Syntel's (SYNT) CEO Nitin Rakesh on Q2 2014 Results - Earnings Call Transcript

Jul.17.14 | About: Syntel, Inc. (SYNT)

Syntel, Inc (NASDAQ:SYNT)

Q2 2014 Earnings Conference Call

July 17, 2014 10:00 ET

Executives

Zaineb Bokhari - VP, Finance

Bharat Desai - Chairman

Nitin Rakesh - CEO & President

Arvind Godbole - CFO

Analysts

Amit Singh - Jefferies

Edward Caso - Wells Fargo Securities

Joseph Foresi - Janney Montgomery Scott

James Friedman - Susquehanna

Anil Doradla - William Blair

Kunal Doctor - Oppenheimer

Vince Colicchio - Noble Financial

Jason Rodgers - Great Lakes Review

Elizabeth Colley - Needham & Company

Puneet Jain - JPMorgan

Operator

Welcome to the Syntel’s Second Quarter 2014 Earnings Call. (Operator Instructions). I will now turn the call over to Zaineb Bokhari, Syntel's Vice President of Finance. Please go ahead.

Zaineb Bokhari

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

On the call with us today, we have Bharat Desai, Syntel's Chairman; Prashant Ranade, Executive Vice Chairman, Nitin Rakesh, Syntel’s CEO and President; Arvind Godbole, Syntel's Chief Financial Officer; and Rakesh Khanna, Syntel's Chief Operating Officer.

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. Syntel made solid progress on our strategic initiatives during the first half of 2014. Our execution remained strong and we have aligned our organization with the opportunity areas that are critical to and can create the biggest impact for our customers. We continue to be proactive in identifying changed drivers in the markets we serve and in developing capabilities that will create significant business value for our customers. This has served as a foundation for strengthening our market position, for solidifying our long term customer relationships and for attracting new clients.

Investing in our future is becoming even more critical in the face of intensifying market pressures in the industries we serve. Many traditional business models in our clients industries are being disrupted by new digital entrants and by entrants from other industries. Technology is enabling companies to serve new global markets, making border superfluous and significantly leveling the playing field for these new entrants. Demand for accountability and transparency are rising. Consumers want to be able to transact with companies anytime, anyplace with any device. They also expect instant response and an exceptional user experience.

In a marketplace with these dynamics enterprises are recognizing that the cost of falling behind is very high and reinventing themselves is both critical and fundamental to their long term business viability. In the face of such rapid change Syntel is using our domain expertise to identify critical areas of opportunity in our client’s businesses and making investments to help them better serve their customers.

We take a long term view of our relationships and of the investments we make behind them. This approach positions us as a trusted partner during the time of considerable business turbulence. I would now like to turn the call over to Nitin Rakesh, Syntel’s Chief Executive Officer and President to provide further details. Nitin?

Nitin Rakesh

Thank you Bharat and welcome everyone. Syntel’s second quarter revenue was $228.3 million rising 13% year-over-year and 4% sequentially. We continue to make progress in expanding our relationships with customers in the 3 to 30 category for which revenue was up 4.7% quarter-over-quarter and 22.5% year-over-year. Europe maintained solid growth on a year-over-year basis rising nearly 35% as our investment in that region continues to payoff. We saw growth across several of our verticals on a year-over-year basis with retail, logistics and telecom, healthcare and life sciences and insurance showing some of the strongest growth. Over the near term we have observed some expansion of cycle times within healthcare and life sciences. This is partly due to regulatory delays as budgets are reallocated to more critical projects and in other cases due to a pause after a period of investment. We believe that healthcare and life sciences vertical remains in a secular spend mode and view this expansion in cycle times as temporary.

The broader business environment remained favorable and our clients are continuing to engage us in substantive discussions around digital enterprise, transformation and as they adopt their businesses to the changing technology landscape. Navigating this change presents a significant challenge for our customers but creates tremendous opportunity for us to help them future ready their businesses.

In late April, we launched our Digital One service line which brings together our capabilities around enabling the adoption of new technologies in a way that makes strategic sense and drives business value. Digital One has since being fortified by creation of a new group to drive the development of digital solutions with which we will go to the market across our industry verticals. We also formed our managed services organization, a new delivery group to industrialize or run business services using innovation, automation and cloud migration.

