Syntel's CEO Discusses Q1 2011 Results - Earnings Call Transcript

Apr.21.11 | About: Syntel, Inc. (SYNT)

Syntel (NASDAQ:SYNT)

Q1 2011 Earnings Call

April 21, 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

Manish Hemrajani - Oppenheimer & Co. Inc.

Jeffrey Rossetti

Bryan Keane - Crédit Suisse AG

Bhavan Suri - William Blair & Company L.L.C.

Vincent Colicchio - Noble Financial Group, Inc.

Joseph Vafi - Jefferies & Company, Inc.

Puneet Jain - JP Morgan Chase & Co

Mayank Tandon - Signal Hill

Brian Kinstlinger - Sidoti & Company, LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel First Quarter 2011 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, April 21, 2011. I would now like to turn the conference over to David Mackey, Syntel's Senior Vice President of Finance.

David Mackey

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

On the call with us today, we have Bharat Desai, Syntel's Chairman; Prashant Ranade, Syntel's CEO and President; 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 Bharat -- to Syntel's Chairman, Bharat Desai. Bharat?

Bharat Desai

Thank you, David. Good morning, everybody, and thank you for joining us today. On our last earnings call in February, we discussed our expectations for flat sequential revenue in the first quarter of 2011 based on our clients' budget cycle. That, coupled with ongoing investments in our business, resulted in lower margins during the first quarter. These investments are critical to meeting client demand and enabling Syntel to maximize the market opportunity over the longer term. Top line acceleration as 2011 progresses should provide us with margin expansion opportunities.

From a market perspective, overall demand for IT services remained stable and healthy. We continue to hear from our clients that they value Syntel's unique combination of size, capability and culture. Syntel's investments in industry-focused solutions have positioned us well to grow at a rate above the industry and gain share.

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

Prashant Ranade

Thank you, Bharat, and welcome, everyone. Syntel's first quarter revenues came in at $145.4 million, increasing less than 1% sequentially but representing a 25% increase year-over-year. As anticipated, clients deferred project commitments pending improved visibility and finalization of their 2011 budgets. With this seasonal impact largely behind us, we expect contract signing and client spending to pick up, which will drive sequential revenue improvement in second quarter.

First quarter revenue impacts, both positive and negative, were mostly client specific. KPO revenues were increased by $2.3 million as a result of a new project transition with a large client. While this created a spike in revenues, it also came with high expense levels, which dragged KPO and overall company gross margins. We expect these transition revenues and associated costs will reduce in the second quarter.

Syntel also saw healthy growth in our health care vertical, which grew 11% sequentially and helped drive the quarter improvement in our EBIT net revenues.

Offsetting this favorability were sequential spending reductions from a few large clients, which were anticipated.

Gross margin in the first quarter reduced by 340 basis points as compared to the fourth quarter of 2010, coming in at 35%. While revenues during the quarter were flat, our costs of delivery increased approximately 6%. The main drivers for this increase were lower average utilization, the impact of wage increases and one time transition costs associated with the large project mentioned earlier.

During the first quarter, Syntel continued to hire in support of our 2011 growth plans and to effectively manage our delivery pyramid going forward. While utilization offshore improved by the end of the quarter, the average utilization rate during Q1 was below Q4 levels. As discussed on last quarter's call, we expect that this utilization rate will improve as 2011 progresses.

First quarter costs also increased as a result of on-site compensation adjustments, which were effective January 1, 2011. The increases, which were in the low- to mid-single-digit range resulted in approximately 100 basis points of gross margin pressure.

The company's SG&A levels were largely unchanged during the first quarter. Increases in SG&A will begin during the second quarter as we begin moving into our new SEZ-leased facility in Mumbai and a second building in our new state-of-the-art Chennai campus. Combined, we'll be adding approximately 6,000 finished seats by the end of the third quarter.

