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Syntel (NASDAQ:SYNT)

Q4 2010 Earnings Call

February 17, 2011 10:00 am ET

Executives

Prashant Ranade - Chief Executive Officer, President and Director

Arvind Godbole - Chief Financial Officer, Principal Accounting Officer and Chief Information Security Officer

Bharat Desai - Co-Founder and Executive Chairman

David Mackey - Vice President of Finance

Analysts

Joseph Foresi - Janney Montgomery Scott LLC

Vincent Colicchio - Noble Financial Group

Richard Eskelsen

Tim Fox - Deutsche Bank AG

Rahul Bhangare

Joseph Vafi - Jefferies & Company, Inc.

Puneet Jain - JP Morgan

Mayank Tandon - Signal Hill

Brian Kinstlinger - Sidoti & Company, LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel Fourth Quarter 2010 Earnings Call. [Operator Instructions] I will 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 fourth 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; 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?

Bharat Desai

Thank you, David. Good morning, everybody, and thank you for joining us today. We are very pleased with the operational and financial performance of our business this past year. The investments we made during the economic downturn resulted in deeper relationships with the clients and prospects and helped lay the groundwork for success in 2010.

As the overall environment stabilized and customer confidence began to improve, Syntel was very well-positioned to help our clients innovate and compete. As a result, 2010 revenues increased 27% over 2009. While overall spending levels improved, projects were largely focused on cost reduction, business efficiency and short-term returns on investment. It is our belief that over time, clients will begin moving forward with longer-term transformational plans designed to not only improve efficiency, but drive competitive advantages in their respective markets. Clients will increasingly expect their partners to execute these initiatives and help provide the thought leadership, innovation and commitment to development. We firmly believe that our culture, approach, size and capability will enable Syntel to deliver this enhanced value to our clients.

As we begin 2011, we feel Syntel is very well-positioned in the marketplace. The feedback we've been receiving from clients and prospective clients had been very positive they tells us that Syntel has the depth of knowledge to understand their business problems and the ingenuity to solve them. We will continue to focus on leveraging our capabilities to drive competitive differentiation and long-term sustainable business value for all Syntel's stakeholders.

I would now like to turn the call over to Prashant Ranade, Syntel's Chief Executive Officer and President, to provide you further details. Prashant?

Prashant Ranade

Thank you, Bharat, and welcome, everyone. Syntel's fourth quarter revenues came in at $144.9 million, representing a 3% sequential increase and a 23% increase year-over-year.

Growth during the quarter was broad-based across two verticals; service offering and clients. From a vertical perspective, healthcare, financial services and retail were the key contributors. ROI-based development projects led the growth from a services perspective. And customer concentration remain unchanged at the top three, top five and top 10 levels.

The fourth quarter marked the return by our clients to a seasonal spending pattern with many differing contractual commitments into 2011 spending finalization of their budgets. As clients' plans firm up, we expect projects signings and reciprocate [ph] to accelerate. As a result, we anticipate first quarter revenues will be similar to fourth quarter levels. Gross margins for the fourth quarter dropped 20 basis points sequentially, coming in at 38.4%. The main drivers for lower margins were currency and reduced offshore utilization.

During the quarter, the Indian rupee appreciated 2.3% which impacted gross margins by approximately 70 basis points. Additionally, Syntel increased net global headcount by 1,095 employees, representing a 7% sequential increase. The majority of this advance hiring was at the campus level and necessary to manage the delivery parameters going forward. As a result, offshore utilization levels dropped to under 68% at the end of Q4, and IT utilization offshore stood at 61%. These levels are temporarily low and should improve as 2011 progresses.

Syntel's SG&A level was largely unchanged during the fourth quarter. Net [indiscernible] from currency movements was largely offset by the full quarter impact of our ongoing infrastructure expansion programs. This includes our new state-of-the-art campus in Chennai and new SEZ-leased facility in Mumbai.

With respect to full year 2010, we are extremely pleased with company's overall performance and current market positioning. Our revenue growth and operating margins were among the best in the industry, coming in at 27% and 23%, respectively.

Revenue momentum was healthy and broad-based, with all verticals growing over 20% and IT solutions including maintenance and development growing over 30%.

The company also added 30 new clients in 2010, including several high potential brand name logos. We continue to aggressively invest in our business as was evidenced by accelerated hiring and infrastructure build-out.

In 2010, Syntel's global headcount grew 38%, adding over 4,800 net employees and finishing the year at 17,383.

During the same period, additional capacity was created in Mumbai and Chennai for over 9,000 potential seats. These investments, coupled with currency appreciation and wage increases, were responsible for much of the margin pressure expected during the year.

As we look forward into 2011, the market is full of both opportunities and challenges. Overall, the demand environment for our services and Syntel's new business pipeline are extremely healthy. We expect that 2011 budgets will be flat to slightly increased versus 2010 levels.

