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Syntel (NASDAQ:SYNT)

Q3 2013 Earnings Call

October 17, 2013 10:00 am ET

Executives

Zaineb Bokhari - Former 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

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

Anil Jain - Senior Vice President and Insurance Business Unit Head

Rakesh Khanna - Chief Operating Officer

David Mackey

Analysts

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

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

Mayank Tandon - Needham & Company, LLC, Research Division

Puneet Jain - JP Morgan Chase & Co, Research Division

Amit Singh - Jefferies LLC, Research Division

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

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

Brian Kinstlinger - Sidoti & Company, LLC

Gregory W. Halter - LJR Great Lakes Review

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel Third Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, October 17, 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 third 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. Our team delivered solid third quarter results guided by a singular focus on delighting our customers through innovation and an unparalleled level of responsiveness to their needs. Customers engage us to help manage business change and boost productivity while freeing up executive bandwidth [ph] for strategic initiatives. Supporting these demands in the midst of rising complexity across numerous fronts requires a thorough understanding of the end markets we serve and a robust portfolio of value-added service offerings. Through a significant investment in intellectual property, we can seamlessly integrate our clients' digital presence with their brick-and-mortar operations, help them navigate changing regulatory landscapes across multiple industries and help them better serve their customers with deeper analysis and insights. In our focus areas, our service offerings are comprehensive and our competitive position, strong. In addition to significant capabilities, we share a strong entrepreneurial culture that encourages Syntelers globally to think outside the box, to develop innovative solutions and to take ownership of customer satisfaction at all levels of an engagement. This approach enables us to be both nimble and flexible as we adapt to changes in our business and the needs of our customers. I feel extremely confident that these qualities will continue to set us apart from the field and support our growth for years to come. 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. Syntel's third quarter revenues were $209.9 million rising 4% sequentially and 13% year-over-year. This quarter, we continue to focus deeper relationships across our customer base and made solid progress in expanding our presence by customers, industry, verticality. This, again, served as a clear growth driver for our revenue target. At the same time, our largest customers remain highly important to us, and we see good prospects to build on these relationships in the future. The broader business environment remains difficult relative to the prior 12-month period and was stable on a sequential basis. This was evident in an improving level of discretionary spending from customers this quarter. We saw revenue growth across several key verticals supported by our ongoing investment in solutions that are relevant to our customers and their operations. Europe was another bright spot for us with growth outpacing overall company. Clients in Europe are more open to outsourcing and understand the need to improve operational efficiency. We have been investing in this region and are optimistic about the long term opportunities this investment will support.

Arvind will provide further details on our revenue performance in his prepared remarks. This quarter, gross margin widened 528 basis points from the second quarter coming in at 46.6% aided by sequential decline in visa and immigration-related expenses, as well as operational improvements. 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 70 in the third quarter, a modest rise sequentially and up 14% from a year ago adding both campus hires and on-site associates in keeping with our customers' needs. Offshore utilization for IP rose to 68% in Q3 from 65% in Q2 on a period end basis and to 67% from 64% on average. We expect utilization to follow typical historic patterns with progressive quarterly movements tied to the requirements of our business. The company's SG&A expenses decreased by about $6 million during Q3 as compared to a year ago but increased by $4 million from the prior quarter. On a sequential basis, the depreciation in rupee lowered SG&A by $2.3 million with currency-related balance sheet translations provided a smaller gain in Q3 than in second quarter. While we are pleased with the level of operating margins in the third quarter, we would not consider this level as sustainable given the notable volatility in the rupee and our investment plans. We remain focused on internal operational efficiency and even without the currency tailwind, are pleased with the benefits this discipline has garnered. We are investing in our business. Training and up-skilling our associates and developing new offerings and technology ahead of industry-specific trends. Given our focus on customer service, we are also investing for our customers' specific needs and this fosters the close client relationships which we value. We are doing this while growing at a healthy level of operating profit. We are expanding our areas of competitive differentiation, and this is supporting the healthy pipeline we are seeing. Our customers continue to engage us to provide domain-focused solutions to their operational challenges, and we see considerable room to raise our profile with our existing clients while adding new relationships with blue-chip organizations. 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, Chief Financial Officer, who will discuss Syntel's financial performance. Arvind?

