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Syntel, Inc. Q1 2010 Earnings Call Transcript

Syntel, Inc. Q1 2010 Earnings Call Transcript

Syntel, Inc. (SYNT)

Q1 2010 Earnings Call Transcript

April 22, 2010 10:00 am ET


David Mackey – SVP, Finance

Bharat Desai – Chairman & Co-founder

Prashant Ranade – CEO & President

Arvind Godbole – CFO & Chief Information Security Officer


Reik Read – Robert Baird & Company

Brian Kinstlinger – Sidoti & Company

Bryan Keane – Credit Suisse

Bhavan Suri – William Blair

Tim Fox – Deutsche Bank

Srinivas Anantha – Oppenheimer

Cynthia Houlton – HFP Capital Markets

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Puneet Jain – JP Morgan

Ed Caso – Wells Fargo Securities

Vincent Colicchio – Noble Financial

Justin Cable – Global Hunter Securities

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Ladies and gentlemen, thank you for standing by and welcome to the Syntel first quarter 2010 earnings call. (Operator Instructions) As a reminder, this call is being recorded today, Thursday, April 22, 2010. 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 first quarter earnings release crossed Globe Newswire at 8.30 a.m. today. It is also available on our website at Before we began, I would 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, David. Good morning, everybody and thank you for joining us today. We also have Prashant Ranade, Syntel's Chief Executive Officer and President and Arvind Godbole, Syntel's Chief Financial Officer, on the call with us today.

As the economy stabilizes, the demand environment for offshore services has continued to improve. Our clients' focus is increasingly shifting from short-term cost reduction and business survival to long-term value and competitive differentiation. Syntel believes we are well positioned as a strategic technology partner to help our clients achieve their business objectives. Our ongoing investments in people, service offerings and infrastructure have created the right framework for success. Our corporate culture of innovation and operational excellence allows us to create custom solutions for our clients and help them succeed in their respective markets.

As the global services economy continues to evolve and mature, our flexibility and deep expertise will allow and enable Syntel to change with our clients' business needs and continue to provide higher value offshore-centric solutions.

At this time, I would like to turn the call over to Prashant Ranade, Syntel's Chief Executive Officer and President. Prashant?

Prashant Ranade

Thank you, Bharat, and good morning to everyone. Syntel's Q1 performance was indicative of the overall offshore services environment, highlighted by solid revenues and increasing margin pressure. Excluding approximately $6 million of short-term project revenue both in fourth quarter of 2009, Syntel's first quarter revenues grew 3.8% sequentially to $116 million. This represented a 20% increase against the Q1 of last year.

Maintenance revenues grew 6% sequentially and overall demand for development work and discretionary projects continued to strengthen. In fact, excluding the incremental Q4 project work, our development revenues grew 5% sequentially.

As Bharat noted in his earlier remarks, while the demand environment appears to be improving, the cost side of our business is becoming more challenging. Operating margins in the first quarter contracted to 23.3%. A portion of this decrease was related to aggressive hiring programs with Syntel adding over 1000 employees for the second consecutive quarter.

While some of these resources became available in March, our average utilization in the first quarter was significantly below previous levels. The company felt this hiring was necessary due to increased improving demand picture and the likelihood of increased acquisitions.

The Q1 margins were also pressured by on-site wage increases, which went into effect on January 1 and a 2% depreciation in Indian rupee. While some of the costs were impacted, our margins in the first quarter have not expected to continue. There will be additional cost pressures forthcoming as a result of currency appreciation, offshore wage increases, result costs and the possible outcomes from a large contract negotiation.

At this point, I would like to provide you with a brief update on the status of our negotiations. As of today, we have yet to finalize any changes to the existing JV agreement. Our conversations with the client remain productive and we believe we are continuing to make progress.

As was the case last quarter, our revised guidance assumes a range of discounts, which would impact both revenue and margins in 2010. However, guidance does not assume that the client will exercise its option to purchase the joint venture nor does it assume that the contract will continue with the same pricing, terms and conditions and without economic impact to Syntel.

Since my appointment as CEO and President, I have spent the majority of my time meeting our employees and clients across the globe. It has solidified my belief in the passion and talent inherent in our organization and also provided me the opportunity to see and hear first-hand the value we are delivering to our clients. It is clear to me, as Bharat has mentioned that the company is extremely well positioned for success. It is also clear that as an organization we must continue to leverage our business knowledge and create deeper relationships with our blue chip clients.

Capitalizing on this opportunity is my number one objective and I believe we are making strides towards this goal. We have been aggressively investing in the client partner role and expanding the number of participants in the program. Recently, we now have strategic account sales reporting directly to the client partners with the balance of the sales team focused on new accounts. Syntel also continues to roll out our new offerings across services, verticals and technologies.

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