However, we also believe that clients will allocate a higher percentage of their budget towards their offshore partners. Cost reduction initiatives will help reduce expenditures for key line items such as maintenance and allow funding for deliverable-based projects. Clients must then decide how available dollars will be spent on three types of initiatives: Short-term ROI-driven projects; longer-term competitive and transformational initiatives; and regulatory- and compliance-related changes.

Syntel will continue its strategy of investing ahead of the curve to help differentiate our services and drive operational efficiencies.

In 2011, we expect to make significant investments in not only our existing campus infrastructure, but also expansion into other cities within India. We will be following the campus approach in these new areas, including the procurement of land.

Operating margins for 2011 are expected to be slightly below 2010 levels, but consistent with the second half of the year. Wage increases and infrastructure investments will create headwinds to margins.

Helping to offset these costs are expected price increases and improved productivity. Upside to our margin guidance in 2011 will primarily come from incremental revenues. As Arvind will discuss, we also expect to face earning headwinds from a higher average tax rate in 2011, which will result from the expiration of the STPI tax holiday in India.

Despite the challenges, we believe that Syntel's positioning in the marketplace remains excellent. We are in a growth industry with a proper mix of size and capability, a differentiated approach and an under-penetrated blue chip customer base.

The company is focused on successful execution of our key initiatives, designed to deepen relationships and drive increased value to our clients. As a result, we believe Syntel is well-positioned for success in 2011.

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

Arvind Godbole

Thanks, Prashant, and good morning. After my comments, we'll open the call to questions.

Syntel's fourth quarter revenue came in at $144.9 million, up 23% from the prior year period and 3% sequentially. For the fourth quarter, Applications Outsourcing accounted for 76% of revenue, KPO was 14%, e-Business represented 8% and TeamSourcing was 2%.

From a vertical perspective, financial services contributed 58%; with insurance, 15%; healthcare, 15%; automotive, 3%; and all other accounted for 9%.

Vertical growth was led by healthcare, which grew 11% sequentially and 28% was just last year. Syntel also experienced healthy growth in financial services and retail verticals.

Syntel's customer concentration remains consistent with current quarter levels. Our top three clients represented 50% of revenue, top five contributed 61% and top 10 in at 75%. The fixed-priced component of our business was 45% of revenue for the quarter.

With respect to Syntel's margin performance, our gross margin was 38.4% in the fourth quarter. This represented a decrease versus 50.2% reported in the prior year period and 39.6% in the third quarter of 2010.

As Prashant mentioned, lower utilization and currency fluctuations led the primary drivers for sequential margin compression.

By business segment, gross margin for Applications Outsourcing was 34.7%, KPO was 60.93%, e-Business was 33.7% and TeamSourcing, 41.1%.

Moving down the income statement. Our selling, general and administrative expenses were 17.4% in the fourth quarter of 2010, compared to 17% in the prior year period and 17.7% in the third quarter.

On a dollar basis, SG&A was up $0.3 million sequentially. From a currency perspective, the average Indian rupee rate appreciated by 2.3%, resulting in the $0.5 million of additional P&L expense.

The impact on SG&A from the balance sheet translation adjustment this quarter was only $0.3 million as compared to the $1.4 million expense recorded in Q3, resulting in a sequential reduction of $1.1 million.

The net currency impact on Q4 was therefore favorable by $0.6 million. This was largely offset by additional facility-related expenditures for the new Chennai campus and the facility at Mumbai and the impact of perspectives or annual customer events.

Other income during the quarter decreased $0.9 million. Coming in at $4 million, the company recorded $0.7 million gain on hedging as compared to a $2 million gain in the prior quarter. Partially offsetting this sequential reduction was an additional $0.4 million of interest income and gains on sales of mutual funds during the quarter.

Our tax rate came in for the fourth quarter at 13.4% as compared to the 14.5% posted in Q3. In the fourth quarter, the company recorded $1 million tax reversal for recent positions no longer require.

Net income for the fourth quarter was $29.8 million or $0.71 per diluted share, compared to $35.8 million or $0.86 per diluted share in the prior year period and $30.4 million or $0.73 per diluted share in the previous quarter.

The company's balance sheet at the end of the fourth quarter of 2010 remains extremely healthy. Our total cash and short-term investments as of December 31, 2010, were $287.2 million. The DSO level is reduced by nine days to 50 days during the fourth quarter.

Our capital spending in quarter four was $9 million as we continued facade of our new building in Mumbai and Chennai and initial construction of phase three in Pune.

For the full year 2010, Syntel's CapEx levels were $22.5 million. Syntel ended the fourth quarter with a total headcount of 17,383, of which 4,705 were assigned to KPO.

