the infosys financial model t.v. mohandas pai. analyst meet 2001, august 6, 2001infosys technologies...

The Infosys Financial Model

T.V. Mohandas Pai

Analyst Meet 2001, August 6, 2001 Infosys Technologies Ltd., © 2001

AgendaAgenda

Overview of Financial Model

Key Drivers of the Revenue Model

Cost Structure

» Depreciation and Income Taxes

Managing Receivables

Capital Expenditure

Pro-forma Profit and Loss Account under proposed format (Indian GAAP)

Management Guidance for fiscal 2002

Meeting Future Challenges


Revenue GrowthRevenue Growth

39.5968.33

120.96

203.44

80.26

130.53

413.85

0

50

100

150

200

250

300

350

400

450

FY 97 FY 98 FY 99 FY 00 FY 01 Q1 01 Q1 02

US

$ m

illio

n

CAGR – 80%

63%

(Under US GAAP)


Net Income GrowthNet Income Growth

8.64 13.39

30.36

61.35

26.8339.24

131.95

0

20

40

60

80

100

120

140

FY 97 FY 98 FY 99 FY 00 FY 01 Q1 01 Q1 02

US

$ m

illio

n

CAGR – 98%

46%

Excluding one-time compensation charge arising from stock split

(Under US GAAP)


A Strong Financial ModelA Strong Financial Model

One of the most profitable software services companies in

the world

A strong balance sheet with zero debt

High quality of earnings

Capital expenditure financed by internal generation

Cash balances of $134 Million as of June 30, 2001


A Strong Financial ModelA Strong Financial Model

Robust offshore model ensures:» A flexible organization that can make smooth technology transitions

» Slack needed to take advantage of new opportunities

Long-term relationship model with clients» reduces sales and marketing costs

» provides enhanced revenue visibility

Financial discipline» Margin impact assessed for all strategic and tactical decisions

» Enhanced amortization ensures technology is current

Comparatively low proportion of fixed costs» Optimized G&A costs


High Quality of EarningsHigh Quality of Earnings

Conservative accounting policies» Revenue Recognition» Provision for bad and doubtful debts

Compliance with laws in all regimes of operation» Tax laws» Employment practices

Low risk from litigation and other issues This is necessary for a sustainable business


Key Drivers of RevenueKey Drivers of Revenue

Billed effort

» Volumes

» Onsite and offshore mix

Per-capita onsite and offshore revenues

Mix of services and product revenues


Changes in Billed Effort VolumeChanges in Billed Effort Volume

-

5,000

10,000

15,000

20,000

Q1-FY00 Q3-FY00 Q1-FY01 Q3-FY01 Q1-FY02

0

20

40

60

80

100

120

140

Q1-FY00 Q2-FY00 Q3-FY00 Q4-FY00 Q1-FY01 Q2-FY01 Q3-FY01 Q4-FY01 Q1-FY02Total billed effort 7,590 8,464 8,921 10,666 11,896 13,005 15,396 16,804 18,586 Revenues ($ mn) 39.73 47.94 52.16 63.62 80.26 97.94 114.91 120.74 130.53

Seq growth in billed effort 11.5% 5.4% 19.6% 11.5% 9.3% 18.4% 9.1% 10.6%Seq growth in revenue 20.7% 8.8% 22.0% 26.2% 22.0% 17.3% 5.1% 8.1%


