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Glossary

 

Some commonly used financial and operational terms are explained in the Glossary below. These explanations are not intended to be technical definitions and if they are found to differ from those provided in the Company’s periodic, certified financial statements (not limited to Notes to Accounts), then the latter will prevail.



Glossary Terms

Accounts Receivable
Active Client
Amortization
Attrition
Basis Point
BFSI
Billable Effort
Billed Effort
Constant Currency
COR
Cost of Revenue
Cross-currency impact
Days’ Sales Outstanding
Depreciation
Dividend
Dividend Payout Ratio
Dividend Yield
DSO
Earnings Before Interest and Tax
Earnings Before Interest, Tax, Depreciation and Amortization
Earnings Per Share
EBIT
EBITDA
EBITDA Margin
Effective Tax Rate
Effort
EPS
ETR
Fixed Price Contracts
FP Contracts
Gross Margin
Gross Profit
Income Taxes

International Revenue
Invested Funds
Last Twelve Months
LTM
Market Capitalization
Minority Interest
Net Income
Net Profit
Offshore leverage
Operating Margin
Operating Profit
Other Income (Expense)
Price Earnings Ratio
Pricing
Profit After Tax
Q-o-Q / QoQ / QQ
Quarter on Quarter
Realization
Revenue
Revenue growth (or decline)
Revenue Recognition
Selling, General and Administration Expenses
SG&A Expenses
T & M Contracts
Time and Materials Contracts
TTM
Unbilled Revenue
Unearned Revenue
Utilization
Volume
Volume Growth (Decline)
Year on Year
Y-o-Y / YoY / YY

  

Term

Definition

Accounts Receivable

This is the sum of all the invoices outstanding at the end of the period. To get a complete picture of the outstandings, one can also add the Unbilled Revenues where invoices are yet to be raised for services already delivered and subtract the Unearned Revenues where invoices have been raised for services that are yet to be delivered. AR is normally viewed in proportion to the size of the organization’s revenue and so it is expressed as Days’ Sales Outstanding or DSO.

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Active Client

An Active Client is one who has contributed to TCS’ international revenues in the last twelve months.

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Amortization

Amortization is an accounting concept similar to depreciation, but used to measure the consumption of intangible assets such as goodwill, patents and copyrights.

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Attrition

This measures what portion of the workforce left the organization (voluntarily or involuntarily) in a certain period. The two common measures of attrition are LTM Attrition and Quarterly Annualized Attrition, the difference being the period over which the attrition is computed.

LTM Attrition looks at employee departures over the Last Twelve Months (LTM). The formula is: Total number of departures in the Last Twelve Months / Closing Headcount.

Quarterly Annualized Attrition takes employee departures in the current quarter only and extrapolates it for the year. The formula is: 4*Number of Departures in Current Qtr / Closing Headcount.

Companies normally report only LTM Attrition because it eliminates seasonal dips or spikes, whereas annualizing quarterly attrition magnifies temporary dips or spikes and could mislead.

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Basis Point

A Basis Point (bp) is one hundredths of a percentage point i.e. 0.01%.

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BFSI

Acronym for Banking, Financial Services and Insurance.

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Billable Effort

Billable Effort is the total effort available in the organization in the form of the technical workforce whose work can be theoretically billed to customers and converted into revenue. However, not all of it gets billed in practice because some employees may be between assignments or working on internal projects and initiatives. The Billable Effort may or may not include the effort attributed to trainees. See Utilization.

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Billed Effort

Billed Effort is the effort put in by employees which has actually been converted into revenue. See Utilization.

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Constant Currency

Restating the current period’s revenue or profit after eliminating the impact of currency movement in the intervening period gives the constant currency revenue or profit.

At TCS, this is done by recalculating the current quarter’s revenue using the average currency conversion rates from the previous quarter.

In organizations where year on year comparisons are the norm, constant currency calculation is done using the average conversion rates from the same period in the prior year.

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COR

See Cost of Revenue.