These infrastructure costs, coupled with the impact of offshore compensation adjustments and visa processing fees, will result in significant Q2 cost increases. We expect, however, that revenue growth during the quarter will drive utilization and productivity improvements and result in operating margin expansion versus Q1 levels.

Overall, the demand environment remains stable and healthy. As Bharat mentioned, client budget cycles are largely complete and on average appear to be slightly above 2010 levels.

For Syntel, there continues to be a significant opportunity for us to accelerate growth within our key strategic relationships. The new business pipeline is healthy, and clients are looking to Syntel to help them not only reduce cost and improve efficiency but also drive part leadership and competitive differentiation. This includes ROI-based projects, regulatory- and compliance-related changes, transformation initiatives and new technology plans.

Our ongoing investments in resources, services and infrastructure are critical to helping us differentiate Syntel with our clients and create operating leverage in our business. While these investments have created short-time margin pressure, we are confident that these actions will enable Syntel to drive long-term profitable growth.

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 first quarter revenue came in at $145.4 million, up 25% from the prior year period and less than 1% sequentially. For the first quarter, Application (sic) [Applications] Outsourcing accounted for 73% of revenue, KPO at 16%, e-Business represented 9% and TeamSourcing was 2%.

From a vertical perspective, financial services contributed 58% with insurance at 14%, health care 17%, automotive 3% and all other accounted for 8%. Vertical growth was led by health care, which grew 11% sequentially and 42% versus last year.

Syntel's customer concentration increased during the quarter largely as a result of the KPO growth. Our top 3 clients represented 52% of revenue; top 5 contributed 64%; and top 10 came in at 78%. The fixed-priced component of our business was at 39% of revenue for the quarter.

With respect to Syntel's margin performance, our gross margin was 35% in the first quarter. This represented a decrease of 42.4% reported in the year-ago period and the 38.4% in the fourth quarter of 2010. As Prashant mentioned, lower utilization, rate increases and transition costs were the primary drivers for sequential margin compression.

By business segment, gross margin for Applications Outsourcing was 20.3%; KPO was 55%; e-Business was 36.2%; and TeamSourcing, 37.3%.

Moving down the income statement. Our selling, general and administrative expenses were 16.9% in the first quarter of 2011 compared to 19.2% in the prior year period and 17.4% in the fourth quarter of 2010.

On a dollar basis, SG&A was down $0.6 million sequentially. The impact on SG&A from the balance sheet [indiscernible] [37:00] adjustment this quarter reduced expenses by $0.1 million as compared to $0.3 million of additional expense recorded in Q4 of 2010, resulting in a sequential reduction of $0.4 million.

Other income during the quarter increased to $2.1 million, coming in at $6.1 million. The company recorded a $1 million gain on hedging as compared to $0.7 million gained in the prior quarter.

Syntel also had an additional $1.7 million of interest income and gains on sale of mutual funds during Q1. This was largely driven by an increase in the interest rates in India and the higher percentage of our offshore tax remaining in rupees.

Our tax rate for the first quarter came in at 22.5% as compared to the 13.4% posted in Q4 of 2010. In the fourth quarter, the company reported $1 million tax reversal for reserve positions no longer required.

During the first quarter, Syntel's tax rate increased due to the expiration of STPI tax holiday in India. This is in line with our previous guidance.

Net income for the first quarter was $25 million or $0.60 per diluted share as compared to $25.1 million or $0.60 per diluted share in the prior-year period, and $29.8 million or $0.71 per diluted share in the previous quarter.

The company's balance sheet at the end of the first quarter of 2011 remained extremely healthy. Our total cash and short-term investments on March 31, 2011, were $278.5 million, and these levels were at 57 days.

Capital spending in Q1 was $20.9 million as we continued buildout of our new buildings in Mumbai and Chennai and initial construction of phase 3 in Pune.

Syntel ended the first quarter with a total head count of 17,610, of which 4,888 were assigned to KPO. Our global head count was 2,726 on-site and 13,797 offshore for a total of 16,523. Net additions to the global head count were 227. Utilizing levels at the end of the quarter were 93% on-site, 71% offshore and 74% globally.