Billed Effort MixBilled Effort Mix

0.0%

20.0%

40.0%

60.0%

80.0%

0

20

40

60

80

100

120

140

Onsite eff ort (%) 28.9% 32.0% 34.1% 34.1% 36.8% 36.4% 33.3% 30.9% 31.2%

Off shore eff ort (%) 71.1% 68.0% 65.9% 65.9% 63.2% 63.6% 66.7% 69.1% 68.8%

Revenues ($ mn) 39.73 47.94 52.16 63.62 80.26 97.94 114.91 120.74 130.53

Gross Margin 48.1% 45.6% 45.3% 43.7% 47.7% 48.7% 47.3% 49.6% 47.6%

Q1-FY00 Q2-FY00 Q3-FY00 Q4-FY00 Q1-FY01 Q2-FY01 Q3-FY01 Q4-FY01 Q1-FY02


Per-capita Onsite and Offshore RevenuesPer-capita Onsite and Offshore Revenues

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000


-

20

40

60

80

100

120

140

Q1-FY00 Q2-FY00 Q3-FY00 Q4-FY00 Q1-FY01 Q2-FY01 Q3-FY01 Q4-FY01 Q1-FY02Onsite 95,511 103,888 103,036 104,028 115,434 135,600 138,400 134,900 136,500 Offshore 49,536 51,098 53,115 54,756 60,862 64,500 65,200 64,500 60,600 Revenues ($ mn) 39.73 47.94 52.16 63.62 80.26 97.94 114.91 120.74 130.53 Grow th in onsite RevProd 8.8% -0.8% 1.0% 11.0% 17.5% 2.1% -2.5% 1.2%Grow th in offshore RevProd 3.2% 3.9% 3.1% 11.2% 6.0% 1.1% -1.1% -6.0%Venture-funded revenue 17.2% 12.2% 9.3% 7.0% 5.0%E-commerce revenue 6.4% 10.3% 15.6% 18.8% 28.7% 31.4% 28.3% 25.8% 23.0%


Drivers of Per-capita RevenuesDrivers of Per-capita Revenues

Pricing

Mix of revenues from existing and new clients

» Impact of reducing business from venture funded clients

Employee productivity


Revenue ForecastingRevenue Forecasting

Methodical Planning

» Rolling plan for five years

» Firm plan for two years

» Firm budget for current fiscal year

» Updated at regular intervals

System based

» Yield Management – provides inputs for pricing strategy

» BPI – Billing Performance Indicator

» InPipe - Infosys Business Pipeline


The Cost StructureThe Cost Structure


The cost structureThe cost structure

0%

10%

20%

30%

40%

50%

60%


Cost of revenues S&M expenses G&A expenses Gross Margin Optg Margin


Cost of revenues 51.9% 54.4% 54.7% 56.3% 52.3% 51.3% 52.7% 50.4% 52.4%

S&M expenses 6.3% 3.5% 4.8% 4.7% 5.2% 5.1% 4.1% 5.6% 4.5%

G&A expenses 7.7% 8.9% 8.0% 8.8% 8.0% 9.5% 8.8% 9.2% 9.6%

Gross Margin 48.1% 45.6% 45.3% 43.7% 47.7% 48.7% 47.3% 49.6% 47.6%

Optg Margin 31.0% 30.5% 30.1% 28.1% 32.9% 32.9% 33.2% 33.7% 32.5%

Slack % 19.5% 18.9% 25.2% 18.5% 14.4% 19.5% 22.4% 27.0% 26.8%


Personnel costsPersonnel costs

Proportion of onsite versus offshore personnel Additions to onsite and offshore personnel Impact of salary increases Utilization of billable and software personnel Includes gratuity and leave encashment liabilities provided

on the basis of actuarial valuation

% of revenues Q1-FY00 Q2-FY00 Q3-FY00 Q4-FY00 Q1-FY01 Q2-FY01 Q3-FY01 Q4-FY01 Q1-FY02Offshore personnel costs 12.0% 12.3% 13.1% 14.8% 10.1% 10.1% 10.2% 10.6% 10.9%Onsite personnel costs 24.5% 25.3% 25.7% 25.2% 28.0% 26.2% 26.3% 24.3% 28.5%Total personnel costs 36.6% 37.6% 38.8% 39.9% 38.1% 36.3% 36.5% 34.9% 39.4%

