Syntel, Inc. (SYNT) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.18.13 | About: Syntel, Inc. (SYNT)

Syntel, Inc. (NASDAQ:SYNT)

Q2 2013 Earnings Call

July 18, 2013 10:00 am ET

Executives

Zaineb Bokhari - Head of Investor Relations

Bharat Desai - Co-Founder and Executive Chairman

Prashant Ranade - Chief Executive Officer, President and Director

Arvind S. Godbole - Chief Financial Officer, Chief Information Security Officer and principal Accounting Officer

Rakesh Khanna - Chief Operating Officer

Nitin Rakesh - President of Americas-Business Development and Nearshoring Center

Analysts

Rahul S. Bhangare - William Blair & Company L.L.C., Research Division

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Amit Singh - Jefferies & Company, Inc., Research Division

Mayank Tandon - Needham & Company, LLC, Research Division

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Brian Kinstlinger - Sidoti & Company, LLC

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel Second Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, July 18, 2013. I will now turn the call over to Zaineb Bokhari, Syntel's Head of Investor Relations.

Zaineb Bokhari

Thank you, and good morning, everyone. Syntel's second quarter earnings release crossed GlobeNewswire at 8:30 a.m. today. It's also available on our website at www.syntelinc.com. On the call with us today, we have Bharat Desai, Syntel's Chairman; Prashant Ranade, Syntel's CEO and President; Arvind Godbole, Syntel's Chief Financial Officer; Rakesh Khanna, Syntel's Chief Operating Officer; and Nitin Rakesh, President, Americas.

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, Zaineb. Good morning, everybody, and thank you for joining us today. We had strong performance this past quarter, propelled by our unwavering focus on helping our customers win in the marketplace.

I would like to congratulate all our colleagues worldwide for a historic achievement, Syntel's first $200 million quarter. This accomplishment is a testament to our DNA of building collaborative long-term partnerships with our customers. Our "customer for life" philosophy has guided Syntel since inception.

Syntel has a strong and deep leadership bench. As a team, we are excited about the significant market opportunity before us. Breakthrough technologies are changing the way our customers engage with their clients. In addition, business complexity is rising worldwide. And in many markets, legislative and regulatory changes have the potential to add meaningfully to this. We are channeling our energies to helping our customers stay ahead of these trends. We continue to invest in building capabilities to help our customers harness new and emerging technologies. Our domain focus supports our ability to understand our customers' business challenges. Our culture drives the ingenuity and creativity to help solve them. Syntel's long-term strategy is to invest to grow faster than the broader industry. Our success has come from directing our energies to helping our customers excel. This is at the core of everything we do.

I would now like to turn the call over to Prashant Ranade, Syntel's Chief Executive Officer and President, to provide further details. Prashant?

Prashant Ranade

Thank you, Bharat, and welcome, everyone. I also want to begin my comments by congratulating our team for their efforts in crossing the significant revenue milestone of $200 million in quarterly revenue. We have a strong team in place and I look forward to building upon this success in future periods.

Syntel's second quarter revenues were $202.5 million, rising 13% year-over-year. We saw revenue growth across our key verticals as our clients moved forward with the spending plans set last quarter. We continue to build our relationships across our customer base. Our 2 largest customers remain very important to our business and we grew our presence there. At the same time, we made strong progress in expanding our footprint at customers in the 3 to 30 category. And this was a clear growth driver for us this quarter. Arvind will provide further details on our revenue performance in his prepared remarks.

Second quarter gross margin widened 15 basis points from the first quarter, coming in at 41.3%, reflecting the impact of offshore wage increases, visa costs and increase in headcount. The Indian rupee's depreciation during the quarter benefited gross margins, as well as operating margins, as Arvind will elaborate later. We grew net headcount by 687 in the second quarter, a rise of 3% sequentially and 14% from a year ago, maintaining the focus on campus hires and reflecting our business needs.

In support of our rising employee ranks, we added more than 2,000 seats in our Pune campus during the quarter.

Offshore utilization for IT rose to 65% in Q2 from 62% in Q1 on a period end basis, and to 64% from 61% on average. We expect utilization to follow typical historic patterns with progressive quarterly movements tied to our pipeline, our expectation and the requirements of our business.

