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Executives

Bharat Desai - Co-Founder Executive Chairman and Chief Executive Officer

Keshav Murugesh - President and Chief Operating Officer

Arvind S. Godbole - Chief Financial Officer

David Mackey - Senior Vice President of Finance

Analysts

Joseph Foresi - Janney Montgomery Scott

Bryan Keane - Credit Suisse

Bryan Kingslinger – Sidoti & Co

David Cohen – J.P. Morgan

Ed Caso – Wachovia

Chris - Wachovia

Vincent Colicchio – Nobel Financial Group

Syntel Inc. (SYNT) Q4 2008 Earnings Call February 10, 2009 ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Syntel fourth quarter 2008 conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) At this time, I’d like to turn the call over to Mr. Mackey. Sir, you may begin.

David Mackey

Thank you and good morning everyone. Syntel’s fourth quarter earnings release crossed business wire at 8:29 a.m. today. It’s also available on our website 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. I would like to take a few minutes to discuss Syntel’s fourth quarter and 2008 results and then focus our attention on the current year.

The effects of a difficult global economic environment continue to impact our business. Revenue acceleration remains for several reasons difficult including currency headwinds, deferral of discretionary projects, and delayed decision making as clients await clarity and direction. Helping litigate this impact are mature users of offshore services who are aggressively working to accelerate cost reduction efforts.

These behaviors are evident in Syntel’s fourth quarter results where modest revenue growth was driven by our maintenance and KPO service offerings. Despite the top line softness, fourth quarter profits were strong as the easing supply side of the business and the depreciating rupee allowed for cost favorability.

The first half of 2008 was marked by healthy top line growth of 30% year over year as the economic downturn spread, the growth rate slowed but earning power remained strong. Given the difficulty environment, Syntel is pleased with our overall financial performance of the year having delivered revenue growth of 22% and EPS growth of 38%.

As we enter 2009, demand and certainty remains high. To date, Syntel has not been materially impacted by headline organizational failures. However, the ripple effect of the widening economic crisis is affecting all companies and clients are looking for ways to cut operating costs. At Syntel, we’re focused on keeping our internal cost structure respectable as possible and delivering margin stability in a highly dynamic marketplace.

That said, we will continue to invest for the future. We believe that when the economy recovers and customer confidence returns demand for global services will accelerate. While the current economic environment is challenging, it presents the opportunity to work closely with our clients to help meet their changing business requirements and to build long-term win-win relationships.

I would now like to turn the call over to Keshav Murugesh, Syntel’s President and Chief Operating Officer and then to Arvind S. 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 fourth quarter revenue performance is reflective of the overall economy and the IT KPO services industry in particular. The demand softness continues to be our number one business challenge as clients are either delaying outsourcing positions or aggressively looking to reduce costs.

Cost reduction approaches continue to include additional outsourcing of maintenance and KPO but increasingly, clients are also looking for reduced costs on existing projects. Ultimately for achieving this goal include lower billing rates, increased offshore leverage, and improved productivity. Many of these approaches are not new; however, we are increasingly seeing clients leverage business volume or transfer of ownership for billables in exchange for reduced costs.

While these actions can create revenue headwinds, if properly managed they can also create additional revenue or margin opportunities. Despite the tough environment, revenues for the full fourth quarter increased 1% sequentially and 11% versus the fourth quarter of 2007.

From a services perspective as Bharat mentioned, our revenue growth was driven by cost reduction offerings including maintenance and KPO. Vertical (ph) growth in the quarter came from clients in financial services and healthcare. As expected, the majority of our growth came from our existing strategic relationships.

Despite this revenue softness, Syntel was able to post healthy operating margins and earnings per share during the fourth quarter and for the full year of 2008. Driving the favorability during the quarter were improvements in (inaudible) levels, increased offshore leverage, proactive expense management, and 11% depreciation in the Indian rupee. We were able to deliver this earnings performance without sacrificing any of the key investments necessary for the long-term health of our business.

During this year, Syntel returned over $30 million in cash to shareholders in the form of regularly and special dividends. Despite the fact, we ended the year with over $132 million in cash and short term investments representing an increase of over $16 million versus the end of the 2007.

Turning to 2009, our initial revenue guidance is reflective of the current business environment. Our weak economy, increase in pricing pressure, delays in spending positions, and political uncertainty have reduced our visibility to top line acceleration at this point and time. As a result, we have provided for a wider range of possible outcomes. Given the current levels of uncertainty, our visibility based approach to guidance, however, remains consistent.

