Good morning. My name is Luann and I’ll be your conference facilitator. At this time, I’d like to welcome everyone to the Infosys Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time simply press “*” then the “1” on your telephone keypad, if you would withdraw your question please press “*” then the “2” on your telephone keypad. I’ll now turn the call over to the Infosys management team in Bangalore. Thank you. You may begin your conference.

Good morning and thank you all for joining us today, for the financial results for the quarter ending December 31, 2005. I’m Sandeep from the investor relations team in Bangalore. Joining us today in this conference and events are, CEO and President Mr. Nandan Nilekani, COO Mr. Gopalakrishnan and CFO Mr. Mohandas Pai along with the other members of the senior management. Start with a brief statement of the performance of the company, the recently concluded quarter, outlook for the quarter in the yearend March 31, 2006. After that, we will open up the discussions for Q&A. Before I handover to Mr. Nilekani I’d like to remind you that anything that we state, as an outlook for the future the forward-looking statement as conjunctions or queries of the consequences (ph). Some statements are extension of these, results affiliated to the filings with the SEC, and found on www.sec.gov. I’d now like to turn the conference Infosys President and CEO.

Thank you, Sandeep and a good welcome to all of you to this third quarter earnings call for Infosys for the quarter ended December 31 2005. Let me give you a brief set of highlights after which I’ll request my colleague Mr. Gopalakrishnan to give you some more highlights and then Mr. Pai will give you a peek into the financials. For the third quarter, our revenues on a year-to-year basis grew by 32%. Our revenues for the quarter where 559 million and our earnings for ADS increased to $0.50 from $0.42 in the corresponding quarter in the last fiscal, this quarter was a good quarter in terms of customer additions. We added 36 new customers during the quarter and also good quarter in terms of broadening the base of million dollar customers; million dollars customers went up to 206. This particular quarter we added gross employee addition of 5,135 which on a net basis was 3,226 employees. With this, our employee strength for the quarter ended at 49,422 as of December, 31 2005. Now on the employee front, we planned to continue to add, we expect to add about 3,500 employees for the current quarter ending March 31. And therefore, our total hiring for the year on a gross basis is expected to be 21,200 which is about 1,000 what we had said when we spoke at the last call. We’ve also given our guidance for the quarter and fiscal year ending March 31, 2006. We expect revenues for the quarter ending March 31, to be between $582 million to $584 million which on a year-to-year basis is a growth of, between 27.9% to 28.4%. And for the year, we expect revenues to be $2.14 billion which on a year-to-year is a growth of 34.6%. The consolidated earnings per ADS is expected to be within $0.55 to $0.56 for the quarter, which is a growth of about 17% to 19% and between 2.04 to 2.05 for the year that is $2.04 to $2.05 for the year, which is a growth between 29% to 30%. I think this quarter has been steady quarter, we have had 8.7 sequential growth under US GAAP, pricing has remain stable within upward bias. And I think the important thing is that the, the strategic direction is on track as we are finding a lot of alignment and congruence in a strategic direction all our initiatives in last two years and operational excellence are proving to bear fruit. Here, the big task in Infosys on capability building to ensure that our people has a right set of skills to deal with the challenges of the future. We are confident that this is going on well and our people are confidently getting re-skilled and rescaled for the future. And generally speaking, I think we are on the right track, we think that the global brand is now well-established, we have essentially, we can say, we are now at a point where we are equal terms with global players in terms of mind-breaking mission brand and timeshare, continue to attract lot of board room level meetings lot of business to Infosys at the CEO level. And I think, it’s really the strategic envelope of what we have to do is well-defined is really question of how well and how quickly we execute on what we have to do, and what we have to do is again a very open book for all of you. With this, I request my colleague Kris to continue, Kris?

Thanks Nandan and good morning to everyone of you in the US. Let me talk about first, client, we have increased the number of million dollar relationship from 191 to 206. And in fact the $10 million relationship gone up from 48 to 51, we have 2 clients giving us revenue of $80 million, for this quarter it was 1 client. And if I look at the growth, Europe as a region has grown faster than other region. Europe is 24 points, 9% of revenues up from 23.6. Actually, last 12 months, Europe has shown a growth of 51.4% in terms of services many of our new services like package implementation or enterprise solution, consulting, testing, business process management for subsidiary Progeon, infrastructure management, all these revenues are growing and growing faster than the company average. Progeon has shown a growth of more than 100% in the last 9 months. From an industry perspective, banking and capital market, retail, energy and utility services, are the best three verticals, we’ve said growing faster than again the company average. For example, banking and capital markets in the last 9 months was 3.6%, as a pricing as well as Nandan said, we are seeing slight up-tick off-shore revenue per employee and overall as a blended level 0.1% as shipment. The pricing is stable as an upward bias utilization is the 78.7% as in the range, we want to maintain we want to make sure that we have sufficient number of people to accelerate growth as we see an opportunity and that range is around 78% to 80% and that’s the level acreage be on maintaining utilization, excluding trainees. Including trainees at 70%, we have sufficient number of people, each would go through comment infrastructure side also we are making significant investments. We have 3.8 million square feet of based on the construction; we can house another 16,500 employees. With this, I’ll pass it on to Mohan.

