Syntel CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: Syntel, Inc. (SYNT)

Syntel Inc. (NASDAQ:SYNT)

Q3 2010 Earnings Call

October 28, 2010 10:00 am ET

Executives

David Mackey - SVP, Finance

Bharat Desai - Chairman

Prashant Ranade - CEO

Arvind Godbole - CFO

Analysts

Sri Anantha - Oppenheimer

Joseph Vafi - Jefferies

Mayank Tandon - Signal Hill Capital

Brian Kinstlinger - Sidoti & Company

Bryan Keane - Credit Suisse

Joseph Foresi - Janney Montgomery Scott

Tim Fox - Deutsche Bank

Vincent Colicchio - Noble Financial

Puneet Jain - JPMorgan

Rick Eskildsen - Wells Fargo

Operator

Welcome to the Syntel third quarter 2010 earnings call. (Operator Instructions) I would now turn the call over to David Mackey, Syntel's Senior Vice President of Finance.

David Mackey

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

Thank you, David, good morning, everybody, and thank you for joining us today. Since the company's inception 30 years ago, Syntel has been able to successfully adapt our business model to meet the changing services landscape. Back in the early '90's, when we set our first development center in India, client's struggled with embracing global delivery. Today, these same clients entrust with responsibility for developing and managing critical system and processes. As these relationship and business models continue to evolve, clients are expecting increased value from their strategic partners.

At Syntel, we believe that this ongoing evolution plays into our company's core strength, a flexible, nimble, innovative culture, with a customer polite philosophy. By keeping true to our DNA and investing in people, services and infrastructure, we believe we can provide both existing and new clients the value they are looking for.

Our third quarter performance was solid, from both a financial and operational perspective. And we are extremely pleased with the overall positioning of the company.

Going forward, the market place will be ripe with opportunities for continued growth. Syntel must remain focused on understanding our client's needs and delivering beyond their expectations. I would now like to turn the call over to Prashant Ranade, Syntel's Chief Executive Officer and President to provide further detail.

Prashant Ranade

Thank You, Bharat, and welcome, everyone. Syntel's third quarter revenue performance highlighted a solid demand environment for offshore IT services. Revenues of $140.5 million represented an 8% sequential increase and a 34% increase year-over-year.

Topline improvement was, once again, broad based across our key service offerings with the financial services and retail verticals driving the growth. Customer concentration increased in Q3 as our largest financial services clients continued to leverage Syntel's capabilities. While these clients grew at an accelerated rate this quarter, we remain pleased with the progress we are making in expanding our other strategic relationships.

Through the first three quarters of 2010, our revenues increased 29% versus the same period last year. During the same period, clients 11 through 30 grew at a rate faster than our average growth rate. Gross margins during the third quarter were consistent with second quarter levels, as Syntel was able to absorb the full quarter pricing impact of a large contract re-negotiation and cost associated with advanced hiring.

During the third quarter, Syntel added 1,362 net employees, representing a 9% sequential increase. Syntel has now grown headcount 30% year to date adding over 3,700 employees globally. The company continues to invest in our business by hiring ahead of committed revenues. Given the current demand environment, pipeline levels and longer term market opportunity, we believe this investment is critical to our success.

As expected, operating margins were compressed by increased SG&A levels during the quarter. From a currency perspective, while the average Indian rupee rate depreciated 0.7% during the quarter, the rupee to dollar exchange rate appreciated significantly at the end of September. This resulted in minimal impact to our rupee denominated cost structure, but created an unfavorable balance sheet translation adjustment.

The adjustment in Q3, increased our SG&A expenses by $1.4 million as compared to the $1.7 million reduction in expenses recorded in the second quarter. Additionally, our third quarter SG&A was impacted by our ongoing infrastructure expansion program, including the depreciation and amortization related to our new Chennai Campus, and expenses associated with a new SEZ lease facility in Mumbai.

The new Mumbai facility is almost 350,000 square feet, and has capacity of up to 4,000 employees. It should be ready for occupancy in the first quarter of 2011. Given the overall economic climate, Syntel is pleased with the stability of demand environment for our services. Cost reduction initiatives remain strong and spending on development projects improved during the third quarter.

As we move towards the end of 2010 and into 2011, it will be important to closely monitor the changes in discretionary spending given low committed visibility and our client's transition to a new budget year. In the longer term we firmly believe that our market positioning is excellent, and that our target investment programs are on track. We'll continue to develop innovative solutions designed to drive business value to our clients, improve the depth and breadth of our sales and delivery teams, and to build out world class infrastructure.