Arvind S. Godbole

Thanks, Prashant, and good morning. After my comments, we will open the call for questions. Syntel's third quarter revenue came in at $209.9 million, up 13% from the prior-year period and 4% sequentially. For the third quarter, Applications Outsourcing accounted for 77% of revenue, KPO was 15%, e-Business represented 7% and TeamSourcing was 1%. From a vertical perspective, financial services contributed 50%; with health care at 18%; retail, logistics and telecom, 15%; insurance, 14%; and manufacturing, 3%. Vertical growth was led by retail, logistics and telecom and health care, which grew approximately 22% and 11%, respectively, on a sequential basis. Syntel's customer concentration levels were as follows: Our top 2 clients represented 39% of revenue in the third quarter of 2013 while accounts 3 to 30 represented 54%. In the second quarter of 2013, our top 2 accounts contributed 42% of revenue while accounts 3 to 30 contributed 53%. In the year ago quarter, top 2 contributed 44% and accounts 3 to 30 contributed 50%. The fixed price components of our business was at 38% of revenue for the third quarter of 2013. With respect to Syntel's margin performance, our gross margin was 46.6% in the third quarter. This was up from 45.5% reported in the year-ago period and 41.3% reported in the second quarter of 2013. So our direct cost were considerably [ph] impacted by the 1.5% depreciation in the Indian rupee during the quarter, which benefited gross margins by approximately 256 basis points. The sequential decline in visa and immigration-related expenses also had a favorable impact on the direct cost. By business segment, gross margin for Applications Outsourcing was 43.2%; KPO was 65.5%; e-Business was 43.5%; and TeamSourcing, 37.8%. Moving down the income statement. Our selling, general and administrative expenses were 11% in the third quarter of 2013 compared to 15.6% in the prior-year period and 9.4% in the second quarter. On a dollar basis, SG&A was higher by $4 million sequentially. The impact on SG&A from the balance sheet translation adjustment this quarter was a $3.8 million gain as compared to $7.3 million gain reported in Q2, resulting in an increase in SG&A of $3.5 million. Depreciation of the rupee reduced SG&A by $2.3 million. Other income was $1.6 million during the third quarter as compared to the negative of $0.9 million in the second quarter primarily due to a loss of approximately $5.6 million on hedging versus the loss of approximately $8 million in the second quarter. Our tax rate for the third quarter came in at 22% as compared to the 25.2% posted in quarter 2. The net income for the third quarter was $59.4 million or $1.42 per diluted share compared to $51.5 million or $1.23 per diluted share in the prior-year period and $44.5 million or $1.14 per diluted share in the previous quarter. The company's balance sheet at the end of the third quarter of 2013 remains extremely healthy. Our total cash and short-term investments on September 30, 2013, were $579 million and DSO levels were at 54 days. Capital spending for the quarter was $4.3 million. Syntel ended the third quarter with a total headcount of 22,936 of which 6,936 were assigned to KPO. Our billable headcount was 3,417 on-site and 17,900 by offshore for a total of 21,322. Net additions to the global headcount were 70 employees. Utilization levels at the end of the quarter were 94% on-site, 76% Offshore and 79% globally. Our delivery mix at the quarter end was 19% on-site and 81% offshore. Voluntary attrition during the quarter was 16.1% as compared to 13.8% reported last quarter. Syntel added 8 new customers in quarter 3. Looking forward, I would 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 $810 million to $815 million and EPS to be in the range of $4.90 to $5 for the full year 2013. The company currently has a 98% visibility to the lower end of the revenue range. And our guidance is based on an exchange rate assumption of INR 61 to the U.S. dollar. We anticipate that the operating margins will be in the range of 31% to 32% and our effective tax rate will be between 24% and 26%. CapEx for the year is expected to be in the range of $20 million to $25 million. We will now open the call for a question-and-answer session. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Joseph Foresi of Janney Montgomery.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

My first question here is just on the guidance for this year. I think you raised the lower end. But can you give us some feel for when you expect to get back up above industry growth rates? I think you're kind of in line at least with what now has come house [ph] already. And if you can give us some color on the accounts, I think, 3 to 20 that kind of pushed you over that mark?

Zaineb Bokhari

Yes. Joe, so I'll just start it off and ask Nitin to jump in on accounts 3 to 30. As far as our outlook, the guidance and revenue range that we offer each quarter is tied to the visibility we have into our business. And that's a pretty consistent way of how we set our outlook, and we feel very good about the business. The broader environment is very healthy, and we continue to build our pipeline. And in terms of industry growth rates, longer term, we will stick to our 20/20 vision, which is our aim to grow faster than industry overall, and do it at a healthy level of profit. We've done that consistently over several years, and we expect to continue to execute along that. And, Nitin, do you want to comment on...

