Syntel Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: Syntel, Inc. (SYNT)

Syntel (NASDAQ:SYNT)

Q4 2013 Earnings Call

February 13, 2014 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 Near Shoring Center

Rakesh Khanna - Chief Operating Officer

Analysts

Mayank Tandon - Needham & Company, LLC, Research Division

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Jason Kupferberg - Jefferies LLC, Research Division

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Brian Kinstlinger - Sidoti & Company, LLC

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

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

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

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

Jason A. Rodgers - Great Lakes Review

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Syntel's Fourth Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, February 13, 2014.

I will now turn the call over to Zaineb Bokhari, Syntel's Vice President of Finance.

Zaineb Bokhari

Thank you, and good morning, everyone. Syntel's fourth quarter earnings release crossed GlobeNewswire at 8:30 a.m. Eastern today. It is also available on our website at www.syntelinc.com.

On the call 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

[Technical Difficulty]

Thank you, Zaineb. Good morning, everybody, and thank you for joining us today. I'm very pleased with the progress we've made in the fourth quarter and throughout all of 2013. As an organization, we're united in our focus on excellence and service delivery, in customer service and the innovative solutions we create for the industries we serve. We will continue to invest in these areas for the long term and are committed to leveraging our strengths to help create better outcome for our clients.

Over the past 30-plus years, we have seen technology become tightly integrated with the way companies run their business and allocate resources. This close coupling will get stronger as companies respond to their customer's demand for always on instant response and rich functionality. Businesses today must be able to scale rapidly across multiple cultures, geographies and regulatory environments. This is what their customers expect, an agile, innovative companies are delivering this and much more.

The bar is continually raised by leapfrogging in technology, rapid market adoption and fast-changing consumer expectations. Every new innovation has lowered the cost of this technology supporting massive scale and efficiency that companies would have to embrace if they aspire to become the digital enterprises of tomorrow.

This proliferation of technology and rapid need for adoption by enterprises provide tremendous opportunity for Syntel. With considerable investment in this max tax [ph] growing industry expertise, fast-growing repository of intellectual property assets and a strong commitment to push hard on all frontiers, we are extremely well positioned to help our customers on their digital enterprise journey.

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 fourth quarter revenue were $223.3 million, rising 6% sequentially and 19% year-over-year. Our growth this quarter was supported by the continued progress we made in expanding our relationship with customers in the 3 [indiscernible] category. At the same time, we grew with our largest customers who remain critical to our long-term success.

During the quarter, we also accelerated timeline for some of the visitors on commissioned projects on which we were engaged, which was tied to our customers' needs and next to a higher on-site component in our revenue in the fourth quarter.

I'm also encouraged by the momentum they are seeing with some of our newer customer relationships. As we emphasized at our analyst meeting, these relationships will serve as the pipeline for significant longer-term business opportunities for Syntel, and we are really pleased with their early progress. I'm optimistic that by targeting the right relationships based on approach and service overlap, we are laying a strong foundation for our mutual long-term success.

We continue to develop long -- domain great offering and then setting this technology expertise, which allows us to provide long-term revenue to our customers. The business environment remains favorable relative to the prior 12-month period, and this supported some of the positive discretionary spending trends we absorbed in the fourth quarter. This was also evident in the growth outlook NASSCOM recently issued for our industry of 13% to 15% for their fiscal year 2015.

Our growth was relatively broad-based across many of the verticals we saw. Our investments in Europe continue to pay off, and we see multiple growth opportunities in the region as it stabilizes and eventually returns to a more normalized business climate.

Fourth quarter gross margin widened 52 basis points from the third quarter, coming in at 47.1%. The Indian rupee appreciated during the quarter, creating a slight headwind, as Arvind will elaborate later. However, we continue to act to our employee role ahead of the demand based on our view of improving market conditions and our data in pipeline.

Net headcount increased by 716 in the fourth quarter, up 10% from a year ago as we added both campus hires and on-site associates in keeping with our hiring plans. Offshore utilization for IP declined to 65% in Q4 from 68% in Q3 on a period end basis, but rose to 68% from 67% on average. As in the past, utilization will follow cyclical historic patterns with progressive quarterly movements tied to the requirement of our business.