Based on US GAAP financials, Production costs only


Employee Utilization LevelsEmployee Utilization Levels

0%

20%

40%

60%

80%

100%

-

20

40

60

80

100

120

140

Uti l - incl . tr ainees 75.8% 71.2% 68.1% 76.6% 74.9% 65.4% 66.7% 64.9% 69.5%

Uti l - excl . tr ainees 80.5% 81.1% 74.8% 81.5% 85.6% 80.5% 77.6% 73.0% 73.2%

Revenues ($ mi l l ) 39.73 47.94 52.16 63.62 80.26 97.94 114.91 120.74 130.53

Gr oss Mar gin % 48.10% 45.55%45.31% 43.67% 47.72%48.75% 47.28% 49.59%47.59%

Q1-

FY 00

Q2-

FY 00

Q3-

FY 00

Q4-

FY 00

Q1-

FY 01

Q2-

FY 01

Q3-

FY 01

Q4-

FY 01

Q1-

FY 02


Understanding UtilizationUnderstanding Utilization

Utilization – including trainees

» Billed employees as a proportion of total delivery employees

Utilization – excluding trainees

» Billed employees as a proportion of billable employees (total

delivery less employees undergoing induction training)

Calculation of available capacity

» Available capacity includes leave and ongoing training time


Other Direct costsOther Direct costs

Foreign travel Software for own use

» Costs charged to revenue in the period of purchase

Data communication expenses Staff welfare expenses Computer maintenance and consumables Consultancy charges Provision for post-sales client support

» Provision made towards likely expenses for providing warranty support

Depreciation


Other Direct costsOther Direct costs

% of revenues Q1-FY00 Q2-FY00 Q3-FY00 Q4-FY00 Q1-FY01 Q2-FY01 Q3-FY01 Q4-FY01 Q1-FY02

Staff Welfare 0.3% 0.3% 0.3% 0.5% 0.3% 0.2% 0.3% 0.4% 0.3%

Foreign Travel 4.0% 4.3% 4.1% 4.9% 4.2% 4.2% 4.3% 4.1% 2.7%

Software For Own Use 1.9% 2.9% 2.0% 1.0% 2.1% 2.7% 1.5% 0.7% 1.3%

Data Communication Expenses 2.2% 2.7% 1.7% 1.4% 1.3% 1.2% 2.1% 1.9% 1.7%

Computer Maint & Consumables 0.6% 0.5% 0.9% 0.7% 0.7% 0.5% 0.8% 0.8% 0.3%

Professional Charges - Technical 0.4% 0.4% 0.3% 0.3% 0.3% 0.4% 0.5% 0.6% 0.3%

Post Sales Client Support 0.4% 0.5% 0.1% 0.0% 0.0% 0.2% 0.2% 0.0% 0.0%

Software for banking product 0.1% 0.1% 0.1% 0.8% 0.2% 0.1% 0.5% 0.3% 0.7%

Depreciation 5.5% 5.1% 6.4% 6.7% 5.0% 5.4% 6.1% 6.7% 5.8%

Total 15.3% 16.8% 15.9% 16.4% 14.2% 15.0% 16.2% 15.5% 13.0%

% of total revenues under US GAAP


Sales and Marketing costsSales and Marketing costs

Sales and marketing expenses include

» Salaries and bonus of sales personnel

» Travel expenses of sales personnel

» Brand building expenses

» Marketing and sales promotion expenses

» Rentals of marketing branches

» Other establishment related expenses of marketing branches


Sales and Marketing costsSales and Marketing costs

Sales and marketing costs are lower on account of our relationship model with clients» High level of repeat business» Enhanced referral business

-

50

100

150

200

250

300

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

T otal cl i ents 69 93 115 194 273 277

M i l l i on $ cl i ents 9 19 35 42 80 84

S&M expenses/ total r evenues (%) 5.0% 4.9% 4.1% 4.7% 5.0% 4.5%

Repeat business % 82% 83% 90% 87% 85% 95%

1997 1998 1999 2000 2001 J un-01


General and Administration ExpensesGeneral and Administration Expenses

G&A expenses include» Salaries of functional department employees» Rentals of development centers » Travelling and conveyance expenses» Telephone charges» Printing and stationery» Office maintenance expenses» Power and fuel» Insurance charges» Donations and research grants» Audit fees» Other miscellaneous expenses» Provision for bad and doubtful debts and bad debts write off


