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| SYNT > SEC Filings for SYNT > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
SYNTEL INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Net Revenues. The Company's revenues consist of fees derived from its Applications Outsourcing, Knowledge Process Outsourcing ("KPO"), e-Business and TeamSourcing business segments. Net revenues for the three months ended September 30, 2009 increased to $104.7 million from $103.8 million for the three months ended September 30, 2008, representing a 0.9% increase. The Company's verticalization sales strategy focusing on Banking and Financial Services; Healthcare; Insurance; Telecom; Automotive; Retail; Logistics and Travel has enabled better focus and relationships with key clients. Further, continued focus on execution and investments in new offerings such as our Testing and Center of Excellence have a potential to contribute growth in the business. The focus is to continue investments in more new offerings and geographical expansion. Worldwide billable headcount as of September 30, 2009 increased by 0.4% to 8,546 employees as compared to 8,509 employees as of September 30, 2008. However, the growth in revenues was not commensurate with the growth in the billable headcount. This is primarily because a significant growth in the billable headcount was in India, where our revenues per offshore billable resource are generally lower as compared to an on-site based resource. As of September 30, 2009, the Company had approximately 81.0% of its billable workforce in India as compared to 80.0% as of September 30, 2008. The Company's top five clients accounted for 61.7% of the total revenues in the three months ended September 30, 2009, up from 58.9% of its total revenues in the three months ended September 30, 2008. Moreover, the Company's top 10 clients accounted for 75.5% of the total revenues in the three months ended September 30, 2009 as compared to 72.3% in the three months ended September 30, 2008.
Applications Outsourcing Revenues. Applications Outsourcing revenues increased to $77.4 million for the three months ended September 30, 2009 or 73.9% of total revenues, from $70.0 million, or 67.5% of total revenues for the three months ended September 30, 2008. The $7.4 million increase was attributable primarily to revenues from new engagements contributing $57.8 million, largely offset by $50.4 million in lost revenues as a result of project completion and net reduction in revenues from existing projects. The revenues for the nine months ended September 30, 2009 increased to $217.1 million, or 72.1% of total revenues, from $202.5 million or 66.2% of total revenues for the nine months ended September 30, 2008. The $14.6 million increase for the nine months ended September 30, 2009 was attributable primarily to revenues from new engagements of $149.4 million, largely offset by $134.8 million in lost revenues as a result of project completion and net decrease in revenues from existing projects.
Applications Outsourcing Cost of Revenues. Applications Outsourcing cost of revenues consists of costs directly associated with billable consultants in the US and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. Applications Outsourcing cost of revenues decreased to 56.5% of total Applications Outsourcing revenues for the three months ended September 30, 2009, from 60.9% for the three months ended September 30, 2008. The 4.4% decrease in cost of revenues, as a percent of revenues for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008, was attributable primarily to better utilization of resources, rupee depreciation, cost rationalization and increase in revenue partly offset by increase in other expenses. Cost of revenues for the nine months ended September 30, 2009 decreased to 57.4% of total Applications Outsourcing revenues, from 64.3% for the nine months ended September 30, 2008. The 6.9 percentage point decrease in cost of revenues, as a percent of revenues for the nine months ended
September 30, 2009, as compared to the nine months ended September 30, 2008, was attributable primarily to better utilization of resources, rupee depreciation, cost rationalization and increase in revenue, partly offset by increase in other expenses.
KPO Revenues. KPO revenues decreased to $19.0 million for the three months ended September 30, 2009, or 18.2% of total revenues, from $19.8 million, or 19.1% of total revenues for the three months ended September 30, 2008. The $0.8 million decrease was attributable primarily to $5.7 million in lost revenues as a result of project completion and net reduction in revenues from existing projects, largely offset by revenues from new engagements contributing $4.9 million. The revenues for the nine months ended September 30, 2009 decreased to $56.9 million, or 18.9% of the total revenues, from $61.0 million, or 19.9% of the total revenues for the nine months ended September 30, 2008. The $4.1 million decrease for the nine months ended September 30, 2009 was attributable primarily to lost revenues as a result of project completion and net decrease in revenues from existing projects by $16.3 million, largely offset by $12.2 million in additional revenues from new engagements.