Nitin Rakesh

Sure. I think regarding account 3 to 30, we've seen a pretty healthy growth in our business volume. This is, and again, as we've been talking about it over the past few quarters, we've made a significant investment in account coverage, executive oversight, as well as investing in our offerings and that has delivered in the results we're seeing today, where we are seeing a higher percentage of wallet share from these customers 3 to 30, and we expect to continue to do that over the next few quarters as well. And that's what you're seeing in terms of the engine [ph] for growth for us.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Got it. Okay. I know you talked about in your prepared remarks, I think, SG&A was impacted $2.3 million due to the rupee. Could you give us a full breakdown of how currency impacted results in this particular quarter? I know that the currency had moved obviously in the positive direction.

Anil Jain

Yes. This is Anil. The net impact on the net profit for this quarter because of the currency fluctuation was $0.12.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And then on the margin profile in general, typically, historically, when the industry has begun to accelerate, I think Syntel has reinvested more heavily in the business to capture some of that growth. Could you give us some idea of how you view the margin profile? I know you've talked about the 20/20 vision, but how you view the margin profile over the next 12 to 18 months x currency.

Prashant Ranade

Yes, thanks, Joe. So I have mentioned, we have consistently followed our 20/20 vision, meaning in the long run, growing at 20% compounded annual growth rate both for revenue, as well as margins. Now depending on the specific market growth rate, the actual growth rate when it is lower on revenue, the margins will be higher. And there are 2 components. I will request Rakesh to add some color to some of the offerings that we are working on, which will help us achieve that higher growth rate. And the second component in addition to offerings is related to currency fluctuation. So there, we have elaborated on our hedging strategy earlier. So, Rakesh?

Rakesh Khanna

Thanks, Prashant. Joe, what we have done is actually we've invested and we are building intellectual property around stuff related to the Big Data, Hadoop appliance, analytics solutions and gearing up for the other trends, what we see out there as a migration to more open source technologies. And the other area is the framework building around legacy modernization to reduce, run the business costs, which definitely helps enterprises to invest more and to grow the business model. So a lot of these frameworks are in beta with some customers, and they are actually filing patents in a couple of new areas.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. Last question for me. As you look at sort of the demand environment right now, how sustainable do you think the pick up in discretionary spendings is as we look towards 2014?

Arvind S. Godbole

Well, if you look at the demand environment today compared to 12 months back, we feel good based on our pipeline, based on our discussions with clients because clearly, the overall economic environment today is much better compared to 12 months back and we have seen that reflected in additional discretionary spending. So we feel good moving forward in terms of what the clients expect to do. And in addition to that, the technology today, it's changing and impacting every business and clients are looking at discretionary spending to take advantage of those technology investments to differentiate themselves both to reduce the cost, as well as improve their stickiness with their customers.

Operator

Our next question comes from Edward Caso of Wells Fargo.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

It's actually Rick Eskelsen on for Ed. The first one is just following on to Joe's question on the discretionary demand. Maybe you could talk about how you're seeing a breakdown between the transformation in discretionary and then the lights on [ph] area. And then, I guess, just following up on that, it doesn't seem like there's any potential for a budget flush here in the fourth quarter or is it more that clients are spending towards their budgets?

Arvind S. Godbole

Yes, we don't -- you are absolutely right. We don't see any budget flush for this quarter and Rakesh will elaborate on the other part of your question.

Rakesh Khanna

Yes. Ed, what we are seeing is on the demand, so we are seeing emergence of people like the chief marketing officers who are becoming additional technology buyers for digital services. Then the other area what we are looking out there on the -- is the technology refresh, multitalented, control centers for our marketing application help. Then managed services using ownership base service catalogs. So these are really the areas where we do see some creep in the discretionary spend.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

But also following up on the operating margin. You've talked a lot about not viewing the current margin as sustainable, but is there a level that you view as sustainable? It's not the 20% number in that 20/20 vision.

Prashant Ranade

[indiscernible]

Zaineb Bokhari

So, Rick, I'll just start it up and then turn it over to Prashant. The 20/20 vision is going to be a function of what we see in the overall demand environment. So if there is an environment where there's a heat up in terms of the demand trend, you would expect margins and the level of investment to trend. The level of investment to trend higher and margin profile will be very different than a 20% margin even. And then if demand were to slow down, you would expect the levels of investment to be scaled back a little bit. And so the 20/20 is a framework and not a hard-and-fast guidance to be tied to. And, Prashant, do you want to add any color?

