SYNT

Syntel, Inc. (SYNT)

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Syntel (SYNT)

Q2 2011 Earnings Call

July 21, 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

Manish Hemrajani - Oppenheimer & Co. Inc.

David Koning - Robert W. Baird & Co. Incorporated

Vincent Colicchio - Noble Financial Group, Inc.

Rahul Bhangare

Edward Caso - Wells Fargo Securities, LLC

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 Second Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, July 21, 2011.

I will now turn the call over to David Mackey, Syntel's Senior Vice President of Finance. Sir, you may begin.

David Mackey

Thank you, and good morning, everyone. Syntel's second 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 pleased with the progress made during the second quarter as solid revenue growth enabled Syntel to absorb costs associated with offshore wage increases, visa fees and infrastructure expansion. As a result, margins expanded versus first quarter levels. From a Syntel perspective, the demand environment for IT services continues to be stable and healthy. While our customers remain vigilant regarding global economic challenges, we've yet to see changes in spending patterns related to 2011 initiatives.

Projects designed to drive cost improvement and business efficiency remain top of mind, and clients have are continuing to spend on engagements with defined return on investment. In addition, we're beginning to see clients move forward with pilots and proof of concepts related to new technology-driven offerings including analytics, cloud computing and mobility.

The business opportunity for Syntel is robust, and the organization focus remains clear. We must continue to leverage our unique combination of size, capability and culture to help our clients compete in their respective industries. By doing this, we are firmly convinced that Syntel can grow our business at a rate faster than the industry and thereby gain share.

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. Syntel's second quarter revenues came in at $157 million, increasing 8% sequentially and more than 20% year-over-year. The combination of 2011 budget finalization and a relatively stable economic environment provided clients with the comfort to move forward with project commitments.

Revenue growth in the quarter was broad-based across the company, with most key services, verticals and angiographies improving sequentially. Arvind, will provide further details on revenue performance in his prepared remarks.

Second quarter gross margin expanded by 120 basis points as compared to the first quarter levels, coming in at 36.2%. Revenue acceleration in the quarter drove improved utilization, which allowed us to more than offset higher costs associated with offshore wage increases, visa fees and rupee appreciation.

Offshore utilization for IT improved from 63% to 66% on a period-end basis and from 61% to 65% on average in Q2. We were able to achieve this while maintaining our focus on campus hiring, as Syntel's net headcount grew over 2% in second quarter.

The company's SG&A expenses increased $3.2 million during Q2, as we began moving into our new 4,000-seat facility in Mumbai. SG&A was also impacted by currency-related balance sheet translations and our annual offshore wage increases. While global economic uncertainty remains a concern, we are pleased that at this point in time, client spending patterns have not been impacted.

From a Syntel perspective, the overall demand environment and new business pipeline for our services continues to be stable and healthy. Mining of our top 30 accounts remains the #1 focus for the company, as we look to leverage our deep domain expertise and unique engagement model to expand our footprint. Clients are increasingly looking for their partners to provide business value far beyond level arbitrage, and we believe that Syntel is well positioned to provide this differentiated value.

In the second half of 2011, we'll continue to invest in creating long-term sustainable value for our clients, shareholders and employees. Key initiatives include the hiring of approximately 2,000 campus trainees, ongoing infrastructure expansion in Chennai and Pune and the creation of new domain and service capabilities. These investments will limit our margin expansion opportunities in 2011 but will position Syntel to drive growth at or above industry levels for 2011 and beyond.

I would now like to turn the call over to Arvind Godbole, Syntel's Chief Financial Officer, who will discuss Syntel's financial performance. Arvind?

Arvind Godbole

Thanks, Prashant, and good morning. After my comments, we'll open the call to questions.

Read the rest of this transcript for free on seekingalpha.com