Thank you, Kris. Folks, I’ll take you through the margins, this quarter. Revenues have been $559 million. Our gross profit has been 43% as same as last quarter even though the rupee had depreciated during this quarter, if you look at the components of cost of revenue the Indian Salary component has gone up from 13.1% to 13.9% what we have done this quarter is to accelerate the hiring for the quarter and that’s why if you look at the fax sheet, the total trainee person months is 15,175 as against 9,518 previous quarter, moving up from 7.4% of total person months for the quarter to 10.5%. It has increased the cost and a part of, a part of extra money that would have made has been put in, accelerating the hiring of people and putting them into training so that we could have more people as we go along, at the cost of revenue side and if you look at SG&A expenses, the expenses have comedown to 13.6% from 15.3% primarily because last quarter we had a provision for doubtful or volume for accounts receivable of 0.4% and now we have a trade of 0.1%, the change of 0.5% and in couple of heads, for expenses, actually expenses have come down. So, we have seen, for the benefits of economists here, like we spoke about earlier outcome, another issue which we would have seen is for our subsidiaries in, subsidiaries namely Infosys China, Infosys Consulting and Infosys Australia, the expected level of profitability has not come up with the budgets that we had and therefore those costs in a consolidated basis has to be absorbed in the parent company. Now our operating income has gone up to 29.4% from 27.7% driven by the version of SG&A and partly by the fact of the rupee also had depreciated at SG&A level. Non operating income, it was 1.9% of revenues previous quarter has come to 0.2% negative, we’ve had a foreign exchange difference of $12 million which have to be taken as a negative in non-operating income line, that’s because we had a increase in the operating income by about $10 million for the beneficial impact of the rupee depreciation and a corresponding negative impact was in the non-operating income line because we’ve had effective hedges to match all of that. The key issues in quarter was the rupee depreciated by about 5% and an average by about 3.7%, 3.4% and the closing rate depreciation was about 2.3%. So the hedges worked both ways for us this quarter, since rupee depreciated and came down. So overall, if you look at what we have done, we have achieved what we should have achieved, we are slightly affinitive of the hiring of people and another important factor you notice is the tax rate, the effective tax rate has come down to 11.2% because of the fact non-operating income which is subject to tax has been negative for the quarter. If you factor that in and the effective tax rate will be around 13.2%. Overall, for this quarter we are going to hire, recruit say at about 3500 people and take out the number of people 21,200 people, so includes, 21,200 people for this entire year up by about 1000 people and we will need to accelerate hiring. Going forward, we see a clear trend of trying to build a deeper bench because now we have about 15 horizontals and verticals and the market has experienced demand in many areas. It also seeing a new trend of clients coming and asking us to ramp up pretty fast, for example, for the ABN AMRO deal we had to have people ready and waiting on the bench for 3 or 4 months before we actually started working, just to make sure that the moment the green signal has gotten we could get to work and ramp up aggressively. Like that we’ve seen many large clients coming to us because they do believe that we have the capability to ramp up, to meet their expectation, in the shortest possible time, that means that there will be a need going forward for a deeper bench reduced utilization rate with a greater flexibility to increase a quantum of revenues that we could get, otherwise we could end up resources constraint if we run a very tight utilization like we are doing. That you very much and we look forward to your questions.

At this time, we would like to remind everyone, if you would like to ask a question please press “*” and the “1” on your telephone keypad. We will pause for a just moment to compile the Q&A roaster. Your first question comes from the line of Rod Bourgeois with Sanford Bernstein.

Great guys, and thanks for taking my call, Mohan your revenue growth in fiscal ’04 was about 41% than in fiscal ’05 you did 50%. Your sequential revenues growth quarter is adjusting annualized revenue growth somewhere close to the 30%. Do you think that is more of a sustainable growth rate then the growth rate you had over the last couple of years, is there sort of a secular growth rate that you think you are able to sustain in the current range?

That’s a very noticed question, let me give you some top of the mind thinking, 2 years ago we had a much higher growth rate, but then we are coming off a very stagnant market and we have been answering the questions, question till then that in the case there is a slowdown in the markets. We will see an increase in revenue and after a gap, we did see an increase in revenue and that’s why you saw the increase in revenue in ’04 and ’05. Now of course, we have a much larger base, we have a much more complex suite of offering and we have a much more robust client list which is growing pretty rapidly. So, I think going forward, our ability to grow will depend upon, our ability to have a deeper bench and hire a larger number of people, train them, recruit them, keep them with us to meet the demand that we are going to see. Overall, for the future right now at this point of time, we do not think that demand is a constraint, but we do think ability to deliver on time, meet all the complex requirements of clients in various verticals and horizontals that is going to be the test for a corporation like that. I don’t want to directly answer the question as to what could be a sustainable growth rate going forward because, we are close to the next year and we need to, we will answer that question. But if you look at this year, if you exclude one quarter, where we had a low growth rate, if you look at this year, if you pick out one quarter where you had a low growth rate that is a first quarter, then sequentially the growth rate is compared to the last quarter of previous year was lower, the rest of the year has been pretty good. Historically, we see that the last quarter of every, of most years that is first quarter of the calendar year is the slowest quarter of growth for the entire year. So, I think the sustainable growth rate will depend upon the capability to off-shore players in next two years, deliver and will depend upon the growth in various verticals and horizontals and you will see that each of the verticals and horizontal grow at differential rates every quarter. I hope, we answered the question for on the sustainable growth rate, I will reserve judgment till April.