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 Godbole

Thanks, Prashant, and good morning. After my comments, we'll open the call to questions. Syntel's third quarter revenue came in at $140.5 million, up 34% from the prior year period and 8% sequentially. For the third quarter, Applications Outsourcing accounted for 76% of the revenue; KPO at 15%, e-Business represented 7%, and Team Sourcing was 2%.

From a vertical perspective, financial services contributed 57%; with insurance at 18%; healthcare, 14%; automotive, 3% and all other accounts at 48%.

Vertical growth was led by financial services which grew 11% sequentially, and 39% versus last year. Syntel's customer concentration increased during the third quarter as spending with our largest two clients grew above the corporate average. Our top three clients represented 50% of revenue. Top five contributed 61% and top ten remain at 75%.

The fix priced component of our business remained at 46% of revenue for the quarter. With respect to Syntel's margin performance, our gross margin was 39.6% in the third quarter; this represented a decrease versus 49.3% reported in the year ago period, and a slight increase from 39.5% in the second quarter of 2010.

By business segment, growth margin for Application Outsourcing was 35.9%; KPO was 62.1%; e-Business was 32.9%; and Team Sourcing 37.8%.

Moving down the income statement, our selling, general and administrative expenses were 17.7% in the third quarter of 2010, compared to 18.1% in the prior year period, and 14.6% in the second quarter.

On a dollar basis SG&A was up $5.8 million sequentially largely as a result of currency fluctuation. As Prashant mentioned, the quarter-over-quarter exchange impact related to balance sheet translation was $3.1 million. Additionally, facility related expenditures for the new campus at Chennai, and Mumbai facility increased SG&A by $1.2 million.

Other income during the quarter increased $2.9 million. The company recorded a $2 million gain on hedging as compared to $0.3 million loss in the previous quarter. Syntel also had an additional $0.6 million of interest income associated with higher cash balances.

Our tax rate came in at 14.5% as compared to 17.9% posted in quarter two. The decrease was largely attributable to a $0.5 million tax reversing for regional positions no longer required. Net income for the third quarter was $30.4 million or $0.73 cents per diluted share, compared to $30.3 million or $0.73 cents per diluted share in the prior year period, and $28.3 million or $0.68 cents per diluted share in the previous quarter.

The company's balance sheet at the end of the third quarter of 2010 remained extremely healthy. Our total cash and short term investments on September 30 were $262 million, and the company had an additional $4.6 million in non-current term deposits in banks.

DSO levels increased 3 days to 59 days during the third quarter. Our capital spending in quarter three was $4.7 million, as we continued fit out of our new Chennai campus and initial construction of phase 3 in Pune. Based on the reduced CapEx levels year to date, the company currently expects to spend between $30 million and $35 million in the CapEx during 2010.

Syntel entered the third quarter with a total headcount of 16,288 of which 4,462 were assigned to KPO. Our billable headcounts were 2,628 onsite and 12,700 offshore for a total of 15,328. Net additions to the global headcount were 1,362.

Our utilization levels at the end of the quarter were 93% onsite, 71% offshore, and 75% globally. Our delivery mix currently stands at 21% onsite and 79% offshore. Voluntary attrition during the quarter was 14.8% down marginally from 15.6 % reported last quarter. Syntel added eight new customers in Q3 and one new Hunting License which takes the total number of proffered partnerships to 104. Looking forward, I would now like to provide you with our updated guidance for 2010.

Based on our current visibility levels, Syntel expects revenue to be in the range of $532 million to $535 million, and EPS to be in the range of $2.65 to $2.69 for the full year 2010. The company currently has 99% visibility to the low end of the revenue range and our guidance is based on an exchange rate assumption of Rs.44.4 to the U.S. dollar for the fourth quarter.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Sri Anantha from Oppenheimer.

Sri Anantha - Oppenheimer

On your comments you talked about customer expectations in general have gone up. May be if you could just comment, What do you think Syntel needs to do a differently versus some of your competitors? And also if you could just update us on your M&A, you talked about making some selective acquisitions geographically or to get exposure to the certain industry verticals. Where does the company stands today?

Bharat Desai

We just had our annual client event last week, and frankly, I came back energized from that. Because the message we were getting from our client is, we have the right combination of capability, size and culture to impact their businesses. So I do not think we need to do anything different. We've got a culture of innovation, flexibility and a customer centricity and a capability that customers love.

We need to continue to innovate which we've done for 30 years which has brought us here. And we've made investments in deep domain skills, which is playing out really well. We are investing ahead of the curve in both infrastructure and people to gear up for demand in the future. So we are going to continue to execute what we're doing.