Our focus on driving efficiencies throughout our operations supported our overall results even as the currency provided a modest headwind in Q4. The company's SG&A expense increased by about $1.6 million during Q4 as compared to a year ago and by $7.3 million from the prior quarter. On a sequential basis, the appreciation in the rupee with SG&A by $0.55 million by currency-related balance sheet translations resulted in a loss in Q4 as compared to a gain in the fourth quarter.

As we have noted in the past, we'll continue to invest in our capabilities, with the aim of improving our long-term competitive position and addressable market opportunity. Our pipeline remains healthy and continue to grow. Based on conversations with clients, we see budget shaping up to be in line with our expectation of flat to slightly higher than what we saw in the prior year.

Our customers remained focused on optimizing their overall technology spending by freeing up resources to further innovate. We are well positioned, given the investments that we have made to help them with their important initiatives and to support their long-term business transformation goals.

I wanted to touch briefly on the announcement made a few days back about my taking on the role of Executive Vice Chairman and the appointment of Nitin Rakesh as CEO and President, both effective April 24, 2014. I'm very pleased with the appointment. Nitin is an experienced leader who will charter a strong future course for Syntel. He understands Syntel's culture [indiscernible] and its focus on customers. I expect to continue to work closely with Nitin to ensure a smooth transition when he assumes his new role this April 24, and also subsequently in my new role as Executive Vice Chairman.

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 will open the call to questions. Syntel's fourth quarter revenue came in at $223.3 million, up 19% from prior year period and 6% sequentially. For the fourth quarter, Applications Outsourcing accounted for 78% of revenue, KPO was 15%, e-Business represented 6% and TeamSourcing was 1%.

From a vertical perspective, financial services contributed 49%; with health care at 17%; retail, logistics and telecom, 16%; insurance, 15%; and manufacturing, 3%. Vertical growth was led by retail, logistics and telecom and insurance, which grew approximately 16% and 7%, respectively, on a sequential basis.

Syntel's customer concentration levels were as follows: Our top 2 clients represented 38% of revenue in the fourth quarter of 2013, while Accounts 3 to 30 represented 54.7%. The fixed price component of our business was at 39% of revenue for the fourth quarter of 2013.

With respect to Syntel's margin performance, our gross margin was 47.1% in the fourth quarter. This was up from 45.2% reported in the year ago period and 46.6% reported in the third quarter of 2013. The Indian rupee appreciated by 2.3% sequentially during the quarter. This lowered the gross margins by approximately 49 basis points.

Despite this marked headwind and higher headcount-related expenses in the fourth quarter, the gross margin widened slightly as revenue growth outpaced growth in direct cost. Our business segment, gross margin for Applications Outsourcing was 73.6%; KPO was 61.9% [ph]; e-Business was 40.4%; and TeamSourcing, 48.3%.

Moving down on the income statement. Our selling, general and administrative expenses were 13.3% in the fourth quarter of 2013 compared to 15% in the prior year period and 10.1% in the third quarter. On a dollar basis, SG&A was higher by $7.3 million sequentially. The impact on SG&A from the balance sheet translation adjustment this quarter was a $1.7 million loss as compared to the $3.8 million gain recorded in Q3, depreciate SG&A by $5.4 million.

Other income and compensation-related provisions raised SG&A by $2.1 million while the appreciation of the rupee raised SG&A by $55 million. Other income was $9.8 million during the fourth quarter as compared to $0.95 million in the third quarter, primarily due to a gain of approximately $1.7 million on hedging compared to a loss of approximately $5.6 million in the third quarter. Other income during the fourth quarter also included $0.6 million related to interest expense.

For the year 2013, earlier reported quarterly numbers towards interest expense which were reported in the selling, general and administrative expenses also been [indiscernible] to other income, which were $0.2 million, $0.4 million and $0.6 million for quarter 1 of 2013, quarter 2 of 2013, and quarter 3 of 2013, respectively.