Okay great and then a quick question on the margin, given that the rupee is trading below 44 per dollar. How do you think margins will be affected as you move into the March quarter? Can you give us a direction on that?

Yeah, I think the margins, we’ve had a operating margin of about 29, I’m sorry operating income margin of about 29.4% and we’ve been holding between 28% to 27.8% over the last few quarters. So we’ve seen a jump up. We do think that a operating margin 27.5 to 28.5 would be a sustainable operating margin. If you see a jump up and the benefits coming through possibly a rupee depreciation, in the short-term they could be counter balance in the non-operating income level, the 27.5, 28.5 that could be range that one should aim for.

Excellent thanks for your help on that.

The fourth quarter I think we should be in the range because Rupees down as it is; our projections are based upon 44.50 per dollar, that as average for the third quarter’s 45.30.

Perfect, thanks Mohan.

Thank you.

Your next question comes from the line of Adam Frisch with UBS.

Thanks and good morning. I’m sure Trideep covered more specific questions on the numbers already, on your local calls. I’ll focus on two more general topics, first there has been increasing chatter around company’s specific execution issues with all company that are getting larger deal sizes. So, I was wondering is your deal size are get larger what do you are doing internally in terms of QA for internal controls to minimize the risk associated with these larger programs?

This is Shibulal, definitely over a period of time the complexity of the project, which we execute have gone up. Today we ran at, at any point with the aim around 3,000 projects 4,500 projects at any point in time. Many of these projects are large complex project. They expand multiple countries, multi lingual capability. So we have done a number of things. We have increased our process capability. We have implemented tools across the board, we have created new framework like Infosys Production Support IPSP framework. We have increased our compliance procedures and we have a process which will identify high risk sorted in advance. So we have a new process in place which will identify high risk projects and prevent them from getting into critical work, and we have a high risk frame, high risk cell which will monitor high risk projects continuously.

Okay secondly, as your eminent strategy change at all, given the seemingly increasing focus around consolidation within the services industry.

This is Kris, yeah. So, from a strategic point of view, we are looking at acquisitions in consulting; we are looking at acquisitions to increase our geographical presence especially in Europe. We have done one acquisition in Australia, which was very well we believe for expanding our presence in Australia. At any point of time, we look at 2, 3 companies, we had discussions with them. And on our terms, you know this is very important for us. When we find the right opportunity, the right fit, the right valuation, we would do an acquisitions. We don’t want to be forced to do an acquisition. Because we are growing organically, you know we have, we believe a good growth. And any, you know the challenge in any acquisitions, especially in the services base in holding on for people. And you know the data show that maybe about 80% of the acquisitions do not deliver the value as expected, so we want to be very cautious when we look at acquisitions. In the last 12 months, we have added about more than 13,000 employees. So, just organic means itself, you know we are growing significantly and that’s why we don’t want to grow through acquisitions, we want to do acquisitions for strategic purposes; that’s our intent right now.

Okay and then thanks for that. A final question for Mohan, you said demand is not a constraint right now. Are you saying the supply of workers be a constraint at any point now or in the near future?

I don’t the think the supply is going to be a constraint but the constraint is going to be your capability to hire the right talent and train them at entry level. At the middle level you need to expect not more than 25%, 30% of all entrants coming in laterally. But that’s the pool of talent that’s available, as smaller companies will lose out larger number in future. But great majority will come in from the colleges; this enormous supply in the colleges but those companies who are built up a training capability those companies will have the faculty to train. Those companies which can train them rapidly and bring them up to scale and then they want to succeed. We have a training capability of about, let say 20,000 people a year 4,000 to 4,500 people being trained at anytime in Mysore, in Mysore, we’re expanding our capacity from 4,500 people at one time to nearly 14,000 people at a single time. We are going to spend about $150 million, leaping up our training capacity in Mysore and other places, just to make sure that we have invested adequately to meet the requirements of growth for the future. So the supply is not a constraint but ability to get them, train them enable them and empower them in the shortest possible time. To give an idea of the cost, it cost us $5,000 to train one fresher coming from the college and $1,000 to get a middle level lateral recruiters fee. If you hire 20,000 people and 15,000 of them the colleges that means you need to spend $75 million. And if you hire larger numbers, such a kind of training cost that we need to observe but we are capable for that. Companies do not make the investment, who cannot bear this cost, well they could receive a challenges?

Okay thank you very much for that.

Your next question comes from the line of David Grossman with Thomas Weisel Partner.