KPO Cost of Revenues. KPO cost of revenues consists of costs directly associated with billable consultants, including salaries, payroll taxes, benefits, finder's fees, trainee compensation, and travel. Cost of revenues for the three months ended September 30, 2009 decreased to 27.7% of KPO revenues from 43.4% for the three months ended September 30, 2008. Cost of revenues for the nine months ended September 30, 2009 decreased to 33.4% of KPO revenues, from 42.2% for the nine months ended September 30, 2008. Both 15.7 and 8.8 percentage point decrease in cost of revenues, as a percent of total KPO revenues, as compared to the three and nine months ended September 30, 2008, was attributable primarily to better utilization of resources, rupee depreciation, cost rationalization partly offset by increase in other expenses.
e-Business Revenues. E-Business revenues decreased to $5.8 million for the three months ended September 30, 2009, or 5.5% of total revenues, from $11.8 million, or 11.4% of total revenues for the three months ended September 30, 2008. The $6.0 million decrease was attributable primarily to $9.5 million in lost revenues as a result of project completion and net reduction in revenues from existing projects, largely offset by revenues from new engagements contributing $3.5 million. The revenues for the nine months ended September 30, 2009 decreased to $20.7 million, or 6.9% of total revenues, from $35.0 million or 11.4% of total revenues for the nine months ended September 30, 2008. The $14.3 million decrease for the nine months ended September 30, 2009 was attributable principally to lost revenues as a result of project completion and net decrease in revenues from existing projects by $22.3 million, largely offset by $8.0 million in additional revenues from new engagements.
e-Business Cost of Revenues. e-Business cost of revenues consists of costs directly associated with billable consultants in the US and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation, and travel. e-Business cost of revenues increased to 50.4% of total e-Business revenues for the three months ended September 30, 2009, from 44.6% for the three months ended September 30, 2008. The 5.8% increase in cost of revenues as a percent of e-Business revenues for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008, is principally attributable to decrease in e-Business revenues partly offset by rupee depreciation and better utilization of resources. Cost of revenues for the nine months ended September 30, 2009 decreased to 46.4% of total e-business revenues, from 48.3% for the nine months ended September 30, 2008. The 1.9 percentage point decrease in cost of revenues, as a percent of revenues for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008, was attributable primarily to better utilization of resources, rupee depreciation and cost rationalization, partly offset by decrease in revenue and increase in other expenses.
TeamSourcing Revenues. TeamSourcing revenues increased to $2.5 million for the three months ended September 30, 2009, or 2.4% of total revenues, from $2.2 million, or 2.1% of total revenues for the three months ended September 30, 2008. The $0.3 million increase was attributable primarily to revenues from new engagements and revenue from the SkillBay web portal, which helps clients of Syntel with their supplemental staffing requirements, contributing $2.0 million, partially offset by $1.7 million in lost revenues as
a result of project completion, including conversion of staffing engagements into Syntel managed engagements, and net reduction in revenues from existing projects. The revenues for the nine months ended September 30, 2009 decreased to $6.6 million, or 2.2% of total revenues, from $7.3 million or 2.4% of total revenues for the nine months ended September 30, 2008. The $0.7 million decrease for the nine months ended September 30, 2009 was attributable principally to $5.6 million in lost revenues as a result of project completion and net reduction in revenues from existing projects, largely offset by revenues from new engagements and revenue from the SkillBay web portal contributing $4.9 million.
