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Syntel, Inc. (NASDAQ:SYNT)

Q1 2009 Earnings Call

April 27, 2009 10:00 AM ET

Executives

David Mackey - Senior Vice President, Finance

Bharat Desai - Chairman and Co-founder

Keshav Murugesh - President and Chief Executive Officer

Arvind Godbole - Chief Financial Officer and Chief Information Security Officer

Analysts

Bhavan Suri - William Blair & Company

Bryan Keane - Credit Suisse

Joseph Foresi - Janney Montgomery Scott

Bryan Kingslinger - Sidoti & Company

David Cohen - JPMorgan

Vincent Colicchio - Noble Financial Group

Tim Fox - Deutsche Bank Securities

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel First Quarter 2009 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call id being recorded today Monday, April 27, 2009.

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 first quarter earnings release crossed Business Wire at 8:24 AM 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 Syntel's Chairman, Bharat Desai. Bharat?

Bharat Desai

Thank you, David. Good morning everybody and thank you for joining us today. During the first quarter of 2009, the global economic downturn continued to press significant pressure on our client and in turn on Syntel.

As Keshav will discuss in more detail, our revenue acceleration has been impacted by a lack of discretionary project work, currency headwinds, increasing pricing pressure and ongoing delays in decision making.

On a positive note, we continue to aggressively manage our internal cost and overall profitability levels. And have been able to do so without sacrificing the investments necessary to ensure long-term sustainable value.

I have always felt that one of the keys to Syntel's ongoing growth and success is the ability to create proven leaders internally. It was therefore a very special privilege for me to announce the promotion of Keshav Murugesh, to the role of Chief Executive Officer in late February.

Since joining the Syntel family in 2002, Keshav's leadership has helped the company nearly double revenues, improved profitability and creates unique opportunities for our clients and our employees.

My plan is to remain an active participant in the company, retaining my position as Chairman and working closely with Keshav, the rest of the board to help drive value for all Syntel's stakeholders.

I am confident that together, we will continue to move the company forward, while preserving the legacy of customer service and innovation that defines the Syntel brand.

With that, I would now like to turn the call over to Keshav Murugesh, Syntel's Chief Executive Officer and President. And then to Arvind Godbole, Syntel's Chief Financial Officer, to provide detail on our operational and financial performance. Keshav?

Keshav Murugesh

Thank you, Bharat. Good morning everyone and welcome.

As Bharat mentioned, our first quarter revenue was directly affected by the reactions of our clients to the weak economy. While we continue to help these clients address both short-term cost problems and long-term business needs, the challenge for Syntel in this environment remains top-line growth.

In the short-term, it is apparent that customer focus will be on reducing cost, while we await the business stability and the clarity of direction necessary to once again begin strategic spending.

For Syntel, this means delayed decision making on new initiatives, and increasing pressure to help clients reduce their total cost of ownership on existing projects.

As a result of this difficult backdrop, our revenue in the first quarter decreased sequentially for the first time in the past six years.

Revenue was down 8 million or 8% sequentially, and dropped 2 million or 2% versus the first quarter of 2008.

The first quarter has historically been a soft quarter for Syntel. However, the effects of project endings in fourth quarter and contracts which were delayed are not extended in the first quarter, where magnified in this environment.

The net impact of these reductions was $4 million with automotive clients accounting for approximately half of that decline.

Pricing concessions which were a combination of reduced billing rates and higher offshore leverage, resulted in an additional $4 million or 4% reduction during the quarter. Currency related movements also reduced first quarter revenue by 0.4 million, due to further depreciation of the Indian Rupee.

While first quarter revenues were soft, Syntel was able to proactively manage our expenses during the quarter and as a result maintain healthy margins, earnings and cash levels.

On average, Syntel moved an additional 1% of work offshore during the quarter and improved period ending offshore utilization to 76%. The increase in utilization was achieved through a combination of voluntary attrition and performance based reductions, and helped bring our cost structure inline with current revenue levels.

We are comfortable with our offshore utilization in the 70 to 80% range in today's environment and believe that we remain well-positioned to service our client's current and future requirements.

As a result of these actions, our global head count was reduced 5%, and ended the quarter at 11,760. We will manage to drive operational efficiency in this difficult environment by managing our controllable expense levels and improving delivery productivity.

At the same time, we remain committed to the long-term health of our business and will not sacrifice key investments for short-term returns.

We have began aggressive campaigns to build out our market facing teams in Europe, open new R&D innovation labs in India, hired key (ph) domain and vertical personnel and expand our breadth of services to increase our offering such as remote infrastructure management.

It is also our expectation that we will inaugurate the new Chennai campus in the fourth quarter of this year, with physical space for over 5000 employees and 1700 of those seats, outfitted and ready for use.