Our delivery mix currently stands at 21% on-site and 79% offshore. Voluntary attrition during the quarter was 14.1%, the same number as reported last quarter.

Syntel added five new customers in Q1 and one new Hunting License, which takes the total number of preferred partnerships to 106.

Looking forward, I would now like to provide you with the guidance for the year 2011. Based on our current visibility levels, Syntel expects revenue to be in the range of $610 million to $635 million, and EPS to be in the range of $2.70 to $2.90 for the full year 2011. The company currently has 78% visibility to the low end of the revenue range, and our guidance is based on an exchange rate of assumption of INR 44.5 to the U.S. dollar.

We have assumed that operating margins will be in the 20% to 21% range, and that our effective tax rate will be around 22%. CapEx for the full year is still expected to be 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] And our first question comes from the line of Bryan Keane from Crédit Suisse.

Bryan Keane - Crédit Suisse AG

I just wanted to go through the interest income. It was a little higher than I expected. I know you broke it out in pieces. It sounded like there was a $1 million gain, and I couldn't tell if there was another gain in there. And then the second part of the question is, what should we expect for interest income for the year?

Arvind Godbole

Yes, this is Arvind here. We showed an additional interest of $1.7 million during the quarter as compared to the last quarter primarily because the interest rates have firmed up toward the end of the quarter 4 of 2010. And we expect the interest rates to be at this current level or be marginally lower as we go down the year.

Bryan Keane - Crédit Suisse AG

Okay. And then turning to the operating margin guidance, I think -- did you say 20% to 21% for 2011? And how is that different from the previous guidance? I think you guys said you expected to be slightly below 2010 levels but consistent with the second half of 2010, so I'm just trying to compare and contrast there.

David Mackey

I'll Sure, I'll take that, Bryan. Our previous guidance, we actually spoke to having an operating margin expectation of 20% to 22%. We've now guided to 20% to 21%. So just 100 basis points off the high end of the margin expectation is really all that's changed since February. The real reason for that is when you look at what's happened to the rupee in terms of appreciation versus February, our previous guidance was based on INR 45.6. Currently, as Arvind mentioned, we expect the last 3 quarters of this year to be at INR 44.5 based on where the rupee is trading today. About a 2% appreciation in the rupee, it's close to the 100 basis points in margin compression that we expect.

Bryan Keane - Crédit Suisse AG

Okay. And just last question for me on demand. There was some question if some of the global events and some of the turmoil out there caused a kind of a stop in spend patterns in March. Can you just talk about maybe how spending looked sequentially through the months of the first quarter and maybe how it started out in April?

Prashant Ranade

If you look at our historical performance, the relationship between quarter 1 and quarter 4 is reflected in what we expected for this quarter. Our guidance is based on visibility, which we see firming up, again consistent with our historic patterns of 78% visibility to low end guidance. And overall, from a market perspective, we see budgets to be flat to slightly up compared to 2010 levels.

David Mackey

Yes. And another thought on that, Bryan. When you look at kind of how things proceeded through the quarter, as Prashant mentioned, the slowdown in Q1 revenues is certainly something we anticipated, and it's really a function of our clients' budget cycles. I don't think it's been a function of macroeconomic trends. We did see a firm up in terms of clients' activity levels and client commitments as we moved into March. And again, I think that's part of the reason you see the company's comp [ph] arriving to sequential revenue increase for the second quarter.

Bryan Keane - Crédit Suisse AG

Okay, so there's no change in kind of behavior patterns, different than what you expected?

Prashant Ranade

That's correct. As Dave mentioned, the macro demand environment is healthier than it was a couple of years back.

Bryan Keane - Crédit Suisse AG

Okay, great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of from Mayank Tandon from Signal Hill Capital.