Our tax rate for the fourth quarter came in at 32.1% as compared to 22% in Q3. Net income for the fourth quarter was $66.3 million or $1.50 per diluted share as compared to $49.9 million or $1.19 per diluted share in the prior year period and $59.4 million or $1.32 per diluted share in the previous quarter.

The company's balance sheet at the end of the fourth quarter of 2013 remains extremely healthy. Our total cash and short-term investments on December 31, 2013, were $669 million and DSO levels were at 60 days. Capital spending for the quarter was $6.6 million.

Syntel ended the fourth quarter with a total headcount of 23,652, of which 7,133 were assigned to KPO. Our billable headcount was 3,696 on-site and 18,332 offshore for a total of 22,028. The net additions to the global headcount were 716 employees.

Utilization levels at the end of the quarter were 94% on-site, 73% offshore and 77% globally. Our delivery mix at quarter end was 20% on-site and 80% offshore. Voluntary attrition during the quarter was 15.2% as compared to 16.1% reported last quarter. Syntel added one new customer in quarter 4.

Looking forward, I would now like to provide you with the guidance for 2014. Based on our current visibility levels, Syntel expects revenue to be in the range of $910 million to $940 million and EPS to be in the range of $5.10 to $5.35 for the full year 2014. The company currently has a 59% visibility to the lower end of the revenue range, and our guidance is based on an exchange rate assumption of INR 62 to the dollar. We anticipate that operating margins will be in the 28% to 30% range, and our effective tax rate will be between 25% and 27%. CapEx for the year is expected to be in the range of $30 million to $40 million.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mayank Tandon of Needham & Company.

Mayank Tandon - Needham & Company, LLC, Research Division

I think, Prashant, you touched on some of the early read on budgets for 2014. But I wanted to get your thoughts in terms of -- are the client priorities different this time around versus a year ago? And how would you rate the spending on emerging technologies such as cloud and mobility, and also on compliance and regulation this year versus 12 months ago?

Bharat Desai

We definitely see an improvement in the demand around the delivery of transformation projects. And some of these projects, what happens is the bigger, higher on-site content and just like Prashant mentioned in his prepared remarks, this could help us bump up nicely because of slightly higher on-site content and we did have some accelerated ability we could cover a few digital confirmation projects. So definitely we do see demand in the slightly higher and in the right direction.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. But when you look at the pipelines this year versus last year in some of these areas, are you seeing higher activity levels or is it fairly consistent with what you saw entering 2013?

Zaineb Bokhari

Mayank, I'll take that. And first of all, I just want to say we did experience some technology glitches, so please bear with us there. We've made a lot of investments in terms of our customer-facing individuals, our sales and marketing efforts as well, and so that is helping our pipelines and how they're building that on top of the ongoing investments we make in terms of IP and some of the horizontal solutions we've been investing in, including snack, has supported the build and the health that we are seeing in our pipeline.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay, that's helpful color. And then I think Prashant also talked about Europe and the focus there. I wanted to get your thoughts in terms of what the strategy is? Is it going to be around some M&A to build a local presence? Or do you go about doing it organically? And where are you in that development curve in terms of building out a more deeper presence in Europe?

Zaineb Bokhari

So for several quarters now, we have been making investments in Europe, increasing our people there, our customer-facing people, our marketing efforts in that region. And this was certainly in anticipation of an eventual stabilization in that region, and we're seeing some positive trends. This quarter, we had strong quarter-over-quarter growth and year-over-year growth. And it certainly looks like the interest level in global delivery continues to trend higher than where it was even 12 months back. It's an environment where revenue growth still is somewhat challenged, and in that context, customers are clearly interested in making our operations more efficient as they look for this top line growth. And we think that this is very conducive to encouraging them to make operational improvements and efficiencies in back office, main office and this is a tremendous opportunity for us. And we're very positive on that.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And then just finally, in terms of the operating cost for this year, what is the early sense in terms of wage hikes for 2014? And also, how should we be thinking about Visa costs and also the timing of that over the course of the year?