Thank you, you know Mohan you guys trying a lot of new business in the first six months of the fiscal year. I was wondering can you give us a sense for the pace at which those you know new contracts are ramping and any trends you are seeing that are they ramping kind of, inline with your expectations, or slower or faster than you would have anticipated.

Yeah, David I’ll ask Kris to answer this question.

Hi David, if you look at the top few clients, there is a churn you know some times in any quarter would not grow as much as other clients. But if I look at the top 25 clients some clients have grown sequentially 39% you know the highest growth rate has been 50% in this quarter. So there is momentum in our top 25 clients just to read out top 5 clients have grown 12%, top 10 clients have grown 9.3%, next 5 clients have grown 7.4%. So now they, some of them are growing faster than the company average and there is still momentum left, in fact in this quarter alone out of the 36 clients we have added, 10 are from the Fortune 500.

And in terms of, the actual, the new business that you have signed recently, are those contracts ramping the new customers inline with your expectations more quickly or perhaps slower than you would anticipated?

See the contracts like ABN AMRO which ramp up very fast but most of the contracts are of the traditional nature where we do one or two projects but the difference the ramp up is much faster. Its starts with one or two projects but within a year, within 18 months as Mohan was saying, they are expecting us to grow significantly we have now multiple services through Progeon Consulting, infrastructure management, so we have lot more offer to offer those clients and they ramp up much faster.

Sure. If we take ABN AMRO as an example I think you said around it can contribute only normally to this quarter and it think $3 million next quarter. Would, should we expect more of a hockey stick in fiscal ’07 from that contract and we would form, the other more traditional contracts?

Yes you should expect that.

Okay, and as I have recalled in, that the December quarter had pretty sure work base sequentially. Is that’s correct, I don’t know, you gave a number, I think of what you thought the impact could be on the growth rate? Could you just refresh us on how that, is that in fact true? What impact that had on the sequential growth rate in revenue?

We had three less working days. We had 61 days compared this quarter compared to 64 days of previous and those three working days had an impact of 3.1% on revenue of this quarter. So the revenue growth that has been in normal circumstances maybe about 9.8% or so. It is less because of working days are less compare to the previous quarter and of course David you are going to ask what about the next quarter, the fourth quarter. The quarter has same number of working days as the third quarter but just one day more in the fourth quarter compared to third quarter. But the key challenge in the fourth quarter that’s the quarter that we are here right now is a fact that it is a first quarter of the calendar year. We saw last year that the first quarter of the calendar year is challenging because clients just comeback from their holidays. They have a new budget, they close their old budgets and have to reopen new budgets and if you have more transaction-lead deals, not annuity of dealings like maintenance, and you have a larger number of developing deals or you have a larger number of enterprise solution deals that consulting deals. It takes some time for the work to ramp up and that’s why you are seeing on the US GAAP, our growth rate for this quarter is about 4.2%, which at this point time, we feel comfortable with. This is not a reflection on the state of the market; it’s not a reflection on the potential growth in the market. It just that, this is the first quarter of the year we saw that same last year when the first quarter was indeed challenging, and we feel comfortable with this number at this point of time.

Okay and I’m sorry where did you get the 4% number you’ve quoted. What does that relate to?

That is for the fourth quarter of this year that is January, February, March.

I see.

That’s the guidance that we given for this quarter. Yeah.

And actually Mohan, getting back to your commentary about customers asking to maintain a deeper bench, what impact is that having on your margins. If any I know you discussed in the second half of the year investing a 150 basis points in both growth initiatives and capacity. So, should I assume that the requirement for maintaining a deeper bench because it clearly got reflect in the utilization rates during the quarter and obviously the gross margins. Should I assume that, that was embodies in the 150 basis point or is there requirement for deeper bench about and beyond?

David the bench of the offshore still the cost of that bench could be 50 to 75 basis point not much higher because I think the utilization that we have of about 79% or thereabouts. It should be ideally be something like about maybe 78% or much better at 76%, so that just give us a flexibility. Because we were operating for the large part of the quarter at 80%, 81%, we had people coming off training and getting into delivery in the last month. And that brought it down for the entire quarter to some extent. But overall, this number does not give the flexibility to meet client needs. We are finding this more and more because of the fact that we have 15 horizontals and verticals, many, many clients and each client behavior is difficult to track and sometimes clients come and ask us to ramp up fast and quote for work and do not have people to send them there, and the skills requirement of the various divisions are totally different, then there are visa commitments. For example you have a certain number visas for the US, the visas are close still September, and therefore you need to make sure that you can take up the work with people who have ready visas and to move them up from other units would be difficult unless you have more people in visas and bring down the visa utilization rate. Or if the client wants to work in Europe, it takes maybe 2 to 3 months to get a visa. So, I think the complexity in the business is increasing and in between that reduce the bench, I mean, increase the bench so that you can have the flexibility to grow more rapidly within the quarter every quarter there should be a flexibility of 3% or 4% for the quarterly growth and that should be in the number of people that you have so that you can take advantage of market circumstances and grow that’s come to ramp up rapidly. Now that flexibility is reduced and that’s what we want to build, that will cost us maybe 50 basis points to 75 basis points and once you have passed that, you can easily pay for itself, many times over.