On the acquisition front, we continue to look for niche areas where we have, we think we have, an opportunity to significantly grow the company, and that is an ongoing area that we continue to look at.

Operator

Our next question comes from Joseph Vafi from Jefferies

Joseph Vafi - Jefferies

I was wondering if we could focus on the gross margin for a second. May be you did have some headwind here and in Q3 in terms of the price negotiation and these large head count adds. But you still posted a slightly up gross margin sequential. I was wondering what was the positive input into margin that helped offset those headwinds?

David Mackey

Joe, I think the biggest upside that we had, certainly, was getting a little bit of leverage from having a higher revenue value. So it really comes down to volume when you look at the drivers on the gross margin, you're right. We definitely had headwinds from utilization, we had headwinds from the contract re-negotiations. But when you look at the type of business that we're doing for our client, when you look at the mix of business that we're doing for our client, and you look at the productivity and efficiency of the team that we have assigned to that work, those are all moving in appositive direction.

Joseph Vafi - Jefferies

Okay. And then on the SG&A line, I know Arvind said that we had some; was there translations gains that went into the SG&A line? So just trying to a feel for if this is proper run rate moving forward in SG&A, or are there other things we should be aware on that line moving forward?

Arvind Godbole

Yes, this quarter we had a translation loss because the rupee appreciated at the end of the quarter. We do follow hedging for which we have similar gains because of the hedging in the other income. But translation is something which we really cannot tell, that we continue to be there, but we do follow hedging to offset the translation losses.

David Mackey

On the SG&A line, Joe, all things being equal, we would expect SG&A to be $1.4 million less in the fourth quarter because that translation adjustment is non-recurring. That being said, we have had a pretty significant move in the rupee on a quarter-to-quarter basis. So we should have some incremental SG&A on an operating cost, rupee denominated cost basis during the quarter. And additionally, we are going to have a full quarters worth of the impact from this facility expansion plans that Prashant discussed.

So we do have some upside in terms of the currency, but overall we would expect our SG&A levels in the fourth quarter to be slightly higher than where they were in Q3.

Operator

Our next question comes from a Mayank Tandon from Signal Hill Capital.

Mayank Tandon - Signal Hill Capital

Just in terms of 4Q, are you building any potential impact from a budget flush at all?

Prashant Ranade

As far as budget flush, 2009 there was higher budget flush than normal in 2008 with firming up of demand, customers, our clients, have spend during 2010, during last three quarters. So we do expect budget flush, but at reduced level compared to last year. And that's what we have built into our Q4 forecast.

Mayank Tandon - Signal Hill Capital

Okay. And, Bharat, you talked about having the client event recently. Can you may be provide us with us with a little bit more specifics in terms of how your clients are thinking about FY11 in terms of their overall IT spend, and may be in terms of the off-shoring percentage? Just, I understand that is not from firmed up yet; the IT budget. But just may be some anecdotal reads based on your conversation with customers regarding FY11 would be very helpful.

Bharat Desai

We think there is probably going to be a slight uptick in their overall IT spend. While they continue to drive efficiencies, we are seeing possible investments in creating new revenues streams and creating more thickness with the current clients. And again, across the board, from medium size to very large companies, a resonating message was, "Guys, we like your size, we like your culture of responsiveness and customer centricity. And we would encourage you to continue this culture of innovation."

Operator

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

Brian Kinstlinger - Sidoti & Company

With that pricing pressure from one customer, volumes went up significantly. So I want to see if that was the one particular customer that, now that a new contract is in place, if you feel that they're now more open to sending more work offshore. And then, from the margins side, how you were able to maintain margins while pricing was down so aggressively there?

Arvind Godbole

We did have growth in our KPO business across all the customers. And the renegotiated price impact was fully included in our quarter three results. And it was an indication of our ability to manage the business, and our ability of Syntel and our joint venture partner to work towards improving that joint venture business which is what resulted in the growth.

Brian Kinstlinger - Sidoti & Company

I'm aware that the pricing pressure was in there and that's why I'm curious did that top customer dramatically pick up volumes in order to make up the price declines and then some? Because they dominate that line item.

Arvind Godbole

As a percentage increase, we had about same growth percentage for our KPO customers. Now clearly our joint venture partner is the largest portion of that business and that percentage tracked our overall percentage to our KPO business.

