Syntel, Inc. Q3 2008 Earnings Call Transcript

Oct.28.08 | About: Syntel, Inc. (SYNT)

Syntel, Inc. (NASDAQ:SYNT)

Q3 2008 Earnings Call Transcript

October 23, 2008, 10:00 am ET

Executives

David Mackey – SVP, Finance

Bharat Desai – Chairman, CEO and Co-founder

Keshav Murugesh – President and COO

Arvind Godbole – CFO and Chief Information Security Officer

Analysts

Bryan Keane – Credit Suisse

Brian Kinstlinger – Sidoti and Company

Tim Fox – Deutsche Bank

Joseph Vafi – Jefferies & Company

David Cohen – JP Morgan

Joseph Foresi – Janney Montgomery Scott

Operator

Ladies and gentlemen, welcome to the Syntel third quarter 2008 conference call. (Operator instructions) As a reminder, this call is being recorded today, Thursday, October 23rd 2008.

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 third quarter earnings release crossed business wire at 8:30 A.M. today. It's also available on our Web site at www.syntelinc.com.

Before we begin, 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 Bharat Desai, Syntel's Chairman and CEO. Bharat?

Bharat Desai

Thank you, David. Good morning, everybody and thank you for joining us today. Syntel's results for the third quarter were mixed, with profits rising sharply but on relatively soft revenue.

With respect to demand, client decision making slowed during the quarter and we witnessed a pronounced change in behavior starting September as the financial markets faltered. While Syntel has not been directly impacted by any of the headline organizational failures, the ripple effect of the widening credit crisis is affecting our customer base.

Today, the majority of our clients businesses and business models remain stable. However, the growing economic uncertainty has caused many organizations to stall projects and reprioritize initiatives. This has impacted both existing clients and adoption or acceleration with new clients.

On a positive note the overall sales pipeline is now reaching record levels. The backlog of critical client projects and cost reduction initiatives continues to grow. And we remain committed to keeping these opportunities in play. This includes several large scale integrated ITO, KPO relationships with major U.S. institutions. We firmly believe that when the economy stabilizes and customer confidence returns we will be well positioned to take advantage of this backlog.

With respect to profitability, the supply and cost side of our business remains extremely healthy. Despite revenue softness we were able to deliver healthy earnings as a result of the strengthening U.S. dollar and an improved supply environment.

Given the current environment, we continue to focus on offerings, help our clients cut costs and improve operational efficiency, with the objective of building long-term relationships. We also continue to work on developing a greater breadth of services to help our clients meet their challenging, changing business requirements. We believe that this approach will allow us to capture increased market share in the future.

I will now turn the call over to Keshav Murugesh, Syntel's President and Chief Operating Officer and then to Arvind Godbole, Syntel's Chief Financial Officer to provide details on our operational and financial performance. Keshav?

Keshav Murugesh

Thanks, Bharat. Good morning, everyone and welcome. As Bharat mentioned our third quarter revenue performance reflected the downturn in the overall economic environment. In addition to delayed decisions on the client side, revenue for the quarter was also adversely impacted by the strengthening U.S. dollar.

For Syntel, the jump in the Rupee-Dollar exchange rate has the effect of reducing the third quarter revenues by $1.2 million, which Arvind will discuss at greater length. Also during this quarter, we had our second largest KPO client experience a sharp downturn in their business. This India based brokerage firm had a significant reduction in their transaction processing volume, as the Bombay Stock Exchange tumbled. For Syntel, this resulted in approximately $1.6 million of lost revenue.

Revenue was also adversely impacted by the ramp down of a large e-business project highlighted on last quarter's call and a reduction in one of our legacy team sourcing relationships. Combined, these two items resulted in a $1.2 million sequential revenue decline. Despite this revenue softness, Syntel was able to post extremely healthy earnings during this quarter. While a portion of this favorability related to exchange, the balance was the direct result of proactive operational management.

Utilization levels were increased, employee productivity was improved, and some costs were delayed. We are most pleased with the fact that we were able to deliver this earnings performance without sacrificing the key investment necessary for the long-term health of our business.

Looking forward, the recent downturn in the financial markets has resulted in increased client caution. Visibility to spending plans and incremental revenue remains limited as of now, and as a result, we have lowered our full-year estimates. We currently expect revenue to be in the range of $408 million to $412 million, which represents a 1% to 2% reduction from our previous guidance. As of today, we have 99% visibility to the low-end of this range.

In response to the top line softness, we have adjusted our hiring and construction plans accordingly. While we expect to continue hiring during the quarter and optimizing employee productivity we do not expect our net global headcount to expand materially beyond current levels.

