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Syntel, Inc. (NASDAQ:SYNT)

Q1 2014 Earnings Conference Call

April 17, 2014 10:00 AM ET

Executives

Zaineb Bokhari - VP of Finance

Bharat Desai - Chairman

Prashant Ranade - CEO and President

Arvind Godbole - CFO

Nitin Rakesh - President, Americas

Rakesh Khanna - COO

Analysts

Edward Caso - Wells Fargo

Mayank Tandon - Needham

Jeffrey Rossetti - Janney Montgomery Scott

Brian Kinstlinger - Sidoti

James Friedman - SIG

Puneet Jain - J.P. Morgan

Kunal Doctor - Oppenheimer

Vincent Colicchio - Noble Financial

Jason Rodgers - Great Lakes Review

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Syntel First Quarter 2014 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded today, Thursday, April 17, 2014.

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

Zaineb Bokhari

Thank you, and good morning, everyone. Syntel's first 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 are off to a good start for the year making progress along some of our long-term strategic initiatives. We remain committed to providing best-in-class solutions in the industries we serve, and are investing in support of this goal.

Our focused approach enables us to distinguish ourselves with industry-specific innovations and to help clients address business challenges and respond to market opportunities. This makes Syntel a valuable partner to our enterprise clients, and provides a strong foundation for the long-term relationships we have with our clients. The need for innovation has never been more critical. Business agility is synonymous with near-term success and long-term survival.

Today, more than ever before, established companies are being challenged by new entrants and disruptors in their core markets. Instant access to complex information is becoming table stakes for competing and for opening new markets.

Consumers are challenging enterprises by leading the wave of technology adoption and demanding that companies they do business with also evolve and become digital. These digital natives are impacting a broad swath of industries from banking, healthcare, payment processing, retail and many, many more. The reality is if companies do not adapt they risk becoming irrelevant.

In this environment, we see tremendous opportunity to support the transformation that market forces are imposing on industry after industry. Our focused approach and deep industry knowledge positions us very well to help clients as they navigate this change.

Our investment in building SMAC stack capability and creating accelerators along with a deep understanding of our clients existing systems make Syntel an ideal long-term partner for their success.

I'd 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 first quarter revenues were 219.5 million rising 16% year-over-year and falling 2% sequentially. As we shared with you in the last quarter, there were some projects on which customers required accelerated delivery during Q4. This had an impact on the sequential growth rate for Q1.

Aside from this, we continue to make progress in expanding our relationships with customers in the three to 30 category, which was up 2.5% quarter-over-quarter and 29.7% year-over-year.

I'm also pleased that we have grown an additional customer relationship into one that is contributing greater than 10% of company revenue. We'll be providing further disclosure about this in our upcoming 10-Q filings for the quarter ended March 31, 2014.

The broader business environment remains favorable relative to the prior 12-month period, and while Q1 is a seasonally slower period for us, we remain optimistic that prevailing market conditions support a continuation of the favorable discretionary spending trends in last year.

Our investments in Europe continued to pay off, and we're very pleased with the growth in that region, which was at twice the pace of overall company growth on a year-over-year basis. We also saw revenue growth across several of our verticals on a year-over-year basis with retail, logistics and telecom, and healthcare and life sciences showing some of the strongest growth.

First quarter gross margin narrowed 334 basis points from the fourth quarter, coming in at 43.7%. The Indian rupee appreciated slightly during the quarter creating a modest headwind as Arvind will elaborate later. We continue to grow our employee ranks in support of our business needs and our building backlog.

Net headcount increased by 555 in the first quarter, a rise of 2.3% sequentially and 9.1% from a year ago as we added both campus hires and on-site associates in keeping with our hiring plans. Offshore utilization for IT declined to 62% in Q1 from 65% in Q4 on a period end basis, and to 63% from 68% on average.

As in the past, utilization will follow typical historic patterns with progressive quarterly movements tied to the requirement of our business.

The company's SG&A expense increased by about 6.5 million during Q1 as compared to a year ago, and by 2.5 million from the prior quarter. On a sequential basis, currency-related balance sheet translations contributed to some of the increase in SG&A in Q1 as compared to the fourth quarter. And Arvind will provide additional details in his comments.