Our global headcount was 2,648 on-site and 13,687 offshore for a total of 16,335. The net additions to the global headcount were 1,095. Utilizing levels at the end of the quarter were 91% on-site, 68% off shore and 72% globally. Our dilutive mix currently stands at 21% on-site and 79% offshore. Voluntary attrition during the quarter was 14.1%, down from 14.8% reported last quarter. Full year attrition came in at 14.8%. Syntel added eight new customers in quarter four and one new Hunting License, this takes a total number of preferred partnerships to 105.

Looking forward, I would now like to provide you with our initial guidance for the year 2011. Based on our current visibility levels, Syntel expects revenue to be in the range of $600 million to $630 million and EPS to be in the range of $2.65 to $2.90 for the full year 2011.

The company currently has 57% visibility for the low end of the revenue range, and our guidance is based on an exchange rate assumption of 45.6 Rupees to the dollar.

We have assumed the operating margins will be in the 20% to 22% range and that expiration of the STPI holiday in India will result in an effective tax rate in the low 20s.

CapEx for the year is expected to be in the range of $70 million to $80 million including land purchases.

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

Question-and-Answer Session

Operator

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

Joseph Foresi - Janney Montgomery Scott LLC

My first question here is just on the guidance itself. Can you maybe give us some color on how your assumptions to getting to the top end of the guidance and then the low end of the guidance. Maybe you could just give us some color around that.

Prashant Ranade

Our guidance is consistent with our past practice of having visibility, as Arvind mentioned, at 57% to the low end of the guidance. And that has been the consistent practice. The high end is based on our pipeline and discussions with the customer, as well as what we expect the budgets to be for our customers.

Joseph Foresi - Janney Montgomery Scott LLC

Is there any color you could give us, I mean obviously, I think you said in your prepared remarks that the first quarter is going to be similar to the fourth quarter. Is there any color you could give us around our pipeline and just how you see that sort of ramping and how it's ramped compared to maybe last year and why you expect things to be more weighted towards the back half of the year?

Prashant Ranade

There are three elements that address that issue. The first one is, the customer and client budgets for the year which are flat to slightly higher than last year. Second is number of clients that we have added to our list, as we share with you 13 new clients in 2010, as well as the visibility to the specific projects and the new service offerings that we have. So it's a combination of those three things that we have used to provide the guidance.

Joseph Foresi - Janney Montgomery Scott LLC

And how do you expect the trending of -- clearly, it looks like from the headcount that you're hiring. Are you hiring ahead of demand, are you hiring in line demand, maybe can just as a little color on the hiring and maybe any expectations you have for next year?

Prashant Ranade

Yes, throughout the last year, we have hired ahead of the demand because two factors. One is the firming up demand environment as well as the propensity of our clients to increase the off shore percentage. Clearly represents an opportunity for us. And we are investing to take advantage of that opportunity. And as we have done since last year, we are investing ahead of the curve both in headcount as well as infrastructure.

Operator

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

Brian Kinstlinger - Sidoti & Company, LLC

If I'm not mistaken, traditionally your guidance has been, it's the low-end, 60% of visibility. I know splitting hairs here with 3%. But why did you decide to go lower this year as opposed to others?

David Mackey

I think, Brian, we've been as low as 57% in the past and as high as 62% in the past walking into the year. So it's fairly consistent. I think obviously, as Prashant, mentioned one of the phenomenon’s that we're looking at that clients in the fourth quarter had pushed out decision making into the first quarter, pending budget finalization. We do see the opportunity to continue to firm up those commitments throughout the first quarter. And I think looking at how the cycle typically runs and the opportunities that are sitting in front of us right now, we felt comfortable going at the slightly lower end of the committed-visibility range, given the discussions that we're having with clients today.

Brian Kinstlinger - Sidoti & Company, LLC

And then I'm curious, Dave, on the maintenance side of business that's unassigned so far. If you were to get commitments 100%, which you generally do, and your renewals that renewed throughout the year, how much visibility would that add assuming that was the case for the year?

David Mackey

Obviously, we're not going to report a metric relative to the new, the additional commitment opportunity. But suffice to say, Brian, that 52% of our revenue in the fourth quarter was maintenance. So to the extent that you're correct and that there are renewals embedded in the pipeline and the visibility to 2011 but not in the commitment levels, that certainly something that should give you a lot of comfort. You can look at our KPO business and you look at our Maintenance business, which combined, represent roughly 66% of our revenue. We obviously feel very good about that business and the opportunity for that to continue throughout the year.

Brian Kinstlinger - Sidoti & Company, LLC

Does maintenance renew annually? And if that's the case, to sort of get an equal amount in the first, second and third quarter throughout the year of new commitments?

