Syntel Management Discusses Q2 2012 Results - Earnings Call Transcript

Syntel (SYNT)

Q2 2012 Earnings Call

July 19, 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

Puneet Jain - JP Morgan Chase & Co, Research Division

Brian Kinstlinger - Sidoti & Company, LLC

Mayank Tandon - Needham & Company, LLC, Research Division

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

Gregory W. Halter - LJR Great Lakes Review

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

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, July 19, 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 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; Arvind Godbole, Syntel's Chief Financial Officer; and Rakesh Khanna, Syntel's Chief Operating Officer. Before we begin the call, 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. In an uncertain business environment, our team has executed very well and made solid progress on our strategic imperatives. The current environment, along with the microeconomic headwinds, presents us with opportunities to help clients drive efficiencies in their businesses. We're engaged in active dialogue with clients across a range of service offerings. While decision cycles have lengthened, I'm pleased with the size, quality and breadth of our pipeline. New technologies like cloud, mobility and analytics are top of mind for clients. We are engaged in active discussions in helping them leverage the power of these technologies to gain share and better serve their customers. We continue to invest in enhancing our capabilities to help evolve and grow our clients' businesses. Our value proposition continues to resonate well with clients as we help them respond to business demands. This creates a great opportunity to engage and partner closely with our clients. As we grow, our goal is to maintain our customer focus and innovation DNA and to help our clients win in the marketplace.

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 were $179 million, rising 5% sequentially and 14% year-over-year. We saw revenue growth across our key verticals and services. Macroeconomic conditions introduced more uncertainty during the quarter. This impacted revenue growth as clients were incrementally more cautious than in prior periods. However, as Bharat noted, we see many opportunities for growth ahead. Because of the progression of revenue, we have reported year-to-date in our review of our backlog and pipeline, we have tightened the guidance range for our 2012 revenue outlook. Arvind will provide further details on our revenue performance in his prepared remarks.

Second quarter gross margin narrowed by 58 basis points as we -- as compared to the first quarter coming in at 41.3%, reflecting the impact of offshore wage increases and Visa costs as we had shared with you last quarter. The Indian rupee depreciation during the quarter benefited reported gross margins as well as operating margins. We continue to add to our employee roles and maintain the focus on campus hiring.

We grew net headcount by 401 in the second quarter a rise of 2% sequentially and 11% from 1 year ago. Offshore utilization for IP rose to 66% in Q2 from 63% in Q1 on a period-end basis and to 65% from 63% on average. We were able to achieve this while maintaining a focus on campus hiring. We'll continue with our campus hiring plans tied to demand expectations and realization. The company's SG&A expenses declined $8.9 million during Q2 as compared to 1 year ago impacted by the depreciation in rupee. On a sequential basis, the depreciation in rupee lowered SG&A modestly while currency-related balance sheet translations had more significant impact. We are pleased with the level of operating margin in the second quarter but would not consider this level as sustainable, given the volatility in the rupee and our plans for investments in our business over the balance of the year.

As 2012 unfolds, we see continued uncertainty in the global macroeconomy and while this has pushed out cycle times, it has also created new opportunities for us. Clients are mindful of how they invest their IT dollars with an eye on the value they derive from their investment. This plays to our strength, and we expect our addressable market continuing to outpace IT spending overall for foreseeable future. We continue to feel good about our business and our near-term as well as long-term prospects. We are confident in our ability to grow faster than the market and will invest in our capabilities to do so. I want to conclude by thanking the employees of Syntel around the world for their continued dedication and hard work.

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