearing in certain areas. Like in PeopleSoft, we are seeing quite a few upgrades happening. In other areas it is not so much. It is a combination of all of these which is driving growth now in SAP and Oracle.

Bhavan Suri - William Blair & Company, LLC

Got it. And then just trying to, one of your large deals, I just saw the announcement with Microsoft regarding sort of management of their internal IT systems. Could you provide a little more color around sort of how big that is and sort of just box it for us a little more?

B.G. Srinivas

Hello, this is B.G. Srinivas. The size of the deal specifically is it’s more than $150 million over three years. This is a deal which, in partnership with Unisys, we are managing their entire IT infrastructure and this is over a period of three years the deal.

The scope of the engagement could also mean that we will work on their product suite both in terms of service delivery and manage their IT services worldwide. This also includes streamlining their processes, simplifying support service, while at the same time we are lowering the enterprise cost through use of the latest Microsoft solutions, which also includes Windows 7.

Bhavan Suri - William Blair & Company, LLC

Great, great. And I guess when you look at these deals, the PeopleSoft upgrades and everything else, you describe that win rates had gone up against the global SIs. But have you seen win rates go up against the other offshore players as well, are you seeing increased win rates against the TCS and the Wipros of the world?

B.G. Srinivas

In most large transformation deals we do not encounter too many offshore players and that is more we compete with the global SIs and in Europe more the local large European players.

Bhavan Suri - William Blair & Company, LLC

Right.

B.G. Srinivas

So we have very less occasions where we take offshore players head on in transformation deals.

Bhavan Suri - William Blair & Company, LLC

Great. That’s all my questions. Thanks for taking my call, guys. Good quarter.

Operator

Thank you, Mr. Suri. Ladies and gentlemen, due to time constraints, that was the last question. I’ll now hand the conference over to Mr. Sandeep Mahindroo for closing comments.

Sandeep Mahindroo

Thanks everyone for joining us on this call. I would now like to pass it on back to Bangalore for any closing comments from there.

Kris Gopalakrishnan

So thank you everyone. I really appreciate your participation on this call. You can contact us during the quarter through Sandeep Mahindroo or Shekar Narayanan in India. And we look forward to further interactions with you during the quarter. Thank you very much again for your participation.

Operator

Thank you, Mr. Mahindroo. Thank you, gentlemen of the management. Ladies and gentlemen, on behalf of Infosys Technologies Limited that concludes this conference call. Thank you for joining us on the Chorus Call Conferencing Service and you may now disconnect your lines.