Similarly, we will finalize bid outs [ph] and desktops for our 2,300 seats in Pune as required and push out Phase 1 completion of our new Chennai campus until at least the second quarter of 2009. As a result, we can now expect our 2008 CapEx to be approximately $35 million. These actions will allow us to manage our business at current utilization levels, keep SG&A expenditures in line and optimize earnings and cash flow in upcoming quarters. Despite the projected revenue softness for Q4, we will continue our plan to invest in targeted service offerings and enhanced geographic presence.

I would now like to turn the call over to Arvind Godbole, Syntel's Chief Financial Officer who will discuss Syntel's financial performance. Arvind?

Arvind Godbole

Thanks, Keshav, and good morning everyone, and welcome. I also have Dave Mackey, Syntel's Senior Vice President of Finance joining me on the call. After my comments, we will open the call to questions.

Revenue for the third quarter was $103.8 million, up 18% from $87.9 million in the prior year period and flat sequentially. As Keshav mentioned, revenue was reduced by $2.8 million in specific client projects and an additional $1.2 million related to Rupee depreciation. The exchange rate movements within the quarter affected not only Rupee denominated billings for our India base lines, but more significantly impacted the accounting translation on direct contract struck between U.S. clients and our India entity.

For the third quarter, Application Outsourcing accounted for 68% of our revenue. KPO was 19%. e-Business represented 11% and Team Sourcing was 2%. The KPO revenues were reduced $2.2 million due to the exchange impact and reduced volumes in the brokerage business described earlier.

On our vertical basis, financial services contributed 55% with insurance 20%, healthcare 13%, automotive 3% and other was 9%. From a customer concentration perspective, Syntel's top three clients represented 47% of revenue while top five ended the quarter at 59% and top ten came in at 72%. Fixed price business was 38% of the revenue for the quarter.

Gross margin in the third quarter was 44.3% compared to 39.8% in the year-ago period and 41.1% in Q2. By business segment, gross margins for Application Outsourcing were 39.1%, KPO was 56.6%, e-Business was 55.4% and Team Sourcing 39.8%. Once again, this quarter gross margins were favorably impacted by the depreciation in the Rupee, improved utilization and better pricing.

The company's selling, general and administrative expenses were 19.1% in the third quarter of 2008 compared to 20.9% in the prior year period and consistent with the 19.1% posted in the second quarter. SG&A levels also benefited from favorable currency movement during the quarter, which reduced our operational Rupee-based costs and also resulted in a foreign exchange translation gain similar in amount to Q2. These reductions were offset by expenses associated with our annual customer event and key practice in vertical hiring.

As a result of the improved gross margin and stable SG&A levels, Syntel's operating income improved to 25.2% in the third quarter. This favorably compared to 19.0% in the prior year period and 22.1% last quarter.

While the Rupee depreciation favorably impacted our operating margins, Syntel conversely incurred losses on our hedging positions which were reflected in the other income line of the P&L. During the third quarter the impact of the hedging losses was $1.1 million as compared to a $2.5 million loss in the second quarter.

Our third quarter tax rate was 17.3%. The tax rate came in slightly below expectation as a result of the actual geographical distribution of the profits in the quarter.

Net income for the third quarter was $22.1 million or $0.54 per diluted share, compared to $18.3 million or $0.44 per share in the prior year period and $17.4 million or $0.42 per share in the second quarter of 2008.

Other period-end metrics from the third quarter are as follows. Total headcount was 12,277, representing a 2% increase versus the second quarter and a 15% versus Q3 of 2007. Billable headcount was 1,807 onsite and 9,650 offshore for a total of 11,457.

Utilization levels were 93% onsite and 71% offshore with a global utilization at 74%. We ended the quarter with 4,273 people assigned to KPO. Delivery mix at the end of the quarter was 20% onsite and 80% offshore. Attrition during the quarter was 14.3% annualized.

Syntel added 10 new customers and has now added 26 new customers year-to-date. We also added two new "Hunting Licenses", which takes the total number of preferred partnerships to 92 and activated one additional license taking the total to 62.

Relative to the balance sheet, Syntel ended the quarter with $118.7 million in cash and short-term investments. CapEx for the quarter was $8 million and DSO levels reduced to 58 days from 63 in the second quarter.

As Keshav mentioned earlier, we have updated our 2008 full-year guidance to reflect the actual results from the third quarter and fourth quarter visibility. We currently expect revenue in the range of $408 million to $412 million and EPS between $1.88 to $1.93. This guidance is based on an exchange rate of 48.8 rupees to the dollar for the fourth quarter of 2008.

We will now like to open the call for a Q&A session. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Bryan Keane of Credit Suisse.

Bryan Keane – Credit Suisse

Hi, good morning. Just due to the deteriorating environment, what's going on with pricing? And do you expect that to come under pressure going forward?