Arvind S. Godbole

Okay. So as you know, sort of wage hikes are concerned, we have already implemented it on-site, which has been low to mid single-digit, which we have implemented. Our offshore wage hike, we don't really see much change from where we were last year. And as you know, we implement those in April so we expect that to be low double-digit. As far as Visa costs is concerned, clearly, all of us -- all of you have been following the environment. The [ph] Visa costs have gone up so we do expect that but we are well positioned right now with unused visa to serve our customer and we will continue that strategy into next year.

Operator

Our next question comes from Ed Caso of Wells Fargo.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

It's actually Rich Eskelsen on for Ed. Just a question on the Q4 revenue. You did have very strong sequential growth, and I believe you talked about some acceleration of snack projects. Was that sort of a one-time budget costs that came through and clients ended up having more money to spend? Or was it just pushing forward these projects that have now continued into 2014?

Zaineb Bokhari

Rick, so we're very pleased with the execution and the revenue growth above what we had originally talked about back in October. And certainly, strong execution was a good factor in the overall contribution. But as Prashant has noted, we were engaged in some digital transformation projects at some customers where there was a need to accelerate somewhat faster than original timelines. So we were able to do that. And in addition, some of these projects had a higher on-site revenue component. So this contributed to some extent. And as far as categorizing it as a budget flush versus an ongoing thing, we noted in our analyst meeting that we weren't seeing a budget flush. So a budget flush, I would characterize as year-end spending tied to a desire to spend previously budgeted amounts. So this is more along the lines of additional spending, which we said customers are looking at unbudgeted spending where it makes sense with respect to their internal plans. And that's how I would characterize some of it.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And just on the 2014 budgets, I believe you said flat to slightly up, and I guess to me that sounded similar in terms of what you've been talking about at least for the last year. So while we've heard some of your peers saying we're seeing things as more up in the U.S. after several years of then being flattish. So then we -- can you kind of strip some of the puts and takes of what you're seeing in client budgets?

Arvind S. Godbole

Yes, we definitely see an improvement in the budget scenario and an uptick in terms of some of this max spend that we are seeing, stuff like R&D and across the verticals, we are seeing a bigger emphasis on getting a single customer view. So investments around Big Data to enable that kind of functionality, analysis using structured and unstructured data. So we are seeing spends moving in this direction.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Okay, great, very helpful. The last question for me just on the tax rate. You came in lower than what we were expecting for Q4. So what are the puts and takes for the tax rate here? And just remind me, I missed the number for 2014.

Arvind S. Godbole

Yes. As you know, we operate in multiple geographies [indiscernible] different tax rates and different tax treatment and [indiscernible] throughout the quarter. 2014, again, one more factor there apart from the geography distribution. We also are expecting higher on-site revenue compared to current year, and that is why we're expecting the tax rate to lower. And we are expecting it be 25% to 27%.

Operator

Our next question comes from Jason Kupferberg of Jefferies.

Jason Kupferberg - Jefferies LLC, Research Division

Your commentary, obviously, is very encouraging. And then you mentioned NASSCOM raising their fiscal '15 growth outlook to 13% to 15% from fiscal '14, which was 12% to 14%. But if I look at your guidance, the midpoint of guidance, revenue guidance, you're F'14 suggests like a growth of 12-something percent versus fiscal '13 growth which is closer to 14%. So if you could just help us understand. I know your guidance is based on your visibility at current levels. But based on -- the demand environment doesn't change, why would fiscal '14 growth be lower than fiscal '13?

Zaineb Bokhari

Okay, so I'll take that up, and then I just missed part of your earlier part of that question, but I think you were asking about the demand environment basically. Overall, I would say that the environment is fairly healthy. The macro economy has been fairly stable in the U.S., seems to be stabilizing in Europe. This provides us with a scenario where our customers remain focused on optimizing their operations and becoming more customer-centric, looking for new ways to reach their customers. So that's a healthy demand environment for us. As you noted, the guidance that we share on each quarter is visibility based. And at a 59% visibility, this is what we're seeing at the low end and we tie the upper end into that. There'll be some tightening as the year progresses. And we have a long-term aspiration of growing faster than industry overall. We did that in 2013. When you compare the 14% growth that we delivered versus what NASSCOM believed happened in their fiscal '14 at a growth rate of 13%, and we expect to continue to execute along this aspiration.