Prashant Ranade

Yes. I think Zaineb has done a good job of covering the range of margin. So outside the impact of currency, what we look at is opportunities to invest when we see substantially higher opportunity like we saw 3 years back. Clearly, that investment, we bring that margin to a lower level. And in a more stable environment, when the environment is not growing like 2008, 2009, then you will see higher margins. So those are the ranges.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

And then just a last question for me is do you see any impact or potential impact to your business from American Express announcing that it was planning to spin off its business, travel business?

Prashant Ranade

Actually, that announcement was made, the actual -- after all the regulatory clearance, the decision will come out formally later in the year, and we are connected with both businesses. So we feel good about opportunities that their new focus represents.

Operator

Our next question comes from Rahul Bhangare of William Blair.

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

First one is on the KPO business. I noticed a sequential decline in revenue there. Could we have a little bit more detail on what's going on there?

Zaineb Bokhari

Yes, Rahul, I would say that the pipelines remain fairly healthy within KPO. We actually cross sold one of our IT customers some KPO services this quarter. So we're continuing to expand relationships in that way leveraging some of our KPO capabilities. It is an area where the overall sale cycles and decision times can be a little more lengthy than on the IT side.

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

Okay. And then my second one is can you just comment on the health care business? Obviously, it grew quite nicely again this quarter. How sustainable is that growth going forward?

Zaineb Bokhari

So I'll ask Rakesh to add onto my initial comments. We're very pleased with the growth within health care, and it is an area where customers are looking to stretch existing resources. OpEx reduction is a key focus, and the ICD-9 to -10 work continues and for us, there's more in the pipeline. And certainly, on the consumer side, there's a consumerization of health care as an industry. And so technologies to support that are certainly of an interest. And I'll ask Rakesh to add some comments.

Rakesh Khanna

Sure. What you're seeing out there is we've had a couple of our customers migrate to the health exchanges and for helping them to increase the consumer enrollments. So that's clearly one area which we feel very positive in terms of the growth. The other area is around the clinical trials. We do see optimization of the current area to remain a focus. And then to Zaineb's point, we also see the ICD-9 to -10 area until October 2014. Clearly, the investments have -- are being committed and some of these payers and providers are looking at it as more transformational, where some of those projects have continued to grow even after the October 2014 deadline where they have made or they are making transformational changes to their systems in addition to the compliance related delivery.

Operator

Our next question comes from Mayank Tandon of Needham & Company.

Mayank Tandon - Needham & Company, LLC, Research Division

Prashant, I just wanted to go back to your thoughts on Europe. You said Europe is now opening up in terms of outsourcing. Maybe give us a better sense of what are the key drivers of growth beyond just the outsourcing trend. Are they spending on specific areas, is it broad-based across verticals? And then how do propose to build up a stronger presence in Europe? I still think Europe is relatively small for you. So what is the strategy in place to scale up?

Prashant Ranade

Right. Today, it represents 7% of our business, but we are pleased with the fact that over the 2 years, we have grown 3 years -- I'm sorry, we have grown at a rate, percentage rate, higher than our overall business growth rate. In terms of verticals and areas to focus on, clearly, across Europe, with the exception of U.K. market, they have not done outsourcing as much, and now they are clearly open to it and the drivers for that is clearly the world of technology changing, and those who don't change with it and take advantage of it would be left behind. So they see that as an opportunity to build partnerships with organizations like us to take advantage of that trend. Second driver is their top line is clearly not growing. So that will require them to make operational improvements, and that would require efficiency in their back office, mid office, which again opens up a great opportunity for us. So those are the areas.

Bharat Desai

This is Bharat. If I can just chime in on that. I think the other area we're starting to hear about in Western Europe particularly is the demographics issue and aging workforce. And I, for a long time, felt that that's going to be the long-term driver for this offshore industry. So if you look at population growth in Western Europe, that's actually negative, and we think that bodes well for -- that could be a tailwind for this industry over the foreseeable future.

Mayank Tandon - Needham & Company, LLC, Research Division

Great. And just one more question. Last year in the fourth quarter, you ran into some issues with your top client around discretionary spending. I just wanted to get more sense if you've built in a little bit more caution in your fourth quarter numbers to reflect maybe a repeat of that trend, or do you not foresee that this fourth quarter?

