Infosys Technologies Q1 Earnings Call Transcript

123jump.com Staff
14 Jul, 2011
New York City

The Indian technology services company said revenue for the quarter grew 23% to $1.67 billion. On an IFRS basis, net quarterly income rose 18% to $384 million. Earnings per American depositary share rose to $0.67 from $0.57 in the prior-year quarter.

Infosys Technologies Ltd. ((INFY))
Q1 2012 Earnings Call Transcript
July 12, 2011 8:30 a.m. ET

Executives

Sandeep Mahindroo – Investor Relations
S. Gopalakrishnan – Chief Executive Officer and Managing Director
S. D. Shibulal – Chief Operating Officer
V. Balakrishnan – Chief Financial Officer
Ashok Vemuri – Senior Vice President, Head, Banking and Capital Markets and Strategic Global Sourcing
Pravin Rao – Global Head, Retail
Prasad Thrikutam – Head, Energy, Utilities, Communications & Services

Analysts

Joseph Foresi – Janney Montgomery Scott
Jason Kupferberg – Jefferies & Company
Nabil Elsheshai – Pacific Crest Securities
George Price – BB&T
Moshe Katri – Cowen & Company
Rod Bourgeois – Sanford Bernstein
David Koning – Robert W. Baird
Edward Caso – Wells Fargo Securities

Presentation

Operator

Ladies and gentlemen, good day and welcome to the Infosys Earnings Conference Call. As a reminder, for the duration of this conference, all participants’ lines will be in the listen-only mode and there will be an opportunity for you to ask questions at the end of the opening remarks. Please note that this conference is being recorded. Should you need assistance during this conference call, you may signal an operator by pressing star and then zero on your touchtone telephone. I would now like to hand the conference over to Mr. Sandeep Mahindroo of Infosys. Thank you and over to you, Mr. Mahindroo.

Sandeep Mahindroo

Thanks, Rochelle [ph]. Good morning everyone and welcome to this call to discuss Infosys’ earnings release for the quarter ended June 30, 2011. I am Sandeep from the Investor Relations team in New York. Joining us today on this conference call is CEO and MD, Mr. S. Gopalakrishnan; COO, Mr. S.D. Shibulal and CFO, Mr. V. Balakrishnan, along with the other members of senior management team.

We’ll start the call with a brief statement on the performance of the company for the recently concluded quarter, followed with the outlook for the quarter ending September 30 and year ending March 31, 2012. Subsequently, we will open up the call for questions.

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

S. Gopalakrishnan

Thank you, Sandeep. Good morning, good afternoon, good evening to every one of you. The top headline is we have exceeded the upper end of our guidance. Our guidance for the quarter was 1.643 billion to 1.659 billion and we’ve -- our revenue for the quarter was 1.671 billion.

The revenue grew sequentially by 4.3%. The volumes increased sequentially by 4%. On-site volumes increased by 6.8%. This typically happens when there is an acceleration of growth because most projects start on site.

There is all-round good performance by the company, so revenue per employee increased by 1.2% on blended terms. We added about 9,900 employees this quarter. We said we’ll add 6,500. Because of that, of course, our utilization is slightly lower. Utilization excluding trainees is 73.3%. Last quarter, it was 73.4%. But given that we want to be prepared to take advantage of the growth opportunities that we see, we had decided to actually recruit ahead of demand and so this was, in some sense, planned. In fact, we plan to recruit another 12,000 people in the second quarter.

We had three large deals closed this quarter, three transformation deals this quarter. We added 26 clients. The top five clients grew at the rate of 8.2% sequentially. We had five platform deals closed this quarter.

As part of Infy 3.0, Product Platforms and Solutions is a key thrust area for the company. It takes advantage of some of the trends that we see in the market in terms of Cloud, mobility, et cetera. It takes advantage of emerging engagement models like pay-for-use, because most of these are sold as services to our clients. It takes advantage of the IP that we develop, sometimes co-create with our clients. So an inventory of the IP shows that we have an increasing portfolio today.

And, lastly, this also is part of our strategy to look at a non-linear growth engine, where the growth happens disproportionate to the number of employees being added because the traditional model is that growth is proportional to the employees added, so this addresses that also. So it is very strategic for us and I’m very happy to report that we have five platform wins in this quarter. Shibu will talk about what some of these platforms are.

The revenue profile as we move to these kind of solutions are different from our traditional revenue streams because you invest upfront and then you derive revenue on a continuous basis across several quarters. So the revenue is -- the revenue profile is very different. Our EPS for the quarter was $0.67 versus a guidance of $0.63, so we’ve exceeded our guidance. We have kept our annual guidance the same, 18% to 20% growth.

There is a slight improvement at the margin side. We had projected a decline of 300 basis points in operating margin, but now we project 2.5% or 250 basis points, a slight improvement on the margin side.

Given that the environment is uncertain, given that this may impact the timing of decisions being made by our clients, we felt that it is better to be cautious in this environment and that’s why we have not revised our guidance for the entire year at this point, even though we have exceeded our guidance in Q1. So all round a good performance in the different parameters you use to measure the company.

