SYNT

Syntel, Inc. (SYNT)

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Syntel (SYNT)

Q1 2013 Earnings Call

April 18, 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

Nitin Rakesh - President of Americas-Business Development and Nearshoring Center

Rakesh Khanna - Chief Operating Officer

Analysts

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Brian Kinstlinger - Sidoti & Company, LLC

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

Rahul Bhangare

Puneet Jain - JP Morgan Chase & Co, Research Division

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

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

Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel First Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, April 18, 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 first quarter earnings release crossed GlobeNewswire at 8:30 a.m. today. It's also available on our website at www.syntelinc.com. On the call with us today, we have Bharat Desai, Syntel's Chairman; and 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 performances this quarter in an evolving business environment. Customers expect more from their technology partners than ever before. They want proven capabilities and a demonstrable understanding of their business challenges. Our focus remains on providing a high level of innovation and services to our customers. This focus supported by our investments and industry expertise and understanding of their business helps us deliver compelling value to our customers.

From the time Syntel was founded in 1980, these values have been core to our business. Our customers, partners and even industry observers recognize this. We have garnered many accolades over the years in recognition of our relentless focus. I was very pleased recently when an article in one of the world's most prestigious business publications, the Harvard Business Review, cited Syntel as one of only 344 exceptional companies after a review of over 25,000 publicly listed companies. This list included some of the best known companies in the world, including another technology company that you may be familiar with, IBM. We are thrilled to have been included in this elite list and humbled by the company we keep. As we look to the future, we will continue to invest to support our growth and expand our capabilities. Our singular focus on listening and collaborating with our customers guides our long-term vision and definitely sets us apart from the pack. I'm very appreciative to our customers for their business and their confidence and belief in us. I'm equally appreciative of the tireless efforts of my colleagues around the world in support of our principles.

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 everyone. I want to begin my comments by expressing my sincere appreciation to our customers. The recognition that Bharat noted is the result of our focus on serving our customers, and we look forward to continuing to do just that.

Syntel's first quarter revenues were $189.1 million, rising 11% year-over-year. We saw revenue growth across many of our verticals on a year-over-year basis, with insurance and retail showing some of the strongest growth. We continue to strengthen our relationships across our customer base and did see some of our larger relationships deliver strong growth in the quarter. Arvind will provide further details on our revenue performance in his prepared remarks.

As expected, first quarter gross margin narrowed 406 basis points as compared to the fourth quarter of 2012 coming in at 41.1%, impacted by our higher billable headcount and the on-site increment, which took effect at the start of the year. Indian rupee's appreciation during the quarter also impacted reported gross margins, as well as operating margins modestly, as Arvind will elaborate later.

We grew net headcount by 772 in the first quarter, a rise of 3.6% sequentially and nearly 13% from a year ago. This was a combination of campus hires and experienced hires based on the requirements of our business. However, as a result of this, offshore utilization for IT fell to 62% in Q1 from 63% in Q4 on a period-end basis and to 51% [ph] from 56% [ph] on average. We expect utilization in 2013 to reflect quarterly hiring trends.

The company's SG&A expenses decreased by $1 million during Q1 as compared to a year ago, aided by the depreciation in the rupee and the impact of balance sheet translation adjustment. On a sequential basis, the rupee appreciated slightly but SG&A expenses decreased by $2.2 million, aided by a lower level of local tax provisions required in Q1 as compared to Q4 of 2012. We are pleased with the level of operating expenses during the quarter even as we increased our ranks and look forward to further investments to support our growth.

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