Great, to get it back to your comment earlier about you know investing a 150 basis point of revenue in these various initiatives did you kind of meet that expectations in the third quarter and is your fourth quarter reflects that as well?

Yeah. I said that you may context that we will make those investment, our investment depends upon the availability of margin also, David. And what we do normally is that we can accelerate hiring to some extent, get people faster than what we anticipated because we are up to speed in terms of what we can do. We can increase our banding exercise; we can accelerate the hiring of people in the client-facing group and things like that. So they, you know, we use this flexibility to prepare for growth better, we do think that the issues that, the focus for the comprehension should be on growth. We have a great delivery capacity, the market demands remains good, we must have the ability for growth and we need to prepare for that invested elements.

Great, I guess the question was Mohan, did you kind of, hit that target, in the third quarter and you kind of, expecting to hit that target at fourth quarter being able to invest 150 basis points.

No, we didn’t invest that much, we didn’t have, we didn’t, couldn’t invest that much we probably invested about 75 basis points in the third quarter, in the fourth quarter we are looking to invest an equivalent number.

Okay. And just one last question on the tax rate of fourth quarter, I know, it’s probably variable depending on, where foreign currency comes out, but are we still pretty much in that range as 13% to 14%?

Well I think the tax rate we’ve taken for the third quarter is about 13.5%.

Okay.

And for the fourth quarter 13.5%, because we have taken a non operating income which is normal, we got exchange differences of about $9 million.

Okay great. Thanks again.

Your next question comes from the line of Julio Quinteros with Goldman Sachs.

Hi, good evening guys, I just wanted to back and talk first of all about the change in the growth margin, maybe Mohan, if you can kind of walk through the individual components, if you look at the gross margin for the current quarter versus last quarter what was sort of the issues that had the biggest basis point impacts, because I guess relative to last quarter, where the rupee was, we would have expected to seen a little bit stronger gross margin performance. So, maybe can you just walk us through what, where the biggest basis point impacts where both from a cash and a non-cash perspectives if you were to focus on some of the depreciation items as well?

If you look at the gross margin, our component called Indian Salaries has gone up from 13.1% to 13.9%. Since they are, they are paid in rupees, they are paid in rupees it means that the rupee impact would be higher because of this issue and it is about 0.8%. Our depreciation has gone up from 4.2 to 4.6. So that is increase of 0.4% there. And all this, all these has led to the neutralization of the benefits of the rupee depreciation at that level. Because, in this line item, of 56.8% of revenues, which is a cost of revenue 30.6% is spent on overseas salary and another 3% is spend on expenses abroad. So basically we have 34% out of 56.8% being spent in convertible currency or the dollar, you had about 22.8% which is spent in rupees where you had a beneficial impact of the rupee depreciation in terms of getting a larger number of, larger quantum of rupees. And we had a, have a depreciation rupee of 3.4%. So, 3.4% of 22.8% that is something like 0.8 or 0.9 is the benefit that we got over the rupee depreciation. So that is being gallant largely the hike in the Indian Salaries component because we absolutely do hiring and enhance training and the other expenses that were, which came up because of higher depreciation because of higher capitalization has been counteracted by slice version of that as of expenditure. If you look at, G&A expenses, the impact on SG&A expenses has been that is being downed by 1.7% primarily, led by a reduction in outside consulting charges by 0.3% and a turnaround in provisioning for doubtful accounts receivables of 0.5%. So, both of them add up to something like 0.8%. So, this is a big ticket items here apart from that there has been a small decline in other sides of expenditures, so overall it adds up to about 1.7%.

Okay, what about the change in the overseas travel experiences, I was wondering, it looks like, it was down about, just on my calculation, its roughly $4.5 million to about $5 million. Is that something that bound comeback next quarter as we look forward?

No it will remain at the same level next quarter because we don’t see a bump up happening in our foreign travel expenses or the Visas, because we had expected that to happen, that’s why I didn’t count, count on that because as part of what we have budgeted for in quarter three, because we’ve said that the US visas are closed and we are not going to invest in this US visas and the jump up in quarter two was basically because of US visas.

But the window opens again in April correct?

Yeah.

So, okay, so you won’t see any impact in March quarter but going into June quarter you would expect to start investing again in that area.

Yeah, in the June quarter September quarter we could expect more investments, in the March quarter, we don’t expect any official increase from where we are today.

Got it, and I just wanted to go back to you previous point about carrying a deeper bench and I want, if you sort of make a connection in from that point to the second point you made about, the work being more sort of transaction-oriented, I guess the way we think about its being more discretionary nature. Whether its package implementation work or development work et cetera, what is the visibility that you run and maybe also the risk related to that, that you run in keeping a deeper bench when say more of your work down the road, considerably come from more discretionary areas, as you keep at bench and all of a sudden the work doesn’t show up like, how much visibility do you really have on this bench that you are willing to keep if more of the work is going to go towards discretionary projects?