The company's SG&A expenses increased by $141,000 during Q2 as compared to a year ago. On a sequential basis, the depreciation in the rupee lowered SG&A by $1.2 million, while currency-related balance sheet translations had a more significant impact. We are pleased with the level of operating margin in the second quarter but would not consider this level as sustainable, given the recent volatility in the rupee and our investment plans. However, even without the impact of the depreciating rupee, our operating margins stand up very well in comparison to the broader industry. This is supported by our ongoing internal focus on operating efficiency. We are investing in our business, engaging with our clients, growing our ranks and delivering growth at a healthy level of operating profit.

As 2013 progresses, we are encouraged by prevailing demand trends and we out-strength [ph] them, our pipeline through our domain-led efforts. Our customers are feeling better about the environment as compared to a year ago, and this all goes [ph] well for our near-term prospects. We are keeping an eye on developments in the U.S. on the immigration front and are confident that we'll be able to manage our business around potential changes, while maintaining a focus on providing our customers a high level of service, a differentiated offering and flexible delivery.

While final outcomes are uncertain at this juncture, we are building our preparedness and creating [ph] our action plans, which will be triggered by specific external developments along internal timelines.

In short, we continue to feel good about our market position and are investing in our company for the long term. I want to conclude by thanking the employees of Syntel around the world for their continued dedication and hard work. I would now like to turn the call over to Arvind Godbole, Syntel's Chief Financial Officer, who will discuss Syntel's financial performance. Arvind?

Arvind S. Godbole

Thanks, Prashant, and good morning. After my comments, we'll open the call to questions. Syntel's second quarter revenue came in at $202.5 million, up 13% from the prior-year period and 7% sequentially. For the second quarter, Applications Outsourcing accounted for 76% of revenue, KPO was 16%, e-Business represented 6% and TeamSourcing was 2%.

From a vertical perspective, financial services contributed 53%, with health care at 17%; insurance, 15%; retail logistics and telecom, or RLT, at 12%; and manufacturing, 4%.

Vertical growth was led by RLT and health care, which grew approximately 13% and 14%, respectively, on a sequential basis.

Syntel's customer concentration levels improved from the previous quarter. Our top 3 clients represented 50% of revenue, top 5 contributed 65% and top 10 came in at 78%. This compares with 52%, 66% and 79% for top 3, top 5 and top 10, respectively, in the first quarter. The fixed price component of our business was at 37% of the revenue for the quarter. With respect to Syntel's margin performance, our gross margin was 41.3% in the second quarter. This was comparable to 41.3% reported in the year-ago period and just about 41.1% reported in the fourth quarter of 2013.

Our direct costs were negatively impacted by higher billable headcount, compensation increases for offshore employees and immigration expenses. The Indian rupee depreciated 5.75% on an average basis against U.S. dollar during the quarter which raised the gross margins by approximately 144 basis points.

By business segment, gross margin for Application Outsourcing was 37.1%; KPO was 62.7%; e-Business was 40.7%; and TeamSourcing, 36.17%.

Moving down the income statement, our selling, general and administrative expenses were 9.4% in the second quarter of 2013, compared to 10.6% in the prior-year period and 13.7% in the first quarter. On a dollar basis, SG&A was lower by $6.8 million sequentially. The impact on SG&A from the balance sheet calculation adjustment this quarter was a $7.3 million gain as compared to a $0.45 million loss reported in Q1, resulting in a decline in SG&A of $7.75 million. Depreciation of the rupee reduced SG&A by $1.2 million.

Other income was a negative $0.95 million during the second quarter as compared to income of $9 million in the first quarter primarily due to a loss of approximately $8 million on hedging versus the $0.5 million gain in the first quarter. Our tax rate for the second quarter came in at 25.2% as compared to 23.8% posted in Q1 of 2013. The net income for the second quarter was $47.5 million or $1.14 per diluted share, compared to $43.4 million or $1.04 per diluted share in the prior period -- year period and $46.4 million or $1.11 per diluted share in the previous quarter. The company's balance sheet at the end of the second quarter 2013 remained extremely healthy. Our total cash and short-term investments on June 30 were $552 million and DSO levels were at 55 days. Capital spending for the quarter was $4.4 million.

Syntel ended the second quarter with a total headcount of 22,866, of which 7,103 were assigned to KPO. Our billable headcount was 3,295 on-site and 17,986 offshore for a total of 21,281. The net additions to the global headcount were 687 employees. Utilization levels at the end of the quarter were 94% on-site, 73% offshore and 76% globally. Our delivery mix at the year end was 19% on-site and 81% offshore. The voluntary attrition during the quarter was 13.8% as compared to 12.4% reported last quarter. Syntel added 10 new customers in quarter 2 of 2013.