David Mackey

No, that's part of the reason it would be very difficult to even give you the number. The reality of the maintenance contracts is there project by project. And for many of our clients, the maintenance portfolio can be comprised of dozens and in some cases, several dozens of individual projects, those each have their own individual start and end date and maintenance contracts can be anywhere from a one-year contract that we renew at any point during the year to two to three-year contracts that have kind of a longer visibility. So there's always a component that we expect to renew within the year and certainly our visibility walking into 2011 does not include the full impact of our maintenance portfolio.

Brian Kinstlinger - Sidoti & Company, LLC

And I want to go back to Joe's question on recruiting. I think that you talked about last year hiring ahead of demand, I think, that we're aware of that and I'm interested more on this year. Your utilization is exceptionally low, obviously, earnings are depressed but ultimately they'll come back when utilization comes back. I'm curious, are you willing to -- with your guidance and even if there's upside like there's been in the past, do you -- just give us a sense for this year's plan where you think utilization will play out throughout the year? Will you guys start to slow hiring a little bit as gross slows a little bit and utilization will become to come up? What's your sort of assumptions for the year?

David Mackey

Yes I mean, as Prashant mentioned in his prepared remarks, we do expect the utilization to improve throughout the year. These levels are temporary low for us. And the real metric to kind of watch is the offshore utilization on the IT side of our business. As Prashant mentioned in his prepared remarks, we were at 61% at the end of the fourth quarter. That is low for us. Although we've historically told everyone that we expect utilization offshore to range between 60% and 80%. At 60%, you're obviously preparing for accelerated growth. At 80%, you're probably in a situation where you're not prepared to grow as an organization. Ideally, we'd like to get closer to that 70%, but not at the expense of missing revenue opportunities. I think the other thing that's important to understand is that when demand snapped back in the first two to three quarters of 2010, a lot of that required very aggressive lateral hiring to meet quick demand. And part of what we're doing now is hiring at the campus level to make sure we're prepared to not only meet demand longer term, but also to manage the cost of service and delivery going forward. So there are really two elements to the utilization. One is hiring ahead of the curve for anticipated demand acceleration. The second is hiring to kind to of right-size the delivery pyramid.

Bharat Desai

And just to add a little bit color to that. The anticipated demand acceleration is based on all the initiatives that clients have on the table, on their plate, that we feel comfortable they will move forward with it.

Brian Kinstlinger - Sidoti & Company, LLC

Just two more questions on the utilization. It was 61% at the end of the quarter. What was it during the quarter? And then if revenues is not going to grow all that much sequentially, but my guess is you're still hiring, is that going to go down further in the first quarter?

David Mackey

Yes, if you look at, Brian, we don't give average utilization numbers through the quarter. But if you just took a straight two-point average and looked at where it would put us, we were at 65% offshore at the end of the third quarter. So it's pretty safe to assume that average utilization during the quarter was 62% to 63%. I think as we look forward, as Prashant mentioned, we do have some additional hiring still to go at the campus level. We would expect, at least in the short run, that utilization might be similar in the first quarter to where we were in Q4, plus or minus, but the reality is, we do expect as the demand picks up and obviously with our comments about Q1 revenues that that's not something we're expecting in the first quarter. We would expect those utilization levels to improve throughout the year.

Brian Kinstlinger - Sidoti & Company, LLC

Last question I have on the new facility. In the fourth quarter, what was the increase expense related to your new facility? And then when are their points and what's the quantity of the step-up in expenses in 2011? For example, is there going to be even more cost-related facility per quarter? And if so, which quarter does it start to hit?

David Mackey

Yes, we did have in the neighborhood of an incremental $600,000 to $700,000 of expense in the fourth quarter for the new facility. We do expect that, that will continue to ramp throughout the year as we put additional facilities into production. The major hit at this point that we would expect would be during the second quarter.

Operator

Our next question comes from Tim Fox of Deutsche Bank.

Tim Fox - Deutsche Bank AG

My first question is, again, going back to guidance and just taking a step back and looking at the original guidance for 2010. Obviously, you're done looking for somewhere in the mid-single digits, around 6% growth top line and outperformed significantly on that front. Bharat just mentioned a snap back in demand, second, third quarter. I just want to help frame our thinking here about how much of the upside in 2010 was from the over-utilized word pent-up demand? And looking at your guidance going forward, where do you think, if there's any additional upside to what you provided, have we washed through that pent-up demand, we're now back to more normalized state. Can you just help kind of frame how that played out heading into 2010 and 2011?