David Mackey

From a relationship standpoint, Brian, I don't think there was anything unique in the quarter that drove business volumes or anything else in a direction different from where we have got that drove business volumes or anything else in a direction different from where we've gone the last few years. This is consistent, this is the same approach that we've had together and we expect that to continue in the future.

Brian Kinstlinger - Sidoti & Company

I understand. I'm just saying that you've had two quarters of down-to-flat numbers, and all of a sudden, when the pricing pressure hits, it goes up. So that was a strange phenomenon. The other question I wanted to ask you was there's some people that are getting salary increases, it sounds like may be they were and others who are not. And I'm curious your stance on mid-year salary increases.

Prashant Ranade

As you know, we have a meritocracy based salary increment culture which is over annual cycle. Having said that, we watch the market condition, we look at the growth environment, and we would regularly review the need for targeted increments. We don't have any plans for across the board increase at this time, but as I said earlier, we will continue to look at the market needs, our ability to attract and retain the talent to drive the growth, and to satisfy our clients.

David Mackey

And again, Brian, continue to follow our policy and our process of adjusting on an across the board basis, on site compensation in January, and offshore compensation in April.

Brian Kinstlinger - Sidoti & Company

And the utilization, I know you gave utilization numbers, but where was it at the end of the or may be today, since it was low and you've been hiring, I am curious to your assumptions for next quarter for based on based on may be where we are today?

David Mackey

Overall, the offshore utilization at the end of the third quarter, Brian, was at 71%. The onsite was at 93%. Again, important to bifurcate the two business, the KPO and IT given that they have different lead times and different approaches. At the end of the third quarter, the IT utilization offshore was at 65% and the KPO utilization offshore was 84%. Just to give you a little sense of the investment that we made and how it affected our business. That IT utilization level was at 70% at the end of the second quarter.

Brian Kinstlinger - Sidoti & Company

And finally, my last question is, Dave, you talked about some of the puts and takes on SG&A. I'm curious what the additional costs related to the facilities are in the fourth quarter, if you could?

David Mackey

As Prashant mentioned, we had about $1.2 million of additional cost that affected us in the third quarter. Currently, the expectations for Q4 is about an additional $1.5 million of cost.

Brian Kinstlinger - Sidoti & Company

And will there be another balance sheet loss, even sit to 44.4 that you guys are projecting will it be another loss in the quarter?

Arvind Godbole

Frankly, we can not anticipate how the currency will move. But the present guidance is based on this rate, 44.4. It appreciates from this level, then there will be an impact.

David Mackey

I believe that the number at the end of the second quarter, Brian, was 44.2. So 44.4, we're consistent and should not have material transition adjustment.

Operator

Our next question comes from Bryan Keane from Credit Suisse.

Bryan Keane - Credit Suisse

I know you guys aren't giving 2011 guidance. But as we build out our models, what are some of the factors we should think about into 2011 for operating margin? And I guess, in particular, I'm curious about the infrastructure cost to those for the new facilities. Do those carry through into 2011? Or any other cost or things we should think about that will automatically affect the margin?

Prashant Ranade

Okay. As Bharat shared with you the demand environment is stable and based on stable currency environment, the performance we have had of outperforming our peer group, because year to date, we have a 29% growth rate. So we certainly cannot predict what the market growth rate will be. But what we can manage and lead is, to ensure that our growth rate remains higher than our peer group.

And investing ahead of demand, like we have done so far in last three quarters, is what we'll continue to do which will ensure that we are hiring talent ahead of time, and investing in our facilities. And operating margin corridor, I expect to be low 20s to mid 20s

David Mackey

I think the other think that's important, Bryan, to understand is the operating margins in this space, and we saw it through the down turn in the demand environment, and we're certainly seeing it here as demand picks up. And where that operating margin shakes out is going to be a functional of, not only how we perform from an execution standpoint but the overall market dynamics.

And certainly what we've seen is that when the demand environment for these services is healthy, there is a significant amount of operating margin pressure. When the demand environment gets the little bit soft, there is an opportunity to leverage some of those costs and to go ahead and improve the operating margin. So that's part of the reason for is the bandwidth, if you will, on the operate margin line. It is somewhat linked to the overall health of the demand environment.

Bryan Keane - Credit Suisse

Well, what about getting some prices increases to help offset some of the margin pressure's demand increases?

Prashant Ranade

Clearly, with the current cost environment, with wages and situation around increments which we discussed, impact of currency, utilization, and strength in demand. There is a need, and we will discuss price increases with our clients as we get into next fiscal year.

Bryan Keane - Credit Suisse

Just to follow up on that, The price for this year, 2010, is roughly flat, would be my guess?