MSO will leverage our entry manage, migrate and modernize offering to help our customers optimize their spend. The formation of these two groups centralizes capabilities that we have honed over the years and frees up resources to support the development of additional capabilities in these key areas. It also increases bandwidth at the business unit level to proactively identify trends and create solutions that will be impactful in our focus industries. With these changes we have aligned ourselves as an organization to the megatrends that we think are going to drive demand for our services over multiple years.

Net headcount declined by 85 or 0.4% on a sequential basis in the second quarter to 24,122 but increased by a 5.5% from a year ago. The small sequential decline in headcount is partly tied to some of the organizational changes I have discussed. We have centralized our run-the-business functions with the formation of our MSO Group and as a result we have had an opportunity this quarter to do some rationalization from the consolidation of Bench & Buffer [ph].

We expect to continue to add headcount in support of our business in subsequent quarters. Second quarter gross margin narrowed 451 basis points from the first quarter coming in at 39.2% reflecting the impact of offshore wage increases and visa cost. Offshore utilization for IT rose to 64% in Q2 from 62% in Q1 on a period-end basis but was unchanged from the previous quarter at 63% on average. As in the past utilization will follow typical historic patterns with progressive quarterly movements tied to the requirements of our business. Wrapping up, I’m excited about Syntel’s future prospects and believe that we’re investing in areas that are relevant to the challenges of our customers, our size and flexibility also allows us to be responsive to customer demand and the realignment that we have recently undertaken positions us for continued profitable growth. I would conclude by thanking the employees of Syntel all over the world for their tireless efforts.

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

Arvind Godbole

Thanks Nitin. Good morning. After my comments we will open the call for questions. Syntel’s second quarter revenue came in at $228.3 million up 13% from the year-ago period and 4% sequentially. For the second quarter banking and financial services contributed 49% with healthcare and life sciences at 17%, retail, logistics and telecom 16%, insurance 15%, manufacturing 3%. On a year-over-year basis vertical growth was led by retail, logistics and telecom, healthcare and life sciences and insurance grew approximately 43%, 15% and 14% respectively. Syntel’s customer concentration levels were as follows. Our Top 2 clients represented 35.6% revenue in the second quarter of 2014 while accounts 3 to 30 represented 57.5% up from 57.1% in Q1 of 2014 and 52.9% in the year-ago quarter.

The fixed price component of our business was at 39% of revenue for the second quarter of 2014. With respect to Syntel’s margin performance our gross margin was 39.2% in the second quarter. This was down from 41.3% reported in the year-ago period and down from 43.7% reported in the first quarter of 2014.

Our direct cost were negatively impacted by higher cost tied to visa and immigration expenses and compensation increases for offshore. So Indian rupee appreciated by 2.7% sequentially during this quarter. This lowered the gross margins by approximately 56 basis points. By industry segment gross margins were banking and financial services was 30.4% with healthcare and life sciences at 44.5%, retail logistics and telecom 41.1%, insurance 33.8% and manufacturing 29.4%.

Moving down the income statement our selling, general and administrative expenses were 11.5% in second quarter of 2014 compared to 9.2% in the prior year period and 14.7% in the first quarter. On a dollar basis SG&A was lower by $5.9 million sequentially, the impact on SG&A from the balance sheet translation adjustment this quarter was $1 million gain as compared to 3.6 million loss recorded in Q1 which lowered SG&A by $4.6 million.

The appreciation of the rupee raised the SG&A by $0.7 million. The company recorded an out of period accounting adjustment during Q2 that lowered SG&A by $3 million, this onetime adjustment added $0.07 to the quarter to EPS but did not have an impact on revenue or growth margins. Other income was $12.2 million during the second quarter as compared to $11.8 million in the first quarter. Primarily due to a gain of approximately 2 million from hedging versus a $1.5 million gain in the first quarter. Other income during the second quarter also included $0.6 million related to the interest expense. Our tax rate for the second quarter came in at 21.4% as compared to 23.1% posted in Q1.