So I will now pass it on to my colleague, S.D. Shibulal, to give you more details about the performance in this quarter. Thank you.

S. D. Shibulal

Thank you, Kris. Let me start with Infosys 3.0. Our strategic direction has been rolled out to the market and we are seeing good traction with our clients. We have identified specific focus areas which we believe are important to our clients. So it is all about being relevant to the clients. It is all about being -- it is all about strengthening our strategic partnership with our clients. It is all about operating with them globally. It is also all about being relevant to all their parts of the business, operational part of their business, transformational piece, as well as where they do innovation for their clients or their customers.

We have realigned our organization completely towards this strategic direction. We have created four go-to-market industry verticals. These are global verticals. They will operate globally with our clients and these are FSI, manufacturing, retail and life sciences and energy utilities and services. They are headed by people who have been with us for the last many years who understand the clients as well as Infosys very well.

We have also created three offerings. At a very broad level, starting with the first one, Business Operations, which is application development and maintenance, infrastructure management, independent validation and business process management, mostly the lights-on work which we do with our clients. Here, our focus will be to build efficiencies to increase productivity, to increase the business value which we deliver to our clients during these engagements.

The second large piece will be the Consulting and System Integration piece. We have created this offering by combining our Enterprise Solutions, Consulting and System Integration. That piece gives us 31% of our revenue today and we are seeing good traction with our clients.

The third piece is what we’ve talked about. It is a new area of focus for us, Product Platforms and Solutions. It also includes the new models of engagement which we deal with our clients. So on the platform space, we have the HRO platform, the P2P platform, iEngage digital marketing. So out of the five deals which we got this quarter, actually, most of them are the iEngage deals.

There are four different scenarios of iEngage -- actually, five different scenarios of iEngage which are already in the market and we are seeing good traction. We have multiple models when we want to create these platforms.

In some cases, we create our own platforms, like Flypp or digital marketing. Some cases we build it on other people’s intellectual property, like, for example, iEngage uses one of the other -- Jive, right? iEngage uses Jive as the basic platform on which we have built it.

In other cases, like the HRO and P2P, we are hosting third-party intellectual party. HRO uses Oracle and P2P uses SAP. So there are different models which we are adapting to deliver this to our clients. These are delivered on pay-per-use. These are delivered on the Cloud and it truly converts clients’ fixed cost to variable cost.

Now, let me give you some color on various other parameters this quarter. U.S. has marginally grown ahead of Europe and rest of the world. U.S. revenue this quarter is 54.2%. Our segmentation has changed.

Our revenue from Business Operations is 60%. This includes business process management. Consulting and System Integration gives us 31.8%, Product Platform Solutions 8.3% and actually all the services have grown this quarter; Business Operations by 4%; Consulting and System Integration by 4.5% and Product Platforms and Solutions, quarter on quarter, by 5.3%.

Our segmentation in the verticals reflects our go-to-market success. FSI, which is banking, financial services and insurance, was 35.4%. The growth was led by retail, which grew by 10% -- 10.1% quarter on quarter. As Kris said, our on-site percentage has marginally gone up. While the volume growth was 4% across, it was 6.8% on site, which generally indicates higher levels of project starts.

We added 26 new clients this quarter, a couple of them in the Fortune 500 Global and U.S. Number of clients -- number of $1 million clients have gone up to 374. Number of $50m clients went up from 28 to 32. Growth has been led by the top five this quarter. The top five grew by 8.2% and the non-top five grew by 3.6%. We have 142 U.S. Global 500 and 154 Global 500 clients working with us.

With that, let me now hand off to Bala for the financial highlights. Thank you.

V. Balakrishnan

Good evening, friends. This quarter has come out much better than what we expected in the beginning of the year. The revenues grew by 4.3% and the revenue productivity went up by 1.2%. On constant currency basis, the revenue productivity is almost flat.

As you remember, in the beginning of the year, we said the operating margins this quarter could decline by around 4% and for the full year it could decline by around 3%, mainly because of one wage impact in the first quarter. We increased wages in India by around 10% to 12%, on site by around 2% to 3%. It typically impacts our margins in the first quarter.

The first quarter came much better than what we expected and the margins declined only by 3%. The operating margin declined from 29% last quarter to around 26.1% this quarter, mainly factoring the wage increases what we have given this quarter.

The non-operating income is slightly higher this quarter because the yield has gone up. Yield has gone up to around 9.5%. And also we had an exchange gain of around $10 million in the non-operating income this quarter which may not be there next quarter. The effective tax rate is close to 28%. We always said it could be somewhere between 27%, 28%, but it will be closer to 28% and the EPS came much better than what we expected.

For the next quarter, we are giving a guidance of around 5% growth on the upper end. We are also assuming the operating margins to remain at the same level as Q1 but the non-operating could be lesser because we won’t get the exchange gains of 10 million what we saw in the first quarter, to the extent the net margin could be slightly lesser than the first quarter. And for the full year, we are retaining the guidance at 18% to 20% growth, because we believe the environment is still volatile. Clients are still cautious about their spending. So it’s too early for us to re-look at the yearly guidance.