Jason Kupferberg - Jefferies LLC, Research Division

Okay. And then just quickly on operating margins, too. What was the average, I guess, exchange rate INR to USD over fiscal '13? I'm looking at your guidance for operating margins for fiscal '14, which suggests sort of a 2% decline from fiscal '13. So if you can just run through the puts and takes of that.

Arvind S. Godbole

[indiscernible] for the year 2013 was $56.92.

Jason Kupferberg - Jefferies LLC, Research Division

Okay. And then if you could just talk about why you're expecting your fiscal '14 operating margins to be slightly lower than fiscal '13?

Zaineb Bokhari

So I'll start that off and maybe Arvind can add a few comments. Some of the things that were mentioned in our prepared comments, including our expectation that we will have greater on-site revenue and we will be engaging and we have been engaging in additional on-site hiring, those are also factors that are coming into play in what we're thinking about in terms of 2014 margins.

Arvind S. Godbole

Apart from that, we also have a [indiscernible] and we have [indiscernible] in quality, and we also have -- we're expecting lower utilization. We are going to make investments in the facilities, and we have additional facility costs as a result of that. We are also going to spend [indiscernible]

Operator

Our next question comes from Joe Foresi of Janney Capital Markets.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

This is Jeff Rossetti on for Joe. Just wanted to go back to the fourth quarter revenue and some of -- and the digital transformation project commentary. Was that more weighted towards your 3 through 30 clients, because I believe that led growth for the company? Just wanted to get an understanding about where you were seeing that acceleration with which particular clients.

Prashant Ranade

I think the acceleration primarily is not just one of the customers. But I think it's the segment [indiscernible] has been doing fairly well in terms of growth. I mean, we shared numbers with you in our December meeting, just about [indiscernible]. [indiscernible] have grown about 19% compared to [indiscernible] 14%. I don't think that's [indiscernible] segment. In terms of Q4, I think [indiscernible]. Some of our engagements, we were able to [indiscernible] grandfather given the customer demand around some of the high-priority projects. And as I think that's the [indiscernible].

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Okay. And just going back, just overall, you're mentioning just compared to last year, the discretionary spend. Would you say there's -- it's positive with respect to this time last year?

Arvind S. Godbole

Yes, Joe. We definitely see it positive. And we see a lot of innovation happening in the payment landscape in the banking vertical. And our intellectual property, our service offerings position us strongly in all of these verticals. Also in insurance, right? And we see the prospects of interest rates helping. The careers are finally increasing their investments in technology. Customer acquisition [indiscernible]. So some of these trends are definitely helping our business, and we do see a positive uptick.

Jeffrey Rossetti - Janney Montgomery Scott LLC, Research Division

Okay. And just one last on your verticals. I believe maybe just kind of your outlook for health care, I think you may have, as a percentage of revenue, maybe it wasn't -- maybe it ticked down a little bit sequentially. I just wanted to see given the regulation requirements this year [indiscernible]

Zaineb Bokhari

I'll take that, Jeff. If I look at the fourth quarter, our year-over-year growth for the segment was 21%, and that's a pretty healthy growth rate, especially in the context of overall business, so we feel pretty good about that. We're seeing good traction for domain focus solutions, and we have several customers in that 3 to 30 segment that Nitin spoke about earlier, and the traction there is pretty good. We see factors like rising regulatory pressure, focus on optimizing costs, as well as the ongoing ICD remediation contributing in our strategies to continue to improve overall penetration with our customers within the segment, leveraging the IP and domain expertise that we have. So the prospects for this vertical remains favorable.

