SYNT

Syntel, Inc. (SYNT)

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Syntel (SYNT)

Q3 2012 Earnings Call

October 18, 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, Chief Information Security Officer and principal Accounting Officer

Rakesh Khanna - Chief Operating Officer

Analysts

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

Brian Kinstlinger - Sidoti & Company, LLC

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

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Puneet Jain - JP Morgan Chase & Co, Research Division

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

Nathan J. Novak - Robert W. Baird & Co. Incorporated, Research Division

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

Gregory W. Halter - LJR Great Lakes Review

Rahul Bhangare

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel Third Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Thursday, October 18, 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 third 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; Rakesh Khanna, Syntel's Chief Operating Officer; and Nitin Rakesh, President for Americas Business Development.

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, Zaineb, and thank you, everybody, for joining the call today. We delivered solid growth at a healthy level of profitability this quarter despite ongoing headwinds from the uncertain macro economy.

Our market position is getting stronger. Our domain-led vertical offerings provide very targeted solutions to our customers' specific business demands. Our horizontal offerings enabled our customers to become more efficient and to free up resources to focus on innovating and creating value for their customers and shareholders. Our investments in new technologies are helping us expand our market reach and future prospects.

Many customers are looking to modernize their technology infrastructure and leverage these investments in the pursuit of new markets and to better serve fast-changing customer needs. We are increasingly engaged in client discussions about the transformative impact these technologies can have in their businesses and their market positioning.

As an example, the opportunity to harness and leverage the explosion of structured and unstructured data to run their businesses more smartly and to drive new revenue sources is increasingly viewed as a big competitive advantage by our clients. Our investment in these areas has positioned us very well to continue to remain a trusted partner of our customers and to help them win in the marketplace.

Even as decision cycle times remain somewhat slow, our pipeline of opportunities continues to get stronger. Our customers are facing rising regulatory and compliance demand, ongoing cost concerns and rising competitive pressures. We see opportunity ahead to help our customers navigate the challenges they face. We are confident that a deep understanding of our customers' businesses, coupled with our strong value proposition, will drive our future growth and help our customers achieve long-term success.

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 third quarter revenues were $186.4 million, rising 4% sequentially and 11% year-over-year. Our third quarter results reflect our continued focus on delivering differentiated offerings and our dedication to serving our customers. During the quarter, we saw growth across all verticals and continued to invest in our capabilities. As we look to our future prospects, we feel well positioned and on track to grow faster than the market overall.

Macroeconomic conditions remained a challenge in the third quarter and clients remained cautious. But we continue to see opportunity as well. As an example, we saw improving growth out of Europe and continue to invest in the region. Arvind will provide further details on our outlook and our third quarter revenue performance in his prepared remarks.

Third quarter gross margin widened by 424 basis points as compared to the second quarter, coming in at 45.5%, higher utilization and a sequential decline in visa-related expenses contributed to the improvement seen during the third quarter. The Indian rupee's appreciation had a modest negative impact on gross margin during the quarter. We added 132 employees during the quarter, growing headcount by 1% sequentially and 10% from the year-ago quarter. Offshore utilization of IT rose to 70% in Q3 from 66% in Q2 on a period end basis and to 67% from 65% on average. We remain focused on campus hiring and expect utilization levels to trend lower over the balance of the year as we bring on additional associates.

The company's SG&A expenses declined $7.6 million during Q3 as compared to a year ago, impacted by a one-time item recorded in the year-ago period. On a sequential basis, SG&A expenses rose by $10.1 million. The impact of currency-related balance sheet translations was the primary driver for the increase in SG&A during the quarter, while other expense levels were well managed. We do not view this quarter's operating margin as sustainable in view of the recent volatility in the rupee and our investment plans.

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