Well let me explain this because, the way we plan is to look at the potential revenues for four quarters based upon what our client facing group thus does in the market potential and look at the number of people that we need to have willable and then work backwards to see how much time we need, to hire them and make them and empower them to make them willable. So that’s the model we do, we work on a very tight model. But because of this issue, we will possibly accelerate the hiring from two quarters down to now and carry them longer so essentially looking at carrying cost for maybe two quarters, because the third quarter down the line, we could cut the number of people that we are going to hire from the market, in case it doesn’t come up to speed. So, like I said, the additional cost could be 50 basis points, 75 basis points of revenue and it will normalize in about three quarters time, because, there is a lead time for hiring, there is a lead time for training and apart from the offers that we make at the college level, for example next year we have made offers about 6500 at the college level gross offers, you are going to see how many of them join and the balance we pick up from the market both at the lateral entry level, but that way we could fine tune. So a risk, if at all, two quarters.

Got it, okay. And then finally on the top clients, I just want to double check is the top clients that you reported this quarter the same as last quarter?

And now its varying this quarter, there has been exchange in soft clients.

Does it, it is a different client this quarter versus…, this quarter is the same? Sorry.

Yeah this quarter it is the same as last quarter, last quarter it changed.

Okay, got it. Okay, that’s it for me thank you.

Your next question comes from Moshe Katri from SG Cowen.

Yeah thanks, I wanted to focus a bit about some of the ongoing initiatives whether it’s China, Australia or the US consulting side of the business. Can we get an update on where these initiatives are in terms of scale, the expansion and then also in terms of the ability of some of these units, they’re kind of, for their profitability to come at power with Infosys as a whole. Thanks.

We have about 400 employees in China, China is doing on target for local market work, that is in the Chinese market, we are doing on target with respect to the plans we have, with respect to the global markets, we are slightly behind, we are trying to catch up, it also requires little bit more scale because, global market require multiple technologies, multiple capabilities and things that are having a small unit in China with 400 employees it’s slightly difficult to meet all the requirements and so, it takes a little bit more time to really service the global markets and so we are slightly behind there. But overall, its satisfactory with respect to capabilities we are finding that on newer technologies for example, capabilities in Java, capabilities in coding, et cetera, the resources, the people we find are very, very good, in project management, in their knowledge of business industry vertical, ability to do complex assignments et cetera, as expected, the Chinese DC is behind and that’s why we are combining the management capability from other DCs with technical capabilities in the China DC, to service some of the projects.

Can you also talk a bit about Australia and US consulting side of the business, I am just curious is there anyway for us, for you guys to give us a feel on when do you think we are going to start seeing the margins or the profitability of these units too, actually ramp up and kind of get to the same levels as the whole company in terms of where it is today.

I’ll talk about Australia consulting and then come back to your question on margin. Australia standalone is doing actually very well in terms of attacking the market and getting new business and things like that. From a margin perspective, they need to have, they need to improve little bit more, it is positive margin, positive and that we are not loosing money in Australia it is positive, but it has to come up to the onside margin for rest of Infosys, Infosys Consulting did $10 million revenue looking at $13 million for the revenue in Q4, we were hoping to breakeven in Q4, but we may accelerate the recruitment and there maybe a delay in breakeven for Infosys Consulting, but its on track up to now, with respect to its business plan. Overall, if I look across the various subsidiaries Progeon is doing very well with growth of more than 100% this year, operating margin of 24.7% almost 25%, the company average is around 23%, so that’s very close to that, next is Australia which is positive but it needs to improve little bit and China and consulting are on investment mode, and we still need to support them at this point.

Sorry.

You had $28 million of revenue this quarter from Infosys Australia, Infosys Consulting in China, and we had a loss of $2.4 million on this $28 million, since we have a 26% net margin, around 26% on this $28 million, if it was a Infosys parent company business, we would have earned something like $7.5 million net and if we add the loss of $2.4 million to that, we have made an income of $10 million on the parent company, which has gone to subsidize the losses of the 3 subsidiaries, so overall the group profit is about 26%. The $10 million on the parent company, parent company revenue, revenue of say, $500 million, $510 million is approximately 2%. But the parent company should have a normal margin of 28%, now these are all the investments that we have made, which will bear fruit later, emancipated that Infosys China and Infosys Consulting would breakeven in the fourth quarter, we do think that breakeven possibly 2 or 3 quarters on the line next year, because its still subscale and they still need to grow and we have to make more investment.

Thanks for the details Mohan. And then last question can you comment on the recent departure from Progeon, is there anything specific that Infosys is going to make sure that we won’t see more of these departures that we have been seeing? Thanks.

I think this is a, very difficult issue including that people and the key thing what we can do as an organization is to make sure that you have a bunch of leadership. You have succession planning and have leadership because that’s the only long-term sustainable thing. For example, in Progeon Akshaya is leaving us, Amithabh who was COO is here right now and he has stepped in as CEO, Amithabh has been here for 3 years and Amithabh was a natural leader, we had the change in our head of sales in Infosys as Basab left, Hema left, we had the capable people stepping into the beach. Despite the key issue, is we have a deep management layout. Nandan, do you want to add anything?

