SYNT

Syntel, Inc. (SYNT)

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Syntel (SYNT)

Q4 2010 Earnings Call

February 17, 2011 10:00 am ET

Executives

Prashant Ranade - Chief Executive Officer, President and Director

Arvind Godbole - Chief Financial Officer, Principal Accounting Officer and Chief Information Security Officer

Bharat Desai - Co-Founder and Executive Chairman

David Mackey - Vice President of Finance

Analysts

Joseph Foresi - Janney Montgomery Scott LLC

Vincent Colicchio - Noble Financial Group

Richard Eskelsen

Tim Fox - Deutsche Bank AG

Rahul Bhangare

Joseph Vafi - Jefferies & Company, Inc.

Puneet Jain - JP Morgan

Mayank Tandon - Signal Hill

Brian Kinstlinger - Sidoti & Company, LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel Fourth Quarter 2010 Earnings Call. [Operator Instructions] 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 fourth 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; 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?

Bharat Desai

Thank you, David. Good morning, everybody, and thank you for joining us today. We are very pleased with the operational and financial performance of our business this past year. The investments we made during the economic downturn resulted in deeper relationships with the clients and prospects and helped lay the groundwork for success in 2010.

As the overall environment stabilized and customer confidence began to improve, Syntel was very well-positioned to help our clients innovate and compete. As a result, 2010 revenues increased 27% over 2009. While overall spending levels improved, projects were largely focused on cost reduction, business efficiency and short-term returns on investment. It is our belief that over time, clients will begin moving forward with longer-term transformational plans designed to not only improve efficiency, but drive competitive advantages in their respective markets. Clients will increasingly expect their partners to execute these initiatives and help provide the thought leadership, innovation and commitment to development. We firmly believe that our culture, approach, size and capability will enable Syntel to deliver this enhanced value to our clients.

As we begin 2011, we feel Syntel is very well-positioned in the marketplace. The feedback we've been receiving from clients and prospective clients had been very positive they tells us that Syntel has the depth of knowledge to understand their business problems and the ingenuity to solve them. We will continue to focus on leveraging our capabilities to drive competitive differentiation and long-term sustainable business value for all Syntel's stakeholders.

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

Prashant Ranade

Thank you, Bharat, and welcome, everyone. Syntel's fourth quarter revenues came in at $144.9 million, representing a 3% sequential increase and a 23% increase year-over-year.

Growth during the quarter was broad-based across two verticals; service offering and clients. From a vertical perspective, healthcare, financial services and retail were the key contributors. ROI-based development projects led the growth from a services perspective. And customer concentration remain unchanged at the top three, top five and top 10 levels.

The fourth quarter marked the return by our clients to a seasonal spending pattern with many differing contractual commitments into 2011 spending finalization of their budgets. As clients' plans firm up, we expect projects signings and reciprocate [ph] to accelerate. As a result, we anticipate first quarter revenues will be similar to fourth quarter levels. Gross margins for the fourth quarter dropped 20 basis points sequentially, coming in at 38.4%. The main drivers for lower margins were currency and reduced offshore utilization.

During the quarter, the Indian rupee appreciated 2.3% which impacted gross margins by approximately 70 basis points. Additionally, Syntel increased net global headcount by 1,095 employees, representing a 7% sequential increase. The majority of this advance hiring was at the campus level and necessary to manage the delivery parameters going forward. As a result, offshore utilization levels dropped to under 68% at the end of Q4, and IT utilization offshore stood at 61%. These levels are temporarily low and should improve as 2011 progresses.

Syntel's SG&A level was largely unchanged during the fourth quarter. Net [indiscernible] from currency movements was largely offset by the full quarter impact of our ongoing infrastructure expansion programs. This includes our new state-of-the-art campus in Chennai and new SEZ-leased facility in Mumbai.

With respect to full year 2010, we are extremely pleased with company's overall performance and current market positioning. Our revenue growth and operating margins were among the best in the industry, coming in at 27% and 23%, respectively.

Revenue momentum was healthy and broad-based, with all verticals growing over 20% and IT solutions including maintenance and development growing over 30%.

The company also added 30 new clients in 2010, including several high potential brand name logos. We continue to aggressively invest in our business as was evidenced by accelerated hiring and infrastructure build-out.

In 2010, Syntel's global headcount grew 38%, adding over 4,800 net employees and finishing the year at 17,383.

During the same period, additional capacity was created in Mumbai and Chennai for over 9,000 potential seats. These investments, coupled with currency appreciation and wage increases, were responsible for much of the margin pressure expected during the year.

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