Prashant Ranade

That's correct

Operator

Our next question comes from Joseph Foresi from Janney Montgomery Scott.

Joseph Foresi - Janney Montgomery Scott

My first question here is, you had talked in your opening remarks about there being some growth in some of your clients from 11 to 30. Maybe you could talk about what areas that growth is taking place and how we kind of reconcile that with the increase in client concentration this quarter.

Prashant Ranade

I think in that group, first of all, we have opportunity based upon our performance with those clients and our relationship, to increase our wallet share of business as well as helping them in increase the percentage their overall business as it relates to offshoring. In addition to that, the growth in that client segment 11 to 30, is really across the board in all vertical, all horizontal and practices.

Joseph Foresi - Janney Montgomery Scott

And do you expect that client concentration will come down next quarter going forward or when do you expect those numbers to shift?

Prashant Ranade

What we accept is, as we strengthen and take advantage of our strategic relationship with our top clients and our focused and selected target customer base, we expect the growth rate to be higher in client 11 to 30 which would lead to reduction of client concentration.

Joseph Foresi - Janney Montgomery Scott

And then just finally here, you talked about the build out of the Chennai facility. Maybe you could just give us some color on your hiring plans going forward. And I know you talked about Mumbai as well. Just when you expect those facilities to come online and what your hiring plans are for the short and the long term?

Prashant Ranade

As you know, we don't provide specific guidance on hiring numbers. As far as facilities are concerned, the Chennai, one block was opened in June this year. I talked earlier about a new Mumbai facility which will be ready at the end of first quarter being of second quarter. And we'll continue to invest ahead of demand, we'll continue to hire ahead of demand to take advantage of the current stable growth environment and the performance that we've had over last three quarter of 29% revenue growth.

David Mackey

Just to give a little color, Joe, to Prashant's comments, the first block of the Chennai facility added 1,700 seat. The New Mumbai facility will have capacity for 4,000 seats. We also have two blocks ready right now, if we want to outfit at Chennai, could add another 3,400 seats. So we have almost 10,000 seats of capacity or the capability to add capacity that's been added in last 6 months.

Joseph Foresi - Janney Montgomery Scott

Just one last one on that. Are those being filled with people being moved out of lease facilities or are these new hires?

David Mackey

The expectation overtime, Joe, would be that we're continuing to manage our business and to manage the growth. So we have to watch how we grow and where we grow? There are two components to that. But obviously, we're confident not only the fact that we want to make sure we're got the right facilities for right number of people. They need to be in the right geographies. We also want to take advantage longer term of the lower operating costs associated with having owned facilities and also the potentials tax advantages. So we're going to continue to proactively manage that and try and run our business the right way.

Operator

Our next question comes from Tim Fox from Deutsche Bank.

Tim Fox - Deutsche Bank

My first question was around financial services. The strength there has been continuing to improve across the year. I was just wondering if you could talk about any concerns that some of this is pent up demand that's been coming through the pipeline here. Or do you feel that this strength in FS is sustainable into 2011?

David Mackey

Tim, I think when you look at were the revenues have come from and the clients that the revenue has come from, our sense is that this isn't really a pent up demand scenario. When you look at the development projects that we've doing, they've still been relatively short duration, small dollar high ROI types of projects. We really haven't tapped in, in a material way to regulatory and compliance related work that's out there. A lot of growth, when you look across the last three quarters, and it's not specific to financial services across all the verticals has been driven as much, if not more so, by cost production based services like maintenance than the development side.

I think, clearly, this is nothing more than the ongoing trend towards globalization of services. And certainly as client become more comfortable and budget space is freed up, they're going to continue to eat away at the backlog of projects. But from my sense, the pipeline continues to grow at a rate faster than the projects are coming out.

Bharat Desai

This is, I think, smart large companies managing their business very smartly. And leverage the capabilities of companies like Syntel to help them manage their business better.

Tim Fox - Deutsche Bank

And just as a follow-up on that, mentioning deals and pipelines. Any commentary around deal sizes as we've progressed through the year, and sales cycles would be helpful.

Prashant Ranade

I think as Dave mentioned, while the demand has firmed up and we've certainly realized the growth, the projects are of smaller dollar value, lower duration and ROI based. We have seen increased discretionary spending as it relates to topline growth for our clients and improving the customer stickiness. So really tied to revenue growth in top line as well as in ROI based projects. So that's what we are seeing.

Tim Fox - Deutsche Bank

And, Arvind, if I may just one more quick one on taxes. What are we looking at next year for taxes at this point? Do you have a range in mind?

