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SYNT > SEC Filings for SYNT > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for SYNTEL INC

Form 10-Q for SYNTEL INC


5-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SYNTEL INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

Net Revenues. The Company's revenues consist of fees derived from its Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; and Retail, Logistics and Telecom business segments. Net revenues for the three months ended June 30, 2014 increased to $228.3 million from $202.5 million for the three months ended June 30, 2013, representing a 12.7% increase. The Company's verticalization sales strategy focusing on Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; Retail; Logistics and Telecom 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 June 30, 2014 increased by 3.8% to 16,829 employees as compared to 16,219 employees as of June 30, 2013. However, the growth in revenues was much higher when compared with the growth in the billable headcount. This is primarily because of a better utilization of onsite and offshore resources. As of June 30, 2014, the Company had approximately 78.9% of its billable workforce in India as compared to 80.8% as of June 30, 2013. The Company's top five clients accounted for 60.0% of the total revenues in the three months ended June 30, 2014, down from 64.8% of its total revenues in the three months ended June 30, 2013. The Company's top five clients accounted for 60.1% of the total revenue in the six months ended June 30, 2014 as compared to 65.2% of its total revenue in the six months ended June 30, 2013. The Company's top 10 clients accounted for 73.2% of the total revenues in the three months ended June 30, 2014 as compared to 78.3% in the three months ended June 30, 2013. The Company's top 10 clients accounted for 73.1% of the total revenues in the six months ended June 30, 2014 as compared to 78.7% in the six months ended June 30, 2013. The Company's top 3-30 clients accounted for 57.5% of the total revenues in the three months ended June 30, 2014, up from 52.9% of its total revenues in the three months ended June 30, 2013. The Company's top 3-30 clients accounted for 57.3% of the total revenues in the six months ended June 30, 2014, up from 51.9% of its total revenues in the six months ended June 30, 2013.

Cost of Revenues. The Company's cost of revenues consists of costs directly associated with billable consultants in the U.S. and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. The cost of revenues increased to 60.8% of total revenue for the three months ended June 30, 2014, from 58.7% for the three months ended June 30, 2013. The 2.1% increase in cost of revenues, as a percent of revenues, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, and salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances in the second quarter of 2014. Salary increases are discretionary and determined by management. During the three months ended June 30, 2014, the Indian rupee has depreciated against the U.S. dollar, on average, 5.26% as compared to the three months ended June 30, 2013. This rupee depreciation positively impacted the Company's gross margin by 109 basis points, operating income by 164 basis points and net income by 148 basis points, each as a percentage of revenue. The cost of revenues decreased to 58.6% of total revenues for the six months ended June 30, 2014, from 58.8% for the six months ended June 30, 2013. The 0.2% decrease in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to a higher increase in revenue, rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances offset by increases


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in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs. During the six months ended June 30, 2014, the Indian rupee has depreciated against the U.S. dollar, on average, 9.72% as compared to the six months ended June 30, 2013. This rupee depreciation positively impacted the Company's gross margin by 202 basis points, operating income by 307 basis points and net income by 279 basis points, each as a percentage of revenue.

Banking and Financial Services Revenues. Banking and Financial Services revenues increased to $112.9 million for the three months ended June 30, 2014 or 49.5% of total revenues, from $106.0 million, or 52.4% of total revenues for the three months ended June 30, 2013. The $6.9 million increase was attributable primarily to revenues from new engagements contributing $61.5 million, largely offset by $53.4 million in lost revenues as a result of project completion and a $1.2 million net reduction in revenues from existing projects. Banking and Financial Services revenues increased to $221.0 million for the six months ended June 30, 2014 or 49.4% of total revenues, from $208.9 million, or 53.4% of total revenues for the six months ended June 30, 2013. The $12.1 million increase was attributable primarily to revenues from new engagements contributing $116.2 million, largely offset by $85.8 million in lost revenues as a result of project completion and a $18.3 million net reduction in revenues from existing projects.

Banking and Financial Services Cost of Revenues. Banking and Financial Services cost of revenues consists of costs directly associated with billable consultants in the U.S. and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. Banking and Financial Services cost of revenues increased to 59.6% of total Banking and Financial Services revenues for the three months ended June 30, 2014, from 56.9% for the three months ended June 30, 2013. The 2.7% increase in cost of revenues, as a percent of revenues for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 increased to 57.8% of revenues, from 56.6% for the six months ended June 30, 2013. The 1.2% increase in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances.