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Cost of Revenue

Cost of Revenue (COR) is the cost directly incurred in providing services to clients or selling hardware equipment and software. It consists of the cost of all the employees engaged in delivering services to clients, sub-contractors engaged for technical services, visa, travel and communication expenses, rent expenses for delivery centers etc. It excludes the costs incurred in selling and marketing activities as well as corporate overheads.

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Cross-currency impact

When a company derives revenues in multiple currencies, the change in conversion rates of those currencies to the reporting currency (eg: USD) in the current period, vis-à-vis the conversion rates of the prior period affects the reported revenue. This revenue impact due to shifts in the value of currencies relative to the reporting currency is called cross-currency impact.

For example, if 8% of the revenue is denominated in Euro and the Euro has depreciated against the US Dollar by 5% in a quarter, even if the company earns the same amount of Euros as in the previous quarter, it still translates into fewer US Dollars this quarter. The cross-currency impact on overall revenue will be 8% x 5% = 0.4%.

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Days’ Sales Outstanding

Days’ Sales Outstanding is a popular way of depicting the Accounts Receivable relative to the company’s revenue over the last twelve months.

DSO = Accounts Receivable * 365 / LTM Revenue

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Depreciation

Depreciation is a method of allocating the cost of a tangible long-term asset over its useful life. It is a non-cash accounting entry found in the Cost of Revenues (where it pertains to assets directly contributing to the revenues earned) as well as the SG&A (where it pertains to assets indirectly contributing to the revenues or for support activities).

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Dividend

Dividend is that portion of the company’s Net Income that is distributed out to its shareholders, as decided by the Board of directors. It is usually quoted in terms of the absolute Rupee amount each share receives.

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Dividend Payout Ratio

Dividend Payout Ratio is the ratio of the annual dividend paid (including dividend distribution tax) to the Net Income, usually expressed as a percentage.

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Dividend Yield

Dividend Yield is a ratio of the annual dividend paid out to the share price.

Dividend yield = Annual Dividend per share / Price Per share

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DSO

See Days’ Sales Outstanding.

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Earnings Per Share

Earnings Per Share (EPS) for any period is the amount of that period’s Net Income attributable to a single share.

EPS = Net Income / Weighted average number of shares outstanding during the period

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Earnings Before Interest and Tax

See Operating Profit.

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Earnings Before Interest, Tax, Depreciation and Amortization

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) is a measure of the company’s profits if it didn't have to pay interest on its debt, taxes or take depreciation and amortization charges. 

EBITDA = Revenue – COR – SG&A + Depreciation + Amortization

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EBIT

Earnings Before Interest and Tax. See Operating Profit.

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EBITDA

See Earnings Before Interest, Tax, Depreciation and Amortization.

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EBITDA Margin

This is the EBITDA expressed as a percentage of the Revenue.

EBITDA Margin = EBITDA * 100 / Revenue

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Effective Tax Rate

Effective Tax Rate (ETR) is the proportion of the Profit Before Taxes that is provided for income tax expense.

ETR = 100* Provision for Taxes / Profit Before Taxes

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Effort

Effort is the work performed by an employee, measured by the time spent on various tasks as entered by the employee in a timesheet. The smallest measure of effort is a person-hour which is the work performed by one person for one hour.

In very large projects which might entail a few hundred or even a few thousand team-members working over a long period, the effort measured in person-hours can become unwieldy so more convenient units such as person-days, person-weeks, person-months or person-years might be used. In every case, it refers to the work performed by one person for one unit of time.

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EPS

See Earnings Per Share.

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ETR

See Effective Tax Rate.

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Fixed Price Contracts

This is a form of services contract where the vendor takes a turnkey responsibility for delivering a solution for a certain price and within a mutually agreed timeframe. The customer is billed on completion of key project milestones and related deliverables.

In other words, the customer pays for the outcomes and not for the effort expended. This arrangement gives the vendor considerable flexibility in the staffing and execution of the project. On the other hand, it also means bearing all the project risk.

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FP Contracts

See Fixed Price Contracts

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Gross Margin

Gross Margin (GM) is the Gross Profit expressed as a percentage of the Revenue.