We remain focused on driving efficiencies throughout our operations. Our pipelines remain healthy, and are continuing to build as we invest in our capabilities and enhance our long-term competitive position.

As we noted last quarter, customer budgets were finalized in line with expectations at flat to slightly higher than in the prior year. Our customers are continuing to seek ways to optimize their run the business investment dollars while readying themselves for the digitization of their enterprise. This requires an investment in modernizing existing applications and infrastructure and customer-facing technologies that create tremendous opportunity for us as we help them help manage this transformation.

We feel good about our future prospects, and we're well positioned in the market where the dynamics are playing to our areas of strategic strength, which are deep domain expertise in key areas, a focus on innovation and a customer-centric approach, which foster long-term relationships.

As many of you know, I'll be moving into a role of Executive Vice Chairman of Syntel's Board of Directors in a few days. I'm very pleased with the robust succession planning process in place at Syntel. We have promoted our incoming CEO and President, Nitin Rakesh internally, and I believe he has the right combination of skills, experience, client knowledge and understanding of company culture to lead us to the next level in our growth and development.

I want to thank all of you for your support during my tenure as CEO and President. I expect to be an active member of our Board and look forward to working closely with Nitin after he assumes his new role, as well as the rest of our leadership teams. I want to conclude by thanking the employees of Syntel around the world for their continued dedication and hard work.

I'd now like to turn the call over to Arvind Godbole, Syntel's Chief Financial Officer who will discuss Syntel's financial performance. Arvind?

Arvind Godbole

Thanks, Prashant. Good morning. After my comments we will open the call to questions. Syntel's first quarter revenue came in at $219.5 million, up 16% from the year ago period, and down 2% sequentially. As disclosed in our 8-K filed on April 14, 2014, we realigned our segment financial reporting structure into vertical business units effective first quarter, which ended on March 31, 2014.

Under this revised segment reporting banking on financial services contributed 49%, with healthcare and life sciences at 17%; retail, logistics and telecom, 16%; insurance 15%; and manufacturing 3%. On a year-over-year basis vertical growth was led by retail logistics and telecom and healthcare and life sciences which grew approximately 79% and 30% respectively.

Syntel's customer concentration levels were as follows. Our top two clients represented 35.8% of revenue in the first quarter of 2014, while accounts three to 30 represented 57.1%. The fixed price components of our business was at 39% of revenue for the first quarter of 2014.

With respect to Syntel's margin performance, our gross margin was 43.7% in the first quarter. This was up from 41.1% reported in the year ago period and down from 47.1% reported in the fourth quarter of 2013.

Our direct costs were negatively impacted by higher billable headcount, higher cost prior to benefits, and compensation increases for our onsite employees. The Indian rupee appreciated by 0.65% sequentially during the quarter. This lowered gross margins by approximately 14 basis points.

By industry segments, gross margins for banking and financial services was 44.1% with healthcare and life sciences at 50%; retail, logistics and telecom, [34.9%] [ph]; insurance 39.4%; and manufacturing 28.9%.

Moving down to income statements, our selling, general and administrative expenses were 14.7% in the first quarter of 2014 compared as to 13.6% in the year ago period and that is down 3% in the fourth quarter of 2013.

On a dollar basis, SG&A was higher by $2.5 million sequentially. The impact on SG&A from the balance sheet translation adjustment this quarter was $3.6 million loss as compared to a $1.7 million loss recorded in Q4 of 2013. This increased SG&A by $1.9 million. The appreciation of the rupee raised SG&A by $0.15 million.

Other income was $11.8 million during the first quarter as compared to $9.8 million in the fourth quarter of 2013, primarily due to a gain of approximately $2.7 million from the sale of mutual fund units versus a gain of approximately $1.1 million in the fourth quarter. Other income during the first quarter also included 0.6 million related to interest expense.

Our tax rate for the first quarter came in at 23.1% as compared to 22.1% posted in Q4. Net income for the first quarter was $58.1 million or $1.39 per diluted share as compared to $46.4 million for $1.11 per diluted share in the year ago period, and $66.3 million or $1.58 per diluted share in the previous quarter.