Arvind Godbole

Yes, the present schemes and the tax concession, that is ACPI that we're supposed to submit by March 32, 2011. And if it doesn't get extended, then you will definitely see an increase in the tax rate and we are looking at somewhere below 20 for 2011.

Operator

Our next question comes from Vincent Colicchio Noble Financial.

Vincent Colicchio - Noble Financial

It looks like the e-Business segment picked up this quarter. Number one, could you provide insights in terms of which service categories are looking good? And number two, should we expect sequential growth to continue?

David Mackey

Yes, we did see a nice pick up in the e-business line this quarter, Vince. From a business standpoint, if you look at the types of projects that we are doing, as Prashant alluded to, projects where clients had helped drive revenue or that helped operational and business efficiency. So one of the areas, for example, that we've seen some good traction for the last couple of quarters, has been in business intelligence and analytics.

In terms of the sustainability, obviously one of the challenges we have in the e-business segment is, projects tend to be high dollar and relatively short duration. So the visibility is relatively low. We're going to kind of have to watch and see how things from up here over the next couple of months, but the visibility towards sustained growth in this segment is a little bit difficult at this point of time.

Vincent Colicchio - Noble Financial

Okay. I've got a question on verticals. The healthcare vertical, as a percentage of revenue, has been fairly steady. I know that's one you talk about in terms of opportunity. When should we see that start to pick up?

David Mackey

When you look at the opportunities that we see in healthcare, obviously we believe that from a segment perspective, it's relatively underpenetrated. We have seen good growth in this business. And obviously with the healthcare revenues at the same percentage and the company growing at almost 30%, we're seeing a good amount of growth in this vertical.

That being said, I think a lot of the opportunities that we can see over the next four to five years have yet to be passed. And whether that regulatory and compliance related issues associated with HIPAA or associated with the Healthcare Reform Act. These types of projects are still opportunities for us going forward as opposed to things that are already built in.

One of the services that we have seen a little bit of traction recently is part of the new HIPAA compliance requirements, the ICD-9 to ICD-10 conversion. But in terms of adoption, especially for an industry that's relatively immature in offshore outsourcing, the adoption has been slow. That being said, we do believe it presents a significant opportunity and we thing we're extremely well positioned to capitalize on it.

Vincent Colicchio - Noble Financial

On the KPO side, you saw a nice pick-up in growth. You mentioned that it was, I believe, your large client as well as a pick-up in business with other clients. Could you give us a little bit more color there? Was it a couple of other clients? What vertical may have been within? Can you help me out there?

David Mackey

The growth was across the board, Vince. Obviously, the challenges when you look at the JV as a percentage of total, it certainly carries the line share of the KPO. On a percentage basis, if you look at the growth in some of our smaller customers, they're growing at a faster percentage. The challenge obviously is of a much smaller dollar base. So it's not nearly as meaningful.

Prashant Ranade

And it covered two verticals, healthcare life sciences as well as banking and finance.

Vincent Colicchio - Noble Financial

And did you add any new clients this quarter?

David Mackey

We did not add any new clients to KPO this quarter.

Operator

Our next question comes from Puneet Jain from JPMorgan.

Puneet Jain - JPMorgan

A question on DSOs, which increased by around three days this quarter while it's been generally down in September. And we have observed similar trends at other offshore firms as well. So can you talk about the reasons you think that drove increasing DSO?

Prashant Ranade

There is nothing specific as such. It is mainly due to the increase in the revenue. We've seen $10 million growth in the revenue. And though, we collected substantially more than as compared to the last quarter. the DSO has slightly moved up. But it's not a cause of alarm, or we have no issues anywhere that it should be down in the next quarter.

Puneet Jain - JPMorgan

So given that for December quarter, you guided for 3% to 4% growth, you expect DSO to come down?

Prashant Ranade

Yes.

Puneet Jain - JPMorgan

And a follow-up to an earlier question on clients from 11 to 30. Can you talk about the average size of those clients? And I understand there is high churn there, but you have been talking about high growth in that bracket for a while. So just want to estimate that penetration potential relative to some of your larger accounts for average size in clients 11-30

David Mackey

When you look at the overall revenue profile, Puneet, and you look at the percent contribution from our top 10, it's pretty clear to see that the relationship sizes you get into the second level of our customer relationships is relatively small which is the part of the reason that we should be growing those customers at a faster rate. And certainly through the opportunity to grow those customers at a faster rate.

