The Infosys Financial Model T.V. Mohandas Pai

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

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Revenue Growth CAGR – 80% 63% (Under US GAAP)

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Net Income Growth CAGR – 98% 46% Excluding one-time compensation charge arising from stock split (Under US GAAP)

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

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

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

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Key Drivers of Revenue  Billed effort »Volumes »Onsite and offshore mix  Per-capita onsite and offshore revenues  Mix of services and product revenues

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Changes in Billed Effort Volume

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Billed Effort Mix

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Per-capita Onsite and Offshore Revenues

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Drivers of Per-capita Revenues  Pricing  Mix of revenues from existing and new clients »Impact of reducing business from venture funded clients  Employee productivity

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

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 The Cost Structure

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 The cost structure

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Personnel 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 Based on US GAAP financials, Production costs only

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Employee Utilization Levels

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

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

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Other Direct costs % of total revenues under US GAAP

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

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

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

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 General and Administration Expenses G&A expenses/ Revenues (%)

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Continued economies of scale Support staff composition(%)

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Depreciation and Income Taxes

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

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Depreciation  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 each viz. workstations, chairs, partitions, cabling, etc »Investment in technology assets during the period

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Depreciation Based on Indian GAAP

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

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

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

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Domestic versus foreign taxes Proportion of current taxes under US GAAP- domestic versus foreign

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

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

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

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Quality of Receivables Normal credit period for customers is between days

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

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Capital 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 projected at $80 Million – funded from Internal Accruals  Capital commitments for ensuing quarter kept below free cash flows of the current quarter

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Managing Capital Expenditure 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.

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

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Pro-forma Profit and Loss Account

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Pro-forma Ratio Analysis

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Management Guidance for Fiscal 2002

Analyst Meet 2001, August 6, 2001Infosys Technologies Ltd., © 2001 Management Guidance Q2 FY02FY 02 Indian GAAP Total income (Rs.cr)625 – 6402,500 – 2,560 EPS (Rs.)28 – – 121 US GAAP Net revenues (US$ mn)131 – – 545 EPADS ($)0.29 – – 1.27 Employee addition – We plan to add 1, ,000 employees on a gross basis in fiscal 2002

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

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

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