The company's balance sheet at the end of the first quarter of 2014 remained extremely healthy. Our total cash and short-term investments on March 31, 2014 were $712.9 million and DSO level, we're at 57 days. Capital spending for the quarter was $3.8 million.

Syntel ended the first quarter with a total headcount of 24,207 of which 7,257 were assigned to KPO business. Our billable headcount was 3,818 on-site and 18,679 offshore for a total of 22,497. Net additions to the global headcount were 555 employees.

Utilization levels at the end of the quarter were 94% on-site, 71% offshore and 75% globally. Our delivery mix at quarter end was 21% on-site and 79% offshore. Voluntary attrition during the quarter was 13.7% as compared to 15.2% reported last quarter. Syntel added eight new customers in the current quarter.

Looking forward, I'd now like to provide you with our updated guidance for 2014. Based on our current visibility level, Syntel expects revenue to be in the range of $915 million to $940 million, and EPS to be in the range of $5.10 to $5.28 for the full year of 2014.

The company currently has 78% visibility to the lower end of the revenue range and our guidance is based on an exchange rate assumption of 60 rupees to the dollar.

We anticipate that operating margins in the 26% to 28% range and our effective tax rate will be in mid 20% range. CapEx for the full year is expected to be in the range of $30 million to $40 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Edward Caso with Wells Fargo Securities.

Edward Caso - Wells Fargo

It appears based on some of the calls we've had company releases in the last few weeks at the pace of the carve up of historical global outsourcing deals is accelerating particularly in financial services. Is Syntel able to take advantage of this? And it appears it's coming at a fairly aggressive price. Can you sort of give us a handle where you are playing in that? Thanks.

Nitin Rakesh

Hi, this is Nitin. I think we have seen a pretty stable business coming out of the [run] [ph] side of the equation. So clearly, the environment is pretty stable. We have seen good traction ongoing (indiscernible). I think specific to financial services, there isn't that much more to call out than we'd say for the rest of our business as well. But I think the pipeline is pretty good for us across the board.

Edward Caso - Wells Fargo

Can you talk a little bit about your retail sector that seems to have been under intense pressure on the cost side, [run] [ph] side and where may be it appears to be some delays on the deployment of some of the SMAC stuff that was mentioned.

Nitin Rakesh

I think there is a fairly high degree of digital disruption going on in that segment, which is leading to in some quarters significant cost pressures. I wouldn't say we've seen a lot of that play out specifically to our client segment, but I think there is clearly a pressure on the run side, but on the other end there is also an opportunity on the SMAC or the digital side that we've seen. And then Rakesh will provide some more color on that.

Rakesh Khanna

Yeah. Hi, Ed. What we're seeing in the retail, logistics and telecom piece of our business, we're seeing a bigger focus on the legacy modernization, and like Nitin said, more focus on the mobility and big data, which is becoming mainstream.

Edward Caso - Wells Fargo

Great. What can you offer us on the sense of wage increases; we have heard as low as six and as high as 10 for offshore this year? Can you give us a feel maybe where you're shaking out and just remind us of the timing?

Zaineb Bokhari

So, I'll take that. Ed, our offshore incremental will be effective April 1, and that's been trending the low double-digit range, which is very much in keeping with our historical experience. And as we shared with you last quarter, the on-site increment also within historical ranges, low single to mid single-digits. And that's effective as of the beginning of the year.

Edward Caso - Wells Fargo

Great, thank you.

Operator

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

Mayank Tandon - Needham

Good morning. Prashanth, you've made the comment that you thought the environment was very similar to 12 months ago, but coming out of the budgeting cycle, could you give us a little bit more detail in terms of what areas are you seeing incremental strength in, and then what areas maybe seeing some incremental softness versus what's your expectation going into 2014?

Prashant Ranade

As I shared in my prepared remarks, the budgets are flat to slightly upwards, but within that budget, there is pressure on lights on work and what clients are looking at doing is optimizing that and freeing up capital and cash to invest in digitization, SMAC technologies and more importantly how they can connect with their clients better and improve their business. That is what we're seeing, Mayank.