As we enter the year with $0.64 committed for the low end of revenue. Given the delays in budget cycles and spending positions, there are still many projects for which we are awaiting clients’ signature.

On a positive note, the improved flexibility of the staffing side of our business will allow us to manage operating costs and earnings better without impacting top line opportunity. This can be achieved by delicately adjusting our high end construction plans based on demand and proactively managing billable, productivity, and controllable expenses.

Syntel has a long history of solid operational performance and financial discipline regardless of the business environment. We expect this culture to serve us well in 2009. Additionally, we will continue our plan to invest in targeted service offering and enhanced geographic presence throughout 2009 to drive the outcome business value.

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

Arvind S. Godbole

Thanks, Keshav. Good morning everyone. I also have Dave Mackey, Syntel’s Senior Vice President of Finance joining me on the call. After my comments, we’ll open the call to questions.

Revenue for the fourth quarter was $104.7 million, up 11% from $94 in the prior year period and 1% sequentially. Revenue for the quarter was reduced by $5 million related to depreciation in terms of fees to the US dollar. While the full year, revenue increased 32% versus 2007 to $410.4 million compared to $337.7 million from the prior year period. In the fourth quarter, Applications Outsourcing accounted for 69% of the revenue, KPO was 19%, e-Business contributed 10% and Team Sourcing was 2%.

On a vertical basis, financial services contributed 66% with interest 19%, healthcare 40%, automobile 4%, and other was 7%. As Keshav mentioned, revenue growth in the quarter was driven by our large customer relationships. As a result our customer concentration increased by Sytnel’s top three clients represented 50% of the revenue. That’s why end of the quarter 62% and top (inaudible) are 74%.

(inaudible) side business was 37% of revenue for the quarter. Gross margins in the fourth quarter was 48.3% compared to 39.4% in the year over year period and 44.3% in the quarter three of 2008. By business segment gross margins for Applications Outsourcing was 43.7%, KPO was 63%, e-Business was 65.9% and Team Sourcing was 47.7%. Gross margins were favorably impacted by 11% (inaudible), improved utilization and offshore units.

For the full year, Syntel’s gross margins came in at 43.5% representing an increase of over 400 basis points versus 39.2% in 2007. The company’s selling, general, and administrative expenses were 19.4% in the fourth quarter of 2008 compared to 32.9% in the prior year period and 19.1% in the third quarter.

The yearly levels also very (inaudible) moment during the quarter which reduced our operational (inaudible) costs and also resulted in a foreign exchange currency gain of $27 million.

Full year SG&A levels finished that at 19.6% of revenue versus 20.4% in 2007. As a result of the improved gross margins SG&A levels, Syntel’s operation incomes expanded to 28.9% in the fourth quarter. This number compared to 16.6% in the prior period and 25.2% last quarter.

From a full year perspective, Syntel’s believes that we were able to expand our operating margins by over 5 basis points in 2008 without impacting our ongoing investment programs. For the year, operating margins came in at 24% as compared to 18.8% in 2007.

Partially offsetting the currency favorability in the operating margins, we had (inaudible) position while keeping our guidance in line of the (inaudible) by $1 million during the fourth quarter. For the full year, (inaudible) total $5.1 million.

Net income for the fourth quarter was $26.7 million or $0.64 per diluted share compared to $15.9 million or $0.29 per share in prior year period and $22.1 million or $0.64 per share in the third quarter of 2008. For the full year, net income was $86.7 million or $2.10 compared to $62.9 million or $1.52 per share in 2007.

From a comparative standpoint it is important that 2008 EPS of $2.10 per share included the favorable impact of nonrecurring tax benefits. Other (inaudible) metrics on the fourth quarter are as follows: total headcount was 12,363 representing a 1% sequentially increase and a 6% increase for the year end 2007.

(inaudible) headcount was 1,686 onsite and 9,845 offshore for a total of 11,531. (inaudible) levels were 92% onsite and 71% offshore with a global (inaudible) at 74%.

We ended the quarter with 4,264 people (inaudible). During the next - at the end of the quarter was 18% onsite and 82% offshore. (inaudible) during the quarter was 14.1% annualized. Syntel gained eight new customers and 44 new clients for the full year. This is compared to the 34 clients added in 2007.

We also added one new (inaudible) during the fourth quarter which takes the total number of preferred (inaudible) to 93. Sixty one of these licenses generating revenues during the quarter.