Zaineb Bokhari

Mayank, as far as what we've seen year to date and the visibility that we've shared for you -- with you, the year is progressing pretty much in line with our overall plan. We look across our relationships, and they're strong and healthy. And we expect all of them to grow and 3 to 30 to be the driver of growth. So the year is unfolding pretty much the way we had expected thus far.

Prashant Ranade

And only thing, Mayank, I would add to that is as far as last year is concerned, as well as this year, as Zaineb said earlier, our guidance is consistent with visibility. So that's what we did last year. That's what we did now. And when we found out that one particular client had put temporarily hold, that was only for a short period of time. So it began and we did our appropriate filing for that, and we also announced that it ended. So we don't have any such thing this year so far.

Operator

Our next question comes from Puneet Jain of JPMorgan.

Puneet Jain - JP Morgan Chase & Co, Research Division

So your growth profile, top line growth profile over the last couple of years has been in low teens, low double-digit kind of range. So how should we think about Syntel's growth over the next few years? I know you have 20/20 vision. But maybe I'll ask this way, were there any unusual headwinds to growth this year that you do not expect to continue in the future?

Zaineb Bokhari

So, Puneet, I would just start by saying that over the last several years, we've grown faster than industry overall. Last year, we grew about 12.7%, and the year before we were about 21%. So that's pretty healthy growth rates. And to my earlier comment, the way we started the year and where we are right now tied to the visibility that we have, the year is progressing according to our plan.

Puneet Jain - JP Morgan Chase & Co, Research Division

But are there any businesses, parts of businesses that were weak or that are weak this year and you expect them to get better next year or maybe year after that?

Zaineb Bokhari

I think if we look across the industries that we serve, there are going to be some that grow faster than others. Longer term, we're continuing to invest in the domains that we serve and in our intellectual property. We see good opportunities ahead across the range of industries that we serve.

Nitin Rakesh

Yes, I think the only thing I will add is we talked a little bit about that earlier on. I think the focus on investment we started to make in the accounts 3 to 30 is starting to pay off and we would definitely expect that to be a continuing trend at least for the next year as well. And I think there are pockets of industry segments in our business that we are focused on, on improving as well and obviously banking is a very large area of focus where we want to make sure that, that brings back -- that would bring back a high percentage of growth in that segment as well. So I would say these are the other 2 things we'll be focused on for 2013.

Puneet Jain - JP Morgan Chase & Co, Research Division

Understood. A nice segue to my next question about -- nice to see metrics on 3 to 30 clients. And that those clients grew much faster than the overall company average. But is it fair to say that much of the above average growth was driven by some of the largest clients in that bucket or was that fairly uniform?

Bharat Desai

I think the growth actually was fairly uniform, and it's across all of our business units. So clearly, as I said, the investments we've made in expanding our account focus, our account teams, our client-facing groups and executive bandwidth [ph] has been spread across all our verticals and across the product cross-section of accounts. So I wouldn't say it's restricted to any 1 or 2 large accounts; it's fairly broad-based.

Zaineb Bokhari

And I'll just add that these are very large Global 2000 organizations with significant spend. And our penetration levels relative to that spend is something that affords us a tremendous opportunity for growth.

Puneet Jain - JP Morgan Chase & Co, Research Division

Understood. And last one, can you discuss your current hedge positions? I guess, you were hedged by year end at the end of second quarter? Have you extended those hedge contracts into next year?

Arvind S. Godbole

Right. Currently, there has been no change in the hedging policy that you have been following. The current levels are 101 million [ph] at the end of quarter 3 as compared to 202 million as of end of quarter 2 and we are hedged fully in the quarter 4 of this year.

Puneet Jain - JP Morgan Chase & Co, Research Division

But did you not -- so it's still one quarter, hedged one quarter out?

Arvind S. Godbole

Right. Typically, we do not go beyond 2 quarters.

Operator

Our next question comes from Jason Kupferberg of Jefferies.

Amit Singh - Jefferies LLC, Research Division

This is Amit Singh for Jason. I just want to quickly come back to the guidance for fiscal '13. I mean, you're obviously witnessing strong demand environment and the sequential growth in revenues over the last 2 quarters has been good. So I was just trying to understand how -- well, I mean, I know -- I understand how you give your guidance and it's based on visibility on the lower end. But now if I look at the midpoint of your guidance range it's -- you need [ph] to grow sequentially less than 1% to meet that. So I was just trying to understand why the top end of the guidance was not raised. Is there anything that you're seeing this quarter that, that would make you believe that you're not going to be able to grow much stronger this quarter than last quarter?

