Satyam Computer Services Ltd, (SAY)
Q2 Fiscal 2009 Earnings Call Transcript
October 17, 2008 6:30 p m IST

Executives

Ramalinga Raju - Founder and Chairman
Ram Mynampati - Member of the Board and President
V Srinivas – Chief Financial Officer

Analysts

George Price – Stifel Nicolaus
Bhavan Suri – William Blair
Joseph Foresi – Janney Montgomery Scott
Trip Chowdhary – Global Equities Research
Kawaljeet Saluja – Kotak Equities
Julio Quinteros – Goldman Sachs
Sandeep Shah – ICICI Securities
Rod Bourgeois – Bernstein
Pankaj Kapoor – ABN Amro
Viju George – Edelweiss
Ashish Thadhani – Gilford Securities
James Friedman – Susquehanna
Surendra Goyal – Citigroup
Shekhar Singh – Goldman Sachs
Anthony Miller – Tech Market View
Kanchana Vaidyanathan – Pacific Crest Securities
Arvind Ramnani – Bank of America Securities
Vihang Naik -- Motilal Oswal Securities
Vikas Jadhav – Motilal Oswal Securities
Harshad Deshpande – Ambit Capital
Ritesh Rathod – UTI Mutual Funds
Santhana Krishnan – Spark Capital

Operator

Ladies and gentlemen, good morning, good afternoon and good evening, this is the Chorus call conference operator. Welcome to the Satyam Earnings Conference Call for the 2nd Quarter of 2008/2009. As a reminder for the duration of this presentation all participant lines are in the listen-only mode and this conference is being recorded. After the presentation there will be an opportunity for you to ask questions. Should anyone need assistance during this conference call they may signal an operator by pressing * and then 0 on their touchtone telephones. At this time I would like to turn the conference over to Mr. Srinivas Vadlamani the CFO of Satyam Computers, thank you and over to you Mr. Vadlamani.

V Srinivas – Chief Financial Officer

Thank you, Rochelle, very good morning and good evening to you all and thank you for joining us to discuss our 2nd Quarter results. Joining me on this call are Raju and Ram. Now, before we start the discussion, I would like to draw your attention to the fact that during this call we may make certain forward-looking statements concerning our future growth prospect. Such statements involve a number of risks and uncertainties associated with our business. Please refer to our periodic various, periodic filings with the SEC for a description of such risks. The company does not undertake to update any forward-looking statements that we will make from time to time by or on behalf of the company, I now handover the session to Raju.

Ramalinga Raju – Founder and Chairman

Thank you all for joining us on this call. As we announced our results for the 2nd Quarter of fiscal year 2009 I am pleased to announce a better then guided performance for the 2nd Quarter for fiscal year 2009. We give this in a challenging global economic environment and the volatile currency scenario that became reality in the last three months since Satyam last reported earnings. In Q2, our revenue grew by 7.6% quarter-over-quarter and 38.8% year-over-year as per Indian GAAP on the back of a 4% volume growth and Rupee depreciation against the US Dollar. These drivers coupled with efficient cost management resulted in an EPS of Rs.8.63 for the quarter against a guidance of Rs.7.78. We believe that these factors will also enhance annual margin performance. Our US GAAP revenue for a quarter was $652.2 million, a growth of 28.8% year-over-year and a sequential growth of 2.3%. Earnings per ADS, was $0.39. Over time we have expanded the breadth of our services in numerous strategic areas, an effort boosted by several key acquisitions in the recent past. The combined capabilities arising out of the integration of these organizations are especially useful in a market where companies are increasingly focusing on process efficiencies. These competencies will emerge as significant differentiators for Satyam and when combined with our ever increasing global presence will uniquely qualify us to service customers in their transformation of endeavors. The near-term environment remains challenging because of the global slowdown and continued instability notably in the US banking and financial services sector. Consolidation among financial services companies is also contributing to uncertainty although it is also creating transformational opportunities.