Looking forward, I would like -- now like to provide you with the guidance for 2013. Based on our current visibility levels, Syntel expects revenue to be in the range of $800 million to $815 million, and EPS to be in the range of $4.65 to $4.75 for the full year 2013.

The company currently has 90% visibility to the low end of the revenue range. And our guidance is based on an exchange rate assumption of INR 59 to $1. We anticipate that operating margins will be in the 29% to 30% range and our effective tax rate will be between 25% and 26%. CapEx for the year is expected to be in the range of $40 million to $45 million.

We will now open the call for a question-and-answer session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Rahul Bhangare from William Blair.

Rahul S. Bhangare - William Blair & Company L.L.C., Research Division

I was just wondering, how is the environment changed relative to last quarter? And how did the quarter play out relative to your expectations?

Zaineb Bokhari

So, Rahul, I would say that the environment is healthy and stable, and it's certainly improved, as we've noted in last quarter versus what we saw in the prior year. Our pipelines are healthy and building due to some of the past investments we've made in sales and capabilities. And generally speaking, cycle times are also looking to be stable and improving. And that certainly translated into some of the results we saw this quarter.

Rahul S. Bhangare - William Blair & Company L.L.C., Research Division

Okay. And the increased operating margin guidance, is that primarily due to currency? Or is there any other operating leverage that you're building in there relative to the last time you gave guidance?

Zaineb Bokhari

So the operating margin guidance is going to be a function of some of the Forex moves that we've seen. But also, there are operational efficiencies for us as an organization and the increased revenue outlook that we have. All 3 of those factors go into that outlook.

Rahul S. Bhangare - William Blair & Company L.L.C., Research Division

Okay. And then I noticed that there's increased level of debt on the balance sheet now. Can you just go into some detail on why that is?

Arvind S. Godbole

We are comfortable with both credit facility and the cash level on our balance sheet. The credit facility has been drawn and the new facility was entered as the current agreement is more closely aligned with Syntel's requirements around working capital management and general [indiscernible] corporate mix.

Operator

And our next question comes from James Friedman from Susquehanna.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

A couple of questions, maybe first for Zaineb or Rakesh. So you alluded to some of this on the call, but how would you characterize the current pricing environment?

Zaineb Bokhari

So Jamie, thank you for the congratulations and with respect to pricing, our experience has been that it's stable with some upward bias.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Okay. Could you talk a bit, Zaineb, specifically about financial service? You guys are a good bellwether of that. Infosys also performed well in BFSI. Some comments about financial service would be helpful.

Zaineb Bokhari

Absolutely. So I will ask Rakesh to add on to my comments. But in financial services, we continue to see signs of stabilization. Some of the discretionary spending is coming back, but it's at a measured pace and newer technology areas are presenting opportunities for us. You also asked about insurance, which we categorize separately, but I'll just answer that here. Generally speaking, market conditions there have been improving for the property casualty carriers. And we're seeing some better interest rate environment around the life and retirement service area. But I'll turn that over to Rakesh for some additional color.

Rakesh Khanna

Sure. Jamie, what we are seeing out there in the banking space is that [indiscernible] definitely should think of discretionaries in more regulatory compliance work. We also see a lot of investments coming in more on the business process. Management tools are doing this for customer experience. On the insurance side and the life and retirement space, the interest rates sliding, again we are seeing carriers finally increasing their investments in technology. And in the commercial lines, we see more emphasis on financial market for new products. On the personal lines, we see some pressure on the expense ratios. And efficiency -- we are trying to bring in some efficiency in their operations.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

And then maybe a last one for me, maybe for Arvind. So you alluded to the single-digit wage hike on-site for this -- was that April? I was wondering, do you see any extra cost increases that may be unique this year, Arvind, that you may have to reinvest in order to drive this top line performance?

Arvind S. Godbole

Yes, Jamie, we are not seeing any additional costs during the current year.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Okay, so you don't think you'll need to reinvest? You could potentially release the margin in that instance?

Arvind S. Godbole

No.

Operator

Our next question comes from Jason Kupferberg from Jefferies.