Mayank Tandon - Signal Hill

Just on margins, Prashant, I think you mentioned that the transition costs were 100 basis points drag on margins sequentially. What were the other two factors in terms of magnitude of impact?

Prashant Ranade

Yes, two other factors were related to wage increases. On-site wage increases had an impact of about 100 basis points. And second factor was utilization. If you look at the utilization numbers, we were off by about 1 percentage point in terms of average utilization, which had the impact of roughly 70 to 80 basis points.

Mayank Tandon - Signal Hill

Got it. And going forward, in terms of trajectory of margins, so is it fair then to expect that gross margins should increase as revenues scales even with the offshore wages' hike in the second quarter and we then should start to get some leverage in terms of operating margins over the course of the year?

Prashant Ranade

That is correct. We have baked in the impact of additional costs of offshore wages, of visa fees, as well as increased cost of facilities. And those will be offset by increased revenue expectation based on our annual guidance, which in turn will allow us to expand the gross margins.

Mayank Tandon - Signal Hill

Okay. And the visa costs and the offshore wage hikes will all be concentrated in the second quarter, right?

Prashant Ranade

Yes. Obviously, the offshore hikes will then begin in the second quarter and continue through the year. Visa costs, you are right, they will be concentrated in the second quarter.

Mayank Tandon - Signal Hill

Got it, okay. And then returning to demand theme. It seems to be that there's a fair amount of mixed signals in terms of some vendors saying that they're seeing large transformation-type deal activity, while others that it's really more project-type work, and it's a little bit lower visibility type of work. Can you give us a sense of what you're seeing in the market versus some of your peers?

Prashant Ranade

Demand environment, as I've said earlier, in terms of at the macro level is healthier than it was in 2010. Our focus, which we have continued over last several years, of providing differentiated offerings and value addition to our clients is resonating well with our clients, which is reflected in our guidance based on the visibility of 78%. And overall guidance would represent our growth to be higher than the market growth rate as we have targeted in past.

David Mackey

And I think the other way to look at it, Mayank, is when we look at the pipeline and we look at the conversations that we're having with our clients right now, I think we see a little bit of improvement from where we were three to six months ago with respect to transformational initiatives. I wouldn't say that we see significant increases in the overall project size or the overall scope at this point. But clearly, the discussions we're having with clients about longer term transformational types of initiatives are improving. And we expect that to continue as the environment remains stable. So as long as we continue to move forward here without major hiccups in the overall macroeconomic environment, we believe clients will continue to look further and further forward for the transformational types of initiatives that'll make their businesses more competitive.

Mayank Tandon - Signal Hill

That's helpful color. And one final question in terms of revenue growth. So how should we think about -- you mentioned utilization. How should we think about pricing in terms of impact for this year? And also, what are your plans on the head count front for the rest of the year?

Prashant Ranade

As far as head count trend is concerned, as you know, we don't offer annual head count guidance. But to add some color to it, we expect the hiring to be more campus based and back-end loaded. With our current utilization level, we feel improved utilization will allow us to support our guidance in terms of revenue growth and have headroom to take advantage of opportunities should we see upside opportunities.

Mayank Tandon - Signal Hill

And what about pricing?

Prashant Ranade

Pricing? We are seeing firming up to upward bias based on what we have realized during first quarter. And I expect that to continue based on increased costs. Obviously, some of those increased costs are being offseted (sic) [offset] efficiency improvements, but we are seeing pricing firming up to upward bias in terms of our negotiations and agreements with customers.

Mayank Tandon - Signal Hill

Great. Thank you.

David Mackey

Thanks, Mayank.

Operator

Thank you. Our next question comes from the line of Brian Kinstlinger with Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

Could you guys give us the actual IT offshore utilization versus -- in the first quarter versus where it was in the fourth quarter?