David Mackey

Yes, Bryan. This is Dave. Clearly, I think one of the things that we've seen is that as the environment has deteriorated, we have seen some increasing signs of pressure on the pricing. To-date we have not really seen a change in terms of our ability to pass on increases but we are hearing increasing rumblings in the marketplace. And do believe that the longer the currency environment stays favorable and the longer the demand environment remains relatively soft and the easing on the supply side in India will all create some pressure on pricing as we continue to go forward. So our expectation going into 2009 is that the pricing environment will get a little more difficult. That being said, I think we still will be able to pass on price increases to our clients just probably not in the same magnitude as in 2008.

Bryan Keane – Credit Suisse

Okay. You still think pricing will be positive going into 2009?

David Mackey

On a unit basis, yes. Obviously, the objective for our clients is to drive down total cost of ownership. And there are multiple ways to do that, including continuing to push a higher percentage of the work offshore.

Bryan Keane – Credit Suisse

Remind me this year pricing should be up about what percent?

David Mackey

We're going to average above 4% on pricing this year.

Bryan Keane – Credit Suisse

Okay. And then just turning to the operating margin, obviously with the depreciating Rupee it was a real strong margin, 25.2. Backing into fourth quarter numbers that looks like it's going to drop quite a bit, even though you're assuming still I think it's 48 or so for the Rupee. Can you just talk to us about why maybe the margin would fall sequentially so much?

Arvind Godbole

Yes. Actually, fourth quarter, we will have some additional costs as compared to Q3, because we'll be commissioning new facilities, that would add to the costs, and also there will be some hiring costs. And apart from that, there will be a marginal increase in the tax rate. And also, this current guidance does not include any gains or losses from the exchange gain. So because we are giving this at the current rate, but this is excluding any exchange gain or loss.

Bryan Keane – Credit Suisse

Okay. And then just going forward is there a target operating margin, I mean, the margins obviously jumped around quite a bit this year. Is there a target operating margin that you guys are shooting for when we think about longer term?

David Mackey

Bryan, I think we've been pretty consistent before in talking about the company's objective of running this business that between the 19% and 20% operating margin. As long as the currency environment stays favorable, I think we should be in a position to exceed those levels. However, we don't have visibility to what the currency is going to do in the upcoming year.

Bryan Keane – Credit Suisse

Okay. And then just finally, given the environment, can you talk a little bit about conversations you have with clients about 2009? Does it look like there's going to be a big drop off going forward when we get into the New Year?

Keshav Murugesh

I can say a few things there. I think the first thing is that, like Bharat mentioned earlier, I think we're quite happy about the fact that we were really not affected by any of the firms that went down on the financial services side. And in fact, our experience has been that some of our clients actually have acquired impartially or full some of these operations now. So we believe that going forward that could actually translate to an opportunity for us. Client business [ph] continue to remain very strong at this stage and we see that as a very positive sign. We just hosted our yearly client event in the U.S. recently. And we were quite happy to interact very intimately, very closely with a number of our clients there. And the feedback that we generally received gave us confidence that clients will continue to focus more on cost saving initiatives and probably less on the discretionary kind of projects. The KPO pipeline, as Bharat mentioned earlier, is actually continuing to remain very strong. And we're also beginning to see good traction on our healthcare KPO offering, as well. Overall, therefore, that gives us a pretty good feeling as we go into 2009. But having said that, again, timing is still an uncertainty. We still don't know how the overall economic situation is going to play out. And therefore, timing of decisions, our clients will continue to remain uncertain.

Bryan Keane – Credit Suisse

Okay. And I am going to sneak in one last question just because we're going to have to come out with and all the analysts love to come out with 2009 estimates. If we just assume a kind of a slow environment going into 2009, similar to what we've kind of seen here recently, do you guys still think you'll be able to grow earnings per share? Or should we think about maybe a decline in earnings per share next year? I guess just some directional trend would be great. Thanks.

David Mackey

I think we –

Keshav Murugesh

I think that –

David Mackey

Sorry; go ahead, Keshav.

Keshav Murugesh

I'll take that again. I think the focus – if you look at the Q3 numbers and look at our continued focus as we go along, the first thing is if you just look at our global utilization levels they were at 75%, up from 72% last quarter, 71% for the previous year. If you look at our offshore utilization levels, up to 70% from 68% the previous quarter. Visibility was up. In terms of operating income, there was a 320 basis point increase. So the whole focus in terms of both gross margin and net margin has been very high. So going into 2009 as well, our focus will continue to be on investing – continuing our investments in all the areas that we're focused on. And at the same time making sure that our earnings per share continues to grow along with revenue. These are early days as we continue to build up our plan. And we'll probably be able to update you in terms of more detail, specifically at the end of this quarter.

Bryan Keane – Credit Suisse

Okay. Great. Thanks a lot.

Operator

Your next question comes from the line of Brian Kinstlinger of Sidoti and Company.