Selective to the balance sheet, Syntel entered the year with $132.3 million in cash and short-term investments. Capital spending in the fourth quarter was $6.4 million with a total CapEx in 2008 coming to $36.4 million. (inaudible) was improved to (inaudible) in Q4 as compared to 58 businesses in the third quarter.

(inaudible) current year, our initial guidance for 2009 is for revenue to be in the range of $385 million to $435 million and EPS in the range of $1.66 and $2.08. This guidance is based on our current visibility levels and (inaudible) rupees to the dollar.

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

Question-and-Answer Session

Operator

At this time, (Operator Instructions). We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Joseph Foresi with Janney Montgomery Scott.

Joseph Foresi - Janney Montgomery Scott

Hi, good morning gentlemen. My first question here is just around guidance. I know you’ve given sort of a large range there. I wonder if you could talk about from a historical perspective, you know you’ve consistently started off the year conservative and then sort of raised guidance going throughout the year. How should we think about this guidance in terms of what you’ve seen historically and what’s going on in the present environment?

Keshav Murugesh

Joe, I’ll take that. You know obviously you are familiar as we are about the uncertainty in terms of the, you know, economy outside, what’s happening with declines and the fact that a number of clients are still working even at this stage on their budgets. So in terms of what guidance, what we have provided right now is a range of numbers that we see at this stage.

Having said that, the methodology used very consistent to what we normally use but I think what really is impacting us this time is the lack of visibility in terms of clients actually signing off on projects at this time.

So if - one comfort I can give you is that on the fact we have almost 60% visibility to the lowering of our guidance at this stage and if you look at the fourth quarter results and if you just look at Syntel’s overall long recurring kind of revenue which is more the development kind of revenues, don’t be concerned if they’re not met, you know nonrecurring guidance because 70% is generally seeking out business.

So if you look at 70% of the $104 million and that’s, you know if multiply that four times you will see that 60% of the number is actually close to $280 or $284 million and at this stage, we have good visibility to about $230 million already.

That is in spite of the fact that clients have not really signed up because of what’s happening on the environment. So we will up bid guidance as we make progress but that’s where we are today.

Joseph Foresi - Janney Montgomery Scott

So, I mean, just for perspective. I mean should we look at guidance as it relates to what we saw in 2008 where things tailed off? Or in past years where you’ve started off at a low base and started to increase that as visibility increased?

Arvind Godbole

We don’t really know at this point, Joe, because there is too much of uncertainty. So it will be hard for us to, you know, speculate on that because of the economic situation currently doesn’t give us too much visibility. So but if you really see the comparably 2008 versus 2009 guidance, if you add to it the tax reversal impact on the EPS of 2008, then the growth in the EPS unrealized revenue it’s not always consistent. Also, despite these uncertainties we will continue to do investments as we go forward and that is why there is a wide range of guidance this year.

Joseph Foresi - Janney Montgomery Scott

Okay. Then the next question here and I know you’ll probably get a couple of these on the call. Just in regards to visibility, I wonder if you could update us on, you know, your top clients and that visibility with that in particularly Stage Street. Also, has that visibility been better or worse than the last years and how does that compare to the rest of your client base?

Keshav Murugesh

Okay again, you know I’ll take that. Well as far as our larger clients are concerned, you know obviously in this environment, their need to be build more efficiencies and save more costs is actually accelerator. To that extent we believe that, you know, once budget uncertainties are thrown out of the window, you know Syntel could be benefit a bit.

At this stage, I would say that you know we are still constrained by the uncertainty that some of them are having to their own business and - but having said that, even in the fourth quarter in spite of an overall quiet kind of a quarter, some of these clients actually increased their revenues to Syntel and so we’ve actually seen growth.

So, all things remaining equal as they update their budgets and I’ve actually seen more certainty returning to their business, we expect our business to actually be benefited positively.

In terms of discussions that we have, they’re extremely positive. There are a number of discussions taking place and we don’t see any change in terms of the demand environment there.

Joseph Foresi - Janney Montgomery Scott

Just lastly here, I wonder if you could talk a little bit about what you’re seeing on the pricing side and maybe in order of magnitude. Is that coming from present client base or customers?

David Mackey

Sure, I’ll take that Joe. You know pretty clearly as Keshav mentioned in this kind of environment, clients are aggressively looking to take costs out of their structures and in terms of pricing, I guess I like to look at more in terms of cost for clients as opposed to price because price to me implies unit rates or billing rates. Realistically it’s the maturity level of a customer that’s going to determine how they go about achieving those cost reductions.