Mayank Tandon - Needham

Okay, thank you. And then I had another question regarding the verticals. I heard Arvind talk about the gross margin for the key areas. I was just curious that there seems to a really wide dispersion in terms of gross margins across these verticals. Could you share with us in terms of why there is such wide dispersion, and is that a function of utilization, pricing, offshore mix? What are the drivers?

Zaineb Bokhari

Mayank, I'll take that. The normal factors that come into play in some of what you have named in terms of gross margin will vary across the vertical, and will impact the gross margins across the verticals. That will include proportion of the kinds of services that they're engaging us for the mix of where the delivery is coming from on-site versus offshore and underlying industry dynamics as well.

Mayank Tandon - Needham

Okay. Has there been a big change in the gross margins for any of these verticals, or have they been fairly consistent with recent trends?

Zaineb Bokhari

I think if you look at our 8-K filing, which we put out a couple of days ago, we gave you some good trend data going back to 2011 and you can see how the trend has been pretty much flowing.

Mayank Tandon - Needham

Okay. Just one final question; in terms of visa cost, were those costs reflected in 1Q or will that show up in the 2Q?

Zaineb Bokhari

So, Q2 will be where the bulk of that expense will come through and that's pretty much our experience every year.

Mayank Tandon - Needham

Okay, thank you.

Zaineb Bokhari

Thank you.

Operator

Our next question comes from Joe Foresi with Janney Montgomery Scott.

Jeffrey Rossetti - Janney Montgomery Scott

Hi, this is Jeff Rosetti in for Joe. You continue to show strength on your top three to 30 clients, and I just wanted to ask about the top two it seems like the percentage of revenue has continued to trend down, and I just wanted to see -- seems like it was a headwind in the quarter, just wanted to see what you're kind of expecting from your top two client-base going forward, and if there was any reason for the recent weakness?

Zaineb Bokhari

Hi, Jeff. I'll take that. I want to start by emphasizing that our relationship with our largest customers remains very strong, and as a company we're very focused on serving them and supporting their requirements. In any given quarter, factors like seasonality and where we are in the overall budget cycle can come into play. That was more in play here. We don't guide by customers specifically, but we've noted in the past that the rate of growth for three to 30 is going to be above company average, and a clear driver.

Having said that, over the long-term we definitely see potential opportunity across all of our customer relationships, and that's very much incorporated into the full year outlook that we shared with you.

Jeffrey Rossetti - Janney Montgomery Scott

Okay. In say dollar terms, there is nothing structurally different within the top two client base?

Zaineb Bokhari

No.

Jeffrey Rossetti - Janney Montgomery Scott

No. Okay. And it was also mentioned that there was a third client at this quarter became greater than 10%, but there will be some additional information forthcoming. I just wanted to see does that happen to be the same prior insurance client that you've had in the past or was it a more -- one of your top three -- obviously one of your more recent clients that has been growing at a faster pace?

Zaineb Bokhari

Jeff, I think we'll save some of the disclosure for when we actually do our 10-Q filing and provide you that information at that time.

Jeffrey Rossetti - Janney Montgomery Scott

Okay, great. Thanks.

Operator

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

Brian Kinstlinger - Sidoti

I wonder if you can share your thoughts based on the new segments which you expect are going to grow faster based on the Q1 '14 results and which will grow slower from there.

Zaineb Bokhari

So, Brian, we're going to continue our former practice of guiding by company overall. That will factor in our expectations in terms of what individual verticals are doing. We'll certainly continue to provide you information around some of the longer range trends that are emerging over the course of the year, and allow you to get some color that way.

Brian Kinstlinger - Sidoti

So, maybe you can elaborate on some of the trends there impacting you, in retail and healthcare, do you expect those continue to be a factor this year driving outpaced growth to say, for example, BFSI?

Zaineb Bokhari

I'll start that discussion and then ask Rakesh to elaborate a little bit, and I'll give you a little bit more in terms of drill down. One theme across the verticals that we're seeing, and I think Bharat and Prashant references is, companies are embracing some of the digital initiatives that we've been talking about, and that's growing some of the investments in legacy modernization. And Rakesh, why don't you elaborate?