Looking forward, we expect some additional pricing and clients' specific impact as the year progresses.

However, we are comfortable with our pipeline and today have 80% committed visibility to the low end of revenue guidance. This is higher than the 75% figure, we have historically reported at this point during the year.

Based on the current visibility, we believe that our quarterly revenue levels will have lightly bottomed out, during the first half of this year.

I will 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. After my comments, we'll open the call to questions. Revenue for the first quarter was $96.4 million, down 2% from $98.5 million in the prior year's period and 8% sequentially.

As Keshav mentioned, revenue for the quarter was reduced by the impacts of currencies, pricing and delays in finalizing the projects by the customers.

In the first quarter, Application Outsourcing accounted for 70% of revenues, KPO was 19%, e-Business represented 9% and Team Sourcing was 2%.

On a vertical basis, financial services contributed 57% with insurance 18%, healthcare 15%, automotive 2%, and other was 8%.

Customer concentration reduced during the quarter, as some of our large relationships were impacted by pricing and project timing.

For the first quarter, Syntel's top three clients represented 47% of revenue, top five ended the quarter at 59%, and top 10 came in at 74%. Fixed price business was 44% of revenue for the quarter.

Gross margin in the first quarter was 46.5% compared to 40.3% in the year ago period, and 48.3% in Q4. By business segment, gross margin for our application outsourcing was 40.7%, KPO was 62.7%, e-Business was 57.9% and Team Sourcing 46.0%.

Sequentially, our gross margins were negatively impacted by price reductions, lower liability and reduced fixed cost coverage.

These impacts were partially offset by 2% depreciation in the rupee, improved utilization and offshore leverage.

The company selling, general and administrative expenses were 19.4% in the first quarter of 2009 compared to 20.8% in the prior year period and 19.4% in the fourth quarter.

SG&A levels also benefited from the favorable currency moment during the quarter, with reduced our operational rupee-based costs and also resulted in a foreign exchange translation gain of $1.6 million.

Partially offsetting the currency favorability in operating margins where losses on hedging positions, which decreased the other income line of the P&L by $0.7 million.

During the quarter, Syntel reversed $4.3 million of global tax reserves which were no longer required. This had a positive effect on the EPS of $0.10 per share.

Net income for the first quarter was $27.3 million or $0.66 per diluted share compared to $20.2 million or $0.49 per share in the prior year period and $26.7 million or $0.64 per share in the fourth quarter of 2008. Other period and metrics from the first quarter are as follows: Total head count was 11,760. Billable head count was 1,632 onsite and 9,279 offshore for a total of 10,911.

Utilization levels at the end of the quarter were 93% onsite, 76% offshore and 78% globally. We ended the quarter with 4,225 people assigned to KPO.

Delivery mix at the end of quarter was 18% onsite and 82% offshore. Voluntary attrition during the quarter was 10.1% annualized.

Syntel added four new customers during the quarter and one new hunting license, which takes a total number of three-fourth (ph) partnerships to 94.

Relative to the balance sheet, Syntel ended the quarter with $138 million in cash and short-term investments.

DSO levels slightly increased to 51 days in Q1, versus the 47 days reported at the end of 2008 and capital spending was $3.5 million during the quarter.

Based on our first quarter performance, current visibility levels and exchange rate of Rupees 50 to 1 dollar. Syntel now expects 2009 revenue, to be in the range of 385 to $415 million, and EPS between $2.12 and $2.42.

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

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Bhavan Suri.

Bhavan Suri - William Blair & Company

Thanks. Good quarter guys. Couple of quick questions. Between turning to sort of the top-line first. Between January and now, have you seen any change in the pace of new business signings or the type of work that customers are considering?

Keshav Murugesh

Yeah Bhavan, this is Keshav

Bhavan Suri - William Blair & Company

Hey Keshav?

Keshav Murugesh

The first thing is -- the first thing I've like to talk about is in terms of the environment itself. Obviously there has been tremendous uncertainty in the economy out there. And therefore, we saw that impact in the first quarter. But I think one thing that is definitely changing is that we are beginning to see more of our clients take a longer-term view on budgets now. We're actually beginning to see budgets getting a little more finalized at this stage. And from our perspective, the way we see it, based on the concentration on financial services, as well as the concentration on our clients, we really expect that the maximum impact on the revenue line is in the first half really. We're actually beginning to see clients focused much more on taking those decisions. As well as, we're also beginning to see lot more activity in terms of the pipeline.

Having said that, obviously it is a long sales cycle, we're not sure where that will end but we are definitely seeing much more positive signs now.

Bhavan Suri - William Blair & Company

Great, great. And then sort of turning to the existing base, and sort of the near-term focus. You did see the pricing impact this past quarter. What do you guys' kind of assuming going through for the rest of the year? Are you assuming that prices might come down another 2-3%. How are you thinking about that?