For clients that are relatively new to the outsourcing initiative or are less penetrated in terms of their offshore usage, they’re going to get a lot more bang for their buck by outsourcing more maintenance, outsourcing more BPO, outsourcing more KPO, and saving 40 or 50%.

It’s the clients that are heavily penetrated that don’t have a lot of additional work to outsource that are looking to reduce their costs either by allowing their vendors to move to a fixed fee type of arrangement and accrue the benefits of productivity allowing them to move higher quantum's of work offshore or just doing a straight negotiation of reduced billing rate.

Obviously our objective is to make sure that while we try and help clients accomplish these goals, we’re also trying to protect our top line and bottom line. Obviously there’s some inherent challenges in that but you’re hearing a lot of discussions today about trading off billing rate for higher volume.

Or you’re hearing discussions about trading off lower total cost of ownership in exchange for higher offshore leverage. This does allow us some inherent level of protection both on the top and the bottom line.

So those discussions are taking place and are really a function of where clients are on the maturity cycle.

Joseph Foresi - Janney Montgomery Scott

Okay, thank you guys.

Operator

Your next question comes from the line of Bryan Keane with Credit Suisse.

Bryan Keane - Credit Suisse

Hi, good morning. Hey, Dave, just to follow up on that. Is there a way to quantify pricing? I guess the billing rate side. Did it fall by five or so percent in the quarter and any thoughts on what your expectations are for 2009 pricing on the billing side?

David Mackey

I think, in terms of our fourth quarter billing rates, when you go ahead and do the math and look at the number of people we actually had engaged on projects versus the revenue that we actually accrued, I think what you’ll see is that the billing rates were relatively stable Q3 to Q4.

Part of the uncertainty we face as we move into 2009 and Keshav alluded to this in terms of clients waiting to sign some of these agreements, is this exact discussion that we’re going through. So how much of the cost declines yet is going to come from billing rate versus offshore leverage versus fixed fee. It is one of the key variables that we’re dealing with.

Obviously when you look at our range of guidance, depending on how those pricing discussions take place will have a pretty significant impact on which end of that guidance we end up on relative to not just revenue but also margin. If what we have to do is solely give on billing rate it’s going to have the biggest impact to our price and also the biggest impact to our margins.

If we can offset some of that with offshore leverage or improved productivity the impact to the bottom line is much less. So I don’t think it’s possible, at this point and time, to quantify the impact of pricing because this the exact discussions and negotiations that we’re having right now with our clients.

Bryan Keane - Credit Suisse

Have you seen pricing in the marketplace come down from the competitors?

David Mackey

You know my sense, Brian, is that the majority of the pricing issues that we’re dealing with are client driven versus competitor driven.

Bryan Keane - Credit Suisse

Okay. I might have missed it but was there a head count expectation number for 2009?

Arvind Godbole

It was - for 2009 we have not actually given any specific headcount, guidance at this stage. Currently, Bharat mentioned and I followed up later, we did talk about the fact that we have a lot of leverage in terms of what ability to manage the supply side of our business.

So we are including the productivity and (inaudible) levers at this particular point and time. As we finalize - formalize specific guidance around headcounts as we make progress during the year, will give you an update but at this stage, I think our focus is more on getting our top line and we believe that we’re making all the required investment that we need to make in order to get us there.

Bryan Keane - Credit Suisse

Okay and then just my last question. I know that you signed I think it’s 34 new clients for the year. What does that pipeline look like? I mean do you have - is the pipeline a little bit quiet given kind of the recession we’re in or are people starting to knock on doors asking, you know, hey Syntel can you help us offshoring more work?

Keshav Murugesh

Yeah, I’d think that actually in terms of cost saving initiatives and efficiency increased initiatives, we continue to have very good kind of positions with a number of our existing as well as potentially new clients.

So we actually believe that this environment is an outstanding environment really for us to seed our message with new clients in terms of their ability to, you know (inaudible) globalization of services and reduce their costs.

At the same time, as we see a number of clients, our existing clients, also want to save more money. We’re actually coming up with new initiatives, new offerings and therefore, new discussions around this. So the pipeline at this stage both in the IT services side as well as the KPO side continues to be healthy, continues to be strong but what is really impacting us just now is, in terms of how long the position cycle is taking.

So we actually expect - seeing the position cycle taking a little longer and that’s more based on the current uncertainty that some of our clients are facing in their own business. In terms of do they need to save more money? Absolutely, resoundingly, yes.