David Mackey

Clearly, Tim, we did see an improvement in our revenue performance in 2010 that was a result of what I would call more of a return to a development spending. And a normalization of development spending, but I don't think Syntel's revenue growth last year was driven by pent-up demand. And to me, the biggest reason that you would see that is when you look at where the growth came from, our maintenance portfolio grew faster than our development. Logically, you would think that if there was pent-up demand and projects were getting done that clients had tabled, it would tend to be more on the development side than the maintenance side. So we're very, very happy with the broad-based growth that we had in 2010. I think the upside to 2011 comes from just continuing to see that the trends that we have in place today. I don't think it's going to require anything unique to drive excellent accelerated growth. I think as Prashant mentioned, the guidance that we provided at this point in the year is consistent with how we've done it in the past. It's visibility base, it's range bound and we're comfortable with where we provide it at this point in time. Obviously the company's objective would be to improve that visibility quarter-to-quarter and to improve that visibility to an increasing number, but we have to wait and see how that materializes over the next couple of quarters.

Tim Fox - Deutsche Bank AG

You mentioned that the pipeline and remains strong here. I just wondered if you could comment on the opportunities that you're seeing in the pipeline and the size of those opportunities as the scope of the business? Do you feel you have the scale in the business to compete for the deals that out there? And has anything changed relative to the competitive environment? And what kind of deals that you're actually seeing coming into the pipeline?

Bharat Desai

Yes. We've added several brand name logos across different industries. And in each of them, these clients were evaluating a number of our peers. And they chose us specifically for a combination of capability and size. And we feel that each of these logos represent a significant revenue opportunity over the years. And I think that's what gives us the comfort and confidence that we see in the revenue opportunities and therefore, in the hiring.

David Mackey

I think the other thing that's important, Tim, to touch on is you spoke about deal size and the ability for Syntel to compete. The reality today is that most deal sizes remain relatively small. Companies, for the most part, are not committing to two- and three-year major transformation initiatives. And certainly, we're optimistic that over time, we would see that improve. But when you look at what we have out there today in the marketplace, it's not MEGA deals, it's MEGA relationships and these take time to evolve. Syntel at the end of the fourth quarter was sitting with over 4,600 people in bench in training. So the concept that we don't have the size to deliver on the types of initiatives that are out there is completely false in our view.

Prashant Ranade

And one my thing I'll add to that is the recent events which Arvind alluded to, perspectives of a client's demand as well as client's visits to our campuses, one thing that comes across consistently is their confidence in Syntel's teams ability to develop and build stronger deeper relationship and take advantage of the differentiated offerings to realize the higher value. So that's what gives us the confidence in our ability to grow.

Operator

Our next question comes Mayank Tandon of Signal Hill.

Mayank Tandon - Signal Hill

Dave and Prashant and Bharat, I was just wondering if you could maybe provide some specifics around the fourth quarter. I mean if I look back in time, you guys have traditionally come in at the higher end of your guidance or beaten your expectations. I think at this point, again, we're nit picking a little bit but you're close to a low end. I'm just wondering, does something catch you off-guard towards the end of the quarter?

Prashant Ranade

Nothing really caught us off-guard. There are two components. The budget flushed phenomenon becomes clearer in November. So clearly, we did see at the end of the quarter that budget flush didn't happened like it has happened in previous years, which was not known at the time of guidance that was given. And secondly Mayank is there was run down on two projects. So combination of those two resulted in what you are seeing.

Mayank Tandon - Signal Hill

And the ramp down is related to anything specific around service delivery or what were the reasons for the ramp downs?

Prashant Ranade

No, nothing related to service delivery. This was project based engagement which ran down during the quarter.

Mayank Tandon - Signal Hill

So then, first Q is going to be kind of flat because what you're saying is that the clients are still in the midst of deciding their spending plans and that's going to keep 1Q revenue flattish with 4Q?

David Mackey

Even first quarter commitments, Mayank, the real benefit we're going to see from commitments made in the first quarter is going to be in the second and third quarters. So these engagements obviously need to ramp. And we expect that to be the pattern that we're going to follow in 2011. This is, by the way, not an abnormal pattern for Syntel. If you go back and look at Q4 to Q1 performance historically, we have been relatively flat.

Mayank Tandon - Signal Hill

And then, I just wanted to ask you about the regulatory opportunity over and above the traditional growth in off-shoring this year. I mean have you thought much about that? Are you hearing feedback from your clients both on the financial services side and the healthcare side that could be an incremental growth opportunity and what the timing might be?

David Mackey

Yes, I think clearly the opportunity to help clients with regulatory and compliance related challenges is something that could drive revenues for us in 2011. The real question becomes whether that's truly incremental revenue. I think as Bharat mentioned in his prepared much, clients are going to be pushing more work offshore to deal with budgets that are going to be flat to slightly increased. The real question for a customer becomes how do you allocate that freed up budget between the key initiatives that you need to get done? So we certainly expect the benefit from clients moving more work offshore and outsourcing more development based initiatives to meet that budget and to meet that slightly increased budget. The real question is how does that incremental spend get a portion between ROI based projects, longer term transformational initiatives and regulatory and compliance. Because most clients don't have incremental budget in 2011 to deal specifically with regulatory and compliance related changes.