Rakesh Khanna

Yeah. What we're seeing out there, the triggers are digital, agile and legacy modernization. We're seeing more proliferation and movement to more open source. And around some of these with a disruption and the payments landscape also we're seeing some good trends and we're are working with both traditional and companies in that space. And some more spend coming on the regulatory. So that's really the wide spread that we are seeing out there.

Brian Kinstlinger - Sidoti

Okay. Some of your competitors have talked about pricing being relatively stable, but on the large deals there are some pressure and undercutting of prices. Are you seeing this in -- is this impacting your business specifically on the new business you're seeking?

Rakesh Khanna

I think so far we haven't really seen any pressure on pricing. It has been fairly stable. I think we continue to see the fact that issuing so much about just cost especially when it comes to transformation and survival of the business areas. I think as Prashant mentioned, there is definitely some pressure that is coming on the run business, but I think it's really a question of stability that we can bring in by taking our value added offering and helping them actually make the leap on the transformation side of that.

Brian Kinstlinger - Sidoti

The last question I have, you guys just mentioned in one of the previous questions, pressure on lights-on work, I know you've got a lot of lights-on work, you have discussed before. What do you mean by pressure? Is that budget pressure or is that pressure on pricing? Can you elaborate on what you meant by pressure on lights-on work?

Rakesh Khanna

Yeah. I think the issue isn't so much pressure in terms of pricing or budget. I think the point -- the intent from all customers is to continue to be in efficiency on that front, and there are obviously many levers that you can use to get more efficient. And then, use some of those savings to flow back into transformation projects especially on the digital side.

I think for us, the events; that opens up an opportunity area to use that efficiency that we can generate for them to then play on the transformation side of that. I think it's really more dynamic that we see going forward in terms of focus moving away from pure cost to actually transformation.

Brian Kinstlinger - Sidoti

Great, thank you.

Operator

Our next question comes from James Friedman with SIG.

James Friedman - SIG

Yeah, thank you. I was wondering, Prashant, if you could discuss the competitive landscape, anything that you'd call out in that respect in terms of changes you had talked about the year-over-year observations, which is helpful context. Anything changed in the competitive environment in that year duration?

Prashant Ranade

I think the main thing we see is positioning of different companies, there are several routes they can take whether you want to be services company, a product company, a consulting company. And our focus right now on our board of directors and leadership team is very clear. We're services company, and we support best of the breed products. So we're not biased towards one product or other. And that has allowed us to serve our customers well. So that is really the biggest change, if you look at last couple of years in terms of how different services companies are positioning themselves.

Bharat Desai

If I may add to that, Prashant, Jamie; I'd say that in my multiple meetings with customers, I feel our positioning is getting stronger, and it's because of our focus on industries, because of the investments we've made in this SMAC stack in anticipating the changes these industries are going to have to make, and just our innovative culture in health and then find solutions and the investments was made in legacy modernization. So, all those are very timely, and investments that we've made that are leading to a stronger positioning; customers wanting to embrace that to move to a digital enterprise.

James Friedman - SIG

Thank you, Bharat. That's helpful context. Thanks, Prashant.

Bharat Desai

Yeah.

Operator

Our next question comes from Puneet Jain with J.P. Morgan.

Puneet Jain - J.P. Morgan

Thanks for taking my question. Arvind, I think you mentioned operating margin guidance of 26% to 28% for this year, which is down 200 basis points relative to your prior view. So, we understand the [effects] (ph) in part there, but could you talk about other headwinds that you expect will hurt margins on an incremental business this year?

Arvind Godbole

Additional headwind will be -- first will be the offshore increments and visa costs. Apart from that, we're also guiding that liquidity to the dollar, whereas earlier guidance was 62. So that will certainly impact the operating as well as the net values.

Puneet Jain - J.P. Morgan

And do you expect to incur more Visa cost than you'd have talked two months ago, or is it about the same, because …

Prashant Ranade

We'd have – Sorry, go ahead.

Puneet Jain - J.P. Morgan

No, I was just saying, because like the H1 quota for this year, like, cost filled out pretty fast. So, did you applied for more visas than you might have heard three months ago?