Do they need to build more efficiencies for their business? Absolutely, yes. And are we here to be there and be their partner to help them achieve that? Absolutely, yes.

Bryan Keane - Credit Suisse

Okay. Thanks for the color.

Operator

Your next question comes from Bryan Kinslinger with Sidoti & Company.

Bryan Kinslinger - Sidoti & Company

Hi, guys. Good morning, thanks. The first question I had was, when I look at e-business, how much total revenue there is discretionary? And then, how much of your entire revenue in 2008 was discretionary, do you think, as well?

David Mackey

I'll take that, Bryan. You know when you look at our e-business in the fourth quarter, we did a little bit under $11 million. And when you look at the type of projects that typically flow through e-business, they tend to be more discretionary than the type of projects that we see on the outsourcing side.

As Keshav mentioned earlier, if you look at our overall service offering portfolio, about 30% of our revenue comes from development. And it's our estimation that between a third and a half of that development revenue is what we would consider to be discretionary.

So in this environment, you're looking at between 10% and 15% of Syntel's overall revenue portfolio is discretionary.

That being said, you know there are certain types of projects that still need to be done, and we are seeing clients that have to change their systems to adjust for changes in their business going through with those types of initiatives.

Bryan Kinslinger - Sidoti & Company

Okay. And seeing that that's the place e-business where you already saw a drop of $1 million quarterly, it seems like that's where you're might be a little more concerned about. What do you do on the cost side? I mean, I know there's a lot of fixed costs there, and if revenue goes down, then profitability goes down there, too. Do you take action, or will we see margins in that segment drop dramatically if revenue does?

David Mackey

Pretty clearly, I think if you look at the past performance of the e-business segment, that there has been some margin volatility when the revenues have fallen off. And I think a lot of that was due to you know the longer term health of the business in some of the things that we were looking for.

Obviously, if we're looking at a prolonged downturn and significant reductions in specific services within e-business, we're going to have to address the major fixed cost components of those businesses, which, you know for us, is largely people based.

So you'd have to address the utilization, and largely, the utilization on-site for that business.

That being said, one of the things you want to make sure that you're always able to do is deliver these types of projects. They do tend to be lower visibility in terms of how you know far out you can see them coming. They do tend to be shorter, in terms of duration, so they ramp up quickly, they fall off quickly.

And we want to balance the margin side of the e-business segment with making sure that we don't forego revenue opportunities.

Bryan Kinslinger - Sidoti & Company

And is it fair to say it's too difficult to make massive layoffs, for example, there because tomorrow a new project could come in. Right?

David Mackey

Well, I think that that's a part of it. You know one of the things that we try and do is make sure that our model is flexible and that we keep our resources in the best locations to deliver the service. So you know there are some things that we can do with productivity. There are some things that we can do with utilization. We just need to be a little bit careful and make sure that we don't miss revenue opportunities.

But all things being equal, I would expect that there would be, in a soft-demand environment, in a soft-discretionary project environment, some incremental pressure on the e-business margins.

Bryan Kinslinger - Sidoti & Company

Okay. And on the pay side, can you talk about the trends that you expect to see on salaries versus the variable pay side, and then the percentage that makes up total compensation for each?

Keshave Murugesh

Yes, I'll take that. As far as wage inflation for us is concerned, we actually expect to see a very minor turnup in inflation you know on-site in the U.S. As far as the offshore rate inflation is concerned at this time, we expect to see 5% to 6% wage inflation.

Having said that, we've all been (inaudible) for quite some time now a fixed versus a variable kind of compensation policy. So based on the performance of the company, you know the ability for each one of us to (inaudible) the variable component exists.

So if the revenue and EPS numbers look better, then obviously there's a healthy possibility of (inaudible) compensation. But if the company, for whatever reason, does not get the results that we want to achieve, then to that extent the variable component comes down.

So having been all of that in, we expect at this stage to see a 5% to 6% wage inflation offshore.

Bryan Kinslinger - Sidoti & Company

And what is the percentage in total compensation from salaries versus variable, at least in the previous year, in 2008? Do you have a rough estimate?

David Mackey

I think we've on average across the organization, Bryan, somewhere around 20% to 25% variable.

Keshave Murugesh

That is right.

Bryan Kinslinger - Sidoti & Company

Okay. And I guess, reconcile that with what others are saying about not -- I think there was one conference call, they don't expect really, any salary increases. Why do you feel the need to raise rates overall?