Brian Kinstlinger – Sidoti and Company

Thank you. My first question was on KPO. When we take a look at the margin, the strength in the company and obviously currency little bit impacting that, we don't see that in the KPO. And maybe I'm (inaudible) numbers, I think it was flat, the KPO gross margin, quarter-to-quarter. So I'm curious why it was the only one that didn't see an increase based on currency?

David Mackey

Brian, I think the reason you saw relative softness in the KPO margin really relates to the drop in the top line. As Keshav mentioned we did have a very large India-based KPO client whose revenues came down during the quarter. One of the things that we had to do throughout the quarter is to adjust our utilization levels accordingly. So we did have some margin pressure as the revenue fell in this segment. We also had the revenue pressure at the top line created by the exchange headwind that we dealt with relative to revenue. So I think at the end of the day the reason we didn't see the depreciation in the Rupee translate into higher gross margins, at least materially higher gross margins in the KPO segment was really about the revenue softness.

Brian Kinstlinger – Sidoti and Company

And I thought I heard that there was a $2.2 million. Is that foreign currency that hurt revenues for KPO? Maybe the wording was incorrect, because I thought maybe that was client-specific. What was the $2.2 million that Arvind mentioned? That I was confused that he was mentioning?

David Mackey

The $2.2 million headwind in the KPO was about $600,000 of exchange and a $1.6 million drop in our second largest client.

Brian Kinstlinger – Sidoti and Company

That's helpful. Now when you think about what's happened in KPO and utilization came down, you also increased I think about 70 employees in KPO. What do you think about how you handle that utilization going forward with what you're seeing in demand trends? Do you keep that flat and allow utilization to maintain where it is if revenue stays flat? Or will you reign in on some of the KPO employees?

David Mackey

I think one of the things we did throughout the quarter as we saw that clients business start to erode is adjusted that utilization level throughout the quarter. So I mean obviously there is a lag effect. But if you look at where we ended the quarter, I think we were pretty stable in terms of where we want to be going forward for utilization levels. So I would expect that all things being equal, we should see some positive margin signs on the KPO segment walking into the fourth quarter.

Brian Kinstlinger – Sidoti and Company

And your overall offshore utilization was 71%. Will that move now since there is limited hiring with revenue? With that utilization increase as revenue increases? And would it go down if revenue stayed here or went down?

David Mackey

I think the guidance, Brian, assumes a stable utilization level. So if we're able to increase the revenue based on the easing in the supply side and the flexibility in the resourcing model, I would expect us to do just in time hiring, if we do have that kind of a revenue impact. And we should be able to hold the utilization levels accordingly.

Brian Kinstlinger – Sidoti and Company

Great. And in terms of hedging, if we were to hit your expectations of 48.8 and we stayed there for the entire quarter, this quarter, what would be the hedging impact to revenue potentially? What would be the hedging impact to SG&A potentially? And what would be the hedging on other income look like?

Arvind Godbole

No. There won't be any impact, as I mentioned last quarter also. If it remains at the level that which we build the guidance on, there won't be any impact, positive or negative.

Brian Kinstlinger – Sidoti and Company

So there won't be a hedging loss?

Arvind Godbole

Yes.

Brian Kinstlinger – Sidoti and Company

In other income?

Arvind Godbole

Yes. Because we already – mark-to-market as of Q3 so if it does not further depreciate then we will not have any impact.

Brian Kinstlinger – Sidoti and Company

Okay. And then –

Arvind Godbole

It's unlikely to be at the same level.

Brian Kinstlinger – Sidoti and Company

And if we want to drill down into the other income line a little bit more, what is your return on cash? What would other income look like if there was absolutely no hedging loss?

Arvind Godbole

Yes. The hedging loss was $1.1 million as compared to $2.5 million previous quarter. Our interest income remained at $1.1 million and we had a mutual fund investment which we sold which resulted in a gain of $600,000 as compared to $400,000 previous quarter.

Brian Kinstlinger – Sidoti and Company

And is it fair to assume that rates are coming down on your cash on that $1.l million? Or is that not fair to assume?

Arvind Godbole

No. That should remain – that is more or less same levels.

David Mackey

We've been earning about 4% on our cash, Brian. And we've been making money between $200,000 and a $0.5 million every quarter in terms of the gain and loss on our mutual funds.

Brian Kinstlinger – Sidoti and Company

And the final question I have is what was your billable to total headcount? I couldn't write fast enough. So if you can just give me those two numbers? I don't need the –

David Mackey

The number of consultants we had in the company was 11,457 –

Brian Kinstlinger – Sidoti and Company

Okay.

David Mackey

– of which 8,509 were utilized.

Brian Kinstlinger – Sidoti and Company

And what is your total headcount was, not only includes consultants but everyone else in the company?

David Mackey

Global headcount was 12,277.

Brian Kinstlinger – Sidoti and Company

Great. Thanks very much, guys.

David Mackey

Thank you.