Zaineb Bokhari

Puneet, I think we applied for what we think is the adequate amount of visas. And I just want to correct you; our operating margin outlook for the year is 27% to 28%. I think you had mentioned 26%.

Puneet Jain - J.P. Morgan

Okay, okay. So, it's down 100 to 200 basis points. Understood. If we can get a heavier view on discretionary spending themes over the last three months, some of your peers have talked about [fuel] (ph) cut delays there. And would you characterize that client spending on digital areas of discretionary?

Prashant Ranade

I think most of that will fall into the discretionary bucket, because that's how it's classified. In terms of trends, I think the Q1, typically the normal seasonal budget cycles have come into play. I wouldn't say that the decision got delayed, but typically we're seeing good compositions and good pipelines in discretionary areas. And Rakesh probably add a couple of more couple there.

Rakesh Khanna

Yeah. Puneet, what we're also seeing is some business process migrations to more BPM platforms. And like I said, Big Data solutions for analytics and unprecedented business and types, so we do see some discretionary spend in those areas.

Puneet Jain - J.P. Morgan

Understand. Thanks.

Operator

Our next question comes from Manish Hemrajani with Oppenheimer.

Kunal Doctor - Oppenheimer

Yeah. Hi. Thanks for taking my question. This is Kunal Doctor on behalf of Manish. Nice quarter. My question was basically what would it take to reach the top end of your guidance, your guidance of 11% to 14%? What would it take to reach the top end and the 14% for the revenue growth?

Zaineb Bokhari

So Kunal, just to revisit our guidance work, we've shared that the low end is guided by visibility, and Arvind provided the visibility metric for you. The upper end is a function of some of the account-related trajectories and some additional business that we'd expect to add during the course of the year to get us to that level at the top end.

Kunal Doctor - Oppenheimer

All right. And just continuing from Puneet's question, you guys talked about giving offshore increment, how much percentage it would be? And simply one of your peers talked about giving the 10% increment, big hike. So, do you think that would become a trend later on? Is it possible?

Zaineb Bokhari

Our offshore increment, which will be effective April 1, is expected to be in the low double-digits. And if you look at our historic experience, the range has been high single to -- in the low to mid double-digit. So, we're very much within our historical patterns.

Kunal Doctor - Oppenheimer

All right, that's all from me. Thank you.

Prashant Ranade

I just want to add a comment on the guidance for revenue growth. I think our commitment and our endeavor is to grow customer industries, and that's what we've been delivering for the last few years. I think that's really is the direction in which we continue to work towards. And as we go through progressive quarters, we'll obviously continue to revisit our guidance, based on our visibility and the market conditions.

Operator

Our next question comes from Vincent Colicchio with Noble Financial.

Vincent Colicchio - Noble Financial

Yes, hi. I realized you changed your reporting format. I was curious if you could -- I'm not sure who this is for, but you could comment about the KPO business in qualitative terms, did you had any clients in the quarter and as we've meant they feel sort of similar to what it's been in the recent quarters?

Zaineb Bokhari

Yeah. Vince, the thinking behind the segment change was -- just to give you guys more transparency around how we run the business, KPO and IT for us is an integrated service offering. And KPO, the underlying pipelines are still building and they look relatively healthy. I'd say the sales cycle, which from covering us do remain longer than company average, but KPO is still about 15% of overall revenues and the pipelines looks to be still building.

Vincent Colicchio - Noble Financial

Thanks for that. And one more, the European business, how did it perform in the quarter? And what are your feelings about this for 2014?

Zaineb Bokhari

So, as Prashant mentioned, it grew about twice the pace of company overall. So, it's up about 32% on the year-over-year basis. And we've been very pleased with the growth out of Europe since we have been investing in that region and rating ourselves. That region begins to recover economically.

The overall trend there remain that clients are interested in making our operations more efficient. And top line growth may still remain challenged. So, that drives them to look for efficiencies in their back office, in their main office. And the trends around digital are also something that's in play on the European side. So, overall, it's a great opportunity for us.

Vincent Colicchio - Noble Financial

Thank you, Zaineb. That's all I have.