TeamSourcing Cost of Revenues. TeamSourcing cost of revenues consists of costs directly associated with billable consultants in the US, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation, and travel. TeamSourcing cost of revenues decreased to 46.4% of TeamSourcing revenues for the three months ended September 30, 2009, from 60.2% for the three months ended September 30, 2008. Cost of revenues for the nine months ended September 30, 2009 decreased to 49.0% of total TeamSourcing revenues, from 65.1% for the nine months ended September 30, 2008. Both 13.8 and 16.1 percentage point decrease in TeamSourcing cost of revenues, as a percent of TeamSourcing revenues, is attributable primarily to better utilization of resources.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses consist primarily of salaries, payroll taxes and benefits for sales, solutions, finance, administrative, and corporate staff; travel; telecommunications; business promotions; and marketing and various facility costs for the Company's global development centers and other offices. Selling, general, and administrative expenses for the three months ended September 30, 2009 were $18.9 million or 18.1% of total revenues, compared to $19.8 million or 19.1% of total revenues for the three months ended September 30, 2008.
The 1.0 percentage point decrease is primarily due to increase in revenue that resulted in 0.1 percentage point decrease partially offset by foreign exchange loss during the quarter ended September 30, 2008 of $1.7 million that has resulted in an approximately 1.9 percentage point increase. Selling, general and administrative expenses for the three months ended September 30, 2009 was impacted by decrease in compensation and benefits of $0.7 million, decrease in travel $0.6 million, decrease in facility related costs $1.7 million and decrease in marketing fees $0.7 million partially offset by increase in depreciation & amortization of $0.8 million, which has resulted in an approximately 2.8 percentage point net decrease as compared to the three months ended September 30, 2008.
Selling, general, and administrative expenses for the nine months ended September 30, 2009 were $58.5 million or 19.4% of total revenues, compared to $60.0 million or 19.6% of total revenues for the nine months ended September 30, 2008.
The 0.2 percentage point decrease is primarily due to decrease in selling, general and administrative expenses. Cost decreases include decrease in compensation cost of $2.4 million, decrease in travel $1.0 million, decrease in facility cost $5.0 million, decrease in marketing fees & commission $1.8 million and decrease in other expenses $0.1 million partly offset by increase in depreciation & amortization $2.6 million, increase in provision for doubtful debts $1.5 million which has resulted in an approximately 2.1 percentage point net decrease. The decrease in revenue resulted in 0.3 percentage point increase and the foreign exchange loss of $4.7 million resulted in an approximately 1.6 percentage point increase as compared to the nine months ended September 30, 2009.
Other Income. Other income (expense) includes interest and dividend income, gains and losses from sale of securities, other investments and treasury operations.
Other income for the three months ended September 30, 2009 was $3.5 million or 3.4% of total revenues, compared to $0.6 million or 0.6% of total revenues for the three months ended September 30, 2008. The increase in other income of $2.9 million was primarily due to gain on forward contract of $1.7 million, increase in interest income of $0.8 million, interest on income tax refund of $0.7 million offset by decrease in gain on sale of mutual fund $0.3 million.
Other income for the nine months ended September 30, 2009 was $6.8 million or 2.3% of total revenues, compared to $0.7 million or 0.2% of total revenues for the nine months ended September 30, 2008. The increase in other income of $6.1 million was primarily due
to gain on forward contract of $4.2 million, increase in interest income of $1.3 million, interest on income tax refund $0.7 million offset by decrease in gain on sale of mutual fund of $0.1 million.
Income Taxes
The Company records provisions for income taxes based on enacted tax laws and rates in the various taxing jurisdictions in which it operates. In determining the tax provisions, the Company has provided for tax contingencies based on FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48") and on the Company's assessment of future regulatory reviews of filed tax returns. Such reserves, which are recorded in income taxes payable, are based on FIN 48 interpretation and on management's estimates and may also be revised based on additional information. The provision no longer required for any particular tax year is credited to the current period's income tax expenses.