David Mackey

I'll take that. I think when you look at our guidance for the balance of this year, the expectation is that pricing will continue to be a challenge for us. We have included in our guidance from an additional deterioration in billing rates and some increased movement of work offshore during the year. That has been factored in and we would expect, as Keshav had mentioned, the majority of that impact to take place in the first half of the year.

So, we were walking into the area with pretty healthy visibility. We do have some price discussions and price negotiations which are going to be ongoing. But I think when we get past the first half for this year, we should see stabilization in terms of the book of business that we have, and in terms of how we may see projects rolling back in going forward.

Bhavan Suri - William Blair & Company

Great, I mean one quick metric. What was the contribution of AMEX on stage three (ph) to revenue this quarter?

David Mackey

I think we're going to have to wait for the actual queue to come out Bhavan. Suffice to say, when you look at our concentration at the top three levels, we did have a reduction, one of our larger clients did have a Q4 to Q1 sequential reduction in project work, which is not uncommon. We've seen the same pattern in the last two to three years, and in fact as we exited the quarter in March, we did see some of those projects start to comeback online.

Bhavan Suri - William Blair & Company

Great. Thanks good quarter, guys.

Keshav Murugesh

Thank you.

Operator

Your next question comes from Bryan Keane.

Bryan Keane - Credit Suisse

Hi, good morning. I just wanted to follow-up on the revenues. If I annualize the 1Q '09 revenues, I get to the low end of your revenue guidance. So, I guess despite revenues being a little bit below forecast in the first quarter at least below our forecast, it sounds like you expect new business to ramp up to get you even above kind of a sequential even a flat revenue growth rate, so. I guess my question is, did you actually see new deals sign in March and April that give you that confidence, where is that confidence exactly coming from?

David Mackey

I think its coming from two places Bryan. One as I mentioned, we did some activity start to ramp up in March. Obviously we're little bit cautious as we move into the second quarter because we will see the continued impact of some price concession. That being said, we've got 80% visibility to our revenue. So when you look at our book of business, when you look at the services we sell a high percentage of work that's maintenance, high percentage of work that's KPO. These are stabled services, they provide us a nice base to grow from and I think we walk into the second quarter with a pretty healthy understanding of what our revenue profile will look like for the next two quarters anyway.

Bryan Keane - Credit Suisse

Is the second quarter revenue sequentially will decline, stay flat or show a slight improvement?

David Mackey

It's going to depend on timing, Bryan. We need to understand exactly when the price impacts are going to be rolling through and exactly when projects kick off and ramp. So, there is some variability that could take place in the second quarter. That being said, I don't think you're going to see a material impact to the top-line one way or the other.

Bryan Keane - Credit Suisse

Okay, and with the pickup in the revenue in the second half of the year, should we also expect global head count to pickup around that same time?

Keshav Murugesh

Yeah, as far as the head count is concerned, I think there -- one or two things that are going to be impacting that. One really is the sustained availability of people now, the real -- the supply side for people easing up. So we're actually taking a very responsible position as far of our business is concerned. We're making sure that while there is challenge on the top-line. We're also making sure that we have we're making the right investments in the right places, cutting the fat wherever is required in order to feed the muscle so to speak.

So I would say that there are a number of levers, we still have reliable to us including utilization, productivity, the delivery mix as such and so we've played by year as we go along.

So, at this stage I would say that the ability to hire onsite and offshore is extremely good. We do have a good pipeline of people available within the company, as well as lined up at the campuses. And we will adjust our hiring program based on how the revenue ramps. And at the same time, one good metric that you may like to track is the fact that, I did mention earlier that we are continuing our build out of our campus. We are actually building up 5000 -- the capacity of 5000 feet in our Chennai campus, and we'll fit out that campus based on the demand and the number of people we need. So we're having our infrastructure ready and we played by year.

Bryan Keane - Credit Suisse

Okay and then just last question from me. There has been a lot of rhetoric about politics on offshore. Any impact on protectionism in the U.S., in Europe and do you expect any going forward?

Keshav Murugesh

Yeah, I'll take that. Well, actually from our Syntel perspective, we really focus on a global model with a strong bias towards offshore services. So any model that really creates constraints on the onsite people force, we believe will end up in furthering the cause of offshore more.

Client actually need cost savings and efficiency gains, and enhanced offshore levels can provide this. So my team is completely focused on making sure that, while they're providing the impetus for onsite growth, we're also studying the basis ready for offshore gains.

We will hire onsite where resources are available and bringing H1's and those kind of Visa resources only when there is a shortage of skills anyway. So based on the current reality and the ability to hire onsite resources at attractive rates, which has now increased, we don't see any specific challenges with whatever is being spoken about at this stage.