Operator

Your next question comes from the line of Tim Fox of Deutsche Bank.

Tim Fox – Deutsche Bank

Hi. Thanks for taking my question. My first question is your two largest customers have been a very positive source for growth over the past few years and into 2008. I'm just wondering if you could comment in general what kind of conversations you're having with them as far as the levels of growth over the next coming months or years? And how much of that growth is more transaction oriented? Or is it more FTE based?

Keshav Murugesh

Yes. I'll take that. So in terms of the top two clients that we have, one of them currently is much more IT services focused. And the other one provides us revenues from a combination of both IT services and KPO. So in the first case, we continue – in fact in both cases we continue to have very positive conversations in terms of cost saving initiatives, as well as initiatives to help them with their growth. And say, if you look at strictly results of the third quarter, you'll see that our IT services business actually grew in excess of 2%. So that client actually continues to grow. And we continue to have very positive conversations in terms of new areas to support them. We're also working with them on one or two specific KPO opportunities as well, and we're pretty excited with that.

As far as the other client is concerned, obviously we're doing a lot with them on the IT services side. And obviously in this environment there is a lot of expectation in terms of what more and flexible, nimble and right-sized partner that Syntel can really do to help them with their cost saving initiatives. On the KPO side of their business, currently I think what has really happened is they're taking a breather as they look to see what's happening with each and every one of their clients. There have been some clients that have entered. Some clients have exited from them. So they're just looking at the entire risk profile of their client base, and then working on a time frame to step on the accelerators. I would say that currently there is a little uncertainty, essentially around the business environment that has hit the global markets. But we're pretty confident there is some combination that in the medium to long term we will help them step on that accelerator. And in fact, we're also having some very interesting conversations around really helping them, based on our intimate knowledge of their various processes and their business to directly help them acquire end customers into both their environment and our environment as well. So I think very good conversations and we'll see how it goes as the weeks and months progress.

Tim Fox – Deutsche Bank

Okay. That's helpful. Second question was around the decision making processes that are getting delayed. KPO sounds like it's still going quite strong. We've seen some relatively weak results in the broader IT services base. Can you just characterize which types of projects are, you mentioned, discretionary? Is there anything more specific you can talk about? But which projects are getting the stop sign right now or the delay sign more so than others? And how that may affect your growth prospects in '09?

David Mackey

I'll take that, Tim. I think when you look at the overall environment, clearly, as you mentioned, discretionary types of projects are being shelved at this point in time. The definition of discretionary would certainly vary client to client. But realistically, if a development initiative does not have a significant return on investment and that return on investment is not taking place within a shrinking time frame, the projects are typically not getting undertaken. So we are looking at an environment where that definition of discretionary, I believe, is changing month to month, quarter to quarter. And really that definition changed even more so in the back half of September and first half of October. But in terms of – from a technology perspective, clearly you look at consulting types of agreements. You look at package implementation types of work. These are the areas that are being at least visibly impacted at this point in time.

Tim Fox – Deutsche Bank

Okay. And just lastly, you mentioned, Dave you're thinking about sort of flattish utilization rates in the near-term. If in fact things do get materially softer, where could you see utilization rates moving? And what sort of a healthy level on a global basis going forward where you'd be sort of pushing the utilization levels to sort of highest levels?

David Mackey

Tim, I think Syntel has been pretty consistent over the years in saying that utilization levels in this business, at least offshore, can range between 60% and 80%. And typically what we've said is that if you're at or below 60% you've probably done a pretty poor job of demand forecasting or you're experiencing hyper growth. If you're at or above 80% you're probably redlining in terms of your ability to meet growth in any type of new projects. So that's kind of the range. Sitting here at 71% offshore is a pretty comfortable level. I think if the demand environment were to continue to get worse, I think if the growth prospects were to dry up, then you would certainly have the ability to get that utilization level up into the mid 70s because the supply environment now allows you to do much more just in time hiring. So I think companies would take advantage of that if the softness continues. And I think there is a lever to be pulled, if you will, in terms of improvements in margins, if necessary.

Tim Fox – Deutsche Bank

Excellent. Actually I'm going to sneak one –

Keshav Murugesh

If I may just add on there, as far as the fourth quarter in particular is concerned, we did already guided, it was the fact that we have in excess of 99% visibility to the low end of the range. So as of this stage, we've already made our plans in terms of hiring and we're executing to that. So as Dave mentioned you can expect that for the rest of the quarter you'll probably see flattish kind of utilization ratios.

Tim Fox – Deutsche Bank

Great. Alright. Thank you all.

Operator

Your next question comes from the line of Joseph Vafi of Jefferies & Company.

Joseph Vafi – Jefferies & Company

Hi, guys. Good morning, good evening to you. Most of my questions have been asked already. But maybe it would be interesting to get a little bit of color into, first of all, the nice sequential increase in the outsourcing line? What was driving that? And I've got some other ones.