Operator

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

Brian Kinstlinger - Sidoti & Company, LLC

I wanted to revisit the 2014 margin question that was asked. I think you have a 5% benefit in FX year-over-year assumed. So I'm wondering if you can share, as it relates your guidance, your assumptions for offshore utilization where -- that will tell us a little bit about hiring. And then you can also share the on-site offshore mix given some of these projects were more on-site. What's the difference year-over-year on both of those, please?

Zaineb Bokhari

This is with respect to...

Prashant Ranade

Okay, starting with on-site, as we shared with you during Q4, our on-site presence will increase, and some of the projects like those [indiscernible] alluded to, these digital transformation projects begin with higher on-site content so that's what we saw. And we would expect that, and that is reflected in tax rates as well as gross margins that Arvind report to. As far as utilization is concerned, you can expect a similar trend that you have seen in the past progressing from Q4 to Q3, with stronger Q2 and Q3 in terms of seasonality.

Brian Kinstlinger - Sidoti & Company, LLC

Right. I guess my question on '14 is are you going to even further accelerate hiring of utilization down? Will we see throughout the year normal seasonality but more pronounced where you'll hire a lot more aggressively? And then on the offshore, we saw the on-site mix go up in the fourth quarter. Will we see it continue to increase throughout the year sequentially pretty much every quarter?

Zaineb Bokhari

Brian, in general, we have a plan for hiring, and we start the year that way. But we don't share specific targets and across the different geographies. Some of the projects that we talked about where there is a higher on-site component, eventually, what will happen is some of that will shift to offshore. So we'll provide you an update in terms of the shift between on-site and offshore every quarter rather than putting out targets at the start of the year.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. My follow-up is can you...

Prashant Ranade

[indiscernible] We take great pride in delivering and doing a great -- running the business operationally very, very efficient. And we'll continue to do it and adjust it depending on the demand and the needs of our customers.

Brian Kinstlinger - Sidoti & Company, LLC

One follow-up. Can you give us a sense in Q4 if there were any short-term projects that made sequential -- that will make sequential revenue growth challenging, for example, in Q1? And are project starts off to a solid start in '14 or did they generally slow down in '14 -- at the beginning of the year, sorry.

Zaineb Bokhari

Yes. So as we said in Q4, there was some acceleration of timelines, and that contributed to some of the revenue upside relative to what we had -- the levels that we had talked about, that coupled with the strong execution and continuing to add business. Does that answer your question?

Brian Kinstlinger - Sidoti & Company, LLC

Yes. I guess just the other piece was, are projects at the beginning of the year starting slow? Sometimes I know in the IT projects generally take a little bit slower start time in the first quarter as budgets are being finalized, so I guess I'm wondering that, too.

Zaineb Bokhari

I think Prashant mentioned that we expect normal seasonality throughout the year, so you see Q2 and Q3 being seasonally the strongest periods and Q1 and Q4 being seasonally weaker. I don't want to really get into guiding by quarter, but we talked about the accelerated timelines and the normal seasonality that we expect to prevail in the coming year.

Operator

Our next question comes from Rahul Bhangare of William Blair.

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

Nitin, congratulations on the new role. I know you've been focused somewhat on the 3 to 30 initiative, and that's done quite well. But with the new role, can you view any areas that you feel need improvement?

Nitin Rakesh

I think we're going to stay focused on our stated objective of continuing to grow not just the 3 to 30 but also account relationship, as well as continuing to focus on building our pipelines for future growth and new accounts. I think nothing different in investment. I think right now, we attained [indiscernible] execution for our clients and continuing to [indiscernible]

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

All right. And then switching to the KPO business. I was wondering if I can just get more color on demand there and kind of the outlook for '14?

Zaineb Bokhari

Yes. Our KPO pipelines continue to build. We're seeing good tractions for the services that we provide within insurance, health care in addition to our financial services segment. But as you know, some of the sales cycles do remain long. Having said that, within Q4, we did cross sell KPO services to an existing IT customers, and it's very much in keeping with our aim to expand relationships with customers, so we feel good about KPO.

Operator

Our next question comes from Manish Hemrajani of Oppenheimer.