GM = GP*100/Revenue

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Gross Profit

Gross Profit (GP) is a measure of the profits made by the company if it had not incurred any sales or marketing expenses, overhead costs and taxes.

GP = RevenueCOR

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Income Taxes

Income Taxes consist of provisions made for tax payable in India as well as in various overseas jurisdictions where the Company operates and is required to or liable to pay taxes. See Effective Tax Rate.

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International Revenue

International Revenue is revenue earned by the company from customers located outside India.

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Invested Funds

Invested funds are funds that are highly liquid in nature and can be readily converted into cash.

Invested Funds = Cash and Bank Balances + Investments + Deposits with Banks + Inter corporate Deposits

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Last Twelve Months

This is the preferred period over which many operating metrics such as attrition and client contributions are measured. The advantage of taking a 12-month long time horizon is that it eliminates the short term volatility caused by monthly or quarterly ups and downs.

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LTM

See Last Twelve Months.

Market Capitalization

Total market value of all of a company’s outstanding equity shares.

Market Cap = Last Trading Price * Total number of outstanding shares

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Minority Interest

Minority Interest is the share of the consolidated profits attributable to interests of the non-controlling ownership in the subsidiaries.

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Net Income

Net Income is the profit made by the company after deducting all expenses (COR, SG&A) and taxes from the Revenue. In the consolidated accounts, one would also deduct Minority Interest. It is also known as Net Profit or Profit After Tax.

Net Income = RevenueCORSG&A + Other IncomeIncome TaxesMinority Interest

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Net Profit

See Net Income.

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Offshore leverage

This is the proportion of our international revenues derived from services that are delivered out of centers in India.

The same service delivered out of a delivery center in India carries a lower billing rate compared to the regular onsite rate. So higher offshore leverage depresses the revenue growth relative to the volume growth but expands the gross margin.

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Operating Margin

Operating Margin (OPM) is the Operating Profit expressed as a percentage of Revenue. This is a popular gauge of the company’s operating performance. It is also known as EBIT Margin.

OPM = Operating Profit * 100/Revenue

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Operating Profit

Operating Profit (OP) or Operating Income is a measure of the profits of the company if it did not incur any taxes or interest costs (or income). It is also known as Earnings Before Interest and Tax (EBIT).

OP = RevenueCORSG&A

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Other Income (Expense)

Other Income consists of (a) interest and dividend income on the company’s cash balance after deducting any interest expenses on borrowings and (b) foreign exchange gains or losses from the translation of assets and liabilities on the balance sheet as well as from hedges.

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Price-Earnings Ratio

This is the ratio of the company’s current share price to its Earnings Per Share.

PE Ratio = Market Price of one share / EPS

The denominator can either be the reported earnings per share in the last twelve months period – in which case, the ratio is a Trailing PE – or the forecasted earnings per share for the forthcoming 12-month period, in which case, the ratio is a Forward PE.

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Pricing

This is the price charged to the customer per unit of effort. In Time and Material contracts, pricing is the billing rate for a unit of effort (usually measured in person-hours). In Fixed Price contracts, pricing is the total sum the customer is expected to pay for the turnkey solution delivered.

Some use this term interchangeably (and somewhat inaccurately) with the average revenue realized by the company per unit of effort. See Realization.

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Profit After Tax

See Net Income.

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Q-o-Q / QoQ / QQ

See Quarter on Quarter.

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Quarter on Quarter

When the financial performance of a quarter is compared with the immediately preceding quarter, such a comparison is said to be quarter on quarter or QoQ.

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Realization

This is the revenue received by the company per unit of effort expended. TCS reports the quarter on quarter change in realization (in percentage terms) after removing any impact of changes in currency exchange rates and also any impact of change in offshore leverage between the two periods.

Billing rates vary depending on what service is offered and in which country, so it is important to note that increases or decreases in realization could be because of changes in the underlying business or geographic mix and not necessarily because of a change in pricing. Also, realization doesn’t take into account the costs and therefore higher realization is not necessarily better or more profitable.

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Revenue

Revenue is the income earned by the company by providing IT consulting services or software licenses or hardware equipment to customers.