Net income for the second quarter was $59.3 million or a $1.41 per diluted share as compared to $47.5 million or a $1.14 per diluted share in the year ago period and $58.1 million or $1.39 per diluted share in the previous quarter. The company’s balance sheet at the end of the second quarter of 2014 remained extremely healthy. Our total cash and short term investments as on June 30, 2014 were $769.8 million and DSO levels were at 54 days. Capital spending for the quarter was $4.3 million. Syntel ended the second quarter with a total headcount of 24,122 off which 7314 were assigned to KPO.

Our billable headcount was 3832 on-site and 18,520 offshore for a total of 22,352. Our global headcount rose by 5.5% from the year ago period. Utilization levels at the end of the quarter were 93% on-site, 72% offshore and 75% globally. Our delivery mix at quarter end was 21% on-site and 79% offshore.

The voluntary attrition during the quarter was 17% as compared to 13.7% reported last quarter. Syntel added six new customers in Q2. In addition we cross sold our KPO services to one of our IT customers. Looking forward I would now like to provide you with an updated guidance for 2014 based on our current visibility levels, we’re raising the lower end of our expected revenue range by $5 million from prior quarter to $920 million. Syntel now expects 2014 revenue to be in the range of $920 million to $940 million. We’re also raising our full year 2014 EPS outlook to a range of $5.50 to $5.65 from $5.10 to $5.28 in the prior quarter.

The company currently has 91% visibility to the lower end of the revenue range and our guidance is based on an exchange rate assumption of Rs. 60 to the $1. We anticipate that operating margins will be in the 27% to 29% range and our tax rate will be in the low to mid-20s. CapEx for the year is expected to be in the range of $20 million to $30 million excluding any land purchase.

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

Question-and-Answer Session

Operator

Our first question comes from the line of Jason Kupferberg from Jeffries.

Amit Singh - Jefferies

This is Amit Singh for Jason. I will actually start off with a little bit on guidance. I mean you have raised if you look at your guidance you have raised the midpoint of your revenue guidance by around 2.5 million but the midpoint of EPS guidance was raised by almost $0.39. I mean obviously the 1Q EPS upside is there. But we’re trying to get a little bit more sense of what else is causing the EPS guidance raise for the full year. Are you expecting margins -- I am thinking is the margin guidance staying the same and so what else is driving the EPS guidance range increase?

Arvind Godbole

We’re pleased with the performance that we have seen in the first quarter -- first two quarters and primarily as you mentioned we also had a $0.07 positive impact on the EPS for the quarter and we’re also expecting the gross margin to pick up from the level that we have seen during this quarter and as a result of all this we’re expecting the EPS to be higher than what we expected during the last quarter end and if you notice we also had a similar increase during the last year as well.

Amit Singh - Jefferies

Okay, so what was the margin guidance previously? Wasn’t it 27 to 29 last quarter as well?

Zaineb Bokhari

Amit it was 27% to 28% on our April call.

Amit Singh - Jefferies

All right. But the tax rate guidance stayed the same, it was I guess mid-20s earlier, now it's low to mid-20s I guess?

Zaineb Bokhari

That’s correct.

Amit Singh - Jefferies

Okay. And just quickly on the attrition, I mean you mentioned that the attrition this quarter was 17% and it increased from 13.7% last quarter so if you could -- the voluntary attrition if you could talk a little bit about what caused that increase and what are you doing to sort of improve that and on top of that you talked about involuntary attrition this quarter as well. So if you can tie that with your guidance for increase or employee addition for the rest of the year as you’re seeing your pipeline increase or pipeline strengthening?

Nitin Rakesh

There is a seasonal factor at play where we typically see a spike in attrition in the quarter in which the increments were given offshore specifically and we do expect to continue to add headcount in subsequent periods and expect to manage attrition levels to settle down a normal historic ranges for the year.

Amit Singh - Jefferies

What was the salary increases again both onshore and offshore?

Zaineb Bokhari

So offshore the increment was in the low double-digits and that was effective April 1 and we shared with you on a previous call that our onsite increment was in the low to mid-single digits and that was effective as of January 1.

Operator

Thank you. Our next question comes from the line of Edward Caso from Wells Fargo Securities.

Edward Caso - Wells Fargo Securities

Could you talk a little bit about anything you saw in the India budget which may impact the outlook that is or is not included in your guidance particularly around impacts on interest as well as anything with transfer pricing? Thank you.