David Mackey

I think, Joe, when you look at both our services and our verticals, we saw some good, broad-based growth in terms of the drive on the Applications Outsourcing line. We did see some project work in the third quarter, although I will tell you that it would not be what I would consider to be discretionary in nature. We did have some healthy growth in our maintenance, which is a cost reduction based activity. If you look at the vertical breakdown of our revenue during the quarter, again financial services was not a drag on our overall business. You look at our growth in healthcare, our growth in insurance, again fairly strong. So nothing in particular. Just some good, broad-based growth and some good activity. Obviously, given the customer concentration issue though the majority of that revenue was coming from our top 10 customers.

Joseph Vafi – Jefferies & Company

Okay. That's helpful. And then I know looking at the Q4 revenue guidance, obviously, there has been a little bit of weakness in Team Sourcing. A big project ended in e-Business and volumes are down a little bit in BPO. Is there any additional incremental caution going into the Q4 number, outside of those three moving parts at this point?

David Mackey

I don't think so, Joe. I think when you look at our Team Sourcing business for the fourth quarter we should be relatively stable. The e-Business based on what I described a little bit earlier in terms of some of the discretionary nature of projects there, always presents a bit of a concern because of the lack of visibility. But we do believe that our KPO worst case has stabilized here, given what we're looking at for volumes in the fourth quarter. And we do see some pretty healthy opportunities in the Applications Outsourcing area.

Joseph Vafi – Jefferies & Company

Okay. And are those outsourcing opportunities coming from, imagine from the current base of hunting license customers? Or are we talking kind of potential new deals in the pipeline out there?

David Mackey

I think we will add some new clients again here in the fourth quarter. We added 10 in the third. I expect their contribution in terms of dollars to be relatively small. In a short time frame the majority of your revenues are going to come from clients that have been working with you for a while. I will also tell you that in this kind of an environment, given the slow decision making, taking on new partners, taking new direction is something that's a little bit more challenging than it has been historically. So the opportunities that I think we're looking at coming up here in the fourth quarter would be by and large with our mature relationships.

Joseph Vafi – Jefferies & Company

Okay. That's helpful. And then obviously we've been talking about margin here a little bit. And it seems though there were kind of three pieces to the margin lift in the quarter. I was wondering if you had any kind of way to break down the Rupee? Actually it sounds like some increases in bill rates and utilization being the kind of three levers on margin. And how much each of those was kind of a contributor on the margin line?

David Mackey

Sure. When you look at overall, the gross margins, for example, Joe, clearly what we saw during the quarter was that the exchange gave us about 160 basis points of lift. The utilization gave us another 100 basis points of lift. And between delivery mix, pricing and a couple of other initiatives that Keshav had mentioned earlier on the productivity side, we probably had another 50 basis points. So that really accounts for the 300 basis point move on the gross margin line. On the SG&A line it would obviously be almost entirely exchange.

Joseph Vafi – Jefferies & Company

Okay. That's helpful. And then maybe one last question if Bharat still in the line. It sounds like the company is going to dial back on some of the CapEx spend, given kind of the trends in the business and the requirements that are needed over the next couple quarters. Would we kind of think about entertaining any buyback activity down here, in place of that CapEx spending as where we stand here?

Bharat Desai

Yes. Good question, Joe. I think the board will look at that and if we have excess cash there is typically three things to do. Invest it in the business, buy shares back or return it to shareholders. So I think the board will look at all three and then make a determination as to what's the best plan of action.

Joseph Vafi – Jefferies & Company

Very good. Thanks a lot, gentlemen.

David Mackey

Thanks, Joe.

Operator

Your next question comes from the line of David Cohen of JP Morgan.

David Cohen – JP Morgan

Hi. Thanks. Bharat, the last quarter I think you talked about there are some companies that are going to step up and get more aggressive with offshoring. And others that maybe haven't done it that they're not going to sort of take the plunge. Has that trend continued? And how does that play into your opening comments about things softening and the client indecision in September?

Bharat Desai

Yes. I think from September onwards we just saw customers just sort of freeze because of just the turmoil going on in the marketplace. But what we have seen along the way is people thinking about what the economy might hold out in their businesses over the next year or two, and what kind of initiatives to drive to prepare for that. And one of the comments I made is that the pipeline, the health of the sales pipeline is very strong. And we see that largely from both organizations that are current customers as well as organizations that might be new in the entire globalization area, looking for ways to take expense out and improve operational efficiency.