Amit Singh - Jefferies & Company, Inc., Research Division

Amit Singh for Jason. Just quick question, I mean it seems like the demand environment is very good. Same goes for pricing and this is pretty broad-based. But if I look at the guidance -- the revenue guidance for the year, and I just look at the midpoint of that guidance, it sort of implied that you only need sequential growth of less than 2% over the next 2 quarters versus this quarter, you did around 7% sequential growth. So just trying to get a sense how much -- how conservative is that guidance? Or what went behind, maybe not raising the guidance on the back of the healthy demand environment?

Zaineb Bokhari

So, Amit, our guidance practice is pretty consistent. We look at the visibility that we have into our business. And at this point in the year, we have about 90% visibility and that really is what drives the low end of the range that we set. The upper end of the range is tied to other factors including our evaluation of our backlog and pipeline and things of that nature. But we feel good about the overall environment and I mentioned that [indiscernible] cycle's favorable from our perspective. So on a sequential basis, typically in a year, Q2 and Q3 are our strongest -- stronger periods and you would expect to see sequential growth. But the guidance will be tied to the visibility that we have into our business.

Amit Singh - Jefferies & Company, Inc., Research Division

All right. And just quickly coming back to the immigration bill. I know you mentioned that you're getting prepared or you're preparing yourself for sort of any -- if any of the reforms actually become law. One of your competitors yesterday mentioned that they are starting to hire more permanent residents so that to exclude them from the whole work visa requirements. And you mentioned you're taking some steps. Could you elaborate a little bit more into what type of steps you're taking to prepare yourself for -- if there is a law at some point?

Zaineb Bokhari

Sure. As Prashant noted in his comments, we are planning and readying ourselves for several contingencies with respect to the developing immigration reform efforts. But it is premature to articulate specific plans since the bill hasn't become law. But we said in the past that our model is flexible and we have the ability to leverage. Things like our onshore, offshore ratio, we will continue to hire locally using our campus hiring model in the U.S. as we've done overseas. And if an acquisition is something that comes up, it's something we might consider. And these are some of the possible steps. So rather than articulate anything more concrete, these are some of the things that we're sharing publicly. But clearly, we are planning for multiple contingencies and we'll react appropriately depending on what develops.

Amit Singh - Jefferies & Company, Inc., Research Division

Perfect. And just one last one for me. I mean, the cash on hand is now almost more than -- I mean, it's more than $500 million. So if you could speak a little bit about your capital deployment strategies. Are you looking into -- I mean, outside of this integration thing, I mean, are you looking into M&A in general? Or what sectors sort of interest you?

Bharat Desai

Yes, I'll take this. This is Bharat Desai. As I've indicated in the past, our board regularly evaluates our cash position and determines the best use of that cash, and we'll continue to do that. And we look at various activities and then make a decision that we believe is in the best interest of shareholders.

Operator

Our next question comes from Mayank Tandon from Needham.

Mayank Tandon - Needham & Company, LLC, Research Division

Just going back to the quarter, this was the best sequential growth in about 8 quarters. I just wanted to, again, understand if there's anything unusual that drove that performance or was this really a function of seasonality coming off the 1Q budgeting process?

Zaineb Bokhari

So I'll ask Nitin to add his comments, but I wouldn't say there was anything unusual. This was a function of the solid execution across our company and across the verticals that we serve. Clearly, the environment has gotten more favorable and we've taken advantage of that. And I'll turn it over to Nitin. He has additional comments.

Nitin Rakesh

Sure. Mayank, I think, as we've been talking about our strategy over the last few analyst calls, we focused a lot of our efforts in expanding our account coverage, especially in the segment of client 3 through 30. And I think that's what came through this quarter in terms of leading growth. I mean, as you're aware, we've talked about it and we've made investments in our sales and engagement layer and strengthening our relationships, as well as our offerings both from a domain and a technology point of view. And I think that's really what drove growth this quarter.

Mayank Tandon - Needham & Company, LLC, Research Division

I think you just answered my second question, great. But I was also going to ask about health care. That was an important driver I believe this quarter and I think it was weak the last couple of quarters. Were there any specific drivers on the health care side this time around?

Zaineb Bokhari

So Mayank, in -- I'll ask Rakesh to add his comments in a minute. But in general, within health care, customers do want to stretch existing resources. That's something we've seen consistently. We are getting a little bit further away from some of the uncertainty that we saw last year around questions around whether Obamacare was going to survive and the further we've pulled away from that. And we indicated in Q1 that some of the close rates had improved. But Rakesh, if you want to add anything...