During the three months ended September 30, 2009 and 2008, the effective income tax rates were 16.5% and 17.3%, respectively. During the nine months ended September 30, 2009 and 2008, the effective income tax rates were 11.1% and 12.8%, respectively. The tax rate for the nine months ended September 30, 2009 is impacted by a favorable adjustment of $4.3 million as a result of the Company's review of its global FIN 48 liabilities and other tax positions, which is based on the expiration of the statute of limitations related to certain global tax contingencies and completion of certain tax audits. The tax rate for the nine months ended September 30, 2008 is favorably impacted by a reversal of $2.99 million of taxes provided earlier under FIN 48 and $0.32 million towards credit of Michigan Single Business tax for the years 2001 to 2003.
FINANCIAL POSITION
Cash and Cash Equivalents: Cash and Cash equivalents increased from $69.4 million at September 30, 2008 to $70.9 million at September 30, 2009 primarily due to increased collections during the nine months ended September 30, 2009.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally has financed its working capital needs through operations. The Mumbai, Chennai, Pune (India) and other expansion programs are financed from internally generated funds. The Company's cash and cash equivalents consist primarily of certificates of deposit, corporate bonds and treasury notes. These amounts are held by various banking institutions including US-based and India-based banks.
Net cash generated by operating activities was $60.9 million for the nine months ended September 30, 2009. This includes a reduction of $20.2 million related to a decrease in current and non current assets. The net cash generated by operating activities was $53.2 million for the nine months ended September 30, 2008. The number of days sales outstanding in net accounts receivable was approximately 52 days and 58 days as of September 30, 2009 and 2008, respectively. The decrease in the number of day's sales outstanding in net accounts receivable was due to higher collections.
Net cash used in investing activities was $49.3 million for the nine months ended September 30, 2009, consisting principally of $14.9 million of capital expenditures primarily for construction/acquisition of Global Development Center at Pune, Knowledge Process Outsourcing facility at Mumbai and an additional facility in Chennai, as well as for acquisition of computers and software and communications equipment and the purchase of short term investments of $225.6 million, largely offset by $191.2 million from the sale of short term investments. Net cash used in investing activities was $40.3 million for the nine months ended September 30, 2008, consisting principally $120.0 million for the purchase of short term investments and $30.0 million of capital expenditures consisting principally of computer hardware, software, communications equipment, infrastructure and facilities largely offset by sale of short term investments of $109.7 million.
Net cash used in financing activities was $7.1 million for the nine months ended September 30, 2009, consisting principally of $7.5 million in dividends paid out, partially offset by proceeds of $0.4 million from the issuance of shares under the Company's employee
stock option plan exercised during the nine months. Net cash used in financing activities was $7.2 million for the nine months ended September 30, 2008, consisting principally of $7.5 million in dividends paid out, partially offset by $0.3 million proceeds from the issuance of shares under the Company's employee stock option plan and tax benefit on stock options exercised during the nine months.
The Company has a line of credit with JP Morgan Chase Bank NA, which provides for borrowings up to $20.0 million. The line of credit expires on August 31, 2010. The interest shall be paid to the Bank on the outstanding and unpaid principal amount of each CB Floating Rate advance at the CB Floating Rate plus the applicable margin and each LIBOR rate advance at the adjusted LIBOR rate. There were no outstanding borrowings at September 30, 2009 or December 31, 2008.
The Company believes that the combination of present cash balances and future operating cash flows will be sufficient to meet the Company's currently anticipated cash requirements for at least the next 12 months.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of our consolidated financial statements. The Company has discussed this critical accounting policy and the estimates with the Audit Committee of the Board of Directors.
Revenue Recognition. Revenue recognition is the most significant accounting policy for the Company. The Company recognizes revenue from time and material contracts as services are performed. During the three months ended September 30, 2009 and 2008 revenues from time and material contracts constituted 55% and 62% of total revenues, respectively. Revenue from fixed-price, application management, maintenance and support engagements is recognized as earned, which generally results in straight-line revenue recognition as services are performed continuously over the term of the engagement. During the three months ended September 30, 2009 and 2008, revenues from fixed price application management and support engagements constituted 36% and 29% of total revenues, respectively.
