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Wipro: Cloud Computing Hasn't Made Big Revenue Impact Yet

Swami Shanmugasundaram, CFA

Swami Shanmugasundaram: I'm Swami Shanmugasundaram. I'm an equity analyst covering IT consulting and outsourcing services here at Morningstar. Today, we are fortunate to have Sridhar Ramasubbu, CFO, international operations, at Wipro, one of the dominant IT service providers in the world. Thanks for joining us, Sridhar.

Sridhar Ramasubbu: Thanks, Swami.

Shanmugasundaram: Before we get into a talk, for those of who haven't heard much about Wipro, would you mind talking about the strategy, what the company is doing and its performance in the recent quarters?

Ramasubbu: Sure. So, Wipro is a $6.5 billion company, and it has got three main lines of business, which is the IT services, which is almost 88% of the revenues. The the remaining balance of 12% comes from consumer care and infrastructure engineering services.

In terms of the global reach in IT services, about 53% of the revenues come from the United States, about 28% comes from Europe, about 10%-11% comes from India, about 8.5% comes from Asia-Pacific, and the rest comes from the rest of the world.

So it's quite well-spread. We have the broadest portfolio of services. We're having about 12 to 13 verticals and five service lines. All five service lines are very strong. So, with our geographies, service lines, and verticals, we are very broad-based and have been growing significantly well. In the last five years, our compound annual growth rate has been about 28%-29%. We are listed both on the New York Stock Exchange and on Bombay Stock Exchange, and the company has been growing.

We recently had a change at the top, a CEO change, and there was reorganization within Wipro IT division. And those leadership changes at first level and the second level are now behind us. We've done what we need to do, and we're now looking at realizing the benefits of what we've done so far.

In the last quarter, the results were very promising, which could have been better, but we still grew sequentially by 4.7%. I think going forward, there are headwinds in terms of economies slowing down across the world, particularly Europe is causing lot of concern. But we've grown very well in Europe, with 5.3% sequential growth there. So even during last recession, we grew extremely well in Europe.

So, overall, there are headwinds in terms of economy. There are headwinds in terms of possible visa issues, but we are not seeing any big change in the customer behavior. We think with the outsourcing, the offshoring part of it, the value proposition is so strong that we'll continue to see momentum and shift more and more work offshore. And we are looking forward to it.

Shanmugasundaram: Given the uncertainty in the market, I think everybody's question is what's going on with the demand environment in terms of, say, discretionary spending? So, relative to what it was last year, what do you guys see in the market now? Are companies talking to you about discretionary spending at the same level or has it come down?

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Ramasubbu: So, if you look at the spend, first of all, you have to look at the offshore momentum or the offshore growth. It's not really that much dependent on whether the budget is growing 5% or decreasing by 5%. Instead the view is finally, "How much of the IT work is outsourced? How much is captive? And out of how much is outsourced, how much comes offshore?" That I think is the most important piece, which we think that the penetration levels have increased over a period of time, but they still have a long way to go.

If you clearly look at the $1.7 trillion market demand for engineering services, IT and BPO, offshoring--which is, say, services from India--is still about $60 billion which is small portion of the overall demand. Even if you look at the $400 billion-$450 billion of the revenues of the $1.7 trillion, which is being leveraged by all the competition, the global as well as the offshore competition, we still have more than $1 trillion of business which is captive. This means that growth need not be dependent only on the current budget levels. If there is a small trigger or accelerator on the captives going, opening up to outsourcing and thereby going to offshore, the whole world will be different.

Shanmugasundaram: I think the next hot topic is cloud computing, with everybody talking about cloud getting more traction. So I just wanted to understand what kind of traction are you seeing from your clients? Are clients coming to you and saying, "I want to invest in strategy"? So, if so, is it good or bad for Wipro in the long run, and what is Wipro doing to replicate the kind of success that you had in application-development management to cloud?

Ramasubbu: Sure. I think lot has been told about cloud computing, and it has a good and bad impact to the IT services industry. What we think is that cloud will lead to standardization in delivery. Cloud will lead to a different way of delivering your services, and cloud will enable the per-unit cost to come down drastically. Although all of these things are true, it's also going to put a heavy pressure on the back end. So, if you have to do effective cloud computing to millions of users, you got to have a very strong infra backend, which is our specialty, which will play to our advantage.

The second thing is that during these three or four years of cloud computing, we are not seeing any meaningful revenues or meaningful impact in the market as a result of cloud-computing services being offered, except for, I can say, some small level, such as that Salesforce.com has maybe done something, and Amazon has been trying to sell the computing part of its hardware. But in the real sense, if you look at the market, everybody has spoken about cloud computing. It is not in a real sense taken off as a revenue earner.

Having said that, I think we have studied the trends, the technical trends. I think there is a lot of convergence in various initiatives and technologies contributing toward the cloud revolution. And there are investments from venture capitalists, and there are early adoptions in the cycle. We are clearly in the six months to 24 months cycle. Cloud computing as a technology can come as a big time.

So, what we are trying to do is, apart from developing cloud solutions in each of our verticals--each of our verticals have got their own cloud solutions--we are also aligning with the strategic leaders in the industry who are doing something in the cloud. For example, the Vblock, which Cisco, EMC, and VMware are trying to do, we are very closely associated with that initiative. So, if tomorrow Vblock becomes a major cloud-computing offering, we'll have a play in that. Similarly, we are working on what Microsoft is trying to do with Azure. Various people are trying to do cloud computing through various initiatives. So, we are very strategically aligned with many of these big players. So, we will be able to offer our services using those technologies to the customers.

In addition to that, will there be any major change, the fundamental change in the services model? I think the jury is out because we believe that the core of IT services is the knowledge worker, and the knowledge worker and the talent is plenty available in India. So, the way we are delivering is not the way the world is going to look at it. If the delivery mechanism is going to change, we assure that with this knowledge worker backing and the talent backing, we can always find different ways to execute and align ourselves with the new model of execution, which will stand us in good stead. That's our way thinking.

Shanmugasundaram: Sure. I think that's it from us. I mean those were the key points that we wanted to discuss. Thanks again for coming here and talking to us.

Ramasubbu: Thanks for the opportunity, Swami. Nice talking to you.