SYNT

Syntel, Inc. (SYNT)

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Syntel Inc. (SYNT)

Q3 2010 Earnings Call

October 28, 2010 10:00 am ET

Executives

David Mackey - SVP, Finance

Bharat Desai - Chairman

Prashant Ranade - CEO

Arvind Godbole - CFO

Analysts

Sri Anantha - Oppenheimer

Joseph Vafi - Jefferies

Mayank Tandon - Signal Hill Capital

Brian Kinstlinger - Sidoti & Company

Bryan Keane - Credit Suisse

Joseph Foresi - Janney Montgomery Scott

Tim Fox - Deutsche Bank

Vincent Colicchio - Noble Financial

Puneet Jain - JPMorgan

Rick Eskildsen - Wells Fargo

Presentation

Operator

Welcome to the Syntel third quarter 2010 earnings call. (Operator Instructions) I would 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 third quarter earnings release crossed GlobeNewswire at 8:30 a.m. today. It's also available on our web site at www.syntelinc.com. On the call with us today, we have Bharat Desai, Syntel's Chairman; Prashant Ranade, Syntel's CEO and President and Arvind Godbole, Syntel's Chief Financial Officer.

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

Bharat Desai

Thank you, David, good morning, everybody, and thank you for joining us today. Since the company's inception 30 years ago, Syntel has been able to successfully adapt our business model to meet the changing services landscape. Back in the early '90's, when we set our first development center in India, client's struggled with embracing global delivery. Today, these same clients entrust with responsibility for developing and managing critical system and processes. As these relationship and business models continue to evolve, clients are expecting increased value from their strategic partners.

At Syntel, we believe that this ongoing evolution plays into our company's core strength, a flexible, nimble, innovative culture, with a customer polite philosophy. By keeping true to our DNA and investing in people, services and infrastructure, we believe we can provide both existing and new clients the value they are looking for.

Our third quarter performance was solid, from both a financial and operational perspective. And we are extremely pleased with the overall positioning of the company.

Going forward, the market place will be ripe with opportunities for continued growth. Syntel must remain focused on understanding our client's needs and delivering beyond their expectations. I would now like to turn the call over to Prashant Ranade, Syntel's Chief Executive Officer and President to provide further detail.

Prashant Ranade

Thank You, Bharat, and welcome, everyone. Syntel's third quarter revenue performance highlighted a solid demand environment for offshore IT services. Revenues of $140.5 million represented an 8% sequential increase and a 34% increase year-over-year.

Topline improvement was, once again, broad based across our key service offerings with the financial services and retail verticals driving the growth. Customer concentration increased in Q3 as our largest financial services clients continued to leverage Syntel's capabilities. While these clients grew at an accelerated rate this quarter, we remain pleased with the progress we are making in expanding our other strategic relationships.

Through the first three quarters of 2010, our revenues increased 29% versus the same period last year. During the same period, clients 11 through 30 grew at a rate faster than our average growth rate. Gross margins during the third quarter were consistent with second quarter levels, as Syntel was able to absorb the full quarter pricing impact of a large contract re-negotiation and cost associated with advanced hiring.

During the third quarter, Syntel added 1,362 net employees, representing a 9% sequential increase. Syntel has now grown headcount 30% year to date adding over 3,700 employees globally. The company continues to invest in our business by hiring ahead of committed revenues. Given the current demand environment, pipeline levels and longer term market opportunity, we believe this investment is critical to our success.

As expected, operating margins were compressed by increased SG&A levels during the quarter. From a currency perspective, while the average Indian rupee rate depreciated 0.7% during the quarter, the rupee to dollar exchange rate appreciated significantly at the end of September. This resulted in minimal impact to our rupee denominated cost structure, but created an unfavorable balance sheet translation adjustment.

The adjustment in Q3, increased our SG&A expenses by $1.4 million as compared to the $1.7 million reduction in expenses recorded in the second quarter. Additionally, our third quarter SG&A was impacted by our ongoing infrastructure expansion program, including the depreciation and amortization related to our new Chennai Campus, and expenses associated with a new SEZ lease facility in Mumbai.

The new Mumbai facility is almost 350,000 square feet, and has capacity of up to 4,000 employees. It should be ready for occupancy in the first quarter of 2011. Given the overall economic climate, Syntel is pleased with the stability of demand environment for our services. Cost reduction initiatives remain strong and spending on development projects improved during the third quarter.

As we move towards the end of 2010 and into 2011, it will be important to closely monitor the changes in discretionary spending given low committed visibility and our client's transition to a new budget year. In the longer term we firmly believe that our market positioning is excellent, and that our target investment programs are on track. We'll continue to develop innovative solutions designed to drive business value to our clients, improve the depth and breadth of our sales and delivery teams, and to build out world class infrastructure.

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