Bryan Keane - Credit Suisse

Okay. Thanks Arvind (ph). Congratulations on the quarter in a difficult environment.

David Mackey

Thanks Bryan.

Operator

Your next question comes from Joseph Foresi.

Joseph Foresi - Janney Montgomery Scott

Hi guys. I was just curious, you talked about visibility sort of improving and then pointing higher in the back half of the year. Are you seeing something from your present client base. Maybe you could talk about if you are, if there is maybe some lumpiness in what particular businesses expected to ramp.

David Mackey

I'll take that Joe. I think when you look at our revenue profile, the visibility that we have going forward is more about the stable services. One of the things that we've talked quite a bit about, couple of months ago when we spoke with you was, the fact that visibility was a little bit soft at that point in time, while we were going through renegotiations of contracts, while we were talking about pricing. Obviously as we move through first quarter, some of that firmed up, we do have about 70% of our services that are long-term sticky business. So we've got one quarter of actual performance behind us. We've got good visibility looking out into the rest of the year.

I think the health of our visibility and the heath of our pipeline is more about the stability of our services, than it is about any specific visibility to new projects coming on, new projects coming off. The one thing we do have to watch out for relative to lumpiness is again historically what our challenge has been, it's the e-business segment.

These are typically high dollar, short duration projects. They do create revenue spikes and the do create revenue troughs, when they roll off. And in this kind of environment obviously those types of projects are difficult to find. They tend to be what falls into the definition of discretionary work and as those projects roll off, replacement for that type of revenue can be a challenge. The good news is it only represents roughly 10% of our revenue.

So we feel comfortable with where we are right now. We've given a range of guidance that as the low end represents a stable revenue stream and if the high-end represents the opportunity for growth.

Joseph Foresi - Janney Montgomery Scott

And just moving on to pricing. Could you give us an order of magnitude where pricing is right now, on a qualifiable basis versus what you've built in for the rest of the year?

David Mackey

I think when you look at the first quarter impact Keshav talked about, in approximate $4 million impact which -- if you look at that as a percentage of our Q4 revenues, you're looking at above 3.5%. We have baked in some incremental price impact, I don't think we will see it to the same magnitude that we saw in the first quarter, but again this is a dynamic environment and we'll have to kind of see how things shake out. But we are working actively with our clients to solve business problems, we are looking for many different ways to help them do that, and obviously the last thing we want to do is talk about billing rate, we want to have conversations about offshore leverage, we want to have conversations about fixed price. And when you look at our fixed price component in the first quarter moving up to 44% of revenue, clearly we've had some success in being able to take ownership and accountability for applications, and as we move forward, manage the margins in our business by taking that level of control.

So, we're going to continue to do that. We're going to work closer with our clients, but in terms of magnitude prior not to same extent that we saw in the first quarter but we would clearly expect to see some additional impact.

Joseph Foresi - Janney Montgomery Scott

Okay. And then on the margin side, I think you talked about maybe last call target operating margins of 19 to 20% range assuming -- not assuming any kind of currency. I'm curious with the sort of the uptick in margins in the first quarter. What are you now expecting for the full year on the margin front?

David Mackey

I think if you look at where our guidance sits right now, you're looking at an operating margin that's implied of about 25%. The long-term goal of having an operating margin of around 20% is predicated on a growth business. And to have a 20-20 model going forward is not out of the room of (ph) possibility, which is growing the top-line of 20% and having a stable operating margin 20%.

One of the by-products of this environment and I think we've spoken quite a bit about it is that part of the reason we're able to improve our operating margins. Part of the reason we're seeing declining pressure on wages. We're seeing the ability to improve utilization; we're seeing a depreciating rupee. Those are all by-products of the soft demand environment. I would expect that when demand does reaccelerate and revenue starts to grow again on the top-line, we will see downward pressure on our operating margins.

Joseph Foresi - Janney Montgomery Scott

Okay. And then just lastly here on the EPS guidance. That's a 12 figured -- does that include the $0.10 from the tax reversal?

David Mackey

Yes it does.

Joseph Foresi - Janney Montgomery Scott

Okay, great. Thank you.

Operator

Your next question comes from Bryan Kingslinger.

Bryan Kingslinger - Sidoti & Company

Hi, great. Thank you. The first question I had was you're going from at the low end from 60% visibility to 80%. How much of that was just your existing clients firming up price because I think one of the things you said last quarter was 60% fully understated. Because you had commitments just not actual specific price for some of your customers?

David Mackey

A combination of things Bryan. I think a healthy amount of that is just firming up, some of that visibility. I think the balance is also some incremental work and some incremental clients that we've added during the quarter. So the vast majority is just putting on the contract, getting some certainty, getting some visibility around existing clients and existing contracts.