I think, first of all I think, we have to look at the, these departures in terms of the scale of the organization. The company has, close to 50,000 employees; it’s the company that is growing as you see at over 30% a year. And it actually has a very deep bench of leaders and to that extend that we can, we are trying to expose all these leaders to you, and there are many more leaders who are, I mean this, this company is not a one man show or it’s not about a few star. Nearly about a broad bench of leaders who are working out there in the trenches to make this happen. So I think, back to philosophy we, we believe that every one of these people who left was the good person and definitely very capable and we certainly miss them. At the same time, our effort for the last 25 years is to build a platform, a platform with high quality people with great systems, processes, brand and we think the platform is really the fundamental source of our strength. And you have, in each of these cases we have ensured that we have a better or more than adequate people, replacing them and as you will notice in, and none of these function have we even miss the beat in terms of our business performance. Also, I think if you ask the question, are we going to see more of this frankly I can’t answer that question, there is no way anybody in this room can answer whether who is, who will leave tomorrow and those kind of questions. All we can say is that we have built a strong bench of leaders; we have built a very biggest business model, we have built a platform and we believe that Infosys is impervious to this kind of thing.

I think if you…

Moshe just as you can see the kind of people that we have and need a larger number of people and I think, you could test the velocity of the statement, that are large number of people are extremely good and the, the good thing that you see a few faces, you see me, you see Nandan, you see Shibu, you see a few people and is either more, only a few people in the press. But you must visit us and see a larger layer of people who are there in the leadership team.

Thank you very much.

The next question comes from the line of Lou Miscioscia with Lehman Brothers.

Okay great. Hoping you could may be go into little bit more detail on the taxes, in the sense of obviously it came down, maybe explain, why when the other income line is negative change in the absolute tax rate from March, may be some guidance for fourth quarter and also what do you think in general might had for ’07.

Well in the other income line we have a negative of $12 million because of exchange differences. And we have a normal income of something like $9 million to $9.9 million as interest income and we have about $2 million coming out of other income basically from interest on tax free points or whatever it is, which is a small recurring right into some extent. So this $12 million as against in normal income of about 10 to 11 gave us a loss of $1 million. The next quarter, we don’t initiate anything like this because the total hedges that we have is based upon options in the range and that is fully marked to market. The extreme volatility of the rupee movement created an increase in the operating income level and declined in foreign exchange differences except the foreign exchange differences was higher by $2 million. Now, the tax rate is based upon the normal income plus the income that comes from the interest income which is substantially taxable. If you net it off, without the tax impact on the non-operating income will come to an effective tax rate of 13.1% or 13.2%. By going forward, the core business is substantially exception from tax in 2009. The exception is dependent upon, the units which have been in business for not more that 10 years. Next year, a few units will come of the tax holiday for the total revenues form these unit is a very small part of the overall revenue. And the tax holiday is completed by the end of fiscal 2009. Now, we have one unit running in the special economic zone in Chennai and that unit has got 1000 people is ramping up. We have another unit which is been approved in Chandigarh where a building capacity of 3000 people and expanding later. We have another in principle approval for a campus in Pune for SEZ and also Mangalore where we have to build a new campus. So, we do think a substantial, very substantial part of the incremental growth in fiscal 2008 will come from the special economic zone. So when you come of the tax holiday in 2010 the effective tax rate will depend upon the quantum of revenues that come from special economic zone at this point of time, there will be 3 years of incremental growth, 2008, 2009 and 2010. What would be the component of these 3 years to the overall income will determine the effective tax rate. I think we need to wait for some more time before we come to a conclusion, we don’t think there will be a separate jump in 2010 at this point of time because SEZ schemes gives full tax holiday for the first 5 years.

Okay how about, okay how about ’06, how about ’07 in the sense of, you basically add 14.7% taxes in ’05, look at this year is coming in at about 12, or you wish to go back margin of ’05 level.

Yes I would think that may be, may be around 14, 14.5 or between 13.5 to 14.5 would be an effective rate for next year.

Okay thank you.

Your next question comes form Ashish Thadani with Gilford Securities.

Yes good evening. It appears to be some noticeable pockets of weakness, more than the usual in the rest of world segment, the consulting and testing services as well as the telecom and transportation verticals quarter-on-quarter that is. Could you explain what might be contributing to this?

Transportation is because of one big client which is come off and continues to come off and we are making up for that, in transportation our consulting is just a flux of business, we don’t see its end. Nandan?

I think the real way to look at consulting is to look at consulting and package implementations together, because I think that, that could be the way to look at it. If you notice the consulting, yes you are right in saying that the consulting revenue is at 3.1%, but you will notice that these package implementation has gone up from 15.8% to 16.3% and then frankly when the legacy companies talk about consulting, they actually talk about package implementation as much as consulting so if you really look at these two together its close to 20%. And to that extent, I think and one of the big endurance in the last year has been to make a consulting and our package implementation services work seamlessly together to create an end to and value relation capability. That is working very well in the field and this combination enabling us to bid for global conformation projects with the large client. So, I think I would see package implementing and consulting together, that is the strength of the service offering for us.