Obviously, when you do the simple math and you take a look at the total number of clients that Syntel has and strip out the top 10, it's pretty easy to see that the average on the balance is somewhere around $3 million. So the opportunity for us to get these $3 million clients to $6 million and $12 million, which is still relatively small on a spend basis is really the fuel for growth for this company going forward.

We're obviously extremely pleased that our top 10 continue to do more business with Syntel, and like the relationship and the depth of those relationships. But for us to get the growth to the next level and the company to the next level, we need to deepen the relationships with some of those smaller account and double and triple the size of those customers.

Bharat Desai

That said, I want clarify to that Syntel is very disciplined in targeting global 2000 companies as our target clients. While Dave refers to these as small accounts, they are small in total revenue today, they are large clients with a significant potential for revenue growth.

Puneet Jain - JPMorgan

Right. And I'll assume all of those, like 11 to 30 Hunting Licenses?

David Mackey

Not necessarily all of them, but certainly, the vast majority would be what we classify as Hunting Licenses.

Operator

Our next question comes from Edward Caso from Wells Fargo.

Rick Eskildsen - Wells Fargo

It's actually Rick Eskildsen on for Ed. My question is around attrition. You guys saw it come down modestly quarter-over-quarter and some of the players in the industry saw it continue to go up, so I was wondering if there was anything special you did during the quarter to bring that down and sort of outlook. Do you think it's peaked and should subside from current levels?

Bharat Desai

I guess people like working for Syntel.

Prashant Ranade

I think what I'd share with you, is our opportunities that we provide, what we call carrier growth or carrier life cycle for our employees, ensuring its implementation and communication, as well connectivity with the employees at the first level manager has certainly helped us reduce attrition. Now obviously, one quarter reduction is not a trend, so we'll continue to manage our business correctly, do the right thing. And our objective will be to ensure that our attrition remains lower than the industry.

Operator

Our next question comes from Mayank Tandon from Signal Hill Capital.

Mayank Tandon - Signal Hill Capital

Dave, correct me if I am wrong, but I think you said in response to Tim's question that you're seeing a lot of maintenance word drive near term momentum. And I think Prashant said earlier about being some pretty strong strength in the short term discretionary work. So just help me understand what the real driver is? May be I missed it.

David Mackey

I think it relates to timing, Mayank. When you look at the driver of the growth in the third quarter, our development portfolio actually grew faster than maintenance. But on a year to date basis, our maintenance business has grown faster than development.

Mayank Tandon - Signal Hill Capital

As you look forward, do you think it's a combination of the both or do you think discretionary will be stronger in the near term?

Prashant Ranade

As I shared with you earlier, the discretionary project remain ROI focused, small dollar and short duration. So with our people, our talent and our engagement with the clients, we'll be ready to take advantage of those opportunities. But it is difficult to project the percentage between development and maintenance at this point.

David Mackey

I think the other thing that's important, Mayank, to remember, and Prashant touched on it a little bit in his prepared remarks, is because these projects have been short term in duration, typically three to six months, the visibility going forward is often difficult. So given the specifics in a client demand environment, given the overall dynamics within their business. And also, when you look at the type of work that these clients are trying to get done, we're sitting here today in almost November here and budget cycles are set yet.

So we've got to firm up this visibility before we can commit to saying, "discretionary spending is going to be driving business forward in 2011." Certainly, when you look at the backlog of project work that's out there right now, it has that ability, it's the timing that's less certain.

Mayank Tandon - Signal Hill Capital

So is it fair to say then that it really was pent-up demand that drove a lot of this momentum this year and now to get back to a more normalized-type growth environment, we still don't know for sure until we get clarity on budgets?

Prashant Ranade

Actually as Dave said, the budget for next year is not firmed up, clients are working o firming those up. But if you look at overall demand environment, because 2009 was flat to low, compared to that 2010 grew, and based on information and comments we hear as far as demand, while budgets are not finalized we expect demand next year to be stable with increasing penetration of offshoring as clients looks for opportunity to take advantage of a cost improvement as well as a top line growth and stickiness with their customer.

David Mackey

As I guess the other way to look at too, Mayank, our revenue in the third quarter of this year was 34% higher than it was in the same period of last year. If you look at the maintenance segment of our business, it was actually up 40% versus the same period last year. so the cost reduction services, apples-to- apples have actually been growing at an accelerated rate for us. And that's not really a pent up demand situation, this is the longer term trend

Mayank Tandon - Signal Hill Capital

Some of your peers have talked about pricing with an upward bias, to quote them. Just from your standpoint, are you seeing any type of apples-to-apples rate increases or do you think you could get some pricing increases from mix? Just maybe some clarity on that would be helpful.

