SYNT

Syntel, Inc. (SYNT)

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Syntel (SYNT)

Q4 2011 Earnings Call

February 16, 2012 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, Principal Accounting Officer and Chief Information Security Officer

Rakesh Khanna - Chief Operating Officer and President of Banking & Financial Services Business Unit

Analysts

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

Mayank Tandon - Needham & Company, LLC, Research Division

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

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Brian Kinstlinger - Sidoti & Company, LLC

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

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

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

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Syntel Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, February 16, 2012. 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 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; Arvind Godbole, Syntel's Chief Financial Officer. and Rakesh Khanna, Syntel's Chief Operating 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 will now turn the call over to Syntel's Chairman, Bharat Desai. Bharat?

Bharat Desai

Thank you, Zaineb. Good morning, everybody, and thank you for joining us today. We are pleased with our overall performance this past quarter and over the entire year. As the environment remained relatively stable during the course of 2011, we grew our annual revenues nearly 21%, consisted of an attractive level of profitability. We operate in a large and under-penetrated industry with a favorable long-term growth profile. We have a relationship model where we engage deeply with clients and focus on developing expertise in the industry and we've had a history of delivering strong financial and operating performance. It's this combination of capabilities, the culture of customer service and innovation and our nimbleness that we think positions as really well, and that's why we feel great about our prospects. Making the right investments in our future is also an important part of the equation and it's something we expect to continue.

As we begin 2012, macroeconomic conditions continue to bear watching. Even so, we would characterize demand for IT services as stable and healthy. Our pipeline continues to grow, and we expect to continue to leverage our differentiated offerings and unique market positioning to execute in the current environment. Our customers are looking for flexibility in the current environment, and they seek to manage their businesses efficiently. Syntel will be there to help our clients achieve their goals and this will help us, drive us forward as a company in the coming year and over the long term.

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 fourth quarter revenues came in at $172.4 million, increasing 3% sequentially and 19% year-over-year. Revenue growth in the quarter was broad-based with most key services, verticals and geographies improving sequentially. We saw growth across some of our largest relationships during the quarter as we continue to play an important role in helping our clients achieve their operational goals. In addition, we continue to see growth among clients 6 through to 20 outpace growth reported for the company as a whole. Arvind will provide further details on our revenue performance in his prepared remarks.

As disclosed in our 8-K filed this past Monday, we have entered an amended and restated shareholder's agreement with one of our large clients. The amended and restated shareholder's agreement modifies the right of the client to purchase Syntel's interest in our joint venture with that client. As we modified, the client has the right to purchase Syntel's interest in the joint venture during the 90-day period immediately preceding the expiration of initial term, which is February 2017 of an amended and restated Master Service Agreement, or if the MSA is extended beyond this initial term during the 90-day period immediately preceding the renewal term, which is February 2018.

Fourth quarter gross margin expanded approximately 240 basis points as compared to the third quarter levels, coming in at 42.1%. The depreciation in Indian rupee aided reported gross margins, as well as operating margins, as Arvind will elaborate later.

We continue to grow our organization based on our hiring plans, maintaining a focus on top campus hiring and we grew net headcount by 1,191 in the fourth quarter, a rise of 7% sequentially. This advanced hiring is an integral part of the investment necessary to support the long-term vision we have articulated for our company. However, as a result of this, offshore utilization for IT fell to 64% in Q4 from 70% in Q3 on a period-end basis, and to 67% from 68% on average. We expect these levels to improve as 2012 progresses.

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