And we also are assuming that the operating margins for full year could decline by around 2.5%, instead of 3% we predicted in the beginning of this year and 2.5% is basically due to three reasons. One is the currency. The average rupee/dollar rate last year was 45.54. This year it could be 44.72 because for the rest of the year we are assuming at 44.50, which means an appreciation of around 1.8%, which could impact the margin by around 80 basis points.

Utilization could come down from 72% to 70% as we add more people. We’re adding 45,000 more people this year and 12,000 in the second quarter. That could impact the margin by around 90 basis points and the balance, 0.5, is mainly due to salary impact which is not fully absorbed at the growth level of 18% to 20%.

The foreign exchange have been very volatile this quarter. Almost all the currencies appreciated against U.S. dollar, while the rupee also appreciated against the US dollar. We believe the currency environment will be very volatile. We want to take a short-term view, we’re not changing that. We have a total cover of $745 million at the end of Q1. It was $620 million at the end of last fiscal. So we have increased slightly our hedging positions, but we still believe the rupee could depreciate in the short term.

We are also assuming that the effective tax rate could be closer to 28% for the full year. The cash position has been extremely good. We have cash and cash equivalents of 3.8 billion at the end of this quarter. Our DSO days are 63 days, similar to what you have seen last quarter.

So overall I think this quarter has come much better than what we expected in the beginning and the margins for the full year also we believe it could be slightly better than what we predicted in the beginning of the year. The revenue productivity, it is stable, because in constant currency terms, we are not seeing any increase in the first quarter and we are assuming it will remain flat for the rest of the year. So overall things have turned out better than what we expected but we are cautious because the economic situation in all the markets we operate in, has still not recovered and our clients are very cautious.

With this, I will open up the floor for Q&A.

Question-and-Answer Session

Operator

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. To ask a question at this time, please enter star followed by one on your touchtone telephone. If your questions are answered, you may withdraw question from the queue by pressing the star followed by two. Participants are requested to please use only handset while asking a question. To ask a question, please enter star then one now. Our first question is from the line of Joseph Foresi of Janney Montgomery Scott. Please go ahead.

Joseph Foresi – Janney Montgomery Scott

Hi. I was wondering if you could take a little time and maybe frame for us what you’re seeing on the demand side that causes the caution. Has there been any cancellations, any push out of projects or are you just maybe extrapolating what you’re seeing on the headlines in the general economy?

S. Gopalakrishnan

We are not seeing any cancellations. As you can see, our Q1 results show that we’ve done better than guidance. But given that, there is uncertainty about the overall environment. Sometimes you can see very short-term delays in decision making. So we want to be cautious because of that, actually, rather than anything specific that we see in our client behavior. So we’re not seeing any cancellations.

Joseph Foresi – Janney Montgomery Scott

Okay. And then -- but it seems like you’re taking a longer-term approach in the business in general by putting -- by increasing hiring. Maybe you can help us reconcile the cautiousness over the short term versus your increasing of headcount.

S. Gopalakrishnan

So we are definitely taking a very long-term view of the business. We are recruiting ahead of demand. We believe that we need to have a strategic bench so that if the demand picks up we are in a better position to take advantage of that. We are recruiting ahead of demand so that we can train and prepare this workforce to provide value to our clients. Remember that our training is one of the best. At the entry level, we train our people for 23 weeks at our corporate education facility global education center, so we prepare our people.

We’re also thinking long term by looking at the needs of our clients. Clients have three sets of needs, actually. One, to optimize, to reduce the cost in business operations and we’re trying to address that, that has been our traditional business. Second, we are looking at the need for our clients to transform their business, to grow their business to become more competitive. The transformation-related services, these are the Consulting, System Integration services.

And the third piece is when the clients look at new technologies emerging, new ways of engaging with their service providers, maybe moving to a platform model, a Cloud-based model and we’re offering those services also today. This actually also helps us to look at non-linear models of growth. So we are thinking long term. We are adding a thought leadership piece to our value addition to our clients. This is the whole thought leadership around building tomorrow’s enterprise.

Here, we look at what are the themes that are emerging; where are companies spending money today; where are they looking at new opportunities for transforming their business to create new revenue engines, sales engines, new markets and things like that. So we are definitely thinking long term and we are also thinking long term from a leadership development and leadership bench perspective.

Joseph Foresi – Janney Montgomery Scott

One last question from me. I just wonder if you could update us on the pricing environment and the general deal size, and remind us if -- what’s built into that revenue growth guidance and has anything changed on that side?

S. Gopalakrishnan

So even though we have seen a slight uptick in this quarter also in terms of revenue per employee, we have assumed flat pricing and we have assumed the same revenue productivity for the rest of the year. So we have not built in any revenue productivity increase for the rest of the year. It’s the same as Q1. And then -- what is the second part of your question, sorry?

Joseph Foresi – Janney Montgomery Scott

Yes, I just wanted to know in general is pricing trending upwards and what is deal size like at this point.

S. Gopalakrishnan

So large deals are back on the table. Even this quarter we have had three large deals, one more than $100 million. So we see large deals coming back in the strategic global sourcing space as well as in the transformation space.