David Mackey

Yes, I mean, from a period end standpoint, Brian, when you look at the reported numbers, the IT utilization ended the first quarter 63%. That is opposed to 61% at the end of the fourth quarter. So, as Prashant mentioned, when you look at just the optics, it looks like utilization actually went up. The utilization improved in March, which obviously gives us a nice run rate as we head into the second quarter. When you look at the average utilization for IT offshore, though, it was at 62% in the fourth quarter and just under 61% in the first. So while period end-to-period end it looks like the utilization is up, on average it was lower. And To be honest, the biggest drag on that was utilization in January.

Brian Kinstlinger - Sidoti & Company, LLC

And that half a point difference caused by itself almost 100 basis points of pressure?

David Mackey

Well, we actually also had a slightly lower utilization on-site during the quarter. It was about 1% lower as well. And that's actually where the bigger bang for the buck came in terms of the impact of the margins.

Brian Kinstlinger - Sidoti & Company, LLC

And if we think about utilization, where it is today on the IT side versus where based on the high end of your guidance assumes it would be, what is that? I mean, I take it your hiring plans depend on whether you're towards the high end or above or not, right?

Prashant Ranade

That is correct as far as hiring plan. As we have consistently said, the utilization levels are expected in the business to be in the range of 60% to 80%. They'll be closer to 60% in an area where you have substantially higher growth rate and change from quarter-to-quarter as far as growth rate. You can expect to see them, at a higher end, are closer to 80% in an environment which we all saw in the marketplace in 2009. So that will be the range of utilization in which we manage the business. And based on that, we see potential to improve the utilization, which is reflected in our full year guidance.

David Mackey

And I think, Brian, in kind of a stable steady-state growth environment, 70% is a good place to target for offshore utilization on IT. As Prashant mentioned, in any given quarter, it's going to spike up or down and you can't really affect utilization in any given quarter. But we certainly do expect that we will be increasing our utilization from the 63% level that we exited the first quarter as we move throughout 2011.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. And Prashant, I think you mentioned that the demand is much -- is stronger today versus where it was a year ago. I guess maybe take us through last year in the September and -- June and September quarters as you grew 14%, 17%, sequentially, respectively. Maybe, though, you were at a stronger point in demand. Maybe take us through how that might look compared to 2011 where demand is.

Prashant Ranade

If you look at quarter-over-quarter change, historically, the Q4 to Q1 is generally flat to slightly lower. That's why our Q1 revenues are in line with our expectation. If you look at the full year, we have targeted the full year to be at a higher revenue growth rate than the market growth rate. And based on our current guidance, with a low end visibility of 78%, we are within that range. And we have prepared ourselves in terms of hiring, in terms of infrastructure as well as services offering to take advantage of market conditions should we see higher revenue opportunities.

Brian Kinstlinger - Sidoti & Company, LLC

I guess my question is, when is that big bump? I mean, obviously, from where we are in the first quarter, there's going to be some sequential improvements. And last year, the June was the big quarter. September was secondary. So I guess I'm wondering, when we look at the next three quarters, when you expect the largest improvement of flow-through, through what you're seeing of new project commitments.

Prashant Ranade

As you know, we don't provide quarterly revenue guidance. And the growth in revenue is reflected in our overall annual guidance. Directionally, we do expect growth from Q1 to Q2, as I said in my prepared remarks.

David Mackey

And I think it's suffice to say, Brian, that given the discussion that we had a little bit earlier about the incremental costs in the second quarter, we're going to be looking at a nice-sized bump in the revenues in the second quarter to be able to absorb those incremental costs. So if we're talking about expansion in margins and we're talking about an expansion in margins in a quarter with rising costs, we obviously expect that the second quarter revenues should be able to allow us to do that.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. And can you talk about the KPO margins? Has there been any change in the economics? Do you expect the KPO margin to bounce back to the fourth quarter levels? And then maybe also take us through on salary increases, how that affects KPO.