Bryan Kingslinger - Sidoti & Company

Can you quantify the incremental business because you just mentioned that $4 million came from delays or things you expected to happen that I think didn't happen.

David Mackey

I don't know that there were things that we didn't expect to happen. I think part of the ongoing discussions and part of the delays that we've seen are about clients reacting to the environment and when you looked at where our guidance was last quarter, I think some of that was clearly included. So, I don't think there have been any major surprises for us in the first quarter, I think we've just seen a gradual firming and I think we sit here at the end of April much more comfortable about what that book of business looks like.

Bryan Kingslinger - Sidoti & Company

I guess I'm wondering when demand does starts to pickup. What -- is this the first time the industry has been facing meaningful pricing pressure at least in the last decade or so, maybe there's no little bit here and there. But I guess I'm curious when demand does pick up. Do you think there's any reason to believe that pricing pressure would stop say next year or anything like that. Why would customers be less price conscious?

David Mackey

I don't think you see an environment where clients become less price conscious. But when you look at the activities that are taking place today Bryan, what most companies are doing is trying to take the quick return approach to affecting their cost structure. So you're seeing people that are focused on layoffs across the board expense cut, eliminating discretionary project in discretionary cost and pricing adjustments. These are the quick fixes if you will in a very difficult environment.

But I think when people start to take a more long-term approach to their business. When we get to a situation where there is growth and revenue. That prioritization and that kind of a timing will change, and while clients will continue to be price conscious, I think what the realize is, there is a lot more bank for the buck in outsourcing more work. And whether that's IT or KPO then there is haggling over 2 or 3% price adjustments.

The issue today obviously is to go ahead and find a major offshore initiative for either IT or KPO while it's the long-term thing to do for the business, it doesn't provide the immediate returns that a lot of these clients are looking for today. So there is a short-term focus to cost reduction and I think when you see longer-term growth in this industry it will be associated with more outsourcing.

Keshav Murugesh

If I may just add onto that. I think Dave is right on. I think all our clients also understand that we are being very partner like to them just now and all the models that we're working on today are win-win kind of models. They definitely realize that firms like Syntel are going out of the way to be very partner like to them in a difficult environment. But at the same time, as we renegotiate and rewrite some of these contracts, we know very well that some of this is going to stick for the long-term and so we'll have to really change the way we do our business. We'll have to become much more efficient and that's where the operational steam of Syntel is completely focused.

At the same time, as things change in the environment, we do have enough protection in those contracts to make sure that Syntel is able to take advantage of changes in those trends as well. So it's not just a one way kind of a discussion, it's a win-win that we're working on.

Bryan Kingslinger - Sidoti & Company

I guess I'm curious when we listen all your competitors report. No one is just bullish about demand picking up in the second half of the year. So, I guess what's different for you guys, they're all acting as partners, they're all going to say that clients understand that they're value partners. I guess, what's different for Syntel other than say your other competitors?

David Mackey

I think Bryan for us it's our book of business. I think it's having 70% of our revenue tied up in stable services that give us that base to grow from. We're sitting here, I would assume with a higher visibility than a lot of these companies. And when you look at our guidance, the low end of that range does not assume an acceleration. It assumes we're going to have some downward pressure on price and we're going to be able to back still that with some project work.

But at the low end at our guidance, what we're seeing is stability. What the high end of the guidance represents is the opportunity for us to do a little bit better job in connecting with our clients to accelerate some of these relationships. And if demand picks up, that's clearly a positive. But that's why we've got a range of outcomes out there. That's why we've held the low end of our guidance because we do have a degree of comfort with that level. And we've allowed for the opportunity for things to improve.

Bryan Kingslinger - Sidoti & Company

Can you quantify the earnings impact of -- you increased your fixed price worth by 7% sequentially. Obviously you can push more up for leverage there. Are you able to quantify the bottom-line sort of contribution just on something like that happening?

David Mackey

I think it depends, Bryan on exactly what we're doing and over what period of time. In the immediate term, obviously it's pretty hard to increase productivity. It's going to take time if we convert a time and material based contract to a fixed contract for us to improve productivity is the theme, for us to increase the offshore leverage.

In most of these cases it's not a switch that needs to be flipped. And it involves understanding exactly what the service levels are in those contracts to make sure that we're still meeting what the client objectives are. So, there is no specific way to quantify that in every contract and every client is different, but clearly we expect overtime offerings being equal that if we move the contract from time and material base to fixed price, there's a benefit of productivity, there's a benefits of offshore leverage will accrued out as opposed to accruing to the client.

Bryan Kingslinger - Sidoti & Company

A two quick questions, first of all since buyout the agreement in February of 2010 or is there anything adjusted there?