(Technical Difficulty)

Edward Caso - Wells Fargo Securities

Could you talk a little bit about the competitive landscape at the moment and apples to apples pricing on your various offerings. I know a lot of your focus is on the run side of the equation, is that seeing more price pressure. I think I heard that an expectation that as digital takes hold that should help pricing. Anyway can you talk a little on that front please?

Nitin Rakesh

I think for us pricing has been pretty stable and in some cases there has been modest upward bias. I think pricing pressure will continue to be on commodity or undifferentiated services and we have focused more on providing differentiated services and our industry knowledge and business expertise helps on that. The second leverage that we continue to have is our investment in creating those domain specific solutions in each of our industry verticals actually helps us getting some operating leverage there as well and you’re absolutely right as we see the shift of digital services expanding I think it's not going to be so much about pricing pressure but more about pace of adoption of agility.

Edward Caso - Wells Fargo Securities

My last question is assuming that FedEx is still a 10% client what was the growth in clients 4 to 30 as supposed to 3 to 30?

Nitin Rakesh

I think given it's trajectory FedEx obviously has been a good important contributor to the growth we have seen in the 3 to 30 segment but it's not the sole driver of the above average company growth rate. I think in Q2 we saw above company average growth for the entire segment even excluding FedEx both on a y-o-y and q-o-q basis.

Operator

Thank you. And our next question comes from the line of Joseph Foresi from Janney Montgomery Scott.

Joseph Foresi - Janney Montgomery Scott

I wonder if you can give us some color around the softness that you commented about healthcare vertical, how long is that going to continue to linger and maybe you can give us some idea what’s built into guidance from that piece.

Nitin Rakesh

I think as we talked about it, the broader business environment is pretty healthy and we’re seeing good discussion and spend continue this year. On healthcare we did call out some expansion in cycle times and that is kind of two factors at play, one, I think the push out in regulatory deadline in the ICD Remediation and that has led to some customers either dealing or slowing down their investment in that area and the second, you know, keep in mind that they are coming off of a fairly high investment cycle around the healthcare exchanges and they are taking up a partial pause so to speak in terms of evaluating the outcome of those investments. If you bake these two things you know we have clearly baked these into our guidance so our expectation around tempered cycle times is baked into our guidance. In terms of your question around how long we continue to see this, I think we don’t think this is a long term phenomenon. We think it's temporary, lasting probably a couple of quarters and we’re actually very convinced that in over a longer term cycle healthcare continues to be in a secular spend mode.

Joseph Foresi - Janney Montgomery Scott

And then maybe just if you could comment a little bit about the overall pipeline, how does that look midway through the year and heading into ’15. Have you seen an increase in the pipeline, is it flat? Is it down? And does it need to be replenished? I’m just trying to get a sense of what the overall demand backdrop looks like at this point?

Nitin Rakesh

Sure I think the demand backdrop is fairly robust, we obviously increased the lower end of our guidance and that’s kind of taking into account some of the pipeline we have currently in play. We also added 16 new customers this quarter in addition to the eight we added in the first quarter, we cross sold one IT client to BPO services. So I think we’re fairly comfortable with where we’re placed. We do know that there is obviously a very significant opportunity in the market that continues to be out there and our efforts are to continue to expand our pipeline in that direction.

Joseph Foresi - Janney Montgomery Scott

And then last question from me. You picked up the top end of your margin guidance, what is driving that uptick and just as a broader question on margins I think historically the company has run maybe the mid-20s when the demand environment is healthy and clearly we have been around the 27% to 30% range for a while. Is there an uptick in the margins going forward that we should pay attention to? So why is the guidance going up this year and then over the long term should we be revising our thoughts on margins over the long term?

Nitin Rakesh

I think again you probably heard Arvind’s response to a similar question few minutes ago, so I think two or three things are driving the margin one is the lower than expected tax rate so we were in the mid-20s expectation. We’re probably going to be in the low to mid-20s and that has clearly an impact. Also I think we talked a little bit about creation of this rationalized service line, Managed Services Organization and so we’re using leverage that where we have possible that continue to give us a healthy margins.