Joseph Foresi – Janney Montgomery Scott

Okay. And is pricing -- are you still getting price increases; it’s still an upward bias there?

S. Gopalakrishnan

So we’ve assumed flat revenue per employee. I think the pricing will be stable at this point.

Joseph Foresi – Janney Montgomery Scott

Okay. Thank you.

Operator

Thank you, Mr. Foresi. Our next question is from the line of Jason Kupferberg of Jefferies. Please go ahead.

Jason Kupferberg – Jefferies & Company

Thanks. Hello, guys. I just wanted to build on the last question a little bit, just to make sure that everyone is clear as far as what you guys are actually seeing versus what you guys think you may actually start to see at some point in time. It sounds like what you’re saying is that you’re not really seeing or actually observing slower client decision making at this point in time. You’re simply incrementally cautious that that dynamic could start to occur more -- on a more prevalent basis over the course of the next quarter and, therefore, you’re taking a more measured view of your September quarter guidance. Is that a fair assessment or are you actually observing a slowdown in client decision making versus the time of your last earnings call?

S. Gopalakrishnan

If what we’re seeing is maybe a temporary -- that is, for example, what I mean by this is, let’s say a deal is supposed to be signed today, the client sees something in the market in the morning when they come in, they may delay actually their decision by two or three weeks till they fully understand the implications of that. The overhang of the global economy is in everybody’s mind today. Are we going to see something dramatic happen suddenly?

So even though we are not seeing a reduction in the IT budgets, for example, we are not seeing a reduction in the IT budget. It’s belief that the money will be spent but it may be delayed spending for the year. That is what we are cautious about.

Jason Kupferberg – Jefferies & Company

Okay. And you’re a little bit more cautious about that versus how you felt three months ago?

S. Gopalakrishnan

It’s almost the same, actually. We said three months…

Jason Kupferberg – Jefferies & Company

Okay.

S. Gopalakrishnan

…ago also that we have to be cautious and we are still saying be cautious and that’s why we have not revised our guidance, even though our first-quarter performance has been better than what we guided.

Jason Kupferberg – Jefferies & Company

Okay. Okay, understood. The new client adds in the quarter, I know it’s just one quarter of data so you can’t really extrapolate it necessarily, but obviously a bit lower than some recent trends. Do you view that as more of a timing issue or have you seen any material change in your win rate in pursuing new customers?

S. D. Shibulal

Well, there is no material change in win rate or client additions. Last year, we had very, very strong client additions. In fact, we added close to 130 clients last year. This quarter we have added 26 new clients, net eight new clients. There is no secular trend to be taken out of this one-quarter number. I think we need to see -- and also when you add 135 clients, and even if the net is 40, there is a lot of mining to be done on those 40 clients. So we have to balance both. But there is nothing secular which I can say about this quarter’s numbers.

Jason Kupferberg – Jefferies & Company

Okay. And just a last question from me. Your balance sheet obviously remains in tremendous shape with terrific flexibility. Has the aperture opened at all in terms of types of acquisitions Infosys might consider just in this organic growth environment? Is there any appetite to do acquisitions larger than what we’ve seen in the past and can you just make some general comments around what your M&A pipeline looks like right now and any changes there?

S. Gopalakrishnan

So we look at M&A from a strategic perspective. We want to add capability. We want to add capability in some of the new areas that we are looking at. So, for example, one of the last acquisitions we did was McCamish. It provided us a platform for policy management. It was extremely small. It’s a minute acquisition in New Zealand. It opened up the New Zealand market for us. So we look at acquisitions very strategically, typically smaller acquisitions. We have an active pursuit team in place. They look at maybe five, 10 companies at any point of time.

It doesn’t mean that all or any of them will close, actually. It’s just that we have a pursuit team. As and when we see opportunities, as and when we see a company that wants to be part of Infosys, we are looking at friendly acquisitions, so wants to be part, it’s a strategic fit, we can -- we feel that we can leverage that, then you will see us make an acquisition.

Jason Kupferberg – Jefferies & Company

Okay. Thanks, guys, for the comments.

Operator

Thank you, Mr. Kupferberg. Our next question is from the line of Nabil Elsheshai of Pacific Crest Securities. Please go ahead.

Nabil Elsheshai – Pacific Crest Securities

Hi, guys. Thanks for taking my questions. I guess the follow up on the macro questions and, specifically, with financial services in the U.S., there’s a lot of headlines about cutbacks and word going around of them under-spending their IT budgets. So could you give a little color on what you’re seeing in that vertical, particularly since it grew a little bit less than the company overall in this quarter?

Ashok Vemuri

Yeah. So financial services actually grew at about 3.3% this quarter but if you break down that into various components our capital markets business, which is a fairly large chunk of our overall financial services, grew at about 5.5%. Our banking business on the services side grew at about 5.2% and insurance, which has been fairly muted in the past couple of quarters, also showed fairly robust growth. We obviously lost out in terms of some amount of discretionary spend delays, that Kris was alluding to earlier on, not cancellations, but some delays which did not allow us to capture that revenue in the first quarter.