Insurance Revenues. Insurance revenues increased to $34.2 million for the three months ended June 30, 2014 or 15.0% of total revenues, from $30.0 million, or 14.8% of total revenues for the three months ended June 30, 2013. The $4.2 million increase was attributable primarily to revenues from new engagements contributing $20.9 million, largely offset by $16.7 million in lost revenues as a result of project completion. The revenues for the six months ended June 30, 2014 increased to $66.2 million, or 14.8% of total revenues, from $59.1 million or 15.1% of total revenues for the six months ended June 30, 2013. The $7.1 million increase was attributable primarily to revenues from new engagements contributing $38.2 million, largely offset by $24.1 million in lost revenues as a result of project completion and a $7.0 million net reduction in revenues from existing projects.

Insurance Cost of Revenues. Insurance cost of revenues consists of costs directly associated with billable consultants, including salaries, payroll taxes, benefits, finder's fees, trainee compensation and travel. Insurance cost of revenues increased to 66.2% for the three months ended June 30, 2014, from 61.3% for the three months ended June 30, 2013. The 4.9% increase in cost of revenues,


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as a percent of total revenues for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 increased to 63.5% of Insurance revenues, from 61.5% for the six months ended June 30, 2013. The 2.0% increase in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances.

Healthcare and Life Sciences Revenues. Healthcare and Life Sciences revenues increased to $38.8 million for the three months ended June 30, 2014, or 17.0% of total revenues from $33.7 million for the three months ended June 30, 2013, or 16.6% of total revenues. The $5.1 million increase was attributable primarily to revenues from new engagements contributing $7.4 million and a $4.7 million net increase in revenue from existing projects, offset by $7.0 million in lost revenues as a result of project completion. The revenues for the six months ended June 30, 2014 increased to $77.3 million, or 17.3% of total revenues, from $63.1 million or 16.1% of total revenues for the six months ended June 30, 2013. The $14.2 million increase was attributable primarily to revenues from new engagements contributing $13.2 million and a $11.0 million net increase in revenues from existing projects, offset by $10.0 million in lost revenues as a result of project completion.

Healthcare and Life Sciences Cost of Revenues. Healthcare and Life Sciences cost of revenues consists of costs directly associated with billable consultants in the U.S. and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. Healthcare and Life Sciences cost of revenues is constant at 55.5% of total Healthcare and Life Sciences revenues for the three months ended June 30, 2014 and for the three months ended June 30, 2013, due to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 decreased to 52.7% of total Healthcare and Life Sciences revenues, from 56.3% for the six months ended June 30, 2013. The 3.6% decrease in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to increase in revenue, rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances offset by increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs.

Manufacturing Revenues. Manufacturing revenues decreased to $6.6 million for the three months ended June 30, 2014, or 2.9% of total revenues from $7.7 million for the three months ended June 30, 2013, or 3.8% of total revenues. The $1.1 million decrease was attributable primarily to a $2.2 million net decrease in revenues from existing projects and $0.6 million in lost revenues as a result of project completion, largely offset by a $1.7 million increase in revenues from new engagements. The revenues for the six months ended June 30, 2014 decreased to $12.9 million, or 2.9% of total revenues, from $16.0 million or 4.1% of total revenues for the six months ended June 30, 2013. The $3.1 million decrease for the six months ended June 30, 2014 was attributable primarily to a $4.5 million decrease in revenues from existing projects and a $1.3 million decrease in revenue from project completion, largely offset by a $2.7 million increase in revenues from new engagements.


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Manufacturing Cost of Revenues. Manufacturing cost of revenues consists of costs directly associated with billable consultants in the U.S., including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. Manufacturing cost of revenues increased to 70.6% of total Manufacturing revenues for the three months ended June 30, 2014, from 65.8% for the three months ended June 30, 2013. The 4.8% increase in cost of revenues, for the three months ended June 30, 2014, as a percent of total Manufacturing revenues, as compared to the three months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 increased to 70.9% of total Manufacturing revenues, from 64.8% for the six months ended June 30, 2013. The 6.1% increase in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs, offset by rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances.