Rakesh Khanna

Certainly. Mayank, what we've seen is as the deadline for ICD-10, which is October 2014, becomes closer, we are seeing some peers' providers are working towards doing those changes. While some of them are focused on achieving financial and operational neutrality, we do see some transformational work going on in a few of those customers. And the other area, what we've seen is some -- a lot more clarity around legislation, around the medical loss ratio, premium tax, the health exchange investments. So we see some of those spends coming in. Where we are seeing some opportunities and our ability, we've anticipated some of these changes and benchmarked on intellectual property around some of these changes, which is helping us to deliver superior value to our customers.

Mayank Tandon - Needham & Company, LLC, Research Division

Great. And then just one final question around the immigration bill again. I don't know if this might be for Prashant. You've had conversations with the CEOs at your clients. If you can share any specific feedback in terms of how they're looking at the implications of the immigration bill when they're working with vendors, specifically Syntel.

Prashant Ranade

Thanks, Mayank. Clearly, because we work with large enterprise clients, they're watching this closely and we have discussions with them about our preparedness, about what becomes a final law and how we react to that. So we have looked at all different scenarios and how we'll respond to those because regardless of the outcome, we have to make sure the business continues and we deliver value to our clients. So as Zaineb mentioned earlier, combination of offshore, on-site ratio, local hiring and training, as well as other avenues, which we have available, we'll use. And we feel very confident and comfortable that regardless of the outcome, we have internal timeline, as I shared in our prepared remarks, that we'll be able to pull trigger on to ready ourselves to serve our customers. So that is the conversation we are having with our clients, Mayank.

Operator

Our next question comes from Dave Koning from Baird.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

I guess, high level, the sequential growth this quarter, 7%, is the strongest it's been since kind of early to mid-2011 in that period when growth was really strong for a while in the industry. Would you say we're back kind of the industry strength that's really the strongest it's been now since that period? Does it just feel like in the industry, things are getting better now and we're just at a much better place?

Prashant Ranade

I think, first of all, thanks. Right observation, we are pleased with our sequential growth in this quarter and more importantly, as both Nitin and Rakesh covered in their remarks, the fact that it is broad-based. So we are pleased with that, but our focus remains on differentiation, relationships with our client, having broader and deeper engagement with our clients and our relentless focus on ensuring we grow at a rate higher than market. That is our focus. So clearly, market growth rates today are lower than they were a few years back, as you well know, but we are pleased with the fact that we are both growing at a rate higher than the market growth rate.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Yes, great, great. And I guess the second thing just on margins, Zaineb did a nice job kind of outlining that, that the margins this year are kind of moving up for a combination of the FX move, which is probably the biggest, but then the operating efficiencies in the revenue outlook being raised a little bit. Certainly, the FX move is transient, but the operating efficiency in revenue going up, those are something that you'd think would be sustainable. As you keep going over the years, revenue keeps getting better, efficiencies keep getting a little better. So does that mean that maybe we should start thinking of the vision, not necessarily 20% margins longer term, but as you keep growing revenue maybe we do get to some sort of a better place than 20%? I'm just -- and the reason I ask is because this year, with margin is in the high 20s, how do we think of this long-term? We don't necessarily want to step them all the way back down to 20% over the next couple of years.

Prashant Ranade

Well based on where we are today and as we have guided for rest of the year, our margins will be clearly around the range that Arvind has provided, 28%, 29% operating margins. And as I said in our prepared remarks, they are not sustainable. You are absolutely right, our focus on operating efficiency will clearly help us improve the margin, but you have to balance that against the changing landscape of technology. Technology today is reshaping future of every industry and all clients. And clients rely on those as service providers to make sure we are making the right investments. So this success will actually allow us the flexibility to invest more in our business to take advantage of the future opportunities. And that's what we are excited about.

Operator

Our next question comes from Edward Caso from Wells Fargo.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Just 2 clarification questions. If you can offer the impact of foreign exchange in basis points on both the gross margin and the operating margin, quarter-on-quarter. And I have one other question.

Arvind S. Godbole

Yes, I'll take that. The impact of the Forex during the quarter on the gross margin was a favorable 1.47%. And on the operating margin, including [indiscernible] was 5.65%.

Edward S. Caso - Wells Fargo Securities, LLC, Research Division

Okay. And the other question is, can you give us the growth rates on the 2 clients -- top 2 clients and then clients 3 through 30, please?