Bharat Desai

Okay, I'm not sure which call you're talking about, but I think -- my guess would be that, I think, some of the others probably pass off the bulk of their variable compensation as a fixed compensation. And therefore, to that extent, the variability is much less, actually. And so that's the reason why they're probably talking about it.

Syntel has traditionally had a performance-oriented variable compensation. And on that basis, this is our expectation.

David Mackey

It's also entirely possible, Bryan, that you have other companies that aren't expecting to pay any type of increase because they really don't expect their companies to perform to a level that would merit those increases.

So you know we're going to walk into the year with the assumption, as Keshav mentioned, of a 5% to 6% increase. And if the company doesn't perform to our internal expectations, that amount isn't going to get paid.

The real question is, "What do you communicate?"

Bryan Kinslinger - Sidoti & Company

Right. Okay. And last quarter you mentioned that, I think it was Chennai Phase II facility would add $1.5 million of cost in the fourth quarter. Did that play out, and where are you with that?

Keshave Murugesh

Yes, as far as Chennai is concerned, you know, the – Phase I of this (inaudible) is already worked out and you know has gone stream. That’s essentially two buildings with about 2,300 seats that has already, you know, has implemented, and now is now being operationalized adequately.

David Mackey

I think relative to the $1.5 million that we had expected last quarter, though Bryan what we're looking at is that we have outfitted and occupied one of the buildings in Chennai that we had.

Our plan is to outfit and occupy another building here in the first quarter. So from a DNA and from an operating expense standpoint of the $1.5 million that we had expected in Q4 probably about three-quarters of that actually took place in Q4, the balance will roll in Q1.

Bryan Kinslinger - Sidoti & Company

Great. The last question I have, I didn’t catch any interest income. Was there – what was the gain that you had there and what was interest income?

David Mackey

In terms of the fourth quarter, Bryan, we had about $900,000 that was gained on the sale of mutual funds during the quarter. The interest income on our cash balance was $1.4 million. The balance was a $1 million loss on our hedging.

Bryan Kinslinger - Sidoti & Company

And how did you get – this is going to be a question I just have to ask because mutual funds getting killed, how did you have a gain on mutual funds?

Keshave Murugesh

Well this is basically the long-term mutual and long-term capital gains that we have like (inaudible) mutual funds. We are short on capital gains as well as long-term. This is a gain on the long-term capital hedge fund.

Bharat Desai

Just for clarification, Bryan, mutuals funds in India are the equivalent of money market funds.

Bryan Kinslinger - Sidoti & Company

Okay. That’s …

David Mackey

With a fixed maturity.

Bryan Kinslinger - Sidoti & Company

Okay.

Bharat Murugesh

And also, during the quarter four, we have seen a slight increase in the interest rates, which then landed in a slightly higher industry (inaudible).

Bryan Kinslinger - Sidoti & Company

Okay. Thank you very much.

David Mackey

Thanks, Bryan.

Operator

Your next question comes from David Cohen with JP Morgan.

David Cohen - JP Morgan

Hi, thanks. I was hoping you could talk about the timing around the decisions that have been delayed. So in other words, at what point do the decisions need to start getting made to be able to help the revenue outlook for 2009?

David Mackey

I can tell you, David, that, you know, a number of the key projects that Keshav was referring to earlier about, you know, the visibility especially relative to the maintenance and some of the KPO, I would assume that those decisions need to be made in the next couple of months because we're actually rolling a number of maintenance agreements.

What we're discussing is, you know, what the staffing profile and the pricing profile is going to look like but, you know, as we continue to move forward these are not the kind of decisions that are going to be, you know, go or no go decisions.

It's more a fine tuning than it is a complete overhaul. So I would expect some of that visibility to firm up here in the next couple of months relative to, you know, the 70% recurring portion of our business.

Relative to the discretionary side and the project side, obviously, you know, kind of all bets are off right now. Those decisions continue to get pushed out. They've been pushed out for at least the six months. And you know, the expectations at least for the next two to three months are that it's going to be very difficult for our clients to make commitments to project based work that does not add a cost reduction component.

David Cohen - JP Morgan

Okay. And then any projects of size or even if there is a group of projects that in the aggregate, you know, could be material that are winding down, you know, this quarter or in the first half of the year?

Keshave Murugesh

No. Not that we – we're not seeing any specific activity of that nature because of any wind downs but just to add a few more color again to what Dave mentioned earlier. I think in addition to the uncertainties that, you know, clients are seeing with their businesses and such, I think there is also this new dynamic of, you know, in the political announcements that are taking place and where, you know, now our clients are also waiting to see what finally gets announced in terms of ability to use hedge fund resources.

