Infosys Executive INSIGHTS: Guidance Methodology, Hiring Outlook

On Thursday, Infosys Ltd ADR (NASDAQ:INFY) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

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Guidance Methodology

Joseph Foresi – Janney Montgomery: My first question here is just on the guidance. You’ve changed the methodology a couple of times over the last couple of quarters. Maybe you could talk about why you changed it again this time and also it seems like you are not giving quarterly guidance any more, maybe why you decided not to give that guidance too?

S. D. Shibulal – Co-founder, CEO and MD: The first principle of guidance is to remove estimative information and that is the basic principle on which we have always acted and we have always done the guidance. We – in the beginning of the year have visibility for 64% of the revenue for the year, and 94% in the beginning of the quarter for the current quarter. What we are noticing now is that while we have visibility for the client’s budget, we understand some of the areas where they will spend. We are not able to predict some of the movements of large programs in which we are involved in. Because we have a dependency on the discretionary spend, 30% of the revenue comes from that space. That unpredictability matters a lot. So, at this point in time, when we look at all the facts we know, we are fairly confident that we can do minimum of 5% growth for the year. We are not able to predict the quarterly revenue in the fashion in which we used to do in the past, given the uncertainties we are faced with. So we have communicated, we (indiscernible) principle to make sure that we communicate the information and the facts as we know it, and that is the yearly guidance. Given the volatile environment, given some of the challenges which we are faced with, we decided that we will not give the quarterly guidance at least at this point in time. We will revisit that decision once the environment stabilizes.

Joseph Foresi – Janney Montgomery: Moving on to pricing, I think you said in your prepared remarks that the pricing issue is not secular, but you seem to be pointing in your guidance that pricing is going to decline for the full year. Are you expecting more renegotiations as you grow throughout the year and if it’s not secular, why would you include same pricing degradation of the full year?

S. D. Shibulal – Co-founder, CEO and MD: So we have seen a pricing decrease this quarter because of the portfolio change as well as the sporadic pricing renegotiations which we have experienced during this quarter. See when you prepare the guidance for the rest of the year. We take the current revenue productivity, right, at the end of this quarter, because that is where the revenue productivity is today, so we have to factor in the current revenue productivity for the rest of the year for the guidance purpose. It is in a sense very similar to the currency. We have taken the current currency for the rest of the year, right. That is the information which we have and this is the information we need to use for the rest of the year. It is a reflection of where we are today. There is no other secular trend. We have new revenue productivity. We have used that to compute our guidance for the next three quarters. Did I answer that?

Joseph Foresi – Janney Montgomery: Just as a follow-up, I mean do you expect – I understand it’s a snapshot of the quarter, but do you expect more renegotiations throughout the year?

S. D. Shibulal – Co-founder, CEO and MD: We are not seeing a wide spread demand for renegotiations or wide spread demand for renegotiations at this point. We have seen only sporadic ones is the financial service space. We have seen some sporadic discovered demands in the financial services space, but times are going through tough time, but at this point in time we are not seeing it as widespread or secular.

Joseph Foresi – Janney Montgomery: One last quick question, in the past when businesses slowed, you have moved utilization higher, pushed off hiring and kind of protected the margins. What can we expect this time around, will that pattern repeat itself?

S. D. Shibulal – Co-founder, CEO and MD: So we model our recruitment to the demand definitely, at the same time a lot of the recruitment which we do, which is of freshers in the colleges are done early on, so the cycle time is about 18 months. So we had already given offers to 26,000 people last year to join this year, starting now, starting July, right. As our principle is to honor all the commitments which we have given, we are going ahead with the joining of those employees; they will be in training for the first six months. We have spaced it out in a way which is relevant to us, the conversion rate is usually about 80%, which means that we will have about 18,000 to 20,000 people join between now and the next 12 months and they will be in training for six months. We will continue to recruit laterals to enhance our niche capabilities or to fill-in any areas where we have shortage.