General and Administration ExpensesGeneral and Administration Expenses

Incl . P r ov f or debtor s 7.7% 8.9% 8.0% 8.8% 8.0% 9.5% 8.8% 9.2% 9.6%

E xcl . P r ov f or debtor s 7.0% 8.5% 7.9% 8.7% 7.9% 8.4% 7.4% 8.0% 8.5%

Q1-FY 00 Q2-FY 00 Q3-FY 00 Q4-FY 00 Q1-FY 01 Q2-FY 01 Q3-FY 01 Q4-FY 01 Q1-FY 02

G&

A e

xpen

ses/

Rev

enu

es (

%)


Continued economies of scaleContinued economies of scale

3,943

4,7784,996

5,389

6,445

7,925

8,910 9,831 9,947

14.3%

12.8%12.2%

11.7%11.1%

10.6% 10.3%

9.8% 9.8%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q3 01 Q4 01 Q1 02

-2.00%

4.00%

10.00%

16.00%

Total employees Support staff proportion

Su

pp

ort

sta

ff c

om

po

sit

ion

(%)


Depreciation and Income TaxesDepreciation and Income Taxes


DepreciationDepreciation

Accounting policy» Determined using the straight-line method based on useful lives

of assets Buildings - 15 years Plant and machinery - 5 years Computer equipments - 2-5 years

Furniture and fixtures - 5 years Vehicles - 5 years

» Depreciation for assets purchased/sold during the year is proportionately charged

» Capital expenditure incurred on R&D is depreciated over the estimated useful lives of the related assets

» Individual assets acquired for less than Rs.5,000 entirely depreciated in the year of acquisition



Drivers

» No. of new software development blocks/ units

operationalized during a period under report

» Dates of capitalization of the new units

» Proportion of items costing less than Rs. 5000 each viz.

workstations, chairs, partitions, cabling, etc

» Investment in technology assets during the period



0%

1%

2%

3%

4%

5%

6%

7%

8%

Dep / optg rev (%) 5.5% 5.1% 6.4% 6.7% 5.0% 5.4% 6.1% 6.7% 5.8%

Dep on assets < Rs. 5K / Optg Rev (%) 0.4% 0.7% 1.9% 2.4% 1.0% 1.5% 2.2% 2.3% 0.5%


Based on Indian GAAP


Provision for Income TaxesProvision for Income Taxes

Accounting policy» Computed using the tax effect accounting method

» Provision is made for income taxes annually based on tax liability computed after considering tax allowances and exemptions

» Deferred tax assets or liabilities recorded for timing differences

Tax charge depends upon» Proportion of onsite versus offshore revenues

» Proportion of revenues from various countries of operations

» Quantum of other income

» Timing differences


The Tax PositionThe Tax Position

Company provides for tax liability both in India and abroad

Tax liability in India» Profits attributable to operations under the STP scheme is

entitled to a tax holiday for ten years» All but one of the software development centers in India are

under the STP scheme (97.3% of software revenues for fiscal 2001)

» Domestic income arising from sale of banking products and from operations of the non-STP unit is subject to tax in India

» Interest earned on treasury operations is liable to tax in India


The Tax PositionThe Tax Position

Tax liability abroad» Company liable to tax on income from onsite operations

sourced to various countries of operations» Taxes are paid in all countries where the company has a

Permanent Establishment (PE)» Income liable to tax abroad is arrived at by deducting

direct expenses incurred in earning the onsite income. Attributable Head Office expenses arrived at on the basis of an allocation model is claimed as a deduction in arriving at the taxable income

» Infosys pays taxes in 11 countries today namely the US, United Kingdom,Canada, Singapore, Japan, Germany, Sweden, Belgium, France, Hong Kong and Australia


Domestic versus foreign taxesDomestic versus foreign taxes

Proportion of current taxes under US GAAP- domestic versus foreign

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Domesti c tax/ total tax (%) 34.4% 26.1% 28.2% 24.0% 34.4% 19.7% 32.0% 45.9% 21.1%

For eign tax / total tax (%) 65.6% 73.9% 71.8% 76.0% 65.6% 80.3% 68.0% 54.1% 78.9%