Retail, Logistics and Telecom Revenues. Retail, Logistics and Telecom revenues increased to $35.7 million for the three months ended June 30, 2014 or 15.6% of total revenues, from $25.0 million, or 12.4% of total revenues for the three months ended June 30, 2013. The $10.7 million increase was attributable primarily to revenues from new engagements contributing $14.3 million, partially offset by $2.2 million in lost revenues as a result of project completion and a $1.4 million net reduction in revenue from existing projects. The revenues for the six months ended June 30, 2014 increased to $70.4 million, or 15.7% of total revenues, from $44.4 million or 11.3% of total revenues for the six months ended June 30, 2013. The $26.0 million increase was attributable primarily to revenues from new engagements contributing $22.7 million and a $6.8 million net increase in revenues from existing projects, partially offset by $3.5 million in lost revenues as a result of project completion.

Retail, Logistics and Telecom Cost of Revenues. Retail, Logistics and Telecom, cost of revenues consists of costs directly associated with billable consultants in the U.S. and offshore, including salaries, payroll taxes, benefits, relocation costs, immigration costs, finder's fees, trainee compensation and travel. Retail, Logistics and Telecom cost of revenues decreased to 58.9% of total Retail, Logistics and Telecom revenues for the three months ended June 30, 2014, from 61.5% for the three months ended June 30, 2013. The 2.6% decrease in cost of revenues, as a percent of revenues for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, was attributable primarily to an increase in revenue, rupee depreciation and a decrease in travel expenses due to decreases in foreign living allowances offset by increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 decreased to 56.6% of total Retail, Logisitics and Telecom revenues, from 62.8% for the six months ended June 30, 2013. The 6.2% decrease in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to an increase in revenue, rupee depreciation and a decrease in travel expenses due to decrease in foreign living allowances offset by increases in compensation due to a change in the Company's salary model, increases in headcount, salary increases for offshore and onsite employees, increased contract cost and increased benefits costs.


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Corporate Direct Costs-Cost of Revenues. Certain expenses, for cost centers such as Centers of Excellence, Architecture Solutions Group (ASG), Research and Development (R&D), Cloud Computing, Application Management, are not specifically allocated to specific segments because management believes it is not practical to allocate such expenses to individual segments as they are not directly attributable to any specific segment. Accordingly, these expenses are separately disclosed as Corporate Direct Costs and adjusted only against the Total Gross Profit.

Corporate Direct Costs cost of revenues increased to 0.7% of total sales for the three months ended June 30, 2014, from 0.5% for the three months ended June 30, 2013. The 0.2% increase in cost of revenues, for the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, was attributable primarily to increases in headcount and benefits partially offset by rupee depreciation and a decrease in travel expenses in the second quarter of 2014. Salary increases are discretionary and determined by management. Cost of revenues for the six months ended June 30, 2014 increased to 0.6% of total revenues, from 0.5% for the six months ended June 30, 2013. The 0.1% increase in cost of revenues, as a percent of revenues for the six months ended June 30, 2014, as compared to the six months ended June 30, 2013, was attributable primarily to increases in headcount and benefits partially offset by rupee depreciation and a decrease in travel expenses.

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 June 30, 2014 were $26.3 million or 11.5% of total revenues, compared to $18.7 million or 9.2% of total revenues for the three months ended June 30, 2013.

Selling, general and administrative expenses for the three months ended June 30, 2014 were impacted by an increase in revenue of $25.7 million that resulted in a 1.5% decrease in selling, general and administrative expenses as a percentage of total revenue. The overall increase in selling, general and administrative expenses was attributable to an increase in corporate expenses of $3.7 million primarily on account of a decrease in foreign exchange gain of $6.3 million and an increase in legal and professional fees of $0.4 million offset by an out-of-period accounting adjustment during the second quarter that lowered SG&A by $3 million (which related to the prior period cumulative impact, arising out of the modification of the accounting treatment adopted by the Company during the second quarter, around certain foreign currency related balance sheet translations, exchange gains or losses on certain forward contracts and the related tax impacts) an increase in compensation due to increases in headcount of $1.8 million, an increase in facility related costs of $1.2 million, an increase in travel expenses of $0.3 million, an increase in marketing expenses of $0.2 million, an increase in voice and data expenses of $0.2 million, an increase in other expenses of $0.2 million.

