Syntel's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Syntel (SYNT)

Q3 2011 Earnings Call

October 20, 2011 10:00 am ET

Executives

Prashant Ranade - Chief Executive Officer, President and Director

Bharat Desai - Co-Founder and Executive Chairman

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

Zaineb Bokhari - Head of Investor Relations

Analysts

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

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

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

Puneet Jain - JP Morgan Chase & Co, Research Division

Jason Kupferberg - Jefferies & Company, Inc., Research Division

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

Mayank Tandon - Signal Hill

Bhavan Suri - William Blair & Company L.L.C., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel Third Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, October 20, 2011. 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 7 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, Zaineb. Good morning, everybody, and thank you for joining us today. We are pleased with the progress made during the third quarter. The revenue growth was solid, and barring a previously disclosed onetime expense, we saw operating margins expand nicely from a year-ago period and from the second quarter of 2011. We feel great about our competitive positioning, and we believe we are well placed to grow as the industry remains under penetrated.

New customer outsourcing decisions, private cloud migration, mobility, business intelligence and testing remain important sources of growth. We are investing prudently in our business to position ourselves to take advantage of these opportunities.

I'd like to share some comments about the environment. While we are keeping an eye on macro economic trends, we would characterize demand for IT services as stable and healthy. Our pipeline is strong, and we have not seen a slowdown in client win rates or spending patterns related to 2001 -- 2011 initiatives.

The global environment is presenting new challenges to our clients as they struggle to manage costs and boost productivity. We have an opportunity in this environment to help our clients achieve their operational and financial goals. One of the hallmarks of Syntel is client service, and we are leveraging our unique capabilities to help our clients compete and in doing so, grow faster than the industry as a whole. 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 came in at $167.6 million, increasing 7% sequentially and more than 19% year-over-year. Our clients continue to see high-value in the services we provide and their focus on driving down costs helped support our growth. Clients continue to move forward with project commitments in the current economic environment.

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

Third quarter gross margin expanded by 364 basis points as compared to the second quarter levels, coming in at 39.8%. Revenue growth in the quarter drove improved utilization. Offshore utilization for IT improved from 66% to 70% on a period-end basis and from 65% to 68% on average in Q3. We were able to achieve this while maintaining our focus on campus hiring, as Syntel's net headcount grew by 266 in first quarter.

The company's SG&A expenses increased $11.8 million during Q3 as compared to a year ago, impacted by a previously disclosed onetime legal cost. Excluding this item, SG&A was below the year-ago quarter as well as from the second quarter of 2011. SG&A was also impacted by currency-related balance sheet translations and other operating costs. While macroeconomic headwinds remain a concern, we are pleased that at this point in time, client spending patterns have not been impacted.

From Syntel's perspective, we would still characterize the overall demand environment and new business pipeline for our services as stable and healthy. We continue to strengthen our relationship with all of our clients and maintain our focus on building deeper relationships into account 6 through 20. We think we'll be able to leverage our deep domain expertise and unique engagement model to expand our footprint with these customers.

Clients are increasingly looking for prospect partners to help them realize business value and achieve their internal goals. We believe that Syntel is well-positioned to provide differentiated value to our clients and be their prospect partner.

In the fourth quarter of 2011, as we focus on creating long-term sustainable value for our clients and other shareholders, we'll continue to invest prudently in our business. To this end, previously planned initiatives such as campus hiring, ongoing infrastructure expansion in Chennai and Pune and the creation of new domain and service capabilities are on track. While this investment will limit margin expansion opportunities somewhat in 2011, we think they will position Syntel to drive growth at or above industry levels for 2011 and beyond.

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