Prashant Ranade

I think as I shared in answering one of the question earlier; based on current cost environment driven by wages, currency and utilization, based on demand environment, clearly we are going to have and we are having discussions with clients about pricing. And clearly expect to pass some of that on to the clients. So we do see upward bias, and that would be a right way to characterize it.

David Mackey

As always though, Mayank, pricing is definitional. So while we would expect to push forward in 2011with unit rate increases, at the end of the day clients are still going want to aggressively manage their total cost of ownership. So there can be trade offs between unit price increases and the amount of offshore leverage that clients are willing to experience.

Mayank Tandon - Signal Hill Capital

And finally, Bharat, a question for you. You're sitting on a pile of cash. I think you talked about M&A opportunities. Should we also expect maybe a potential for another one-time dividend payout?

Bharat Desai

Our Board looks at that from time-to-time and makes that decision. And we'll continue to do that.

Operator

Our next question comes from Brian Kinstlinger from Sidoti & Company

Brian Kinstlinger - Sidoti & Company

One of your competitors is looking to do M&A a little bit more aggressive than you, I think. Most of their cash is in India so they did a shelf registration because they'll have to raise money. I'm curious, if you were to do something meaningful, and I don't know what that number is, do you have enough cash in the United States or is most of it sitting in India?

Bharat Desai

Well, we have cash across the geographies where we do business. And we're comfortable that it can be productively deployed for any kind of business combination that we would need.

Brian Kinstlinger - Sidoti & Company

So you would need to raise capital in the U.S.? Might you have to raise capital if it was a U.S. accusation?

Bharat Desai

There are no current plans to do that.

Brian Kinstlinger - Sidoti & Company

You had a great spike in revenue sequentially, yet margins, unless I mistyped them in, looked like they got hit pretty hard. Could you talk about what happened there?

Arvind Godbole

Yes Dave mentioned, these are short duration on site centric projects. And those revenue increase, it has also increased the cost along with the increase in the VISA cost for on site projects. And change in the mix which has the resulted in the lower margin.

David Mackey

One other things that we found, Brian, especially across the last couple of quarters, is that as this line has grown and given the short term duration of these projects, the project work has tended to be much more on site centric. And while that does drive better dollars, it also drives lower margins on average.

Brian Kinstlinger - Sidoti & Company

And then, in the past, we've seen a drop-off when contracts expire, especially if you can't replace that revenue, and you've been very good at communicating that. I'm just curious, do you see that in the next couple of quarters as something that's going to happen where at least one time in the next two or three quarters you'll see a sequential drop as that happens?

David Mackey

It's a good news bad news situation, Brian. When you look at the projects because they are all relatively small in size, we don't have any material drop-offs that we're looking at quarter-to-quarter. That being said, the flip side of that is that we don't have a ton of visibility to growth either. So it's going to be a dynamic type of a situation. Historically, this segment has been difficult for us to grow by the very nature of how it's defined. And I think that'll continue and is somewhat exacerbated given the fact that the project size has shrunk and it's become a little bit more onsite centric.

Brian Kinstlinger - Sidoti & Company

And the last question I have is since this quarter was very onsite-centric on e-Business and they're short-term contracts and you don't have visibility longer term, should we expect in the next quarter or two that it'll be very onsite centric as well, since those are the contracts that are going on?

David Mackey

Given the current market environment, I would say yes. I mean clearly, when you look at where clients are demanding the work today, and the types of projects that we're doing, they tend to be a little bit more on site centric right now.

Brian Kinstlinger - Sidoti & Company

Why is that if the costs are higher?

David Mackey

Because the real opportunity, Brian, to do significant components of work offshore, comes with a longer duration. It's very difficult when you are trying to get work done in three to six months and you've got daily interaction with the client to be moving significant portions of that work offshore.

Operator

There are no questions at this time. You may make you concluding remarks at this time.

Bharat Desai

Thank you, everybody, for joining us today. As I mentioned earlier, Syntel has focused on leveraging our corporate culture of innovation to help our client to create in the market place. Our investments and execution strategy are geared towards ensuring that we properly capitalize on this differentiator which will allow us to successfully compete in the evolving global services landscape.

We look forward to talking to you next quarter, good bye and thank you.

Operator

This concludes Syntel's third quarter earnings calls. A replay of today's call will be available until November 4, 2010, by dialing 1800-642-1687 and entering the pass code which is 18671551. Thank you.

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