Operator

Your next question comes from Jason Rodgers of Great Lakes Review.

Jason Rodgers - Great Lakes Review

Could you give an update on the healthcare industry and the growth that you're seeing in the ICD-10 as well as electronic medical records? And then, looking in the financial space, Dodd-Frank, how that initiative is going?

Zaineb Bokhari

Okay. So, I'll start that up, and then Rakesh can certainly add additional color. Overall trends in healthcare remain positive. And long-term, there are factors and dynamics within that industry vertical that make us feel very well positioned. Consumerism seems to be a key area of focus, connecting and engaging with the end customer, which is the patient. And other areas like connectivity between providers and payers and patients and integration of medical devices, information etcetera.

I'll quickly comment on ICD 9 to 10, the delay that was announced a couple of weeks ago, I'd say that most products it will continue some -- it may have some impact on a few customers and that they may elect to shift some of those budgets into other areas. And now I'll ask Rakesh to elaborate on that on Dodd-Frank.

Rakesh Khanna

Yeah. Just one more comment on ICD-10, we do see some delays, but definitely some projects are on track. And we see an opportunity, right. There is -- some of those ICD-10 projects getting shifted to other discretionary spend area. So that's clearly a good opportunity. And we made investments in IT and ICD-10 related intellectual property ahead of time, which is helping us position our service offerings very strongly.

Coming to Dodd-Frank, again, we see a healthy demand as banks and financial institutions spend money in the compliance area in typing up the core systems and improving the regulatory reporting. So clearly that's also a very healthy opportunity that we're seeing out there.

Jason Rodgers - Great Lakes Review

Okay. And just a quick follow up on the guidance, the slight reduction on the top end of the guidance. Is that due mainly to the rupee or are there other factors involved there?

Arvind Godbole

Well, primarily because we earlier got it at 62 rupees and now it is 60. That's one of the main reasons why we're reducing the high end of the EPS.

Jason Rodgers - Great Lakes Review

And then finally in the other income line, you had some gains this quarter. Do you have expectation that these gains will be similar in future quarters?

Arvind Godbole

No. The gain on the total contracts as well as the gain on the sale of mutual funds, they're not predictable, it can be there. Our guidance is assuming 60 rupees to the dollars currencies exchange movement.

Yes, we may have the gain from mutual funds, but they're not fairly stable quarter-wise.

Jason Rodgers - Great Lakes Review

Thank you.

Operator

Our next question comes from Brian Kinstlinger with Sidoti and Company.

Brian Kinstlinger - Sidoti

Two similar questions; just curious what is the changing FX costs in earnings reduction to your guidance, the two points, can you give us earnings figure for that and anything else has changed on the cost side of your business, and your assumptions since we talked to you in February?

Arvind Godbole

Yeah. We're not seeing anything changed on the cost side. Yes, but the only change will be primarily the rupee/dollar rate, which was 62 earlier, and now it is 60, which impacts roughly 32 bips for one single -- one rupee.

Brian Kinstlinger - Sidoti

Thirty two bips for the year is what it cost you, you think?

Arvind Godbole

Yes, 32 bips from the operating margin per 1% movement up to Indian Rupee versus dollar.

Brian Kinstlinger - Sidoti

Oh, okay. So, 32 bips and it moved 3%, so almost a 100 basis points. Then, on the other income outside of all the gains and losses, what are your -- which are hard to predict, what are your assumptions going forward on other income?

Arvind Godbole

Well, as we had mentioned earlier, it is also including the forward contract gain or loss as well as the mutual fund gains. We'll not be able to give the exact number, but what is -- I can give the interest income that we earned, which is $8.2 million and that we expect to continue to get.

Brian Kinstlinger - Sidoti

And actually that increased marginally with your -- marginally stronger cash balance throughout the year?

Arvind Godbole

That's right.

Brian Kinstlinger - Sidoti

Right. Okay, thank you very much.

Operator

This concludes Syntel's first quarter earnings call. A replay of today's call will be available until April 24, 2014, by dialing (855) 859-2056 and entering the passcode which is 29148363. You may all disconnect. Thank you.

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