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Salary hike, higher mktg costs impacted margins: Aztec
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July 13, 2006

Chairman of Aztec Software and Technology Services, KV Chandrasekharan says that salary hike and higher marketing costs impacted margins and profits in Q1. He adds that the company incurred marketing cost of Rs 5.27 crore and that it needs to spend more on sales and marketing to capitalise on demand.

He expects better results in Q2 due to new client additions. He futher states that the company will grow at high single digit rate on topline in Q2. But he expects margins to be affected in future due to investments.

Excerpts from CNBC - TV18's exclusive interview with KV Chandrasekharan:

Your profit numbers seem lower than expectation. Is it salary cost, which has dented your margins this quarter?

These were planned increases; first there was a salary increase; we hiked salary by 18%. Second, we had a one-time marketing expenditure, which started showing tremendous results in new customer acquisitions. Probably, this was one of the best quarters ever for us in terms of new clients added, which will start to yield revenues starting Q2. We are extremely happy with how we performed in Q1.

How much exactly was this marketing expenditure that you incurred this quarter?

We spent about Rs 5.27 crore against last quarter's Rs 4.1 crore because we participated in a few trade shows; we also hired new sales people, which lead to an increase in cost of sales and marketing. This is a long-term investment we have made, which will start to yield results, in fact it has already yielded results through addition of new 16 clients in Q1.

Do you think margins will improve in the next couple of quarters? Is this a one-time margin compression that you have seen or will it continue to keep margins under pressure for the remaining year?

We would like to keep our margins around the mid to high teens because we intend to invest quite a bit. We see a bullish market there and we want to be sure that we are able to capitalise on that trend. When we know that the market is robust, we do not want to be focussed on the short-term while we are able to build for the long-term.

Have you changed your onsite offshore revenue at all; is this salary hike primarily for offshore?

Yes, the salary hike is primarily for offshore because our ratio continues to be 85:15.

Take us to what kind of performance you have seen from the testing side and also from Disha specifically?

Our testing and our development continues to be robust. We continue to maintain the ratio around 2/3:1/3 between development and QA. This means both have been keeping pace at high single digit growth, which we have promised to our investors.

For the rest of the year, what kind of guidance can you leave your investors with?

We will continue to be in the high single digits on revenue growth and around mid to high teens on profitability.

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