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

First of all, Prashant and Nitin, congratulations on your promotions. First question for me, can you talk about your top 3 customers? How do you see that growth rate panning out with the rest of your top 30 and overall growth rates in 2014?

Prashant Ranade

Thank you for that. I think as I briefly mentioned, in 2013, our top 2 customers grew at 6% year-over-year and our 3 to 30, we were at 19% year-over-year, [indiscernible] growth rate was 14%. And I think our objective was to make sure that the 3 to 30 segment continues to grow faster than average [indiscernible] growth, and at the same time make sure that we still have those mindsets our profitable clients. I think that's stated objective and they were for 2014 as well.

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

Got it. Also, can you talk about your current pipeline versus the same period last year? Are you seeing any lengthening of sales cycles for larger deals out there? We've been hearing that from some of your peers. Can you just tell us about that?

Prashant Ranade

I think we are fairly comfortable with the health of our pipeline. I think as Rakesh mentioned, some of those areas that we're very focused on have given us some pretty strong positioning in the market, whether it's the main segment in financial services or the ICD and regulatory [indiscernible] practice in health care policy segment in insurance. I believe [indiscernible] seeing anything directly or different from what we saw this time last year. Obviously, we are seeing higher demand on some of the digital and transformation projects in addition to the [indiscernible] work.

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

Got it. In the [indiscernible] domestic, if so, what percentage of your business is that?

Prashant Ranade

I don't think we have any domestic...

Arvind S. Godbole

No, we -- our focus is not on domestic market, but it is to serve our clients whom we do business with in North America and Europe to help them with their initiative there with growth plans, but we follow them in their markets.

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

The reason I asked that is, is there any uncertainty level around that, given the general elections this year?

Prashant Ranade

Well, we don't expect that to affect us because of what I just described. Our business today is mainly focused in North America and Europe, where we see robust pipeline, positive work outlook and we feel good about what we are hearing from clients about budgets.

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

Okay. Given the amount of cash you have in your balance sheet, special dividend, buyback or M&A, can you rank them in order of preference for cash deployment?

Prashant Ranade

Yes. Our board looks at our balance sheet on a regular basis and decides on the best use of cash and it continues to do that.

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

Okay. Then one last one. Can you talk about pricing in the fourth quarter? And how do you see price coming out in 2014?

Zaineb Bokhari

So I'll take that, Manish. We saw pricing was fairly stable throughout 2013 and the fourth quarter, and our expectation is that in 2014, it will be stable with an upward bias.

Operator

Our next question comes from Vincent Colicchio of Noble Financial.

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

Prashant, on Europe, do you consider -- how large is Europe today? I'm trying to figure out if it's meaningful. And if not, when do you think it could be a meaningful contributor?

Prashant Ranade

So currently, our Europe business is approximately 8% of our overall business and the investments which we have made over the last several years. We are pleased with our results clearly from a smaller base, but our quarter-over-quarter, year-over-year, as well as year-over-year for last 2 years, growth have exceeded our average company growth rate, which is higher than market growth rate. So we are pleased with our progress in Europe, and we remain focused [indiscernible], clients there are definitely open to working with a partner like us.

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

And then, Prashant, to what extent are you actually benefiting from the proliferation of smaller contracts? Does that make you feel better about your business today than it was, say, a year ago?

Prashant Ranade

I wouldn't necessarily say smaller contracts but clients [indiscernible] and focus on [indiscernible] have definitely benefited us given our differentiated offering, domain knowledge and expertise that we have. So absolutely, that has benefited us. And they are back [indiscernible] also as clients to look at multi-sourcing. So combination of all of this and our positioning will definitely bode well for us.

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

The e-Business segment was down a bit in 2013. I know it's not strategic per se. Do we think that will grow in 2014?

Zaineb Bokhari

So, Vince, I want to stay away from guiding by specific segment. But as you noted, e-Business, about 6% of overall revenues. It can be lumpy because it is skewed to the development side. And the other thing is that we do see a move towards Agile versus Waterfall development. And this change in the nature of what customers are demanding is causing some of the variability. But again, some of our newer offerings are around data management, are in that e-Business segment and so that's an important segment for us.