Mayank Tandon - Signal Hill

]And then of the healthcare side, I know one quarter doesn't make a trend but that was a pretty impressive sequential growth there, if I caught that right. And I'm just wondering, I think historically you guys have had some great logos on the healthcare side but that hasn't been the real growth engine. We’ve sort of been waiting for that to really take off. So again I wanted to just specifically ask you about healthcare and how meaningful that could be a growth driver, not only FY '11, but also going forward?

Bharat Desai

I think long-term, heathcare represents a significant growth opportunity. Healthcare traditionally has under deployed technology and now it's been pretty clear that all the four segments we play: Foot payer; provider; medical devices and pharmaceutical; and life sciences, all of them have now realized that technology is the frontier that's going to allow them and enable them to deliver at a lower cost to their stakeholders. So we feel great about the secular trend in that industry. And I think we're quite well positioned to take advantage of that.

David Mackey

I think we're also, Mayank, pretty comfortable with our depth and breadth across those verticals and sub-verticals. And as you mentioned, having brand name logos certainly helps with the process. I think also being a U.S. owned and operated entity helps in dealing with healthcare organizations. The opportunity is pretty significant as Bharat mentioned. Not only because these companies need to embrace technology as a differentiator going forward, but when you look at the other opportunities, they have historically been very slow to embrace offshore for cost reductions. So again, one of the greater opportunities here is to leverage both of those as a true partner. You're correct from growth rate standpoint though. When you look at the sequential growth in healthcare, it was almost 12% in the fourth quarter. And for the full year 2010, our Healthcare portfolio grew 29%, so above the corporate average. We think we're absolutely doing the right things in that area.

Mayank Tandon - Signal Hill

Great just one final quick question for me on the pricing front, I don't know if you already have mentioned that, but what are you building terms of pricing increments in fiscal '10? And how much of that would be for mix versus like to like pricing increases?

Prashant Ranade

We do expect upward bias in pricing. We are not providing guidance on how much is building to our guidance, it's purely based on pricing. But pricing is firming up. Clearly, customers are focused on reducing total cost of ownership. So combination of changing the offshore on site mix clearly helps that. So those two factors coupled with the upward bias on pricing is clearly what we expect and see during 2011.

Operator

Our next question comes from Joseph Vafi of Jefferies & Company.

Joseph Vafi - Jefferies & Company, Inc.

But maybe Bharat or Prashant, maybe you could give us a little bit more of your view here on why you think wallet share for offshore is going higher and have you it would be valuable to hear if there's any specifics that you've heard from clients on that front?

Prashant Ranade

There are two factors that caused the wallet share to be higher. As clients looked at reducing their spending on maintenance side, our lights-on [ph] initiatives to be able to invest more on development, our transformational projects. That is clearly one factor. And second, acceptance and performance of offshore industry over the years and size of that segment, coupled with the maturity of the clients to do off shoring. So those are the two factors that we believe will lead to higher wallet share of offshore work.

Bharat Desai

I agree on both those. I think now clients there's pretty much across the board acceptance of sophisticated offshore capabilities that companies have developed. And for any meaningful initiative, there's always a significant offshore component as clients embark on these initiatives. And especially in an environment where demand is ramping up, as you know, the economics dictates that that's where you can build your bench up the most conveniently and most effectively.

Joseph Vafi - Jefferies & Company, Inc.

And then I know KPO kind of can you give us a view on how we should think about KPO here in 2011? It moved up and then, it kind of moved back down here a little bit in Q4. What's the outlook there for the business in ‘11?

Prashant Ranade

Joint Venture partners of our KPO business remained aligned to long term objectives that we wanted to accomplish. They are realizing the value because of the differentiated and specialized work that we are performing on KPO. So based on that, as well as the pipeline knowledge, we would actually expect to grow that segment during this year. And outside the JV, we do have good pipeline of opportunities. But as you well know, the cycle times of decision making vary because it is a transformational decision, the ROIs are longer, so the cycle time of decision making is longer. So that's what we are confronted with outside the JV business. But we expect the JV business to grow this year.

David Mackey

I think in short, Joe, we do expect the KPO business to accelerate in 2011 but probably not at the corporate rate.

Joseph Vafi - Jefferies & Company, Inc.

I know that you're doing some stuff for your facilities there. There's some moving parts to facility cost in 2011. Could you give us an idea of maybe that headwind in facility cost, and during the year, when it kind of move to maybe potentially more neutral margin contributor if you're going to be able to move more people into the facilities and [indiscernible] some lease cost?