Zaineb Bokhari

So, Amit, I would just tie it back to some of the practices that we engage in when we set our guidance. The low-end, as you noted, is tied to the visibility metric that we give, and the upper end is a function of what we're seeing in terms of pipeline and things of that nature that we expect is going to come in within this year, and we don't try to forecast things that we don't have a view into. And that's a pretty consistent practice.

Amit Singh - Jefferies LLC, Research Division

Okay. And just related to that, I mean, this last quarter and then one month of this quarter, how is the booking strength being specially compared to last quarter, and if you could differentiate how this trend has been in outsourcing versus KPO?

Zaineb Bokhari

I'm sorry, Amit, I didn't catch the last part of your question. Can you please just repeat that?

Amit Singh - Jefferies LLC, Research Division

Sure. So how has the booking strength been this quarter compared to, let's say, last quarter? And then especially if you could differentiate the booking strength, how has it been in outsourcing versus your KPO practice?

Zaineb Bokhari

Yes. So, Amit, we don't generally provide a bookings metric. I can tell you that the pipelines that we have are healthy and building, and that is across both of our business segments, both on the IT side and on the KPO side. Clearly, on the KPO side, some of those decision cycles can be a bit longer. So there's really no change in terms of what we're seeing on that end.

Amit Singh - Jefferies LLC, Research Division

Okay. And then just a final one for me. You guys have a lot of cash in the balance sheet, I think more than $500 million. So if you could just let us know what is your capital deployment strategy from here point on. And also, you spoke about Europe being one of the sort of potential opportunity. Is -- some of the larger peers in the space have done M&A in Europe as a -- the opportunity to grow there. Are you thinking in that line as well?

David Mackey

So, Amit, as we have indicated in the past, the board takes a look at the cash position each meeting and discusses the best use of that cash. And yes, we have considered, in Europe particularly, tuck-in M&A activity as a way to extend our reach. And -- but our plan that we make is based largely on continuing to execute on the strategy that we've laid out for our businesses.

Operator

Our next question comes from Manish Hemrajani of Oppenheimer.

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

One question on pricing, if I may. Given where the rupee is currently in and where your margins are, are you seeing any pressure on pricing out there? And are your existing customers wanting to come back to the table and negotiate lower for existing contracts and renewals?

Arvind S. Godbole

I can see what clients want is particularly [ph] in terms of their relationships [indiscernible] our companies in our space. So fluctuations, if you look at rupee fluctuation, price -- pricing -- price to rupee fluctuation, it can go both ways. So because of that, we haven't seen much discussion around that. And last thing, if clients are more focused on the value they receive from that relationship and they will demand that value, they will monitor the performance, and we are committed to delivering that on an ongoing basis.

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

Got it. On the health care or -- are you continuing to see strong momentum? And do you expect further expiration from here as we get to the ICD-10 transition deadline? And would you expect to see a drop-off in growth post the transition in the health care business?

Zaineb Bokhari

Manish, very pleased with the growth we've shown in health care and clearly, the ICD-9 to -10 migration is providing a nice tailwind for us. But even beyond that, there are numerous opportunities within health care because this is an industry, which has lagged other industries like financial services as an example in terms of using global delivery to benefit from -- of the operating efficiencies that it can support. So longer term, there is a good amount of opportunity within the health care vertical beyond just ICD. And Nitin will add some color.

Nitin Rakesh

Yes. So I think, clearly, the regulatory driver was something we witnessed strong demand for over the last few quarters. But as Zaineb mentioned, I think we will see continued -- we're hoping to see continued demand on 2 fronts. One, clearly these industries haven't invested as much as in technology and now they're forced to based on the pricing pressures that they are seeing. And secondly is the demand from visible modernization related initiatives. And for both of these to be fairly cost optimal, they are exploring and we are seeing a fair number of first-time adopters for our business model.

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

Got it. And then one last housekeeping question, if I may. I may have missed this, can you give us the impact of FX in base points on both gross margin, operating margin?

Arvind S. Godbole

Yes. The net impact from the net profit is $0.12, and -- it was 256 basis points on the gross margin 364 [ph] basis points on the operating margin.