But having said that I think what we are seeing in the financial services space is increased spending in the compliance and regulatory space, a significant amount of interest and traction for our Product Platforms and Services space, especially in the area of analytics, mobility, in securities trading, in processing et cetera. We at the same time are hearing increasing concerns or commentary from our clients, let me put it that way, about sovereign risk issues of the fact that, because of increased requirements for capital, that the associated costs would trickle down. Nothing that we can put a finger on today, but could trickle down to impact IT budgets but nothing that we -- as I said earlier, we can put a finger on.

Overall, I would therefore say that the news on the financial services, notwithstanding a fairly positive performance in the first quarter, is a mixed bag. We’ve had no cancellations, we’ve had one large deal of the three that Shibulal was mentioning in financial services. It’s been fairly significant growth in our non -- in the non-U.S. and non-European market, so that’s essentially Australia. We’ve seen -- we see good traction in the Asian market and we continue to see strong demand for our Business Operation services in the financial services space in the U.S.

Nabil Elsheshai – Pacific Crest Securities

So, given what you’ve mentioned in terms of the regulatory constraints, what have you assumed -- you’re closer to it than us. What are you assuming for the second half from IT spending? Are you expecting them to pull back a little bit?

Ashok Vemuri

Well, we do expect some pull back in some of the areas that we are engaged with, but that could be compensated, we believe, given the commentary and the traction that we have in areas like regulatory and compliance. In these two specifically, we are seeing very good traction. Also in wealth management space, we are seeing very good traction due to some of the regulatory changes, process and system changes, in the cards business.

So at this point in time, I don’t think it would be -- we would call that we would see a deterioration in either spend. But this is a space that we are going to watch very, very closely.

Nabil Elsheshai – Pacific Crest Securities

Okay, a last question on the regulatory. Is that a result of (inaudible) or is it too early to tell what the impact will be from that?

Ashok Vemuri

So multiple things, dart rank which got delayed, it’s a lot of preparatory work on dart rank. We are seeing work as a result of, for example, worker rules, so prop trading going with wealth management in that sense. We are seeing rule as -- from a compliance perspective just basic. We are doing projects, for example, on Taxonomy. We are dong projects and programs on just compliance reporting, both in -- and audit. So there is a whole flue of work that’s actually coming. And our expectation is that last two year, or about 18 months, we made significant revenue on the M&A part of the business.

And as that is tapering off we think that this is the one that will actually replace it. And from our estimates and from our conversations with the clients, we actually expect to see at least a two- or three-time increase in spend in this particular space as compared to what we saw in the M&A space.

Nabil Elsheshai – Pacific Crest Securities

Okay. Great. Just real quick on the service lines. This SI work is particularly strong, maybe a little less on the packaged implementation. So in terms of new application of development and implementation, what are you seeing going forward there in terms of your customers’ appetite or investments discretionary application expansion?

S. D. Shibulal

Well, our Application Development is approximately 15% of our revenue and our Consulting System Integration side is about 31%. I think clients are more and more deciding towards packaged solutions rather than developing Greenfield applications. But there are occasions where they do decide on a Greenfield application and that is what you see in the Application Development space. We are seeing traction in Application Development space, but you can clearly see that our revenue from Consulting and System Integration, which includes the Package Implementation space, has grown faster than the Application Development space over the last many quarters.

Nabil Elsheshai – Pacific Crest Securities

Thank you, guys, for taking my questions.

Operator

Thank you, Mr. Elsheshai. Our next question is from the line of George Price of BB&T. Please go ahead.

George Price – BB&T

Hi, thanks very much. I guess I just wanted to kind of clarify your response to the question before just to understand where a very general sense and mindset is at, back to Jason’s question. When you said you’re basically -- things -- your new on-mode, the broader demand now and what’s happening and they’re basically the same in terms of caution as it was three months ago. But as I recall last quarter you say -- you were looking at fiscal ‘12 being more of a “normal year end” and clearly, that doesn’t seem like what you’re seeing right now. That seems to imply that there is some fundamental change in the market during the quarter.

And I guess I’d like to hear a little bit more about -- you seem to be looking at things on a very temporary delay basis but could we be seeing something more fundamental happening here in the demand environment in terms of what’s going on? I’d like to get your views on that.

S. Gopalakrishnan

From an IT budget perspective, we are seeing no change. Our IT budgets were up by about 3%, 4% and that’s why we had said a normal year and IT budgets continue to be the same. There is no reduction in IT budgets that we can see.

But given the overall economic environment and remember that we are now -- at least some analysts are even talking about double dip in certain economies. We believe that if something were to happen there maybe a pull back, there may be. We are not seeing any at this point, but there may be a pull back and that is the reason why we want to be cautious.

Now, the way it is being reflected is sometimes a temporary delay in decision making. That is what we are seeing on the ground right now. No cuts in budget, no cancellation of projects, but we want to be cautious, that’s all we are saying.

George Price – BB&T

Okay, okay. And I guess what -- can you just be maybe as specific as possible in terms of two things? One, with the delays that you’re seeing when did these start to become apparent? What was the major driver that started off these delays? And then, related to that, what portion of things that you’ve seen delayed have since been re-started? I guess another way to say it is, what kind of visibility do you have that these things may get started up again shortly?