E ff ecti ve tax r ate (%) 14.2% 12.5% 11.0% 9.9% 10.0% 10.2% 11.2% 9.7% 13.4%

Q1-FY 00 Q2-FY 00 Q3-FY 00 Q4-FY 00 Q1-FY 01 Q2-FY 01 Q3-FY 01 Q4-FY 01 Q1-FY 02


Foreign taxesForeign taxes

-

20.0

40.0

60.0

80.0

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%

Onsite revenues 17.4 23.4 26.1 31.6 42.1 53.5 59.1 58.3 65.9

Foreign taxes/ onsite

revenues (%)

7.0% 6.5% 6.5% 6.6% 4.8% 5.9% 4.8% 4.3% 7.5%

Q1-

FY00

Q2-

FY00

Q3-

FY00

Q4-

FY00

Q1-

FY01

Q2-

FY01

Q3-

FY01

Q4-

FY01

Q1-

FY02


Managing ReceivablesManaging Receivables


ReceivablesReceivables

Continuous monitoring of receivables

Receivables classified on the basis of risk categories for

purposes of monitoring

Quarterly collection targets monitored on a daily basis

Receivable collection is part of the performance indicators

for sales personnel and linked to their bonus payments


Quality of ReceivablesQuality of Receivables

0%

20%

40%

60%

80%

100%

120%

140%

160%

0

10

20

30

40

50

60

70

0-30 days 55.0% 53.6% 51.3% 64.7% 76.2% 75.6% 48.3% 69.2% 81.0%

31-60 27.4% 33.0% 30.7% 31.8% 10.1% 13.6% 37.1% 26.6% 12.2%

61-90 10.2% 10.3% 9.1% 1.8% 7.9% 6.7% 10.2% 1.7% 5.5%

DSO 57 64 63 56 59 55 62 58 46

> 90 days 7.4% 3.1% 8.9% 1.7% 5.8% 4.1% 4.4% 2.5% 1.3%

BD Prov. (%) 0.71 0.35 0.11 0.13 0.11 1.07 1.35 1.27 1.13


Normal credit period for customers is between 30- 60 days


Capital ExpenditureCapital Expenditure


Capital ExpenditureCapital Expenditure

Provide employees with world-class facilities to motivate and

retain the best and brightest

Lease Vs Buy argument heavily in favor of Buy

Payback quick when we construct campuses

Capex for 2001-02 projected at $80 Million – funded from

Internal Accruals

Capital commitments for ensuing quarter kept below free cash

flows of the current quarter


Managing Capital ExpenditureManaging Capital Expenditure

0

20

40

60

80

100

120

140

Capital expenditure (US$ mn) 4.95 8.88 10.83 12.19 19.39 25.04 26.78 29.71 20.56

Capital commitments, end of quarter (US$ mn) 7.9 14.2 16.0 18.5 26.6 26.4 26.3 34.0 30.5

Operating cash flows earned in the next quarter (US$ mn) 14.73 14.23 28.99 20.56 43.44 28.98 44.53 48.89

Cash and equivalents, end of quarter (US$ mn) 102.61 104.13 106.79 116.6 105.76 116.48 110.89 124.08 134.18

Q1 00 Q2 00 Q3 00 Q4 00 Q1 01 Q2 01 Q3 01 Q4 01 Q1 02

As of June 30, 2001, we had software development space of 1.87 million sq. ft. capable of accommodating 10,410 personnel and 1.70 million sq. ft. under construction including the Infosys Leadership Institute.


Pro-forma Profit and Loss Account - proposed format under Indian GAAPPro-forma Profit and Loss Account - proposed format under Indian GAAP

The company intends to reformat its Indian GAAP income

statement following the functional classification methodology

commencing next quarter. The company believes that this will

enable a more meaningful analysis and comparison of revenues,

costs and margins as well as facilitate a better understanding of

its business by the financial community


Pro-forma Profit and Loss AccountPro-forma Profit and Loss AccountProfit and loss account for the quarter ended June 30, 2001 in Rs. CrPROPOSED FORMAT CURRENT FORMAT

INCOME INCOMESoftware development services and products Software development services and products Overseas 596.30 97.4% Overseas 596.30 95.3% Domestic 16.22 2.6% Domestic 16.22 2.6%

