SYNT

Syntel, Inc. (SYNT)

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Syntel, Inc. (SYNT)

Q2 2010 Earnings Call

July 22, 2010 10:00 am ET

Executives

David Mackey – SVP, Finance

Bharat Desai – Chairman & Co-founder

Prashant Ranade – CEO & President

Arvind Godbole – CFO & Chief Information Security Officer

Analysts

Reik Read – Robert Baird & Company

Brian Kinstlinger – Sidoti & Company

Bryan Keane – Credit Suisse

Bhavan Suri – William Blair

Srinivas Anantha – Oppenheimer

Puneet Jain – JP Morgan

Vincent Colicchio – Noble Financial

Joe Foresi – Janney Montgomery

Joseph Bossi – Jefferies & Co.

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Syntel’s Second First Quarter 2010 Earnings Call. (Operator Instructions) As a reminder, this call is being recorded today, Thursday, July 22, 2010. I will now turn the call over to David Mackey, Syntel’s Senior Vice President of Finance.

David Mackey

Thank you. And good morning, everyone. Syntel’s Second Quarter Earnings Release across the Globe Newswire at 8:30 a.m. today. It’s also available on our website at www.syntellink.com.

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 risk and uncertainties described in the company’s Earnings Release, and other filings with the SEC.

I’ll now turn the call over to Syntel’s Chairman, Bharat Desai. Bharat.

Bharat Desai

Thank you, David. Good morning, everybody. Thank you for joining us today. We also have Prashant Ranade, Syntel’s Chief Executive Officer and President, and Arvind Godbole, Syntel’s Chief Financial Officer on the call with us today.

Through the downturn, Syntel continued to proactively manage both the short-term and long-term health of our business. We continued our aggressive investment programs, including new service offerings, hiring, and training of key resources, and the ongoing build out of our world-class infrastructure in India.

Additionally, in 2009, we challenged our employees to use the difficult environment as an opportunity to strengthen business relationships and position the company for long-term success.

With the relative stability in the domestic economy, we believe we are beginning to see the benefits of these program. This is evidenced by the ongoing growth in cost-production based initiatives and services, and the acceleration in new development projects.

We are extremely pleased with our Second Quarter Financial and Operational performance, and remain focused on continued execution.

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. During the second quarter, Syntel continued to build on our business momentum. Revenues of $130.6 million represented a 13% sequential increase and a 31% increase was in the Second Quarter of 2009. Not only are we extremely pleased with the overall revenue progress achieved during the quarter, but we are equally excited about the broad-based nature of the improvement across service offerings, verticals, and clients.

Arvind will provide additional color on some of these key metrics in his prepared remarks.

As anticipated, margin pressure increased during the quarter as Syntel rolled out our 2010 off-shore wage increases effective April 1st.

Additionally, other margins in the second quarter were negatively impacted by the recognition of our large – I’m sorry, renegotiation of our large KPO Joint Venture, which was finalized effective June 1st.

As disclosed in our 8K, our client waived their right to purchase Syntel’s interest in the joint venture through February of 2012. And the joint venture provided economic compensations to the client.

From a currency perspective, while average Indian rupee appreciated by 0.2% during the quarter. The exchange rate actually depreciated significantly in the month of June.

This resulted in minimal impact on our rupee-denominated cost structure, but resulted in a variable balance sheet adjustment. The adjustment in Q2 reduced our SG&A expenses by $1.7 million, which was in sharp contrast to the $1.9 million incremental expense reported in the first quarter.

Operating margins in the second quarter also expanded due to accelerated revenue growth, which allowed Syntel to leverage our SG&A costs.

During the second quarter, Syntel added over 1,200 employees on net basis representing a 9% sequential increase.

Improvements in utilization were put on hold as we continued to proactively hire in response to strengthening demand trends, a healthy pipeline, and driving accretion rates.

As a result, average utilization in the second quarter was largely unchanged from first quarter levels.

In support of healthy demand, and accelerated hiring, we are aggressively building our infrastructure in India ahead of the curve.

Syntel inaugurated Phase 1 of our new campus in Chennai during the second quarter with 1,700 finished seats and available capacity of an additional 3,400 employees.

We are also moving forward with construction of Phase 3 of our [inaudible] and are looking at additional opportunities for further infrastructure expansion this year.

Last quarter, we spoke about the need to leverage our business knowledge and create deeper relationships with our blue-chip clients. We believe that our Second Quarter Revenue performance is evidence that we are on the right track.

While our largest clients continue to grow with Syntel, our remaining customers are currently growing at a faster rate. With the backdrop of a stable business environment and aggressive investment programs focused on delivering value, we are optimistic that the second half of 2012 will continue to provide opportunities for expanding existing relationships and forging new ones.

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