David Mackey

Sure. When you look at the KPO margins in the quarter, as Arvind mentioned, we were at 55% for the quarter, obviously dragged by the transition revenues and associated costs that flowed through our P&L during the second quarter. If you were to back out those revenues and costs from the quarter, you'd be looking at a normal 60% gross margin business for the company overall. We do expect, obviously, as we move through the rest of the year that there will be some pressure on these margins. You're going to see the impact in the second quarter of the offshore wage increases, and this business is 100% offshore. You're also going to see some impact to the overall margins on the KPO side because of the appreciation in the rupee. So relative to Q4 levels and kind of normalized Q1 levels, we would expect probably that the margins on our KPO business will be somewhat lower in the last three quarters of the year but certainly not out of line with where we expect them to be.

Brian Kinstlinger - Sidoti & Company, LLC

Now the BPO increase, is it similar to the Apps Outsourcing increases, for example? Or do the guys who run your BPO business command the same level of increases as the IT guys?

Prashant Ranade

As far as the percentage increases are concerned, they are similar.

Brian Kinstlinger - Sidoti & Company, LLC

They are similar. Okay, thank you.

Operator

Thank you. Our next question comes from the line of Bhavan Suri from William Blair.

Bhavan Suri - William Blair & Company L.L.C.

Can you just -- I think, Prashant, you made a comment about the transition revenue and the associated expenses coming up. Just a little more color on the transition revenue: What that was? And was it with one of the top few customers on the KPO side? And does that revenue continue while expenses come down? Or how should we think of that a little more specifically?

Prashant Ranade

It was for our largest KPO customer. It was reimbursement of cost to transition the business over to us. We expect that revenue, transition revenue, to go down substantially in the second quarter, going down to zero in third quarter onwards. So that is our expectation as far as transition revenue.

David Mackey

But there is, Bhavan, a residual annuity to this transition that will provide us with revenue and normal margins on that revenue going forward. So this is kind of a bubble that we expect to be in Q2, a little bit -- I'm sorry, in Q1, a little bit into Q2. But it will lead to increased revenue levels going forward relative to Q4, for example, in the back half of this year.

Prashant Ranade

So to put it in perspective, the Q2 revenue on KPO side will go down with the transition revenue reduction and similar to levels that we had in Q4, and then increase from that point onward based on the project that is associated with the transition revenue.

Bhavan Suri - William Blair & Company L.L.C.

Got it. And now how -- and maybe you can talk about this a little more, too. You've added some new KPO wins. How are those ramping? And did those sort of have sequential growth, too, Q4 to Q1?

Prashant Ranade

We have had a smaller engagement on KPO side. Our pipeline is larger than BNFS [ph] [1:00:00] as well as on our health care side. But as you know, the cycle times for decision on KPO are longer. Our strategy is aligned with keeping our KPO, our operations and IT together and related benefits, which customers realize. And we look at that as an entry point to go or to grow, I'm sorry, our overall business. So that will remain our strategy. And our pipeline remains healthy. But again, the cycle times there are longer.

Bhavan Suri - William Blair & Company L.L.C.

Okay. Then a quick final one for me. Obviously, Application (sic) [Applications] Outsourcing revenue declined sequentially. First, was that on the maintenance or the development side? And then two, I guess it's a little more of a decline than one might have anticipated. Anything specific going on there?

David Mackey

Yes, I'll take that, Bhavan. Combination of maintenance and development in terms of the sequential reduction on the Apps Outsourcing side. Again, similar to the issues that we had in the fourth quarter, softness on the insurance vertical really driving the reduction on the Applications Outsourcing side, and you see that in the vertical mix for the quarter. Something certainly that we had visibility to and we expected, but obviously, we'd love to see that vertical reemerge and reaccelerated. It's just been a bit of a challenge over the last few quarters.

Bhavan Suri - William Blair & Company L.L.C.

David, and any sense on why that vertical is having a challenging time?