Selling, general, and administrative expenses for the six months ended June 30, 2014 were $58.5 million or 13.1% of total revenues, compared to $44.4 million or 11.3% of total revenues for the six months ended June 30, 2013.

Selling, general and administrative costs for the six months ended June 30, 2014 were impacted by an increase in revenue of $56.2 million resulting in a 1.8% decrease in selling, general and administrative expenses as a percentage of total revenue. The overall increase in selling, general and administrative costs was attributable to an increase in corporate expenses of $7.3 million consisted of a decrease in foreign exchange gain of $9.4 million and an increase in professional fees and other related costs of $0.9 million, partially offset by an out-of-period accounting adjustment of $3.0 million, an increase in compensation due to increases in headcount of $3.5 million, an increase in facility related costs of $2.0 million, an increase in marketing expenses of $0.4 million, an increase in travel expenses of $0.3 million, an increase in voice and data expenses of $0.3 million and an increase in other expenses of $0.3 million.


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Other Income (loss), Net. Other income includes interest and dividend income, gains and losses from sale of securities, other investments, treasury operations and interest expenses on loans and borrowings.

Other income (loss), net for the three months ended June 30, 2014 was $12.2 million or 5.3% of total revenues, compared to $(1.3) million or (0.7)% of total revenues for the three months ended June 30, 2013. The increase in other income of $13.5 million was attributable to an increase in forward contract gains of $10.0 million, an increase in gains from the sale of mutual funds of $2.0 million and an increase in interest income of $1.7 million, offset by an increase in interest expenses of $0.2 million during the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

Other income, net for the six months ended June 30, 2014 was $24.0 million or 5.4% of total revenues, compared to $7.5 million or 1.9% of total revenues for the six months ended June 30, 2013. The increase in other income of $16.5 million was attributable to an increase in forward contract gains of $10.9 million, an increase in gains from the sale of mutual funds of $3.1 million and an increase in interest income of $3.1 million, partially offset by an increase in interest expenses of $0.6 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 provides for tax uncertainties in income taxes, when it is more likely than not, based on the technical merits, that a tax position would not be sustained upon examination. Such uncertainties, which are recorded in income taxes payable, are based 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. Conversely, in the event of a future tax examination, any additional tax expense not previously provided for will be recognized in the period in which the actual liability is concluded or the management determines that the Company will not prevail on certain tax positions taken in filed returns, based on the "more likely than not" concept.

During the three months ended June 30,2014 and 2013, the effective income tax rates were 21.4% and 25.2%, respectively. During the six months ended June 30, 2014 and 2013, the effective income tax rates were 22.2% and 24.5%, respectively. The tax rate for the three months ended June 30, 2014 and 2013 was affected by the effective tax rate impact of changes in the offshore/onshore profit mix of the Company offset by certain Company facilities going out of tax holiday effective April 1, 2013.

Other Comprehensive Income (Loss)

The other comprehensive income (loss) consists of foreign currency translation adjustments, gains (losses) on net investment hedge derivatives, unrealized gains (losses) on securities and a component of a defined benefit plan. During the three months ended June 30, 2014 the other comprehensive loss amounted to $5.3 million primarily attributable to foreign currency translation adjustments of $7.0 million which includes an out-of-period adjustment of $3.0 million, which related to the past period cumulative impact, arising out of the modification of the accounting treatment adopted by the Company during the second quater, around certain foreign currency related balance sheet translations, exchange gains or losses on certain forward contracts and the related tax impacts. During the six months ended June 30, 2014 the other comprehensive gain amounted to $20.9 million, primarily attributable to foreign currency translation adjustments of $17.8 million.

During the three and six months ended June 30, 2013 the other comprehensive loss amounted to $54.3 million and $52.8 million, respectively, primarily attributable to foreign currency translation adjustments of $49.8 million and $47.9 million, for the three and six months ended June 30, 2013, respectively.


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FINANCIAL POSITION

Cash and Cash Equivalents: Cash and Cash equivalents increased to $170.89 million at June 30, 2014 from $136.32 million at June 30, 2013.

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 and treasury notes. These amounts are held by various banking institutions including US-based and India-based banks. As of June 30, 2014, the total cash and cash equivalents and short term investment balance were $769.8 million. Out of the above, an amount of $700.6 million was held by Indian subsidiaries which was composed of an amount of $95.4 million . . .

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