Other income 13.49 2.2%612.52 100.0% 626.01 100.0%

SOFTWARE DEVELOPMENT EXPENSES 285.56 46.6%

GROSS PROFIT 326.96 53.4%

SELLING, GENERAL AND ADMINISTRATION EXPENSES EXPENDITURE Selling and marketing expenses 27.65 4.5% Software development expenses 318.33 50.9% General and administration expenses 58.79 9.6% Administration and other expenses 53.68 8.6%

86.44 14.1% 372.01 59.4%

OPERATING PROFIT 240.51 39.3% OPERATING PROFIT (PBIDT) 254.01 40.6%Interest - Interest - Depreciation 35.48 5.8% Depreciation 35.48 5.7%Operating profit after depreciation and interest 205.03 33.5%Other income 13.49 2.2%PROFIT BEFORE TAX 218.53 35.7% PROFIT BEFORE TAX 218.53 34.9%Provision for taxation 28.50 4.7% Provision for taxation 28.50 4.6%NET PROFIT AFTER TAX 190.03 31.0% NET PROFIT AFTER TAX 190.03 30.4%

AMOUNT AVAILABLE FOR APPROPRIATION 190.03 31.0% AMOUNT AVAILABLE FOR APPROPRIATION 190.03 30.4%


Pro-forma Ratio AnalysisPro-forma Ratio Analysis

PROPOSED FORMAT CURRENT FORMAT

Ratios - Financial performanceExport revenue/ total revenue (%) 97.35 Export revenue/ total revenue (%) 95.25 Software development expenses/ total revenue (%)46.62 Operating expenses/ total revenue (%) 59.42 Gross profit/ total revenue (%) 53.38 Selling and marketing expenses / total revenue (%)4.51 General and administration expenses/ total revenue (%)9.60 Administration expenses/ total revenue (%) 8.57 Operating profit / total revenue (%) 39.27 EBIDTA/ total revenue (%) 40.58 Depreciation/ total revenue (%) 5.79 Depreciation/ total revenue (%) 5.67 Profit before tax/ total revenue (%) 35.68 Profit before tax/ total revenue (%) 34.91 Tax/total revenue (%) 4.65 Tax/total revenue (%) 4.55 Tax/ PBT(%) 13.04 Tax/ PBT(%) 13.04 PAT from ordinary activities/ total revenue (%) 31.02 PAT from ordinary activities/ total revenue (%) 30.36

Ratios - year on year growth ratesExport revenue (%) 70 Export revenue (%) 70Total revenue (%) 72 Total revenue (%) 69Software development expenses (%) 67 Operating expenses (%) 71Gross profit (%) 77 Operating profit (%) 75 Operating profit (%) 66Net profit from ordinary activities (%) 57 Net profit from ordinary activities (%) 57


Management Guidance for Fiscal 2002Management Guidance for Fiscal 2002


Management GuidanceManagement Guidance

Q2 FY02 FY 02

Indian GAAPTotal income (Rs.cr) 625 – 640 2,500 – 2,560EPS (Rs.) 28 – 29 118 – 121

US GAAPNet revenues (US$ mn) 131 – 134 530 – 545EPADS ($) 0.29 – 0.30 1.24 – 1.27

Employee addition – We plan to add 1,500 - 2,000 employees on a gross basis in fiscal 2002


Meeting future margin challengesMeeting future margin challenges

Salary increases» Historical increase Current year increase

25-30% offshore 15% (70% linked to company revenue performance) 10-12% onsite 4-5% Impact on margins 6-8% 2-3%

Other costs like telecommunication costs, travel costs etc. have been tightly controlled

Margins to be maintained within an acceptable band by:

» managing costs

» improving utilization

» converting some fixed costs to variable costs


In SummaryIn Summary

Strong financial model

» Invest in technology, training and processes

» Slack to capture additional opportunities Strong and liquid balance sheet

» Invest for growth even in the current challenging environment

Higher depreciation charge

» Technology is kept current Compliance with all relevant tax laws

» Minimum risk to earnings in the future

» High quality of earnings


Thank You

the infosys financial model t.v. mohandas pai. analyst meet 2001, august 6, 2001infosys technologies...

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