Operator

Our next question comes from Vincent Colicchio of Noble Financial.

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

Looks like you had a very nice quarter on e-Business side. Is there any color you could provide there? And do you expect that growth to continue into the fourth quarter?

Zaineb Bokhari

So, Vince, e-Business segment, the growth there can be -- there can be some variability in the growth there. We're pleased with the growth this quarter. And -- but the composition of work can be skewed towards development. And so that contributes to some of that. In addition, there continues to be a shift from waterfall to agile, and customers are looking for development work where there's a lot of prototyping proof-of-concept. So you do the development in short bursts and launch the product and then do changes. So that change in the nature of what customers are demanding is also contributing to what we're seeing in e-Business.

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

You talked about health care, the vertical looking nice going forward. And you said last quarter and this quarter, you had pretty uniform growth across verticals. Is there any verticals you want to point out that look particularly good over the next couple of quarters aside from health care?

Zaineb Bokhari

So I'll make a couple of high-level comments and ask Rakesh to add his additional take. Retail or -- actually, it's called RLT which stands for retail, logistics and telecom, that particular industry vertical is another standout this quarter. There is tremendous opportunity that we're seeing around leveraging mobile tied to customer engagements. Our multichannel commerce has remained a focus and then also on the back end, modernizing some legacy systems. And, Rakesh?

Rakesh Khanna

Sure. Yes, what we're seeing in retail really is around the omnichannel. What we see, it's moving both from foundation to immersion. And then, the mobility and Big Data. We see that as becoming more mainstream and huge focus on the legacy modernization. So retail, RLT, clearly, we see as a strong opportunity. Then coming also to insurance, right? We do see some good stuff happening around the personal lines because we have increased pressure on expense ratios that's really driving some discretionary spend than around the commercial lines and even the life and retirement space. So in the insurance, RLT, health care, we definitely see a very strong demand. And then the other 2 verticals, also we see good opportunities for growth.

Operator

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

Brian Kinstlinger - Sidoti & Company, LLC

The first 2 are quick numbers questions. I'm not sure I heard appropriately the numbers, the year-over-year growth from 3 to 30 this quarter, year-over-year, and can you compare that to second quarter growth?

Zaineb Bokhari

Brian, what we provided, and it's a newer metric for us, what we shared with you in addition to what we provided along customer concentration is the trend in customer concentration. So we didn't actually break out the growth rate. Do you need me to go over the numbers?

Brian Kinstlinger - Sidoti & Company, LLC

Well -- I mean, yes. Sorry.

Zaineb Bokhari

Okay. Yes, in Q3, from 3 to 30, we derived about 54% of revenues and that compares to Q2 where the contribution was about 53%.

Brian Kinstlinger - Sidoti & Company, LLC

Great, that's helpful. And then the other numbers question. What was the FX loss in the quarter? Below the line, of course?

Arvind S. Godbole

Yes. Other income, it's $5.6 million.

Brian Kinstlinger - Sidoti & Company, LLC

$5.6 million. Okay. And just a more in-depth questions hopefully. We heard one of your competitors talk about vendor consolidation. And so I guess I'm wondering, are you seeing that? And have you lost any customers, or do you expect that to drive share gains next year? Maybe talk about how that's impacting Syntel.

Arvind S. Godbole

Well, first of all, we haven't lost any customers and that is something we are very proud of because in our history we look at customer for life philosophy. So we haven't lost the customers.

Brian Kinstlinger - Sidoti & Company, LLC

And share gains, is it something you're gaining share from, or is it not really a trend that's impacting your company?

Arvind S. Godbole

So clearly, as both Nitin and Zaineb mentioned, the growth in 3 to 30 were the share -- the information that we shared from [indiscernible] almost twice the percentage growth rate for 3 to 30 area. So clearly, we are gaining share in that area.

Brian Kinstlinger - Sidoti & Company, LLC

But not driven by vendor consolidation?

Arvind S. Godbole

As far as vendor consolidation is concerned, really what clients are looking at is best-of-the-breed mergers from applications, but also on partners. So consolidation happens when a particular partner doesn't have differentiated offering. We see growth of our positioning, our offering, domain-specific offering, our technology offering and on top of that, strong relationships with our clients.

Brian Kinstlinger - Sidoti & Company, LLC

And, Prashant, maybe you could talk about hiring. You hired -- you have 70 net new people. It seems pretty low given your operating margin is so high and your revenue growth has been picking up. It also seems to contradict the strengthening market conditions. So maybe just talk about how you think about hiring right now versus the market growth and how you think we should think about that.