You know, things like that, so I think all of this put together is really causing, you know, that delayed impact. And as soon as there's more stability in some of these areas, we expect to see, you know, each of these clients moving ahead with some of the decisions.

Because remember all these clients are traditionally very solid clients. Traditionally clients that, you know, do outstanding, are leaders in their space, and, therefore, also pleased, you know, they are going to be making progressive decisions as soon as they see some certainty. It's obvious.

David Cohen - JP Morgan

Okay. And then I think in the prepared remarks you talked about despite the very strong margins, you're continuing to invest. Can you talk a little bit about some of the investments, the longer term ones, the investments that you're making query.

Where are you spending that money?

Keshav Murugesh

Right. You know I think the key investment that we continue to make is obviously around infrastructure programs. You know, we did talk about the Chennai campus Phase I coming on.

At this stage, we're building out almost 150,000 square feet. At Tulane at a new special economic zone, so that will actually have, you know, close to, you know, 5,100 or 5,100 seat capacity software blogs coming on along with a few other blogs as well.

And we will fit them all in a base on the demand that we see. Other than that, we're continuing to make investments in our core services and offerings program, which basically increase in the minimum amount of services to our clients, which is traditionally been, you know, welcome by all of our clients.

And, of course, we also continue to make the right investments in new geographies in terms of you know expanding our footprint now into Europe, as well as, you know, making sure that we're doing all the right things in terms of, you know, India as well.

So we expect to make the kind of investments that will not only add value in 2009 so the bulk of these investments we expect to start delivery in 2009. But we're also making those investments that will, you know, deliver value to Syntel in 2010 and beyond as well.

David Cohen - JP Morgan

Okay, then just some – a couple of quick housekeeping, and I'm sorry if I missed it, but did you give your interest rate on cash expectation for 2009 and the tax rate for 2009?

Baharat Desai

I think we'll be in the range of 17 to 19%, that’s what we are still contemplate. There is also a talk of extension of the STPS Team (ph), which is consistent with that statement.

I don't know the other but that’s a possibility. There is – it's right though. If that is – if that is the business we might get some benefit beyond 2010 but right now, 2009 is to somewhere between 17 to 19%.

David Cohen - JP Morgan

Then what the interest is you expect to earn on cash in 2009?

Baharat Desai

Interest is 30 (inaudible). Right now we have averages of 5.7% on the online business which was slightly lower than last year because interest rates have come down.

But we expect interest rates to be stable at this rate currently especially outside yields.

David Cohen - JP Morgan

And I'm sorry. You said 5.7%?

Baharat Desai

Yes. That is the current level here.

David Cohen - JP Morgan

And what's the mix of cash that in the U.S. versus outside the U.S.?

Baharat Desai

Generally, actually we don't have this number but most of the cash is outside U.S. because if you think you paid it special that would be about 20 million, about from that, we also paid approximately $2.5 million. And (inaudible).

David Cohen - JP Morgan

And I was just wondering if …

Baharat Desai

(Inaudible) reimbursed so we require most cash outside the U.S...

David Cohen - JP Morgan

Okay. I was just wondering if there were – if you needed to bring cash back to pay dividend. You know if there is a tax implication to that, that’s why I was asking.

Baharat Desai

Yes. There will be but we haven't paid a special (inaudible) of less $.50.

David Cohen - JP Morgan

Yes. Okay, thanks very much, guys.

Operator

You're next question comes for Ed Caso with Wachovia.

Ed Caso - Wachovia

Good morning. Thank you. Can you talk about any implications from the (inaudible) fresco whether you have any overlapping clients that maybe have come to you and asked for incremental work or have you seen any new clients approaching you or maybe at the other side, is there any increase concern given that you're sort of last year one status.

Keshav Murugesh

Yes, I'll take that. Yes, I think, you know, this particular issue was a very unfortunate development for this company. And to some extent, you know, for the offshore industrial as well. But having said that it's something that we believe that is just a development to that particular company.

A few of a certain clients have had some discussions with our sales and engagement teams. And so you know we are doing what we need to do in order to make sure that these clients are you know (inaudible) kinds of services they need from our other global partners. Other than that you know no special impact you know on us at all. You know from this particular situation.

David Mackey

And I think to the second part of your question Ed about you know not being a tier one. I do believe that you know our U.S. ownership and operating structure and you know our 28 year history gives clients a lot of comfort and I don’t believe that there has been any tier two back-lashes as a result of this.