S. Gopalakrishnan

These delays are temporary in nature. For example, a deal which is supposed to close last quarter may close early this quarter, actually, so it’s a temporary delay. It’s just not anything more specific than that. It is not attributable to any one thing. Something happens in the environment which raises a concern. Currently, a decision is taken to be cautious, that’s it. So there is nothing specific I can point to. These are temporary delays we see occasionally in decision making.

George Price – BB&T

Okay. Just to be clear, have you seen -- are these delays still occurring or have these things started up again, so you just basically are seeing a push out of, be it a month or whatever, but you’ve actually -- many of these initiatives have again started so you’re just going to see that move to revenue and you’re cautious to make sure that you don’t see that again or are you still waiting for the majority of these initiatives that have been delayed to actually start up? You’re hoping that they start shortly; that’s what the clients are telling you but you don’t have concrete visibility on that at this point?

S. Gopalakrishnan

Nothing is permanent, so it just is a delay for a week, two weeks sometimes. So these are not permanent. We are not waiting for something to close with an uncertainty. The client says yes, everything is fine, but I will sign next week, that’s the kind of thing; nothing more alarming than that at this point.

George Price – BB&T

Okay. And, again, when did these really start to become apparent?

S. Gopalakrishnan

During the course of Q1; that’s it, in the last three months.

George Price – BB&T

Okay.

S. Gopalakrishnan

Especially when the grave situation happened, that’s when we saw concerns and even in the financial services, actually -- Ashok mentioned this, actually. So that happens. Suddenly there may be a week or two delay before they assess the situation or see whether it’s going to deteriorate further, or, for example, when France decided to actually renegotiate the loans outstanding. There is a temporary feeling of normalcy coming back, right, so that -- those are the things I’m talking about.

George Price – BB&T

Okay. Thank you.

Operator

Thank you, Mr. Price. Our next question is from the line of Moshe Katri of Cowen & Company. Please go ahead.

Moshe Katri – Cowen & Company

Thanks. Top-one customer was sequentially flat. Excluding the impact from that top-one customer sequentially revenues are up 5% for the quarter. Couple of things, one, can you give us some details on what happened there? That’s number one. Number two, should we assume that the weakness from your top-one client also had impacted the sequential growth coming out of Europe? And then, final question, and that’s related to the final few questions of team on board is whether you’ve seen some of the delays towards the end of the quarter, specifically, during the month of June? Thanks.

S. Gopalakrishnan

There is nothing particular in the top-one client. Quarter upon quarter some clients grow, some clients don’t grow, so there is nothing particular I can talk about in the top-one client. This is a quarter where there was not much change in the top-one client, that’s all, Moshe.

Moshe Katri – Cowen & Company

Okay. Does that impact your sequential growth? Was that one of the issues why sequentially Europe was up, but at a smaller pace than the overall company rate?

S. Gopalakrishnan

No. Europe in general is flat for us, because I see the impact of whatever is happening in the global economy being felt in Europe more than anywhere else, actually. So our strategy in Europe has been to broaden our client base. So we are proactively investing in France, Germany. We are adding sales capacity on the ground, adding more clients and things like that.

So Europe is slow to recover -- slower to recover and is more concerned about whatever is happening in the European region than other regions. We do have the top (inaudible) issues, but they are actually turning around in Europe.

Moshe Katri – Cowen & Company

All right. But going back to your revenue concentration question, you’ve had that uneven performance coming in from your top-five and top-10 customers and top-one customer during the past few quarters and it seems that that has been impacting your sequential growth as a whole. I think it will be beneficial if you give us an update on what’s going on with your top-five or top-10 clients. Again, top-one customer 5% ‘11 is sequentially flat. It had a pretty significant impact on sequential growth for the entire company?

S. Gopalakrishnan

Well, in this quarter the top-five clients grew 8.2%, much faster than the company average, so we have seen the top-five clients grow faster this quarter. Top-five clients are across the industry. It’s just not all one industry and I can’t be more specific than reading out client names, Moshe, which I don’t want to do.

Moshe Katri – Cowen & Company

Understood. And Telecom down 7%. Is that attributed also to one or two customers, or this is across currency across-the-board weakness?

S. Gopalakrishnan

Telecom is customer related, plus in Telecom we have been primarily in wireline side of the business rather than wireless, so we are now proactively moving into wireless and cable. That’s where the investment is going. And so proactively we are actually focusing more on the wireless and cable and we have added clients. We have added business in that space and hopefully we will see now growth come back into -- in the Telecom space also, because of the shift and focus to wireless and cable.

Moshe Katri – Cowen & Company

All right. And should we assume that the (inaudible) that you spoke about started taking place during the month of June? This is when some of the negative economic data started coming out and spooking the markets.

S. Gopalakrishnan

Yes, that is also part of what is happening. Yes.

Moshe Katri – Cowen & Company

Thanks.

Operator

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

Rod Bourgeois – Sanford Bernstein

Okay. Great. There’s definitely some evidence that there are increased obstacles to getting U.S. visas approved. And I know NASSCOM is also trying to address this issue with the U.S. So can you give us any update on how many additional U.S. visas you’ve been able to secure in the last month or during the June quarter or any general update on how that U.S. visa approval process is going for the company?