Prashant Ranade

Good question. And I do acknowledge that in this quarter, our hiring number was lower. But if you look at year-over-year growth in headcount, it is ahead of revenue growth. It is slightly higher than 14% [ph]. And if you look at our pattern, the historic pattern, I expect to add -- in this current quarter, we expect to bring in several campus hires, which is the pattern we have had started in.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. And so utilization heated up at the end of the quarter, but it's coming back down as we speak into the early parts of 4Q, is that what you're saying?

Prashant Ranade

That's correct.

Brian Kinstlinger - Sidoti & Company, LLC

Right, okay. And then maybe talk about how cloud -- you expect it's going to change your business over the next 2 years, if at all, for the better or for the worse? And has there been any meaningful impact from this trend on your business yet?

Bharat Desai

Yes, I'll take that, Brian. This is Bharat. We're engaged in cloud discussions with most of our clients, and most of them are at some stage of defining their future and we've invested significantly in creating intellectual property and different tools to help our customers embrace the cloud. And we've got a number of projects underway. Customers are looking at how best to take advantage of this low-cost, highly elastic compute capability. That said, it's a fairly complex organizational decision. But we feel we are very, very well positioned to help customers, a, embrace the cloud; and b, embrace and transition, modernize their business to a digital business. And of course, the other attribute that we have been advocating a lot is open source. We feel the combination of inexpensive, highly reliable, highly elastic compute capability with what is now a very robust open source of a very low cost open source availability, we think bodes significantly for our customers, for enterprise clients and they're all at different stages of exploring how best to take advantage of this. And we think we're really well positioned for that.

Brian Kinstlinger - Sidoti & Company, LLC

The last question I've got is can you just give us an indication of how much of your cash is in India versus the U.S. and/or other?

Arvind S. Godbole

Yes, 23% of our total cash is generally [ph] U.S. dollars.

Brian Kinstlinger - Sidoti & Company, LLC

53%? And it resides in the United States? 53%, is that what you're saying?

Arvind S. Godbole

23%.

Brian Kinstlinger - Sidoti & Company, LLC

23%, sorry. 23%.

Operator

Our last question comes from Greg Halter of Great Lakes Review.

Gregory W. Halter - LJR Great Lakes Review

Just wondering if there are any new industry verticals that you may be working on that are small, that don't show up in the 5 that you've mentioned.

Prashant Ranade

That is a very good question. From time to time, we do get asked that question and we do explore it. But the 5 verticals that we are focused on with our differentiated offering, with our positioning, we feel we have tremendous opportunities on those vertical -- within those verticals and that is in line with our with our strategy to be focused and having close relationship with our clients.

Nitin Rakesh

Yes. If I may add to that, Greg. I completely agree with what Prashant has said and if I can just also point out that each of these industries is very deep. For example, financial services has many subindustries that are very large, capital markets, retail commercial banking, cards and payments, each going through a significant change. Health care life sciences has payer provider life sciences and medical devices. Insurance has commercial line, personal lines and retirements and annuity. And then retail logistics and telecom, while we bundle them as one are, as you know, fairly large industries. So we think with the change drivers across all these industries, what we're doing really is investing in building intellectual capital, understanding what the change drivers are and being prepared ahead of time to have an impact on our customers' business to embrace these new models.

Gregory W. Halter - LJR Great Lakes Review

Okay, great. And you addressed the capital allocation and so forth somewhat with 23% in the U.S. and so forth. What kind of rate did you earn in the quarter on your cash balances?

Arvind S. Godbole

Yes, during the quarter, we earned 6.46% yield from the investment.

Gregory W. Halter - LJR Great Lakes Review

And I know last year, you did a special dividend and you're over $10 a share on a net cash basis, excluding the debt. Just wondered if that's something that the board would consider again for 2013 or beyond?

Nitin Rakesh

Over our history, the board has returned money to shareholders when they thought that was the best use of cash. So as I've mentioned earlier, the board does consider that at every meeting. And as and when it makes a decision to take action, we would make an announcement on that.

Operator

Thank you. This concludes Syntel's Third Quarter Earnings Call. A replay of today's call will be available until October 24, 2013, by dialing (855) 859-2056 and entering the passcode, which is 85630017. Thank you for joining us, everyone. Have a great day.

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