Igate Earnings Call Nuggets: Industry Growth Rate and Sales Prospects

Igate Corporation (NASDAQ:IGTE) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Industry Growth Rate

Joe Foresi – Janney Montgomery Scott LLC: My first question and I know that you’ve given color on this before and the numbers aren’t necessarily out there, but what are your thoughts on industry growth rate this year and then how would you expect iGATE’s performance to match up with that, obviously including the large deal size?

Phaneesh Murthy – President and CEO: I think it’s a little difficult for me to give you that color right now because we are – I’ll just give you a little bit of color on iGATE rather than the industry right now and what we’re seeing is that we’re seeing the two large deals, extremely large deals that we were talking about, both of which were north of $200 million. The first deal that we won will start translating into revenue from Q2 onwards. The second deal will start translating into revenue from Q3 onwards. So, that’s where we will see potentially some little jump up in revenue in addition to the other deals. In addition to that our pipeline actually is quite comfortable now, our pipeline compared to the same period last year is 75% higher and in terms of pipeline, the quality of our pipeline is also being significantly improved. So, we’re looking at 2013 a lot more optimistically than what happened in 2012 and remember 2012 was the integration year, so it was in essence a consolidation and protect year, but we were hoping for growth. So, we didn’t meet our internal goals no question about that in 2012. Part of it was the market environment which also has improved. So, overall, I’m certainly looking for some growth in 2013, difficult to provide you any color and we generally have no guidance philosophy anyway.

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Joe Foresi – Janney Montgomery Scott LLC: And then just maybe you could talk a little bit about the deal ramps. What could cause these deal ramps to be delayed further, is it just simply the macro, is it the execution, is it sign-off within the companies, I mean as we look at these deals your level of confidence in the start times and the ability to kind of bring in that revenue and what could be real?

Phaneesh Murthy – President and CEO: I think the deals – now I think there are not that many uncertainties. The uncertainties are more, if at all, from our side here on execution. So, we have to get the due diligence done on this deal. We have to get it. So basically the way the process works is that you’ve been given the sign-off now. If there is no change in your proposal after doing due diligence, then basically you get – that translates into a contract and you start off. Unless the due diligence finds something completely crazy, generally these deals get translated and that’s what will happen. Could there be a month here or there? Yes. Will it be a quarter here or there? Unlikely, at this stage, because until you win the deal, the estimates could vary by quarter-to-quarter, etcetera, but now that you have kind of got the deal I think the estimates get much tighter and closer.

Joe Foresi – Janney Montgomery Scott LLC: Got it. Okay, and then last question for me, just on the model itself, how should we be thinking about the margin profile for next year and other income? I know that the other income kind of moves around with FX, so you can give us your thoughts with or without the FX on the other income side?

Phaneesh Murthy – President and CEO: Let me try and provide a little bit of color on the way I am looking at margins. See these deals, large deals, iTOPS deals typically what ends up happening is that year one is zero margin potentially, maybe marginally negative margin too, but really they are zero margin deals in the first year. And then from the second year they start ramping up in margin as we put the systems in place and so on. And in the latter years, obviously, the margin structure is very much higher to give you average gross margins in our acceptable range. Now, so you will find I think three things, Q2 margins will be somewhat deflated because of three reasons; the first one is salary increases, which we typically do in April; the second one is as the deal comes on you are adding a chunk of revenue but at no margin; and the third one is we anticipate, again, like last year there to be a bubble of visa costs only in the quarter. So, these three will kind of contribute to deflating the margins a little. Under normal circumstances, we would have picked up – because of efficiencies and all we would have picked up the margins through the rest of the year and gone back to our 40-25 kind of a model. In this case, however, what will happen is that in Q3 we will start getting the other deal on, and so therefore being margin gains in efficiency through the year which normally we think may not be as evident in this year. So we are actually expecting marginally lower gross margin and EBITDA percentage. Also on the SG&A side, we rolled out our corporate brand campaign last quarter. We got very, very positive news. So, we intend to continue and we’ve got positive news and although it is a brand campaign we started getting the leads from it. And I think that’s been a very positive thing where people tend to relate to you very quickly, if you are talking about outcomes and if you are talking about iTOPS and stuff like that, people are starting to relate to you very quickly and we are hoping that that will start cutting into our sales cycle and will help shorten the sales cycle. So, we intend to continue to do that, so the corporate brand campaign (indiscernible). Also in Q1, we conducted the first ever professional golf (trial) tournament for CEOs only. So we had 22 registrants. We did the iGATE CEO Cup Tournament recently and it was a very successful tournament it went out great and everybody had lot of fun, everybody was a little under pressure because there was lot of money for charity and given the fact that all of them have promised to come back for next year and we think we can make next year’s event a little larger and bigger and so on. So, I think if you look at our trend on marketing in the markets we’ll continue to go up a little and therefore over the next year or so, I’m anticipating that our gross margin will be a little lower than now and our EBITDA will be a little lower than now. Hopefully that gives you some color.