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

Arvind, one last question here. Arvind, what portion of cash is based in India? And what rates should I assume today for the cash?

Arvind S. Godbole

You have in India around $25 million [indiscernible] and the year that we got overall from [indiscernible] is 6.83% in Q4 as compared to 6.47% in Q3.

Operator

Our next question comes from James Friedman of Susquehanna.

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

First is for Rakesh. Rakesh, you were mentioning about hardening in the insurance market. I was hoping you can elaborate about that. Is that more commercial or PNC? And then for Arvind or Zaineb, if you could give us some context on what you're thinking about for wage inflation, at least qualitatively, that'd be helpful.

Rakesh Khanna

James, the interest rates hardening [indiscernible] lifetime retirement space, and that's really, like I said, driving improved investments in technology. In the PNC, what has been the trend out there is more around technology stack modernization. And there again, our intellectual property, those offerings are around certain product implementations, hence it's a sweet spot.

Zaineb Bokhari

Okay, I'll just take the wage inflation question, Jamie. As Prashant noted earlier for on-site, which was effective at the beginning of the year, in that low to mid-single-digit range is where that came out. And the offshore wage inflation will provide an update in the coming quarter call for Q1. And historically, it's been trending in that high single to -- I'm sorry, high single, low double-digit range last year, so we'll provide an update to that on the next call.

Operator

And our next question comes from Jason Rodgers of Great Lakes Review.

Jason A. Rodgers - Great Lakes Review

Just detail on the health care vertical in the quarter. I was wondering if you can provide that from -- for some of the others such as financial services?

Arvind S. Godbole

What we've seen the health care vertical is consumerism, right? It's really continuing to be the key focus area, and our digital strategy with accelerated this year to leverage this. We did see a lower-than-expected enrollment on the central exchanges. And most pairs continue to focus in the health exchange private, as well as public. As well as -- as we get closer to the ICD-10 deadline, we do see the testing ramping up because it's -- as we get closer to the deadline, obviously, the [indiscernible] around that entire production and rollout, that's another focus area.

Jason A. Rodgers - Great Lakes Review

I was looking more for some of the other verticals, how they performed in the quarter?

Zaineb Bokhari

Okay. So in terms...

Prashant Ranade

That's all [indiscernible]

Arvind S. Godbole

[indiscernible]

Zaineb Bokhari

Yes, I'll cover that. So financial services on a year-over-year basis was up 7.1%. This was all for Q4. Health care, as we noted, year-over-year, up 21%; insurance, also up approximately 21%. The RLT segment, retail, logistics and telecom, up 94.5%, while manufacturing was down about 14%.

Jason A. Rodgers - Great Lakes Review

And any highlights and looking at financial services as far as what you're expecting going forward and for the quarter?

Zaineb Bokhari

So, Jason, we don't guide by vertical, but the full year outlook that we shared with you for revenues of $910 million to $940 million for 2014 encompasses our view of all of our verticals. Clearly, for health care, we talked about a long-term favorable outlook there. Rakesh touched on the trend we're seeing within insurance, and RLT continues to post very healthy growth rates. So those have been more recently some of the more growth-y areas. Within financial services, payments is certainly an area where there's a lot of dynamism in terms of interest and leveraging of newer technologies. And certainly, regulatory requirements are rising within financial services. So that's just a little bit of color in terms of what we're seeing across some of the verticals.

Operator

And at this time, I'm not showing any further questions. I'd like to turn the call back to management for any closing comments.

Prashant Ranade

We don't have any closing comments. Thank you very much, everybody, for joining us today.

Zaineb Bokhari

Thank you.

Prashant Ranade

We hope to catch up with you next quarter.

Operator

Thank you. This concludes Syntel's fourth quarter earnings call. A replay of today's call will be available until February 27, 2014, by dialing (855) 859-2056 and entering the passcode which is 88510738. Thank you for joining us today. Have a wonderful day.

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