S. Gopalakrishnan

No, I cannot unfortunately give you those details. All I can say is that this quarter we grew. So we are able to grow the business in this environment.

Rod Bourgeois – Sanford Bernstein

Okay. Great. And can you give us any outlook in the U.S. visa approval process, to the extent that you agree that the approval process has become tougher, rejection rates are higher and information requests have been up and so on? Do you expect that to be resolved over the next several months or could this be an ongoing issue from what you can tell so far?

V. Balakrishnan

NASSCOM, which is an industry body (inaudible) of the Board higher degree of projection for the industry. It also stops the Board delays in getting visas for some of their companies. I think the last company selected who have credibility we are able to get those visas. We have enough in the system. We also plan in advance and make sure we get visas on time, so it don’t hurt our business. So we are not seeing any (inaudible) disruption on the visa front which will affect our business now.

Rod Bourgeois – Sanford Bernstein

Okay. Great. So in your inventory of visas you have enough of the right visas for the right types of skill sets for that to not be a disruption any time soon. Is that the way to look at it?

V. Balakrishnan

Yes. We plan in advance. We make sure we have the visas for the right skill of people so that it don’t impact our business.

Rod Bourgeois – Sanford Bernstein

Okay. Great. And then are you continuing down the path of -- I know that you’ve talked about on the last couple of conference calls a desire to lower utilization to prepare for the upcoming growth that you expect to improve. We had a lot of discussion in this conference call where people are asking about the demand weakening, but it seems like the strategy is to lower utilization to get ready for better growth. So is that strategy still fully intact, to try to drop utilization some to get ready for better growth that apparently is being signaled in your pipeline?

V. Balakrishnan

It look like it is. The client budgets are still firm. I don’t think anybody cut down their budgets. So budgets look good, so our strategy is to make sure we have enough capacity in the system. So we are sill going ahead with the earlier hiring plan of 45,000 gross additions for the year. So that could naturally impact the utilization if the growth is only what we are projecting for, that is, 18% to 20%. So we are keeping the model ready. The budget looks good. The environment is stable. Clients could possibly spend the budget that could give us the incremental growth. So we are hiring those people, creating the capacity and keeping the model ready for growth.

Rod Bourgeois – Sanford Bernstein

Great. So you’re saying that you haven’t changed your lower -- your (inaudible) -- you haven’t changed the plan to lower your utilization over the last three months?

V. Balakrishnan

Yeah. The utilization could naturally be lower if the growth doesn’t come, but if the growth comes utilization will look up.

Rod Bourgeois – Sanford Bernstein

Okay. Great. Thank you, guys.

Operator

Thank you, Mr. Bourgeois. Our next question is from the line of David Koning of Baird. Please go ahead.

David Koning – Robert W. Baird

Yeah. Hi, guys. I was just wondering if we could talk just a little bit about the margins again. And I know you improved your margin forecast to down 250 basis points this year. I’m just wondering if you consider this year a one-time step down in margins, given a few different items that you mentioned before or if you feel like the wage pressures et cetera might contribute to a longer-term pattern of margin decline if you’re not able to leverage some utilization or currency continues to be a headwind. Maybe you could just talk through whether it does feel like a one time or maybe more of an ongoing.

V. Balakrishnan

Well, the way to look at it is two things. One is the currency, which is a current word. The currency moves quite faster in a very short timeframe. If you can’t do much it could hurt our margins. But if gradually appreciate over a period of time probably you can pull in some of the levers to offset the impact. The other two, the utilization and also the wages, is more internal to us. If the growth comes better than what we are expect -- I think growth is the biggest lever we have and if the growth comes better than what we expect probably some of this impact we could absorb.

So the way to look at it is we are an industry with a lot of opportunities for growth. Of course, we’ll be subject to the economic cycle, sometimes it could hurt our growth, but if you are taking a long-term view and the growth opportunities are possible, some of the internal things, like the wages and also the utilization, can be taken care of. The excellent thing, as I said, the currency as long as the movement is over a period of time we’ll be able to absorb, but if quite sharp in a short period of time it could impact us.

David Koning – Robert W. Baird

Great. Thanks. And then just a couple of quick modeling questions as well. The other income line, I think you mentioned $10m of FX gains in there. So the best way to think about that going forward just to take -- for next quarter at least just to take $10 million out sequentially.

V. Balakrishnan

Can you please repeat? I’ve not got your question.

David Koning – Robert W. Baird

Yes. I think within the other income line it was higher than spend in the last several quarters. It was 99 million and I think in the prepared remarks you said 10 million and that was from FX gains, I believe, or something around that. So is the best way to think about that next quarter just to take 10 million out of the Q1 number?

V. Balakrishnan

Yeah. Naturally, the yield has gone up this quarter. It was around 9.5%. But I think in the next few quarters probably the interest rate in India could moderate. So for the guidance purpose we assume that the yield could make -- ease a little bit, maybe somewhere between 8.5% and 9% for the rest of the year.