That’s helpful. What about the telecom and testing anything, anything is happening over there.

I think actually, I think testing is, I think is doing well I don’t know, perhaps we have to look at it. Yeah, it’s not enough material. I think the telecom, the telecom in fact is growing well, again let me go back and bring up the telecom. I think telecom is really probably if you look at it some of it could be related to the R&D side. But certainly telecom service provider segment is growing, booming for us, we are now working with one of the world’s largest telecom service providers and these includes large comps in the US, it includes firms like BT in UK and so forth and we think that that is going to be a growth area for us Ashish.

Okay and very quickly, the strong demand environment has translated into 14% year-on-year increase in offshore wages in April. But only 1% year-on-year increase in offshore revenue productivity. Should we expect with this gap will narrow and to what extent in the future?

Well, we’ve been seeing for some time that, prices, prices are growing up for new business, (2) we’ve been saying that new bill is coming in a 3% or 4% and (3) All you folks have been asking show it to us in the first half side revenues and we’ve been saying that is the portfolio impact and is looking its way through. This is a very interesting piece of data. You see the first half side revenue this quarter compared to the last quarter is flat, very small change, small up-tick in offshore small downside in onside not big very, very small. But 70% of revenues come from time and material contracts and this year we had, this quarter we had 3 less working days. That means the total number of billed hours will be less compared to the previous quarter that obviously means that some of the rate in fact is coming through. So, there is a real rate in fact upside in the whole model. Now, how do you estimate this for the fourth quarter or the future going forward? We have to wait and see, because this quarter in the fourth quarter we have a small increase in the number of working days of 1%. So, we have to see how it works through the portfolio impact. But, if we get beyond the figures, all this is beginning to show and what a period of time is showing the much more operand manner.

Thank you, thank you very much and good luck for the future.

Your next question comes from the line of James Friedman with Fulcrum.

Good evening. This is Sam Saunders on for Jamie Friedman. Just wondering to dive into the headcount additions of just more, I think you’ve done a great job explaining how those who support the strategic decision going forward. Could you just comment on to what extent those head count thus from eluded of those make sure of those headcount additions are competitively driven.

Well this year we will have 21,200 peoples gross. We started off the beginning of the year by saying we will have about 13,000 people. In the July guidance we increased it to 18,000 people, in the October guidance we said it will be 20,200 people and now the January guidance we said will be 21,200. So obviously the ramp up is not showing up in the revenues primarily because, we had we have extended some of the training period because we are giving more specialized training to people as we have to need them to join many more different internal units, so the training is getting more specialized. And like Shibu has told you we are in the mix of a larger certification guide for the middle level, so that people develop dual expertise and people develop more capabilities to go of the valid chain. But the total contemn of training in the system has increased this year to better prepare for our future.

So…

We had 1.34 million of applications for jobs. We tested 146,000 people, interviewed 44,400, offered 19,500 and 15,520 joined. So yield rate has gone up to 1.2% from 0.9% the previous fiscal year. Now the key question is, are there enough people in the system, there are enough people in the system. We’re largest hirer from the college education system for the next year, we made more than 6,500 offers for fiscal ’07. People have joined in the second and third quarter of the next fiscal. But like I said earlier the key challenge for company should ramp up and get the source in India is going to be the ability to get them and train them and invest in them for training. For people who don’t have the cost of increase.

So shall we worst at fiscal ’06 as an investment year and perhaps that utilization rate should increase next year or is this, is something that’s going to be endemic to the business for sometime now?

Well I think the utilization base we should bring it down to have increase flexibility in the model. We are looking at a fairly high utilization rate. And when we look at the utilization rate, we work on a 12 month basis. Please remember that we work on the 12 month basis. Out of the 100% that a person could work for the year about one month will be the leaves that 8.33% gone and about 4 to 5 to 10 days or 15 days trainings that’s 4.3% that is 12% that you need some kind of bench. A normal bench for people who get our projects go to a new project. So if you look at that you have an effective capability of a something like about 88%. We are at 79% to 80%. So the flexibility of the system is very, very limited and we want to increase the flexible take care of the market. I think the way to look at this is how do we, leave the cost of the downside of having lower utilization versus the upside of having the flexibility to respond to rapid market conditions and I think that’s a really the question. And I’ll give you that in an expanding market where there is tremendous opportunity. It’s worth the training for lower utilization and the cost of that are relatively small, compared to what we can get on the upside, by having really availing of all the opportunity in front of us, in that balance that we are trying to achieve. I’m now handover the mic to Sandeep.

This seems us and being with us at the end of this earnings call. Thank you for joining us today and we will look forward to talking to you again next quarter.

Yeah thank you very much. This is Nandan here, signing off I think we are very delighted that all of you have come on this call and have some really searching and incisive questions. And we look forward to sharing this again with your quarter from now. In the mean time all the data will be put on our website. You also please feel free to send us email questions on Investor Relation, so that we can get back to you at the earlier. Thank you very much and good night.

This concludes today’s conference call. You may now disconnect.