SYNT

Syntel, Inc. (SYNT)

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Syntel (SYNT)

Q4 2012 Earnings Call

February 14, 2013 10:00 am ET

Executives

Zaineb Bokhari - Head of Investor Relations

Bharat Desai - Co-Founder and Executive Chairman

Prashant Ranade - Chief Executive Officer, President and Director

Arvind S. Godbole - Chief Financial Officer, Chief Information Security Officer and principal Accounting Officer

Rakesh Khanna - Chief Operating Officer

Nitin Rakesh - President of Americas Business Development and Nearshoring Center

Analysts

Amit Singh - Jefferies & Company, Inc., Research Division

Brian Kinstlinger - Sidoti & Company, LLC

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Mayank Tandon - Needham & Company, LLC, Research Division

Rahul Bhangare

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Puneet Jain - JP Morgan Chase & Co, Research Division

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel Fourth Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, February 14, 2013.

I will now turn the call over to Zaineb Bokhari, Syntel's Head of Investor Relations.

Zaineb Bokhari

Thank you, and good morning, everyone. Syntel's fourth quarter earnings release crossed GlobeNewswire at 8:30 a.m. today. It is also available on our website at www.syntelinc.com.

On the call with us today, we have Bharat Desai, Syntel's Chairman; Prashant Ranade, Syntel's CEO and President; Arvind Godbole, Syntel's Chief Financial Officer; Rakesh Khanna, Syntel's Chief Operating Officer; and Nitin Rakesh, President of Americas.

Before we begin, I'd like to remind you that some of the comments made on today's call and responses to questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.

I will now turn the call over to Syntel's Chairman, Bharat Desai. Bharat?

Bharat Desai

Thank you, Zaineb. Good morning, everybody. Thank you for joining us today. We are pleased with our overall performance this past quarter and over the entire year. We grew our annual revenue nearly 13% year-over-year, and we did this at an attractive level of profitability. Our customers' world is changing rapidly. On one hand, we have faced significant pressure to reduce and run the business cost and improve service level. On the other, their client's expectations are evolving rapidly on how they purchase and consume goods and services. This is both a challenge and an opportunity for our clients and both present exciting potential to Syntel.

Syntel is making significant investments on many fronts. These include cloud, mobility, analytics and social media. We have successfully completed client engagements in each of these areas. Based on results, it is very clear that innovative adapters of these technologies will gain mind share and critical market momentum.

As we begin 2013, Syntel stands before a broader addressable market than ever before in our history. This is a direct result of the investments we have made in expanding our market reach, in industry expertise, in breakthrough technologies, in product partnerships and in building intellectual property.

I would now like to turn the call over to Prashant Ranade, Syntel's Chief Executive Officer and President, to provide further details. Prashant?

Prashant Ranade

Thank you, Bharat, and welcome. Syntel's fourth quarter revenues came in at $187.8 million, increasing approximately 1% sequentially and 9% year-over-year. We saw favorable results for key segments like Application Outsourcing and KPO, as the lights [ph] on portion of our business showed resilience. Arvind will provide further details on our revenue performance in his prepared remarks.

Fourth quarter gross margin narrowed by approximately 30 basis points as compared to the third quarter levels coming in at 45.2%. The appreciation in the Indian rupee had a modest impact on gross and operating margins. We continue to grow our organization this quarter. Net headcount increased by 1,215 in the fourth quarter, a rise of 6% sequentially. In keeping with our internal plan, we maintain the focus on campus hiring. We are positioning ourselves for the opportunities we see in the seasonally stronger periods ahead. However, as a result of this, offshore utilization for IT fell to 63% in Q4 from 70% in Q3 on a period-end basis and to 66% from 67% on average. This decline is typical for Q4 and we expect utilization in 2013 to reflect quarterly hiring trends.

The company's SG&A expenses increased $8.5 million during Q4 as compared to 1 year ago, impacted by a higher headcount and related expenses. On a sequential basis, SG&A declined $0.9 million. The appreciation in the rupee had a modest impact on SG&A, while factors such as currency-related balance sheet translations and lower marketing expenses had more of an impact. We are pleased with the level of operating profit this quarter even as we continue to grow our ranks and invest in our capabilities. However, we do not consider this level of operating profit to be sustainable. With respect to full-year 2013, we believe the overall environment has improved over the past 12 months, and we see a robust pipeline for both our horizontal and domain-led services. Client budgets are finalizing, and we expect 2013 budgets to be comparable to slightly up from what we saw in 2012. We see reasons for optimism ahead despite muted macroeconomic growth as offshoring frees up client resources for further innovations.

We continue to enjoy strong relationships with our customers and expect to build on these as we demonstrate the value we add in support of the business outcomes our customers want. We experienced favorable results in 2012 from our efforts to grow with client 6 through 25, as well as position to garner more successes in 2013.

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