Keshav Murugesh

If I may add something there, as we see a number of companies begin to actually face the pain of what's happening in the environment around us, one of the impacts that you normally see in this kind of economic environment is the direct impact on retailing and healthcare. And that, to some extent will force some of these players to really accelerate their offshoring and their cost saving records. So we're actually seeing a lot more activity now on the – from potential retail clients where people were – from the retail side of the business, looking at introducing cost saving initiatives to their business. And some of them really are doing it for the first time. We're also seeing much more activity from the healthcare side of the business, lot more new players, focusing on initiatives that will build efficiency or reduce costs. So there is one group of players maybe taking a little longer. We are actually seeing a lot more visits [ph] from another group who are looking at accelerating and they are bringing in more cost savings to their business.

David Cohen – JP Morgan

And was –

David Mackey

I'm sorry, David. I think the one thing we also have to keep in mind is that in addition to development dollars kind of being high dollar value, short duration types of work, the sales cycle for those types of activities also tends to be shorter because it does not involve a lot of client disruption. Any time you start talking about maintenance or start talking about KPO, especially for a client who is taking these on for the first time, you're talking about organizational change and behavior change that is not always as easy as it seems for them. So what we've historically seen is that the sales cycles for these types of activities have been longer and obviously in this kind of an environment it is those cost reduction based activities that the majority of our clients and our prospects are looking for.

David Cohen – JP Morgan

In terms of the client indecision or pausing, did they get worse in October relative to September?

David Mackey

From my perspective, David, from the middle of September to the middle of October things definitely got worse.

David Cohen – JP Morgan

Okay. And I know it's early for '09 and so I won't ask you for guidance. But what sort of visibility do you have? You give us for '08 and you said you got 99% visibility into the fourth quarter. What sort of visibility sitting here today do you have into '09?

David Mackey

I think the nice thing about our business, David, is when you look at maintenance composing about 50% of our revenue and the KPO running close to about 20%, obviously there is a transaction component to the KPO that does create some variability. But I think we do have a nice stable base of revenue to grow off of. In terms of the visibility, obviously that percentage is linked to an actual number. But I would expect as we walk into next year that when we do provide guidance in February it would be consistent with how we've done it in the past and that we will walk into the year with about 60% visibility to the low-end of our guidance.

David Cohen – JP Morgan

Okay. And just to clarify on the revenue shortfall at your client and I guess it's in India. What drove the shortfall? It sounded like it was related to volume. I understand the markets have behaved differently although directionally they've seemed to move sort of together. But what was it that drove? Did they have fewer transaction? There was less volume? What was the driver behind the shortfall more specifically?

Keshav Murugesh

Yes. I will take that. Two things actually contributed with this client. This client is actually a large brokerage firm. So there are two things that really contributed to that shortfall in revenue so to speak. One was the fact that fewer clients really signed up for their services during this time. And that's one service that we perform for them. Helping them sign up new clients for them as well as pick up their calls and then help them service those clients so one entire segment dried up for the time being. And the second was on actual transactions thereafter. The volume dramatically have dropped because of what's happening in the – on the stock exchanges now. So I would say a combination of both of these really resulted in a shrinkage of volumes, both in terms of the number of new clients we brought in as well as the number of transactions that people pushed through their systems.

David Mackey

David, you had asked the question a little bit earlier about things getting materially better or worse in September versus October. To give you a little bit of sense at how significant their business was impacted, the KPO revenues from this client actually grew 15% for us in the second quarter and then dropped 41% in the third. So it was a very sudden drop and it was largely not something that we had visibility to walking into the quarter.

David Cohen – JP Morgan

Sure. The last question I had and I think you mentioned something along these lines, the hunting licenses. Obviously they take some time. What sort of metrics do you use to track from signing a hunting license, the revenue? How long does it take? And how do you think about how well those new hunting licenses are performing? And how should we think about – how many of them, if any are stale? And what the mix looks like in terms of their ability to contribute, say in '09?

David Mackey

It's something obviously we watch on a monthly basis, David. And we look at the number of hunting licenses that we sign. We look at the number that are active at any point. We look at the revenue generation and the pipeline from each of these. Obviously at any point in time you got a handful of them that have gotten stale or that have moved through – and the hunting license numbers that we report quarter-to-quarter are net numbers. So for example if we are no longer a preferred vendor at a global 2000 organization, that hunting license is removed from the list. So we are constantly looking at the list. We're constantly looking at how things are moving through there. I think what you've seen in terms of the hunting license progress for Syntel has largely been reflected in the company's revenue. Obviously, our top 10 clients are all hunting licenses and we're one of three, one of four preferred vendors and we've got healthy traction at those organizations. But at any point in time we've got different clients at different stages with these relationships.

David Cohen – JP Morgan

And have you given sort of the average revenue per hunting license? And if not can –

David Mackey

Again, then you get into the average revenue per active license versus the average revenue of total licenses. But if you were to look at the company for example today, we said we've got 62 active licenses. The average revenue from those licenses is a little bit over $6 million a piece.

David Cohen – JP Morgan

Great. Thank you.

Operator

You have a follow-up question from the line of Joseph Foresi with Janney Montgomery Scott.