David Mackey

Joe, I think when you look at the plan and how it was built and when you look at the assumptions that we made relative to aggressively building out our infrastructure in 2011, there's a pretty significant opportunity to expand margins if we're able to grow the revenues at above the rates that we've guided to. Our facility and infrastructure build out plans basically have been put into place here and it begins largely in the second quarter. But they will scale and phase in Q2 through Q4. From an overall margin perspective, they create a headwind because it is ahead of the demand and ahead of the revenue curve at this point in time. But there is margin leverage to our business if we do exceed the high-end of our guidance.

Joseph Vafi - Jefferies & Company, Inc.

And then maybe just back on the hiring here. Continued strong hiring here. Is this is a function of demand, is it function of optimizing your pyramid, is it a combination of the two? Kind of just getting some thoughts here on why you're hiring?

Prashant Ranade

It is clearly combination of two. As was said in our prepared remarks, we are building our delivery pyramid, as well as we see a strong pipeline that we wanted to ensure we take advantage of. So it's a combination of both.

David Mackey

I think the one thing that shifted over the last couple of quarters, Joe, is the mix between the lateral hiring and campus hiring. And clearly the first half of 2010, the focus was on lateral hiring. The focus now is still it's been shifted to the campus side, but we are still hiring latterly as well.

Operator

Our next question comes from Ed Caso of Wells Fargo.

Richard Eskelsen

It's actually Rick Eskelsen on for Ed. Just a clarification question on the budget expectations to net growth outlook. Are you assuming that you see more of a normalized spending pattern from our clients? And you’re not really assuming any sort of slowdown or delays in decision making? Did I hear that correctly, at least in Q1, that is?

David Mackey

I don't think this represents a delay in decision making, Rick. And I think as we've said, we expect budgets for our clients will be flat to slightly up in 2011. This is really kind of more of a normal cyclical behavior that we've seen in the past from clients. So this is nothing unusual. This is similar. And part of the reason we've historically seen a similar revenue pattern from a Syntel.

Operator

Our next question comes from Patrick Sarinski [ph] of William Blair.

Rahul Bhangare

It's actually Rahul Bhangare for Bhavan. Could you give us a little bit more detail about the concerns that you have in the expected price increases in 2011? Are they coming from new customers, existing customers and then have you been able to get price increases year to date?

David Mackey

Good question, Rahul. Obviously, we expect that we will be able to approach many of our clients where we have the opportunity, existing clients, and get price increases. And given the wage environment in India, given the currency environment, these are pretty compelling arguments that we can make with our existing customers. And historically, we've been able to pass on some of those cost increases to clients in the way of unit price increases. The flip side is that we also do expect to price at a higher price point for new clients. So reality of that though is, you got to remember that typically in any given year, less than 5% of your revenues going to come from new customers. So while they should be at a higher price point and certainly present opportunities down the road, the ability to impact 2011 margins with unit price increases for new customers is pretty minimal.

Rahul Bhangare

And then, are you planning to move more work offshore just to offset some of the margin headwinds? And then, what kind of margin impact would that have if you're planing to shift more work offshore?

David Mackey

The delivery mix, Rahul, is typically more a function of client comfort than it is our ability to move work off shore. And one of the logical byproducts of raising unit prices to clients is clients wanting to manage that total cost of ownership so that it is flat to slightly down. Clients don't want to pay 5%, 10% more for the same services year over year. The way to allow them to manage that going forward is to increase the unit prices but to leverage global delivery to help them manage total cost of ownership. This has been a pattern that we've seen in the past. We think we've got significant opportunity to move more work offshore. If you look at our IT portfolio today, we're doing 30% of the work on site, 70% of the work offshore. And that is a little bit more conservative than the industry average. So we certainly have the ability, as our clients become more comfortable with the delivery model, to use that mix shift to help offset the impact of price increases for our clients.

Rahul Bhangare

Last question, I might've missed this previously, but what was volume growth in the quarter?

David Mackey

All of our growth is volume growth. We don't have a currency impact on the top line.

Operator

Our next question comes from Puneet Jain of JPMorgan.

Puneet Jain - JP Morgan

Quick question on penetration level in your top six through 30 accounts. Can you comment on like how far along you are penetrated on those accounts? And can any of them retain the scale you have achieved for your two largest customers?

Prashant Ranade

The 11, outside 10 accounts, our growth rate during fiscal year 2010 as a percentage was actually higher than our top 10 accounts. Now clearly, top 10 accounts represent 75% of the business. So it did not move a needle. And your second part of your question is, what do they represent? There are logos in actually seven and higher clients. Some of them represent opportunities as big as our current top five to seven clients.

David Mackey

I think in short, Punee, the reality is we believe not only is our customer base largely under penetrated, but even within our top 10 and top five and top two clients, there is absolutely room to continue to expand the relationships. And you saw that in 2010.