Arvind Godbole

And Joe, we continue to run a very tight shape in terms of the delivery efficiency across Syntel and our proactive investments in domain led solutions in intellectual property assets delivery accelerators help us to keep an edge and add value continuously to our customer so that also does give us a strong leg up.

Joseph Foresi - Janney Montgomery Scott

Can you maintain this margin profile, an accelerated revenue growth trajectory?

Nitin Rakesh

I think our effort is to balance our revenue growth and profitability and that’s what we baked into our guidance.

Operator

Thank you. Our next question comes from the line of James Friedman from Susquehanna.

James Friedman – Susquehanna

I’m not sure if it's most appropriate for Arvind but I wanted to get a little bit clarity about the other income of $12 million. I know there is a lot of movement but $12 million is a lot. Arvind if you could articulate some of the sources of that that will be helpful.

Arvind Godbole

Quarter we had the breakup of the other income -- we had interest income of $8.35 million which was the interest earned. We paid interest of 0.58, that is the net interest earned is $7.77 million. We also had a gain on mutual fund sales which was $2.42 million. We had a gain from forward contracts that was $1.98 million totaling to $12.17 million. In Q1 also we had similar numbers, the forward contract gain was $1.48 million, the mutual fund gain was $2.6 million and interest income growth was $8.21 million and we paid interest for $0.57 million.

However let me caution you that the interest earned and interest paid are more or less to the numbers where it can be reasonably estimated subject to interest rate of course but the gain on mutual fund sale and forward contract is where -- they are uncertain items. So it will be difficult to predict them with reasonable accuracy.

James Friedman – Susquehanna

In the 8K call out, $0.16 of earnings related to FX is that embedded Arvind in the other income or is that partly in the gross profits as well?

Arvind Godbole

James can you repeat or rephrase your question? I didn’t get it.

James Friedman – Susquehanna

The 8K calls out $0.16 of earnings related to the foreign exchange and I was just trying to figure out how much of that is included in your previous answer?

Zaineb Bokhari

James, I’m not sure that would be in our 8K. Perhaps that was in another company that reported this morning.

James Friedman – Susquehanna

Well I’m reading from it here, I will forward it to you Zaineb and then the other question I had was with regard to utilization. It was down in a prescribed - normal sequence but I was trying to figure out maybe Rakesh if that’s more the numerator or denominator, how should we think about utilization going forward?

Rakesh Khanna

So James, what we do is we adjust the utilization as a function of the demand for the next quarter or two and that’s really is part of the strong execution metrics. So that’s really as per the plan what you’re executing to James.

Operator

Thank you. Our next question comes from the line of Anil Doradla from William Blair.

Anil Doradla - William Blair

Can you remind us what is the average loaded cost for applying for a visa per employee?

Zaineb Bokhari

Anil I don’t think that that’s something that we generally talk about, with respect to Visa’s we always in this particular quarter since it hits us in addition to that offshore increment. What we do share is the basis point impact at the gross margin level, and you know this quarter collectively that was 4.1% at the gross margin. So that’s the combination of visa and related expenses and offshore increment.

Anil Doradla - William Blair

And Nitin big picture question, when I look at your results and compare it with your peer group, clearly there are tailwinds. TCS reported this morning too and then they had one of their great quarters too. So I think the question I have is when you look at the tailwind of the sector improving trends and you compare it with previous such events, how would you compare it with how sustainable they are or is it just that we were a little bit cautious in January and things are a little better. Appreciate some commentary.

Nitin Rakesh

Sure. I think it's a good question, so clearly you talked about tailwinds, we have talked about stable demand environment and slightly increasing discretionary spend models. I think if -- you have to keep in mind two things, one, in the steady state businesses I think the environment continues to be competitive. So it's really the emergence of new technology areas around digital and around cloud and mobility being the two backbones for digital. I think that’s where there is clearly customer demand and appetite and it requires a certain degree of shifting your capability and mix as well. So, yes you know the environment is stable but it also requires us to be continuing to assess demand and where demand comes from and be ready for it and I think that’s kind of where we continue to adjust our forecast and our business model as we proceed into quarters.

Anil Doradla - William Blair

So basically what you’re saying is that in this paradigm of stability companies that have focus on emerging technologies will outperform the peer group?

Nitin Rakesh

I think that’s an accurate assessment.