Revenue on fixed price development projects is measured using the proportional performance method of accounting. Performance is generally measured based upon the efforts incurred to date in relation to the total estimated efforts required through the completion of the contract. The Company monitors estimates of total contract revenues and cost on a routine basis throughout the delivery period. The cumulative impact of any change in estimates of the contract revenues or costs is reflected in the period in which the change becomes known. In the event that a loss is anticipated on a particular contract, provision is made for the estimated loss. The Company issues invoices related to fixed price contracts based on either the achievement of milestones during a project or other contractual terms. Differences between the timing of billings and the recognition of revenue based upon the proportional performance method of accounting are recorded as revenue earned in excess of billings or deferred revenue in the accompanying financial statements. During the three months ended September 30, 2009 and 2008, revenues from fixed price development contracts constituted 9% and 9% of total revenues, respectively.
Significant Accounting Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses for the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. The Company bases its estimates and judgments on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Revenue Recognition. The use of the proportional performance method of accounting requires that the Company make estimates about its future efforts and costs relative to its fixed price contracts. While the Company has procedures in place to monitor the estimates throughout the performance period, such estimates are subject to change as each contract progresses. The cumulative impact of any such changes is reflected in the period in which the change becomes known.
Allowance for Doubtful Accounts. The Company records an allowance for doubtful accounts based on a specific review of aged receivables. The provision for the allowance for doubtful accounts is recorded in selling, general and administrative expenses. These estimates are based on our assessment of the probable collection from specific client accounts, the aging of the accounts receivable, analysis of credit data, bad debt write-offs, and other known factors.
Income Taxes-Estimates of Effective Tax Rates and Reserves for Tax Contingencies. The Company records provisions for income taxes based on enacted tax laws and rates in the various taxing jurisdictions in which it operates. In determining the tax provisions, the Company has provided for tax contingencies based on FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48") and on the Company's assessment of future regulatory reviews of filed tax returns. Such reserves, which are recorded in income taxes payable, are based on FIN 48 interpretation and on management's estimates and accordingly are subject to revision based on additional information. The provision no longer required for any particular tax year, is credited to the current period's income tax expenses.
Accruals for Legal Expenses and Exposures. The Company estimates the costs associated with known legal exposures and their related legal expenses and accrues reserves for either the probable liability, if that amount can be reasonably estimated, or otherwise the lower end of an estimated range of potential liability.
Undistributed earnings of foreign subsidiaries. The Company intends to use accumulated and future earnings of foreign subsidiaries to expand operations outside the United States and accordingly undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested outside the United States and no provision for U. S. federal and state income tax or applicable dividend distribution tax has been provided thereon.
FORWARD LOOKING STATEMENTS
Certain information and statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report, including the allowance for doubtful accounts, contingencies and litigation, potential tax liabilities, interest rate or foreign currency risks, and projections regarding our liquidity and capital resources, could be construed as forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements containing words such as "could", "expects", "may", "anticipates", "believes", "estimates", "plans", and similar expressions. In addition, the Company or persons acting on its behalf may, from time to time, publish other forward looking statements. Such forward looking statements are based on management's estimates, assumptions and projections and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward looking statements. For a detailed discussion of certain risks associated with the Company's business that could cause future results to materially differ from recent results or those projected in any forward-looking statements, see "Item 1A. Risk Factors" in this Form 10-Q.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2008, the FASB issued FSP FAS 132(R)-1-Employers' Disclosures about Postretirement Benefit Plan Assets. This FASB Staff Position (FSP) amends FASB Statement No. 132 (revised 2003) - Employers' Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. It prescribes additional disclosures pertaining to investment policies and strategies, categories of plan assets, fair value measurements of plan assets and significant concentrations of risk in plan assets. The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009. We are in the process of evaluating the impact, if any that this FSP will have on our disclosures.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," which establishes general standards for accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The pronouncement requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, whether that date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective with interim and annual financial periods ending after June 15, 2009, and accordingly, we adopted this Standard during the second quarter of 2009.
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