Zaineb Bokhari

So Ed, we've never provided any numerical data around what clients 3 through 30 have done, but I can follow up with you with the growth rates on top 2.

Operator

Our next question comes from Joe Foresi from Janney Montgomery Scott. [Operator Instructions]

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Yes, this is Jeff Rossetti on for Joe. You alluded earlier about the strength in the top 3 through 30 clients benefiting in part from some of your investments on the sales force. Can you just provide some additional details about how their productivity is progressing and some of the recent additions and how you would expect some of those recent additions to be the time frame when you expect them to be fully ramped?

Zaineb Bokhari

So I'll ask Nitin to add comments. But clearly, the investment and the focus has been driving growth from 3 through 30. And one of the initiatives has been around enhancing the sales, the coverage that we have within those accounts across sales and client partner. And then Nitin, please add your comments there.

Nitin Rakesh

No, I think you covered it, Zaineb. I think the -- we started this -- it's been an ongoing initiative. We've been on this journey for the past few quarters. And the management focus, the investment in the sales and engagement there and effectively, building long-term sustainable relationships is yielding result. And I think it's an ongoing journey for us.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Okay. And so -- but typically, you would expect some of those sales force to be fully ramped in about a 6- to 12-month time frame, is that correct? Or is it safe to assume that, as you said, it's progressing and so they may -- you would expect some further traction in the coming quarters?

Nitin Rakesh

Yes, I think it's -- as I mentioned, it's an ongoing journey for us so we will continue to make adjustments to our sales force, both in terms of size and scale. And I think also, we are taking a harder look at quality of accounts and logos that we're going after. And again, in addition to the fact that we added a nice number of clients this quarter, I think the focus -- it's an ongoing process so there isn't a start point or an endpoint. I think we continue to evaluate that on a -- pretty much on a monthly basis.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

And the focus of those new hires by vertical, is there any color around that? Is it evenly distributed based on your current revenue breakdown?

Nitin Rakesh

Yes, I think it's across all of our business units. Obviously, each of those business units have a -- represent a different opportunity segment. And we are focused on all, but I would say it's pretty much across the business units.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

And just one final question on immigration. I think it was discussed earlier about conversations with CEOs. Has -- have there been any discussion with -- where any kind of feedback from CEOs, maybe mentioning that they would be willing to get involved in the process at all in Washington?

Nitin Rakesh

No, there hasn't been a discussion around that. Our focus is more on what are the possible outcomes, the timing of the same, our readiness around that and specific plans for their particular account in terms of how do we ensure that we remain their reliable partner who delivers on the promise.

Operator

Our next question comes from Brian Kinstlinger from Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

The first question -- maybe I missed it and I didn't get the metrics, but did you guys lay out the revenue by industry, automotive, financial, health care, that whole -- did I miss that?

Arvind S. Godbole

We covered that, but we'll go over that again.

Zaineb Bokhari

And there was a slight modification to sum up our presentation there, but financial services contributed 52% this quarter. Health care was at 17%. Insurance was at 15%. Retail, logistics and telecom was 12% as a group and manufacturing was at 4%.

Brian Kinstlinger - Sidoti & Company, LLC

Great. And then if I think, going forward, I'm interested in which of these verticals do you think maybe 1 or 2 that will grow the strongest over the next 18 months? And when you think about your answer, maybe help me figure out, do you think that's transformational? Do you think it's regulatory that's driving that? What would drive 1 or 2 reasons to grow faster over the next 18 months that you see?

Arvind S. Godbole

And see, those reasons are different by different verticals. So what we look at and I'll give you color to that, but rating ourselves based on the trends and needs that we see in specific industry. For example, in BNFS, it is driven by shift from discretionary spending to regulatory spend, shift from just run-the-business to change-the-business focus. If you go to insurance, it is similar, but as Nitin and Rakesh covered earlier, different segments whether it is PNC, personal lines, and life and annuity, they're at different stages depending on their need. As to a specific product implementation, if you look at health care, that is clearly around regulatory requirements, loss ratio, ICD-9 to 10 and related timing. Retail, clearly, there is tremendous focus on how new technologies can be used to benefit or to improve the connect with the end clients. And manufacturing remains focused on improving efficiencies and extending their supply chain and related integration needs that they have. So each client, depending on which vertical they fall in, is at a different phase. And we have prepared ourselves to take advantage of that.