Operator

Thank you. Our next question comes from the line of Manish Hemrajani from Oppenheimer.

Kunal Doctor – Oppenheimer

This is Kunal on behalf of Manish. In the (indiscernible) you guys talked about Europe gaining traction and investment paying off. What services are driving this growth? And how much is Europe as a percentage of revenue now? Thank you.

Zaineb Bokhari

For this quarter Europe was about 8.3% of overall revenue and Rakesh?

Rakesh Khanna

Yes. I can talk about the services so I think we’re pleased with the growth in Europe since we have been investing in that region and readying ourselves to benefit as the region recovers economically. But we still see interest in our core service offerings especially around global delivery improving as clients remain interested in making their operations more efficient and again since growth has been fairly elusive on the continent especially in Europe companies are still focused on making operational improvements and driving efficiency which actually plays in our favor. So that’s kind of the primary demand driver we have seen here.

Arvind Godbole

Yes I just would like to add to that the three things also we see specifically around legacy modernization, mobility and big data which is driving the demand and our preparedness due to the automation tool and accelerators is really helping us to leverage and capitalize on some of these demand.

Kunal Doctor – Oppenheimer

And just last one, some of your competitors have talked about pricing being relatively stable but on the large deals they are seeing some pressure and some undercutting. Are you seeing something familiar to that? And is it impacting the business for the new business that you’re chasing?

Rakesh Khanna

Sure. I think as we mentioned pricing has been fairly stable and yes there is -- the environment is competitive especially for larger deals and one of the reasons why we undertook the organizational restructuring and created a managed services organization was to give up that operating leverage that we need in being able to stay competitive as well as to maintain the level of profitability that we want to deal with. So again we take steps where we think we can control those actions and get leverage and that’s how we continue to play in the market.

Operator

Thank you. Our next question comes from the line of Vince Colicchio from Noble Financial.

Vince Colicchio - Noble Financial

Yes question about the banking and financial services segment, it was relatively slow in the quarter. Will that pick up later in the year? And what will be the key drivers there? Will continue to be regulatory for example?

Nitin Rakesh

Sure. It's a two part question so I will answer the question in two parts, one, obviously our top two clients sit within our banking and financial services segment. So on a y-o-y basis it appears to grow slower because as we talked about earlier on the call we expect growth drivers to be accounts 3 to 30 as well as Europe [ph]. So that tends to distort some of that statistic. However on a sequential basis we have seen good growth in the top two clients as well and that’s how we have baked that into our guidance. In terms of what’s driving growth in banking and financial services. I will ask Rakesh to add a couple of points.

Rakesh Khanna

So the two megatrends or the two drivers we see out there one is a disruption and the payment landscape which is changing very rapidly and we do have a very strong position of working with the traditional and disruptive leaders in that space and second trigger around demand is really the heightened regulatory requirements and reporting and with our very strong domain knowledge and flexible our open source reporting frameworks that does give us a very strong positioning and a value add in our customer space in the banking area.

Vince Colicchio - Noble Financial

And question on the KPO stay business did that grow sequentially and any color in terms of the largest client grow as a portion of total or are we seeing some of the other clients gain share?

Zaineb Bokhari

Yes, Vince, in terms of KPO it's remaining around 15% of overall revenue. I would say that the business dynamics there hasn’t changed all that much. The cycle time is generally longer than company overall. However, the investments that we have made there and in services and delivery continue to make it an attractive value added business and we’re focused on building the pipelines there. We did mention that we cross sold those services to an existing customer so we feel pretty good about the overall KPO business.

Operator

Thank you. Our next question comes from the line of Jason Rodgers from Great Lakes Review.

Jason Rodgers - Great Lakes Review

Looking at the spending by your customers on digital services, about what percent of that revenue would you say is one time versus recurring in nature?

Nitin Rakesh

We have -- on that in our previous calls as well so by definition given that lot of customers are in initial phases of adoption of digital technologies, those tend to be lumpier. I wouldn’t say one time but more discretionary that required project specific -- project by project funding and ROI calculations but as this becomes more and more mainstream some of this will obviously get reflected in the run business as well. So given that we’re in the initial stages of adoption it's typically more lumpier and also requires a little more on-site presence given that customers need hand-holding and these are new technology areas.