Keshav Murugesh

Nothing has changed there as far as the ability to buy out is concerned. It's still high as our ability and we still continue to work closely with them in terms of new offerings and growing their book of business with us.

Bryan Kingslinger - Sidoti & Company

And then the last question I had SG&A continues to come down as you get these balance sheet adjustments related I think somewhat to currency. Can you talk about looking forward, is there anyway to be able to tell when we'll see those adjustments and do you foresee anymore maybe in the second quarter where we see today?

Arvind Godbole

It's very difficult to speculate on the currency movements. So I think it will continue for some more time before the rupee starts appreciated. But we really don't know which way the rupee will move in the second quarter or even third quarter. But long-term, we believe that it will appreciate from the 50 up 52 levels, that's what the current outlook. So it will definitely be an item even in the second quarter as well as in the third quarter. We do not see any significant movement.

(Multiple Speakers).

Keshav Murugesh

In the range of numbers and the guidance that we have there, the SG&A expectation is in the region of 20 to 21%.

Bryan Kingslinger - Sidoti & Company

20 to 21% in the second quarter?

David Mackey

For the full year Bryan. I think if you look at our first quarter SG&A, we did about $18.7 million and we've talked about the FAS 52 balance sheet revaluation contributing about $1.6 million to that. Our guidance for the balance of the year is based on Rs.50 for the dollar. So all things being equal, if the rupee comes in at 50 for the rest of the year, you'll see our second quarter, third quarter, fourth quarter SG&A $1.6 million higher than it was in the first quarter because that balance sheet revaluation should not be recurring at a stable currency assumption.

Unidentified Analyst

Okay, right. Thank you.

Keshav Murugesh

Thank you.

Operator

Your next question comes from Ed Caso.

Unidentified Analyst

Hi, good morning. This is Chris Wickwon (ph) for Ed Caso. Can you comment on what the amount fixed price development work was in the quarter and how is that visibility for that has changed since early February?

David Mackey

The fixed price development component has not changed materially Chris. The majority of the increased in our fixed price revenue portfolio has come from maintenance. It's also the result of a slight decline sequentially if you look at our KPO revenues which are all time and material base. So the development portfolio both in terms of dollars and in terms of fixed price percentage shrunk during the first quarter.

Unidentified Analyst

Okay. Thanks. And then also as you said the KPO was down almost 10%. What are your conversations and how are those going with regards to volume expectations for I guess the near term?

Keshav Murugesh

I think that's a function mode of against the environment and what's happening in the market. I think some clients are impacted in the short-term in terms of their demand or they are actually having lost a few clients on their sides, and therefore that's creating a short-term kind of problem, from a Syntel perspective. Having said that in the longer term, based on the new offerings that we've introduced on the health care side of our business as well as other offerings on the brokerage and other areas of the capital market side, we're actually seeing a very good pipeline of clients, good discussions happening, and limited sense we would expect to see growth coming in from some new clients.

We are also happy to see that during this quarter we actually signed up one more new KPO client, so I would say that where as in the short term, because of the environment, and how the clients are impacted, we have seen some decline in the longer-term, every one of our existing clients doing KPO work with us as well as clients in the pipeline will need to save much more money at billed, much more efficiency by using Syntel services. So we are quite positive of the outcome for the medium term.

Unidentified Analyst

Okay, that's helpful. Thank you. And then can you comment on the increase in the doubtful accounts, I think it went up about 1.7 million from December?

David Mackey

Yeah, we did have an increase in the doubtful account reserve here in the first quarter. It's something that in terms of certainty, we're not there yet, but from our reserve policy it was necessary to do. We are going to actively pursue, making sure we try and collect on that. But we did have one client who had some challenges in the first quarter and as a result we've had to move some of the dollars into the doubtful accounts.

Unidentified Analyst

Okay and lastly any update on CapEx expectations for the year?

Keshav Murugesh

Yeah I would say that at this stage, we're still comfortable spending 30 to $35 million during the year on CapEx, essentially around Chennai Phase 1 program as well as other programs that we have in hand in terms of upgrades.

Unidentified Analyst

Okay. Thank you.

David Mackey

Thank you.

Operator

Your next question comes from David Cohen

David Cohen - JPMorgan

Hi thanks. So you've talked a bit about the increased visibility in terms of revenues but could you just talk a little bit about the change in your confidence level around the EPS, obviously took the guidance up quite a bit. The tax helped the revenue visibility but if you just sort of break out what the components are, they give you the increase confidence to push the EPS guidance up quite so much.

David Mackey

Sure, I think it's a couple of things David, I think one is obviously as I mentioned a little earlier, we have rolled through the first quarter favorability both in terms of operational performance then in terms of the one-time benefit of the tax reversal through that full year guidance.