Joseph Foresi – Janney Montgomery Scott

Hi, guys. I wanted to ask, first of all, I know you talked about hiring and it being flat through the year. I wondered and maybe I missed this, was there any hiring guidance given? And what are you looking at for campus offers next year?

Keshav Murugesh

Right. In terms of the numbers for this year, for 2008, we expect approximately around 600 people to be hired totally. And in terms of the campus offers that we already have out there in the marketplace, that's something that obviously we'll not state [ph] you on as part of our prediction for the next year. But we already have been quite active there. And like Dave mentioned, we will follow a just in time kind of an approach. So we have engaged with the campuses. We have significant interest from the students there. We have made a few offers out there in the marketplace. We still continue to make a few offers. So we'll have a better update to you at the next quarter.

Joseph Foresi – Janney Montgomery Scott

And just in terms of how – when you plan on moving into the new facilities and maybe out of some existing facilities. I think you said phase 1 or 2. Maybe you could just update us on which phases are happening in which period?

Keshav Murugesh

I'll do that. So we will actually be moving into Phase 1 of our Pune special economic zone campus in the fourth quarter. So that's actually a campus with 2,300 seats. And that's readily – actually begun to occupy it. And so that's Phase 1 of Pune. We will also have Phase 1 of Chennai ready somewhere around second quarter of 2009. And that's in Phase 1 there. We're actually building out three software blocks with a capacity of almost 5,000 seats plus the cafeteria and the training block. So that's going into Q2 2009.

Joseph Foresi – Janney Montgomery Scott

And I'm sorry, was Pune pushed out a quarter?

David Mackey

I'm sorry. The fit out, Joe, for Pune was pushed out. We had originally expected that we would put the desktops into production in the third quarter. We have moved that, as Keshav mentioned, to the fourth quarter and we have started doing that in October.

Joseph Foresi – Janney Montgomery Scott

And just in reference to sort of some of the new clients and the new hunting licenses. Are you seeing a larger flow from your KPO or your IT services? Has it been balanced? And where is that particular – where is the demand coming from?

Keshav Murugesh

Yes. Like I said earlier, the demand really is the visits and the interest we're seeing from almost every one of our existing clients, because definitely in this environment every one is looking at accelerated cost saving initiatives. So we are completely focused with each one of them. Now different approaches are being followed by each of them. And so that's where we're focused just now. Separately, like I mentioned we're seeing a lot more of activity around our KPO offering, not just on our financial services offering, but also on our healthcare KPO offering where we're seeing much more traction. We're seeing much more interest. And we believe that we'll see success, more success soon. We're also seeing a number of visits, like I mentioned earlier, from retail clients and healthcare clients, which is a refreshing change because it's very clear that this group of clients are looking to accelerate their cost saving initiatives as the retail business itself gets impacted. Therefore, they need to stay profitable by initiating cost saving initiatives. So we're actually seeing a combination of all of this happening just now. We're also seeing some of our existing clients also look at changing the approach in saying the sense that also looking at really focusing with a nimble, right size player like us in terms of consolidating a portfolio as well. So that's another interesting trend that we are seeing. Again, like I said earlier, the timing of the decision is unknown. But there is a lot of activity on all these fronts.

Joseph Foresi – Janney Montgomery Scott

And just one last question if Bharat is still on the line. I'm just curious we've seen a lot of domestic players selling their captives in India. And obviously I know you guys usually pay a dividend. I was wondering if you've put anymore thought into potentially doing an acquisition? And if you're looking at some of those potential captives that are being sold there?

Bharat Desai

So we have been approached by a few of them. And we will continue to look at those opportunistically. I think where we might move forward is if it provides us an opportunity to extend our capability into a new vertical or a new geography.

Joseph Foresi – Janney Montgomery Scott

And any particular vertical geography – is it on the IT services side or KPO that you're looking at?

Bharat Desai

Probably I would say both. But areas that we think would be interesting over the next five years and more include areas like biotech, pharmacy and also extensions into Europe. So these areas would probably be areas for us to look more closely at as we think about combinations.

Joseph Foresi – Janney Montgomery Scott

And just lastly, have you seen the valuations come down and the amount of potential acquisitions increase over the last couple of months?

Bharat Desai

Not significantly for private companies.

Joseph Foresi – Janney Montgomery Scott

All right. Thank you.

Operator

There are no questions at this time. You can make your concluding remarks at this time.

Bharat Desai

Well, thank you everybody for joining us today. While the overall economy is currently struggling, the mega trend towards globalization of services remains intact. Syntel as an organization remains focused on the long-term business opportunity and creating value for all key stakeholders. We are confident in our strategic direction and current market positioning and will continue to invest for future and focus on successful execution of our business plans. We look forward to talking to you next quarter. Good bye and thank you again.

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