Operator

Thank you. Our next question comes from the line of Elizabeth Colley from Needham & Company.

Elizabeth Colley - Needham & Company

I’m looking for additional clarification on the earnings guidance. You raised the lower end of guidance for the year and part of this is due to the earnings due to the quarter and part is due to the raised operating range but are there any other factors that will contribute to the raised range and by how much?

Zaineb Bokhari

So Elizabeth I will just comment on it and then ask Arvind to expand if he has anything. We did raise the lower end of our revenue outlook, so that has a contribution and the outlook for taxes has also come in a little bit so it's a little bit lower than where we were last quarter. In the second half you will see lower visa increment related costs tied to normal seasonal patterns. And Arvind did I cover it all or do you want to add anything in there?

Arvind Godbole

Basically what I said, I can only repeat that, we are pleased with the performance for the first half and every quarter based on the visibility that we have we will keep updating the guidance and we did similarly during the last June quarter. So from 425 to 465, so as the year progress we will keep revising the guidance.

Operator

Thank you. Our next question comes from the line of Puneet Jain from JPMorgan.

Puneet Jain - JPMorgan

Following up on your comments around increase in traction in digital areas. So my question is are you winning shares in some of those services on back of your accelerators and cloud and other stuff, or are you expanding that business at par with peers?

Rakesh Khanna

Yes Puneet, we’re definitely looking at good demand in that area in almost each of the verticals where these are short burst on-site centric projects like Nitin mentioned earlier where there are transformational changed the business initiatives, domain led and you do a short release and that gets funded for the next release and next cycle and so on and so forth. So it is going as per track and each of our vertical solutions and automation tools accelerators are helping us to win business and grow not only the digital part but there is a lot of back-end plumbing which needs to happen so that’s really a virtuous cycle which is driving the growth in that area for us Puneet.

Puneet Jain - JPMorgan

I understand that these areas are growing but are you growing faster than what you think industry growth is?

Nitin Rakesh

I think the way we look at it is that these areas are expected to grow faster than the run business and hence we have expanded our outlook and investment in that area by trading the Digital One Group but given that these are early stages of adoption of these technologies in a mainstream basis I think even if they grow much faster than company, the incremental growth to the company obviously will be much lower. So expectation is that as this becomes a bigger part of business for our client’s budgets and us we will see that play back into our overall company growth.

Puneet Jain - JPMorgan

And follow-up like you said earlier like, you would characterize some of these sources as discretionary. Does that change your predictability or visibility on annual guidance or quarterly numbers specifically?

Nitin Rakesh

Not specifically. Also what I did mention in addition to the fact that these tend to start as discretionary projects is that once they become mainstream they also throw out run-the-business. The nature of the run business obviously will change over the years as well.

Operator

Thank you. (Operator Instructions). We have a follow-up from the line of Jason Rodgers from Great Lakes Review.

Unidentified Analyst

Hi actually it's (indiscernible). Congratulations on the quarter, especially on the buildup of your cash. I would appreciate any comments on your utilization of that hoard as relates to possible acquisitions. I know that has not played a part in the past or dividends or repurchasing of shares.

Bharat Desai

Our Board does look at our balance sheet on a regular basis and determines the best use of cash. As far as acquisitions go, our strategy remains what we have said in the past. We will look at acquisitions to extend market reach whether it be geography or in a new industry and we continue to focus on that strategy.

Operator

Thank you. And that concludes our question and answer session for today. I would like to turn the call back to Mr. Nitin Rakesh for closing comments.

Nitin Rakesh

Thank you operator. I want to close today’s call by saying that I’m very excited about Syntel’s future growth prospect. We’re making strategic investments in the rapidly shifting environment with the guiding principle of servicing our customers and staying relevant. This principle has helped us develop close customer relationships and allowed us to scale our business profitably and we look forward to building on this in the years to come. Thank you for joining us and we look forward to updating you on our progress in our next quarterly call.

Operator

Thank you. This concludes Syntel’s second quarter earnings call. (Operator Instructions). Thank you. You may now disconnect.

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Syntel (NASDAQ:SYNT): Q2 EPS of $1.41 beats by $0.19. Revenue of $228.3M (+12.7% Y/Y) misses by $1M.