I think when you look at kind of the sustainable operating margin with we've talked about, gross margins in the 45-46 range, we've talked about SG&A in the 20 to 21 range. So what we are looking at operating margins about 25% for the year and I think it's a function of two primary factors. One is we have got the benefit in those numbers of the currency being at Rs50 to the Dollar. The second is if you look at how we have exceeded the first quarter with our offshore utilization up at 76%, we both think those are contributors to help drive that operating margin forward. The one mitigating affect to that is we have discussed that it's the expectation that we'll see some further deterioration in pricing.

David Cohen - JPMorgan

Okay. Thank you.

Keshav Murugesh

If I may just answer that. While obviously we have seen -- we have moved very aggressively and workout a number of solution. The number of areas around costs. I just want to give you comfort that we continue to make investments in the right areas, which we think will end up providing Syntel with revenues as the market turns. We're continuing to make investments in new geographies like Europe and India sales. We're continuing to work on R&D, new offerings like management (ph) while I spoke about earlier.

New offerings in the KPO side, as well as focused very strongly in this market in terms of bringing in some outstanding seat on the ground, both sales side as well as on the domain side, we believe this is a great time to invest in bringing in the right kind of people into Syntel in each one these geographies, and we are doing that.

David Cohen - JPMorgan

And how much of an impact all those investments having in the margins for full year.

David Mackey

I don't think that it's something we're going to specifically quantify David, also in terms of exactly how much, each one of those investments will be but, I think when you look at where our margins were in the fourth quarter, operating margins almost 29%,first quarter operating margins just north of 27% its clearly reflected in the margins going forward that we will looking at between 1& 2% investment.

David Cohen - JPMorgan

And in terms of the demand what are the kind of new projects or sometimes new clients coming on board. Can you just drill down a little bit in terms of the kinds of work that people are asking you to do?

David Mackey

Sure. I think it, as I mentioned a little bit earlier the focus of most clients right now appears to be fairly short term focused, high return cost reduction types of work so obviously discretionary work is not filling up our pipeline right now. When you look at what we're seen in terms of traction. It's kind of a lot of more of the same David because I think it's the quick fixed. So clients that we're already doing sizable amount of work with are looking to do more.

How do we increase the offshore leverage, how do we find more applications outsource, how do we find new processes there to the KPO? I think it's more about what they can do with minimal efforts to have maximum impact in this environment than bringing on a new customers and expecting them to offshore 5, $10 million worth of work. It's really a lot more of the same as opposed to finding new services, finding new touch point at this point in time, it's acceleration with existing clients and existing books of business.

David Cohen - JPMorgan

Okay, and then just lastly what's the insertion is, what's the I'm sorry if I missed this but what's the way to think about the tax rate for the year?

Arvind Godbole

We are expecting it to be 13%.

David Cohen - JPMorgan

Great. Thank you.

Operator

Your next question comes from Vincent Colicchio.

Vincent Colicchio - Noble Financial Group

Nice quarter guys. I've got a question related to TARP. Is the company being negatively impacted by TARP in terms of affecting center-mids, some TARP clients may have towards offshore work?

Keshav Murugesh

Obviously the clients who are benefited from the TARP program, are being quite conscious about it but being a U.S. company, the ability to hire onsite gives us a lot of flexibility and from our perspective, at this stage we've not actually seen any significant impact from TARP.

David Mackey

I think the impact if we've seen it all Vince is been more about delays and lost opportunities than it has been impacts to an existing portfolio. So clearly when you looked at our client base, we have done some work in the past with the automotive firm. In this type of environment, getting and understanding of what the actual rules of engagement are as difficult and as a result some of that decision making has also become difficult.

Vincent Colicchio - Noble Financial Group

Question on currency, if the Rupee moves against this year in the balance for the year, will that impact Syntel or are you hedging all of your exposure currently?

Arvind Godbole

Yes, if it depreciates from this level it will have negative impact on the SG&A and direct costs, as well as in the FAS 52. But, we are following agent policy and we have managed this so far pretty well.

Vincent Colicchio - Noble Financial Group

Yeah Dave, can you quantify what portion of your portfolios hedge?

Arvind Godbole

We do not have a fixed percentage as such but we keep looking at the market and the future scenario. And based on the crop currency moments as well as rates. And the individual positions of the U.S. economy as well as Indian economy. We decide at what rate we'll hatch.

Vincent Colicchio - Noble Financial Group

And one last question on the competitive environment to what extent you are seeing increased competitions from the major the tier one ties?

David Mackey

I don't think there has been a material change Vince in the competitive environment. I think the one think that may have changed over the last couple of quarters has been some of there the tier one from willingness to look at smaller project with existing clients. I don't think you have seen large firms willing to try and find molar clients. But I think they have got in a little bit more aggressive about books of business with existing clients.

