Syntel Inc. (SYNT)
Q1 2010 Earnings Call Transcript
April 22, 2010 10:00 a.m. ET

Executives

David Mackey – Senior Vice President, Finance
Bharat Desai – Chairman and Co-Founder
Prashant Ranade – President and Chief Executive Officer
Arvind S. Godbole – Chief Financial Officer

Analysts

Reik Read – Robert W. Baird & Company
Brian Kinstlinger – Sidoti & Company
Bryan Keane – Credit Suisse
Bhavan Suri – William Blair
Tim Fox – Deutsche Bank
Srinivas Anantha – Oppenheimer & Co.
Cynthia Houlton – HFP Capital Markets
Edward Caso – Wells Fargo Securities
Vincent Colicchio – Noble Financial Group
Justin Cable – Global Hunter Securities
Joseph Foresi – Janney Montgomery Scott

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Syntel First Quarter 2010 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, if you have any questions, we need to press star then the number one key on your touchtone telephone to place your line into the question queue. If you would like to withdraw your question, press star and the number one again. 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 www.syntelinc.com. 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.