Hiring

David Grossman – Stifel Nicolaus: I think in the last call we talked about hiring in the local markets, I guess primarily U.S. and Europe as well, can you – I may have missed it in the release, but can you tell us what your plans are for the year as well as what you hired locally in the quarter?

S. D. Shibulal – Co-founder, CEO and MD: So, hiring in the local market is very much in line with the (push) which we are doing with consulting and system integration. If you want to put the revenues in that space that means if we want to build capacity, we have to hire in the local markets, there have to be people who understand the local business practices and have local domain expertise. We hired 600 people, we hired 600 people the quarter before. I think this quarter we will hire 550 people, and it will be local hires and that is the plan right now. For the rest of the year also we will hire as we go ahead.

David Grossman – Stifel Nicolaus: Shibu let me ask you just about the dynamic about rupee and pricing. So, if the rupee starts appreciating relative to the dollar and pricing stays relatively flatter, revenue realization stays flat, how should we think about the margin outcome for this year under that scenario?

S. D. Shibulal – Co-founder, CEO and MD: If I look at the past, if the change in rupee is gradual then we have managed –-we have operated the business at 54% and at 44%, so in the balance we have been able to managed our business across the rupee rates. As long as appreciation or the depreciation is gradual, as long as it doesn’t happen at the end of the quarter. In fact, we had seen it once before the end of the quarter that makes it very tough to adjust. We have multiple levers all said and done, so if you look at the volume growth this quarter of 2.7%, if that volume continues to grow and the utilization go up there is a lever there, you have the on-site/offshore ratio, which is another lever. You have the freshers joining into the system that means that payment structure changes, so the average compensation comes down. We have deferred the compensation. We have postponed the compensation in previous quarter. We just rolled out the current margin factors in the 20,000 promotions and the progressions which we just sold out. So there are multiple levers to margin. It is not rupee alone and we have operated at different spectrum of the rupee rate. So, I believe that as long as it is not a cliff, which happened at the end of the quarter, we should be able to manage within a small range and make sure that our margin aspirations are met.

David Grossman – Stifel Nicolaus: But historically I don’t think you’ve been going through the same investment cycle that you are right now, so do you have that same point of view that you can manage it and continue the investment trajectory that you’re on right now?

S. D. Shibulal – Co-founder, CEO and MD: We have invested continuously in our business, but it has been in different parts of the business, that is an important distinction to make. So, for the last many years we have been investing in building our consulting and system integrations practice. We created Infosys Consulting, we hired local talent. We have some of the best people in the industry join us and now that investments have yielded results in many ways. Today our revenue from that space is 30%, it is at about 15% to 20% revenue productivity, higher than rest of our business. We do some of the most interesting work. So, the point I’m trying to make is we have always invested in our business. Now the focus has shifted. The focus has shifted to a new area, product and platform, cloud and enterprise, mobility and sustainability, these are two areas. So we are able to shift part of the investment which we do, which we did in some of the maturing part of the organization. So, those are newer areas. It is true that in products and platform, you invest upfront and you reap benefits over a long period of time later on. We are already investing into it. It is all factored into the current guidance. So, I don’t expect this to drastically go up overnight. I also expect the revenues from some of our new investments to pick up.

David Grossman – Stifel Nicolaus: Let me just ask you about the revenue guidance. If my math is right, it would seem to imply a little over 3% sequential growth on average if you straight line it through the balance of the year. Could you help us understand how much visibility you have on that based on – it sounds like you’ve got 10% unit volume baked into your guidance. How much visibility do you have on that now versus what you would typically have at this point that you have?

S. D. Shibulal – Co-founder, CEO and MD: So, beginning of the year we have 65% of visibility for our revenue. Now we are into the second quarter, so we should be approximately somewhere between 75% to (audio gap). For the quarter usually we have 95% visibility. This time we have not given the guidance, so we are with all the information we have, we are quite fairly confident about the minimum 5% growth for the year. There are couple of wildcards like if you get a huge pricing change, then that will have an impact, but with all the information which we have today, we are fairly confident about the 5% minimum growth which we have predicted for the year.

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