Vincent Colicchio - Noble Financial Group

Thanks guys. Nice quarter.

Keshav Murugesh

May be I'll just add on one comment there. We've also sent that like Dave mentioned that some of the larger forms have looked at servicing some of the smaller clients to some extent in some cases we have also experienced situations where they have one deal that have not really been able to handle those clients and that is actually worked also in our favor and I must say that way.

Vincent Colicchio - Noble Financial Group

Okay. Thanks guys.

Operator

Your next question comes from Tim Fox

Tim Fox - Deutsche Bank Securities

Hi, thanks. One question on utilization rates. Obviously you have taken the offshore up night earlier, how much head move do you have left on your onshore and offshore mix and imply in your guidance for the full year. Were you targeting your mix going forward?

David Mackey

Tim it's a great question, obviously when you look at our delivery mix right now we are at 18% onsite, 82% offshore that is skewed though by the KPO business which is a 100% offshore. If you look at our IT business excluding the head count associated with KPO that delivery mix today 31% onsite, 69% offshore, so still little bit below industry average which is ranging between 70-75% offshore.

From a utilization standpoint, we kind of have a similar scenario, while the overall offshore utilization today is at 76%. The KPO utilization remains extremely high because it is high visibility services. The utilization on just our IT business today is actually only 65% offshore so there is some room if we chose to continue to improve that utilization level going forward, I think that being said when you look at the assumptions for guidance for this year, the assumptions are relative stability in the utilization levels.

Tim Fox - Deutsche Bank Securities

Okay and then just follow up on, KPO, obviously the business was down a bit in the quarter but probably speaking are you seeing a little bit of an uptake there, on the demand side and the pipeline and any particular offerings within KPO that you're starting to see some clients adopt more rapidly?

Bharat Desai

Yeah I'll take that. I think based on the new offerings that we announced few quarters on the healthcare side, the team has worked on building a strong pipeline. We are actually seeing some very good discussions on the hunting side there, we've very recently signed up one large client on the health care side, and if you ask me we are actually seeing g a number of good, kind of discussions happening, across KPO, with some of existing clients based on the current environment. They're obviously taking a breather. But they are pretty confident in the medium term that they too will accelerate and the teams both sides are actually discussing ways and means to make them much more efficient and also help reduce cost while coming out of the win-win model.

So I'm pretty comfortable with the pipeline, the effort the team is making as well as the potential from both the healthcare kind of our business as well as on the capital market side of the business as the market recovers.

David Mackey

I think another thing that's important thing to remember Tim is especially relative to the KPO services. A lot of what we're doing for clients are not part of what today's mainstream outsourcing. So it doesn't have the general acceptance of IT maintenance, of offshore development. And as a result I think when you see clients willing to move forward and willing to adopt these type of KPO initiatives, that adoption rate is going to be relatively slow.

So they're going to start small, they're going to make sure it works before they increase the penetration in those existing services and before they move to other higher value added services. So obviously our objectives on KPO side is to get our foot in the door to demonstrate the capability to knock out of the park the success rate on that first project, on that first process and then move forward with other initiatives but as Keshav mention the pipeline is terrific right now, we've been bringing on new clients but the adoption rate and the ramp of those types of initiatives tends to be relatively slow in this environment.

Tim Fox - Deutsche Bank Securities

Okay, that's helpful. Lastly for me, can you just remind us your business exposure in Europe and what if you're seeing any changes there obviously it's been softening a bit but what do you think out of Europe and your prospect for growth this year.

Bharat Desai

Right, from our perspective, we've traditionally been much more focused on North America and Canada as from a revenue point of view. We have obviously followed some of our global clients into Europe and therefore have centers in some of these locations and have serviced a number of clients there. But over the past few quarters, what we've done is really put in a number of new people in there, brought a lot more focus on the sale side into Europe and though we know that the market is tough at present, there is opportunity for us to provide the same attention that has helped us to be successful in North America, to clients in Europe and we're therefore focused on certain niche areas with certain clients in certain verticals and we're actually beginning to see a very decent pipeline develop there.

Tim Fox - Deutsche Bank Securities

Thank you

Operator

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

Keshav Murugesh

Thank you for joining us today, while the signing of a pickup in demand for IT and KPO is uncertain. Syntel remains focused on the long-term objective of leveraging the mega trends towards globalization of services. We believe that the company is extremely well-positioned at the marketplace and will continue to drive sustainable business value for all key stakeholders including our clients, our shareholders and our employees. We look forward to talking to you next quarter. Goodbye and thank you.

Operator

This concludes Syntel's first quarter earnings call. A replay of today's call will be available beginning at 2'o' clock PM by dialing 1800-642-1687 and entering the passcode 96314390. The replay will be available through midnight on May 4th, 2009. Thank you.

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