I mean obviously we're fighting for our positioning in most large accounts but in terms of the impact of the (inaudible) issue I have not seen a material change in clients approach to Syntel.

Ed Caso - Wachovia

Help us out a little bit with Senator Grassley proposals and what specific – how specifically that may influence you. Is that just your clients ability to use H1B or is that also their ability to hire vendors who use H1B?

Keshave Murugesh

I think that still in the proposal stage and it's up for discussion. So I don't think anybody has visibility as to what the ultimate form of that legislation will be if there is any.

David Mackey

For us correct Ed you know it's obviously a piece of work that's undergoing change but the way the legislation stands today it is just a restriction on our clients ability to use that visa it's not a restriction on our ability.

Ed Caso - Wachovia

Maybe I missed it what was the impact of currency in basis points on your operating margin in Q4?

David Mackey

Well we had an 11% move in the rupee during the quarter versus the third. So in terms of the overall operating margin impact quarter-to-quarter you're looking at you know roughly 400 basis points.

Ed Caso - Wachovia

I think Chris might have a question.

Chris - Wachovia

Hi good morning could you maybe talk a little bit more about the Chennai Campus and I think previous expectations was to be complete in Q2? Is there any update on that please?

Bharat Desai

Yes you know at this stage we expect the Chennai Campus to be on stream in the third quarter of 2009. As I mentioned earlier we are building 650,000 square feet of space over there just now. Consisting of three software blocks with about a 1700 seats per block.

We're also building a cafeteria, a training center, as well as, a welcome block. This stage we expect to see that ready and finished by the third quarter. Having said that based on our need we will actually fit interiors of you know each one of those blocks. So that's a big flexibility that Syntel has because it's only after you actually fit out an occupy (inaudible) the cost is impacted it really hits us.

Chris - Wachovia

Okay, thank you that is helpful. And then also is there a preliminary thought on CapEx for the year?

Keshave Murugesh

Yes at this stage, we expect to spend between $30 to $35 million on CapEx in 2009, essentially on our ongoing investment programs in Pune and Chennai. Other than that should we make any decision to acquire any other you know land banks and other locations that might be incremental CapEx spend of you know $4 or $5 million at this stage.

Chris - Wachovia

Okay thank you.

Operator

Your next question comes from Vincent Colicchio with Nobel Finance Group.

Vincent Colicchio – Nobel Financial Group

Are there any relatively large clients that we need to be worried about from a financial distress standpoint at this stage?

Keshave Murugesh

I'll take that. Yes you know actually as Brad mentioned right at the top – beginning of this call we're really happy with the fact that we've not been really associated with any clients who are you know had any headline account failures. So well as a number of our clients obviously are impacted with generally you know what's happening in the economy outside.

Again as I mentioned even earlier we believe that you know each one of them is a very strong client offering a very strong kind of value proposition to their own clients. And at this stage we don't see any of these clients you know being impacted in the way you know you would expect of some of the other names that we saw in the headlines.

David Mackey

So we don’t see any significant solvency risk with any of our big customers and I think that is a good question.

Vincent Colicchio – Nobel Financial Group

Yes, thanks. This one for Arvind or Dave, can you provide an update on your hedging strategy for 2009 in terms of you know what portion of the low end guidance is covered?

Arvind Godbole

You know we have been following the consistent strategy and I think that worked well all along. Last 1.5 years we have been doing hedging. And there again (inaudible) today (inaudible) 11% the (inaudible) from this level, last. But we don’t really know and we don’t want to take a short term debt.

So what we're do is we monitor the situation and day by day basis, we (inaudible) and sell it forward, which protects us from the (inaudible) appreciation, but (inaudible) from that level than we might not be able to (inaudible) that year.

But objective continues to protect their own income and not to speculate are (inaudible) positions. So kind of the same policy.

Operator

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

Keshave Murugesh

Thank you everybody for joining us today. While the current outlook for 2009 demand remains uncertain we firmly believe that Syntel is well positioned to take advantage of the long term globalization trend.

We will continue to strive for financial and operational excellence, by working closely with our clients to create long term sustainable business value. We look forward to talking to you next quarter. Good bye and thank you.

Operator

This concludes Syntel's fourth quarter earnings call. A replay of today's call will be available beginning at 2:00 p.m. by dialing 800-642-1687 and entering a pass code which is 84187403. The replay will be available through midnight on February 18, 2009. Thank you.

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