Brian Kinstlinger - Sidoti & Company, LLC

And if I fast forward 18 months, which one of those -- which 2 of those do you think would grow the fastest based on the pipeline that you see? Based on the spending patterns, which 2 are the healthiest and will grow the most?

Arvind S. Godbole

Well if you look at all the 5 segments and additional color, which I provided, all of them have different opportunities. Now specific segment growth for us will be a function of at what phase each client is at. The point I'm making is all these trends represent opportunity for us to grow at a rate higher than industry rate. And just like -- it will be better to answer that question looking back about 2 years. So regulatory changes clearly drove our growth rates to be higher in health care. Then when there was slight uncertainty, the brakes were applied. When PNC in insurance segment faced several market issues, that growth slowed down. But now, it has improved again. So it is not a categorical answer about which will grow higher. All of them have opportunities and depending where the client is, growth rates will defer. But we have unwavering focus on growing at rate higher than the market growth rate.

Brian Kinstlinger - Sidoti & Company, LLC

Great, okay. If we rewind now to the fourth quarter of last year, you mentioned a large customer delay. And I think that at that point, you thought that over the course of the year, you'd get back to where you wanted to be with that customer and it was short term. Was there a spike from that customer? Are you back where you want to be with that customer? Maybe just give us an update of how that's played out over the last 6 to 7 months.

Arvind S. Godbole

So as we shared with you and covered in our 8-K filing, it was a temporary move for a period of few weeks and that was lifted as that customer had announced. Now what happens is the discretionary spends are even the lights [ph] on spend typically doesn't change because the business has to continue so that delta clearly comes from the discretionary side and that just moves out. So it is not like there'll be a spike. We didn't expect it. We don't have it.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. You mentioned, I think -- Prashant, I think it was you who mentioned that utilization will move with seasonal trends, and based on your pipeline can you just remind us in the second half of the year what those utilization trends you see playing out based on your hiring? Will it -- it seems like it spiked up at the end of the quarter compared to the average of the quarter. Will it continue to increase in the third quarter?

Prashant Ranade

So we expect it to increase slightly to remain flat, okay? But the overall trend, if you look at the last several quarters, it is at the lowest point in Q1 and then it progressively increases. Typically in Q2, there is a higher revenue growth. And the biggest impact on that comes from campus hiring because that is increased headcount at point in time. But overall trend, I don't expect that to change and for the next 2 quarters, it will be flat-to-slight improvement.

Brian Kinstlinger - Sidoti & Company, LLC

Great. A couple of housekeeping. The first one, I missed the FX loss below the line. What did you say that was?

Arvind S. Godbole

The FX loss as included in the other income is $8 million.

Brian Kinstlinger - Sidoti & Company, LLC

$8 million?

Arvind S. Godbole

Yes. And on the income expense side, it was favorable by $11.45 million or 5.65%. The net impact to it is $0.06 on the net profit [ph].

Brian Kinstlinger - Sidoti & Company, LLC

Great. And then what was the seasonal visa cost in 2Q that won't recur? Right, don't you typically have some seasonal expenses in the second quarter?

Zaineb Bokhari

So what we typically provide, Brian, is -- and you're absolutely right, we see this in Q2 most prominently, but we'll provide you the impact from the offshore increments and immigration and visa impact combined. And in Q2, that was about 4.9%.

Arvind S. Godbole

So to answer your question, visa cost, which we incurred in this quarter, they will be substantially lower than the sequential quarters.

Brian Kinstlinger - Sidoti & Company, LLC

Right, okay. And then a final question. Someone previously on the call asked you, you've taken a little bit more debt. I realized you're comfortable with the debt, but maybe you can explain the need for the debt. Did you not have enough cash in the United States that you needed? What was the reasoning for taking on the debt?

Arvind S. Godbole

Yes, because we are growing in different geographies and our requirements in these geographies are different. That is why basically we took the additional borrowing to finance the working capital requirements and also of general corporate requirements [ph].

Operator

[Operator Instructions] Our next question comes from Manish Hemrajani from Oppenheimer.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Can you touch upon the regulatory alignments, especially in health care and the work you're doing there on the ICD-10 transition? Are you starting to see customers now starting to do the work on the ICD-10 transition [ph]?

Zaineb Bokhari

Manish, we certainly have ICD-9 to 10 conversion work in our pipeline and in the current quarter revenue. And I'll ask Rakesh to add his comments there.