So I think naturally the other income will proportionately come down. In the first quarter, we had a 10 million positive impact because of the movement in currency in the non-operating income. That naturally will not be there for the rest of the three quarters.

David Koning – Robert W. Baird

Great. And then, just finally, the tax rate. You said, I think -- it might have been in your first call this morning you said it was going to be about 28% this year. Is that sustainable, at 28% or was there something one time in nature that’s pushing it higher this year that might subside in the next couple of years?

V. Balakrishnan

No, there is no one time in that impact. Even last year we had a small proportion of revenues coming from our software technology parts unit. That is only one unit. That also has gone out of tax holiday this year. So I think we always said it could be somewhere between 27% to 28% and it could be closer to 28%. That is what we are seeing in the first quarter.

David Koning – Robert W. Baird

Great. Thank you.

Operator

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

Edward Caso – Wells Fargo Securities

Good evening. I want to ask a little bit about the labor market. Particularly in India it looks like your attrition is starting to come under control. Is that efforts on your part or is that -- or is it also of the market settling out at this point? And do you sense that there might be needs for interim compensation adjustments as we might have seen in the last 18 months or so or are we beyond that now?

S. Gopalakrishnan

No, I don’t expect any interim comp increases necessary. I think there is enough supply. Attrition has come down. The blip we saw was, when growth accelerated, everybody scrambling for resources. We had done long-term planning and so we were probably more of a target than -- we were not scrambling because we had actually continuously recruited during the downturn, but things are stabilizing and our own attrition is also coming down. Our comp increase is behind it. So this is the quarter when it will -- it would -- it impacted us and it’s already behind us.

Edward Caso – Wells Fargo Securities

Can you talk a little bit about your win rates and your trends? I think you talked about slippage within the quarter, but how, sort of, over, say, a year or two timeframe can you talk about your win rates and maybe your pipe -- size of your pipeline trends?

S. Gopalakrishnan

So let me request my colleague, Pravin. Retail is one of the fastest-growing segments, you know win rates there. We are very strong there. And I’ll also ask Prasad, who heads our Energy, Utilities, Communications Services Group, actually, to talk to you about win rates in the ECS segment. Pravin?

Pravin Rao

Well, in the retail space, we are seeing a lot of traction in the Transformation, Consulting and System Integration space, so where our intake is anywhere up from 60% to 70%. We had this win rate over the last couple of quarters and the kind of growth we are seeing this quarter is currently because of many deals that we have won in the last couple of quarters. We continue to see a healthy pipeline in this space and we are also having two or three large deals in the pipeline which we expect to close some time towards the end of quarter two. So the overall pipeline is fairly good, mostly around transformation, mostly around platforms, Consulting and System Integration and about 60% to 70% conversion.

S. Gopalakrishnan

Prasad?

Prasad Thrikutam

Hi, this is Prasad. Yeah, let me comment about the Energy, Utilities and Services sector. Q1, if you take the communications part of the Energy, Utilities and Services…

Operator

I am sorry to interrupt but may we request the participant to move closer to the microphone, please?

Prasad Thrikutam

Can you hear me now?

Operator

Yes. Please go ahead.

Prasad Thrikutam

So let me repeat what I said. I’m going to comment on how Energy, Utilities and Services performed last quarter. We grew 7.6% quarter on quarter and this is on the basis of a strong pipeline. We had good conversion in Q1. We are continuing the momentum and the pipeline continues to look healthy. There are transformation deals involving package implementations, involving very deep domain consulting capabilities that, for example, enhances the hydrocarbon accounting capabilities of our oil company, our Smart Grid for our utilities company et cetera, so the pipeline is strong. The outlook is very good in these sectors. Thank you.

Edward Caso – Wells Fargo Securities

My last question is, is there -- are the management changes at this point pretty well baked in? And is there a -- what’s your view on replacing the COO role?

S. D. Shibulal

The management changes are almost fully done. We have the realignment completed. The Business Operations phase is completed and 55,000 people got realigned. Because we can update the Consulting and System Integration space the realignment is going on. It will be -- it is also almost done, it will be finished by the end of this month and there will be some residual work which we need to do next month. So before the end of next month, definitely, we’ve completed the full realignment. The four industry vertical heads are in place, two (inaudible) heads are in place and there is a new person looking after sales at the corporate level.

We have one slot to be filled, which is the Corporate Head for Products and Platforms. We have the process in progress. As far as the CEO position is concerned, I think given the changes we have made we will wait for a while before we look at that. We will look at appointing somebody else as COO.

Edward Caso – Wells Fargo Securities

Thanks very much.

Operator

Thank you, Mr. Caso. Ladies and gentlemen, due to time constraints that was the last question. I now hand the conference over to Mr. Sandeep Mahindroo to add closing comments. Please go ahead.

Sandeep Mahindroo

Thanks everyone for joining us on this call. We look forward to talking to you again during the course of the quarter. Have a good day.

Operator

Thank you, Mr. Mahindroo. Ladies and gentlemen, on behalf of Infosys that concludes this conference call. Thank you for joining us and you may now disconnect your lines. Thank you.