In light of our better than guided performance for the first half and the favorable movement of the Rupee against the US Dollar, we are revising our annual revenue growth guidance under Indian GAAP upwards to between 33% and 35.4%. The annual EPS growth guidance is now expected to be in the range of 33% to 35%, aided by a superior margin performance. While Rupee has depreciated against the US Dollar, it has appreciated against other major currencies impacting our annual US GAAP revenue adversely by 3%. Given this background and prevailing market conditions, we are revising revenue growth projections downwards as per US GAAP to between 19% and 21%. In closing I would like to emphasize that Satyam is leaving no stones unturned in our efforts to create a sound foundation for our future. We will leverage the robust de-risk model, we established after 2000 the time of our last major slowdown. Since then we have grown 10 folds. As we did then, we will emerge stronger and better able to deliver superior customer value. The board has declared an interim dividend of 50% for fiscal year 2009, thank you.

V. Srinivas

Thank you, Raju. Our interim financials have been posted on the website and I assume that most of you would have got an opportunity to go through the same. Raju shared with you some of the business highlights of the quarter and for the fiscal. I will now focus on some of the financial highlights. Now for Q2 consolidated revenue growth was 38.8% year-on-year and 7.6% sequentially in Rupee terms. EPS for the quarter was Rs 8.63 year-on-year growth of 41% and sequential growth of 5.8% and sequential volume growth for the parent company was 4%. Reported onsite prices were lower by 0.75% and offshore prices were lower by 0.43%. This is primarily because of cross currency movements during the quarter. On a like-to-like basis local currency our onsite billing rates were up by 0.2% and offshore billing rates were by 0.5% sequentially. Given that we are operating in more than 65 countries and our dealings in more than 20 different currencies we have been impacted by cross currency volatility. For example between Q2 and now the Indian Rupee has appreciated by 8.6% against the Australian Dollar and 0.7% against the Euro while it has depreciated by close to 6% against the US Dollar. As our functional currency is Indian Rupees and we also report our financials in US Dollars these currency movements are likely to impact our reported US Dollar revenue by the $65 million for the year. This is the reason why we are lowering our annual revenue growth guidance by 3%.

Coming back to our Q2 numbers, EBIDTA margins for the quarter declined by 103 basis points. This is primarily because of the increments given during the quarter. Increments for the year have been finalized around 12% for offshore and 3% for onsite. The drop in margins because of increments, were mitigated by a better cost management on the SG&A front and the depreciation of Rupee against the US Dollar. Margins of US are expected to improve in the range of 100 to 150 basis points. Gross manpower addition in the parent company was 3323 our net addition was 1814 which includes 221 freshers. In the view of challenging business environment we are scaling down our gross manpower additions from 8000 to 10000 for the year. Parent company’s cash and bank balances increased by 105 million during the quarter. CapEx for the quarter was in US Dollars $40 million.

Turning to US GAAP, revenue for the quarter grew 2.3% sequentially and 28% year-on-year. Earnings per EP ADS grew 2.6% sequentially and 26% year-on-year. Coming to our guidance for fiscal 2009, we have revised our EPS towards upwards both on the Indian GAAP and US GAAP. Under the Indian GAAP we expect the EPS to grow between 33% to 35.1% corresponding earnings per ADS growth under the US GAAP is expected to be 17.6% and 20%. Thank you and now we throw up the session for Q&A.

Operator

Thank you very much sir. Ladies and gentlemen we will now begin the question-and-answer session. Please note that all participants who have logged into the call are allowed to ask questions. And there is no specific priority for the participants outside India and the ones in India. Anyone who wishes to ask a question may press * and 1 on their touchtone telephone. If you wish to withdraw a question from the queue you may press * and 2. Participants are requested to use only handsets while asking a question. Anyone who has a question may press * and 1 at this time. The first question is from the line of George Price from Stifel Nicolaus, please go ahead.

George Price – Stifel Nicolaus

Hi thanks very much. Couple of questions, one just to understand in terms of currency how much the 5%, 500 basis points reduction in your outlook for fiscal 09 would you attribute to currency versus demand. Should we take that 3% kind of going forward or would it be different for the fiscal year?