Rakesh Khanna

Yes. Manish, like I said, we are seeing these -- some customers getting a head start. Some of these are already underway and some are signing up very quickly to start kind of getting down the road to migrate to ICD-10. And like I said, we see 2 categories of customers. One category, we are just looking to migrate to look at compliance financial operation neutrality. And the other one, where they are doing some changes, transformational changes, to their business along with the changes to migrate to ICD-10. And we have a lot of IT we invested over the last 24 months where some of the IT has been very helpful in helping customers migrate. And some things, what we are seeing that some customers are also using [indiscernible] to make some move more to the digital enterprise, right, where they're looking at opportunities to retire legacy or migrate to open force. So again, these are some of the opportunities that we see out there.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

And as you bid for this kind of work in the health care space, who among your competitors are you seeing there at the table? Is it pretty much everyone? Or are there more BPO versus IT? What are you seeing there on the competition?

Prashant Ranade

More than benchmarking to competition, what we really focus on, Manish, is around really seeing what's relevant for the customer. And like I said, different customers are basically [ph] in different stages of evolution as they either start their migration or already underway or after debt or nearing completion. So what our focus is really building IT, building solutions around stuff which is very relevant which has helped them in their current journey, Manish.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Got it. And then you said in the past that this year continues to look better than last. Can you talk about the discretionary spending environment in particular? And what are you seeing on that front?

Zaineb Bokhari

Yes. So our customers are focused on reaching out to their own customers and some of the spending is tied to that. I'll ask Rakesh to add, but some areas that are being invested in include analytics in mobile and private cloud enablement. And Rakesh, would you add to that?

Rakesh Khanna

Certainly, Zaineb. So exactly right. So in the region, for example, we see a big push towards Big Data Hadoop analytics. A lot of [indiscernible] on the omni-channel stuff. And some of [indiscernible] customers we see are really first movers in embracing cloud to provide the realtime inventory and using cloud to communicate between multiple providers. And again, they will be part of very strong offering around IT. These help customers migrate quickly to the private and public cloud. I think it depends on the vertical. In insurance, we are seeing some different in the region. For example in one of the personal lines, some of the customers where we see a convergence of mobility and telematics capturing data to offer premium discounts for safer [ph] guiding behavior in auto insurance and so on and so forth. So it's a different pattern and depending on the kind of vertical, Manish.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Okay. And one last one for me. Can you talk about the pricing environment especially on the lights on work? We've been hearing mixed signals from your larger peers on the pricing side. And also, could you disclose your volume growth for the quarter?

Zaineb Bokhari

Manish, we don't break out volume as such, and generally speaking, our pricing experience is that stable with some upward bias is what we're seeing and it's been pretty consistent over several quarters now.

Operator

Our next question comes from Vincent Colicchio from Noble Financial.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

On the KPO side, you have a -- you had a nice quarter, quite strong on the growth side. Wondering if you continue to see a nice ramp with other customers outside of the -- your major -- your big customer there. Any color on how that's progressing would be helpful.

Zaineb Bokhari

Sure, Vince, and thank you. On the KPO side, our pipelines continue to look fairly healthy. Year-over-year, we did see revenues for that particular segment grow at a faster pace than the company overall. And growth within the JV, I would say, kept pace with company while the non-growth -- sorry, non-JV growth was at a faster pace.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

And is that non-JV growth, is that spread amongst several clients or is it concentrated?

Zaineb Bokhari

It is spread across clients and across verticals.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Okay. And e-Business grew for the first time sequentially in a few quarters. Should we continue to expect that to occur in the second half here?

Zaineb Bokhari

Vincent, we've shared with you in the past, with e-Business, there is some lumpiness that is possible due to the composition of the work, which can be skewed towards development. In Q2, we did see the -- that portion of our services pick up and that was a contributing factor within e-Business growth.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

And do you have any large contracts coming up for renewal in the second half here that could potentially be a source of a headwind?

Prashant Ranade

No.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

So nothing that you're -- have any worries about?

Prashant Ranade

We always worry about different things and we prepare for that. But as far as large contract coming up, we don't.

Operator

Thank you, and I'm showing no further questions at this time. This concludes Syntel's second quarter earnings call. A replay of today's call will be available until July 25, 2013, by dialing (855) 859-2056 and entering the passcode, which is 18532373.

This concludes our program. You may all disconnect, and have a wonderful day. Thank you.

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