Joe Foresi – Janney Montgomery Scott LLC: Then just any color on the other income would be helpful to I mean I know that’s a hard number to kind of come up with, so if you have any, and if not then I guess we can just try on the model side?

Sujit Sircar – EVP and CFO: Sure. Whatever the cash balances are there between 75% to 80% of that cash remains in India and that gives you anything between 8% to 8.5% of return. Currently the return has gone down it used to be 9%. So, I think in terms of the modeling, two things one is on that cash generation and cash balance 75% to 80% you should be able to get that 8.5% that’s one. Second is that we intent sometimes in this year maybe Q2, in Q2 or Q3 will be we intend to pay off around $300 million of our debt which is a bank loan which we have taken, which is a short term bank loan, so in that case you know that amount will come down. But in that case you will also be on that $300 million we’ll be able to save 3.2% of interest, which we have.

Sales Prospects

Glenn Greene – Oppenheimer: A couple of questions kind of following on the last, but maybe you could drill down a little bit on what you are seeing in the U.S. obviously that’s a key market for you. You’ve had some changes from a sales management perspective it’s obviously early. But give us a little sense for sales prospecting activities in the U.S. and also I’ll be curious of the U.S. Financial Services performance in the quarter, some of your peers have had – apparently had some issues this quarter related to that sort of sub vertical?

Phaneesh Murthy – President and CEO: So, we made a change – we’ve made a number of changes Glenn in the sales team, both at the North American head of sales there and at the – and at one layer below that and we continue to make changes even at the two layers below that. We have gotten a lot more focused, lot more rigor in the account management activities and stuff like that. So, I think we are more than half way in our sales effort transformation, probably about 60% plus of the way in the sales transformation. In the Banking Financial Services, we had actually, remember our Banking Financial Services the way is large partly U.S. and partly Canada too and we didn’t have any challenges in that sector, actually it grew both quarter-on-quarter, and of course year-on-year. It did grow for us as a unit.

Glenn Greene – Oppenheimer: Maybe Europe was obviously a bit of a problem or I think I wish your commentary throughout the year was, pretty negative related to Europe activity. Have you seen any change or signs of life there?

Phaneesh Murthy – President and CEO: Yes. So, I think multiple things happening in Europe. This large financial services deal that I’m talking about is a global deal, but a lot of that stuff is actually in Europe. So we are starting to see activity, I mean, in the sense that, obviously, in all these global companies there is leadership across both the sides of the pond, and based on comments that we are hearing, we are starting to see a little more openness. In addition to that, our European pipeline right now is actually quite strong and quite robust, and we expect just based on what we are seeing in 2013, winning those deals, we are expecting 2014 Europe to be a much larger percentage of our total revenues than it is today.

Glenn Greene – Oppenheimer: Alright and finally you had made a comment that you thought the market environment was better now than lets say it had been in the last two, three quarters it sounded like. What’s making you say that? What are you seeing out here that’s suggesting the market environment is better?

Phaneesh Murthy – President and CEO: The broader sense Glenn that this year spending will be in line with budget rather than under budget, and so therefore, from our perspective the market is looking a little better than it had looked in the last two or three quarters. And remember, there are some positives, right. I mean we averted the fiscal cliff. So if you look at much of the uncertainties in the macro situation have come down. I am not saying everybody is optimistic and spending a ton of money, but at least it certainly looks like they will be spending on pace with the budget and there is a lot of discretionary spending which is happening in the customer’s area, and we are fairly well positioned for some of that discretionary spend.