Bharat Desai

And I'll just add a little more color to that. Over the last year or so, we've become quite disciplined at only pursuing those client relationships where we feel and believe that there is significant revenue potential. And we raised the bar for our revenue expectations long term from each of these clients. So only those clients where we believe we can grow into meaningful contributors of revenue in over $10 million plus on an annualized basis are the ones we engage with and pursue.

Puneet Jain - JP Morgan

About the contracts, the two contracts that slimmed down in Q4. Obviously, most of your clients and specifically those two accounts would have completed their annual budget cycle by now? Are you seeing those slimmed down contracts coming back now? Or do you expect them to come back anytime soon?

David Mackey

I think there are different scenarios with the projects that we were talking about. Clearly, when you see, for example, a development project that ramps down whether or not it to ramp back up, it's not specific to the project but more specific about the client plan. We believe we're absolutely doing the right things to engage with our clients at the right level. We think we have the ability to grow our top 10 and outside of our top 10 relationships. Project by project, piece by piece, client by client, it's not going to make a lot of sense, but we're absolutely doing the right things to engage with and grow these relationships going forward.

Puneet Jain - JP Morgan

On site wages would increase at Syntel becomes effective from Q1?

David Mackey

Correct. January 1.

Puneet Jain - JP Morgan

So what was the magnitude of such increase and what do you expect for offshore wage increasing in Q2?

Prashant Ranade

The on site increase is low single digit, and offshore, we expect it to be low double digits.

Puneet Jain - JP Morgan

On what percentage of your total cost stems from on site wages versus offshore wages?

David Mackey

We have not disclosed, Puneet, the breakdown of our cost structure. Though the one thing we can tell you and we do report is that on a direct cost basis, about 50% of our cost are Rupee denominated. So we'll give a feel at least for the competition component offshore.

Puneet Jain - JP Morgan

You reported $0.4 million in hedge gain in this quarter, below that line. Is that right?

Arvind Godbole

Yes.

Puneet Jain - JP Morgan

And so can you quickly tell us how far along and how much Rupee based exposure is hedged at this time?

Arvind Godbole

Hedging for the seller is up, December 31, has been higher than what it has been traditionally. And we are trying to hedge something you can say first half of the 2011.

Puneet Jain - JP Morgan

And how much of the exposure is there?

Arvind Godbole

Roughly, you can say 25% of the revenues that we need to cover, we have covered at an average rate which is much higher than the present rate.

Operator

Our next question comes from Vincent Colicchio of Noble Financial.

Vincent Colicchio - Noble Financial Group

E Business came in quite strong sequentially, better than I expected. Can you give us some color on your expectation going forward? Was that just lumpiness? Can e Business grow at the corporate rate in 2011?

David Mackey

I think it's certainly a possibility, Vince. e Business has been a very good year in 2010, but a lot of that had to do with a comparative 2009 that was extremely poor. As you mentioned, that segment for us in the way it's defined is extremely lumpy. They tend to be high dollar, short duration projects. And the visibility tends to be pretty low. Obviously, we were pretty pleased with the performance of the segment in the fourth quarter. We think there are certainly opportunities for us to grow that segment at/or above the corporate average in 2011. But as I said, at this point of time, the visibility to that growth is pretty, pretty muted.

Vincent Colicchio - Noble Financial Group

And question on our large KPO client. Has there been any new negotiations there on a longer time contract? Anything in terms of color would be helpful.

Prashant Ranade

Our current contract is valid through February 2012. And as I shared earlier, Vince, both sides have remained aligned to longer term objectives. We are providing value to our partners. And there are no additional discussions at this point because the current contract does go through February 2012.

Vincent Colicchio - Noble Financial Group

What plans may unfold throughout the year in terms of deploying your cash? Any thoughts would be helpful there as well.

Bharat Desai

We do have we will have probably our largest capital expenditure in a single year, this year, given the plans we've made for expansion into the future. This will constitute both land track acquisitions as well as significant build out of structures, both on current campuses and future planned campuses. And then we continue to look opportunistically at niche type acquisitions that will help us extend our reach both into new industries and geographies. And of course, third is our Board evaluates our cash position and the best use of those proceeds. We are going to await any developments on the part of the regulators on how they might think about the significant cash balances that most American companies have overseas and an effective way of repatriating it.

David Mackey

And I think, in short, relative to cash, Vince, with the exception of as Bharat mentioned, the accelerated spent on the infrastructure build and the land acquisitions, it's business as usual for Syntel.

Operator

There are no questions at this time. This concludes Syntel's Fourth Quarter Earnings Call. A replay of today's call will be available until February 24, 2011, by dialing 1(800)642 1687, and entering the passcode which is 43767427. Thank you.

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