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Revenue growth (or decline)

Revenue growth or decline is measured by the difference in the revenues earned in the current period and a prior period. Depending on which prior period is selected as the baseline, growth (or decline) is said to be measured Quarter on Quarter or Year on Year.

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Revenue Recognition

Revenue recognition is a core element of accrual accounting, governed by rules which determine how revenues are recognized for any accounting period. Simply put, revenue is recognized when the company delivers the contracted goods or services to the customer, no matter when the cash is actually received.

In time and material contracts, revenue is recognized as services are rendered and as related costs are incurred.

In fixed price contracts, revenue is recognized over the life of the contract using the percentage of completion method. At the end of each period, a part of the total project value which is in proportion to how much of the total budgeted cost of the project was incurred in that period is recognized as revenue from that project. To illustrate with a simple example, if the total contracted value of a fixed price project is $12 Mn and at the end of the first quarter, the company has spent $900,000 out of the total budgeted cost of $9 Mn, then 10% (i.e. 900,000 / 9 Mn) of the project value i.e. $1.2 Mn is the revenue recognized from that project in that quarter.

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Selling, General and Administration Expenses

Consists of : (1) Selling and Marketing  (S&M) expenses i.e. the salary, benefits and commissions of sales and marketing executives , travelling and communication expenses, provisions for bad debts, business promotion, brand building expenses etc. (2) General and Administration (G&A) expenses which consist of R&D expenses, salaries and benefits for employees engaged in internal initiatives and support staff, office expenses etc.

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SG&A Expenses

See Selling, General and Administration Expenses.

 

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T & M Contracts

See Time and Materials Contracts.

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Time and Materials Contracts

This is a form of services contract where the customer is billed for the hours logged by the project team members (and any direct reimbursable costs incurred). In other words, the customer is billed for the effort rather than for the outcomes. Project risk is borne by the customer.

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TTM

Acronym for Trailing Twelve Months. See Last Twelve Months.

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Unbilled Revenue

Unbilled revenue is revenue that is yet to be invoiced for services already delivered.

In fixed price projects, the revenue booked at the end of a period may not match the total invoiced amount in that period. This is because invoicing is based on meeting project milestones whereas revenue recognition is based on what proportion of the total costs were incurred in that period. So revenue gets recognized at the end of a period even if no project milestones were scheduled in that period. If the revenue recognized at the end of the period is higher than what was invoiced in that period, the excess amount is called Unbilled Revenue and treated as an asset on the balance sheet.

The opposite of Unbilled Revenue is Unearned Revenue.

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Unearned Revenue

Unearned revenue is revenue that has already been invoiced for services yet to be delivered.

In fixed price projects, the total invoiced amount at the end of a period may not match the revenue booked in that period. This is because invoicing is based on meeting project milestones whereas revenue recognition is based on what proportion of the total costs were incurred in that period. If the amount invoiced at the end of a period is higher than the revenue recognized in that period, the excess amount is called Unearned Revenue and treated as a liability on the balance sheet.

The opposite of Unearned Revenue is Unbilled Revenue.

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Utilization

Utilization, simply put, is the billed effort expressed as a percentage of the total billable effort. The denominator includes the effort attributed to employees who are unassigned to any project (i.e. “on the bench”) or are engaged in internal projects. While reporting utilization, organizations typically mention whether the number has been calculated by including the effort attributed to trainees (who are not billable) in the denominator or not.

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Volume

Volume in any period is the Billed Effort and the quantum of hardware equipment and software licenses sold in that period.

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Volume Growth (Decline)

Volume growth or decline is measured by the difference in the volumes registered in the current period and a prior period. Depending on which prior period is selected as the baseline, the growth (or decline) is said to be measured Quarter on Quarter or Year on Year.

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Y-o-Y / YoY / YY

See Year on Year

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Year on Year

When performance of any financial or operating metric in a quarter is compared against the same quarter of the preceding year, such a comparison is said to be year on year or YoY. This can also apply to a comparison of the full year’s performance with that of the prior year.

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