David Mackey

I don't know that it's anything that's vertical specific as opposed to client specific, Bhavan. I don't know that we can paint it with a broad brush per se. I can tell you that for Syntel, anyway, one of the challenges that we've historically had with insurance vertical is that it has been skewed somewhat towards development and towards enhancements to systems that we're maintaining. And as a result, when their business tends to get difficult, it's certainly one of the areas that we've historically seen pull back on. But I don't know that I would pay the overall insurance industry with a broad brush that way. And certainly, given the lack of maturity of some insurance clients, both on the property and casualty and on the life insurance side, we think there's significant opportunity for growth with our existing clients and for better penetration on kind of mainstream types of services like maintenance.

Bhavan Suri - William Blair & Company L.L.C.

And then you kind of lump the other into 8%. Are you seeing anything or any softness in the retail space at all?

Prashant Ranade

No. Actually, our retail revenue growth is something that we are pleased with. We're not seeing any softness in that area.

David Mackey

Yes, the retail revenues actually went up sequentially, Bhavan. And if you look at where our retail revenues were in the first quarter of this year, they're up over 60% from where they were last year. Now granted that it's off a relatively small dollar base, we have seen good traction in our retail space.

Bhavan Suri - William Blair & Company L.L.C.

Okay. Great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Joseph Vafi from Jefferies & Company.

Joseph Vafi - Jefferies & Company, Inc.

A lot going on here. Maybe first question for Bharat. Bharat, after all these years of following your stock, I don't think I've heard you say anything to the tune of growing above the industry. So combining that with some of the other commentary we've heard and probably what you have seen already this quarter in terms of ramps, I was wondering if we could get a little more color on that kind of bullishness on the top line from two perspectives. One is just business that you're seeing ramping now, which probably obviously will keep moving forward for this quarter and next, and what's in the pipeline and hasn't ramped at this point.

Bharat Desai

Yes, Joe. I think it's a few factors. One, where -- we continue to hear from clients that they like our combination of capability, size and culture. And also, we took a very concentrated and concerted effort to create industry-focused solutions and sub-vertical-based solutions in the industries that we decided to concentrate on. So I think that -- our combination of preparedness, solutions availability and customers looking for a nimble, capable, responsive company is what gives us confidence and optimism on the opportunities in the marketplace. And then in particular, there are new technologies that we think clients will have to take bets on: mobility, cloud computing, social media. And then there are -- one particular vertical where we have a decent presence vis-à-vis our peers is life sciences and health care where we see demand across the payer/provider, device manufacturer and pharmacy verticals or sub-verticals. So we think we are well positioned. We've made investments in creating solutions. We've got more feet on the street. And we like what we hear from our customers.

Joseph Vafi - Jefferies & Company, Inc.

Okay. Maybe just -- I mean, we'll just -- okay, that's helpful, Bharat. On the health care vertical, obviously, it was -- and I know that you guys said it was up pretty strong here, about 11%. Was that broad based? Or was it concentrated in one or two clients? And it's -- if it was that strong on a sequential basis, is that business or that spurt of growth fully ramped or is that in the middle of a ramp at this point?

Prashant Ranade

It was broad based, Joe. So it was not concentrated to few customers. It was also project based related to some of the offerings we have come up with around regulatory requirements. But we do expect health care, life sciences vertical with our positioning to see higher growth rates than our overall average growth rate, which we achieved for Syntel.

Joseph Vafi - Jefferies & Company, Inc.

Okay. And then was the wage increase on-site, was that -- that wasn't at all out of cycle, was it? Or is that just normally when you do the on-site wage increases?

Prashant Ranade

No, that is a normal January wage increase for on-site, and we stayed with that cycle, consistent with what we have done in the past.

Joseph Vafi - Jefferies & Company, Inc.

Okay. And then just 1 question on the guidance just to be clear on it. I know you -- in some of the prepared remarks, you've talked about a little bit -- or on the Q&A a little bit lower margin assumption. But you fine-tuned up the guidance range on revenue modestly and fine-tuned up the low end of the EPS range modestly. Are those kind of all linear? Or has the revenue guidance gotten slightly more conservative to fine-tune up the bottom of that earnings range?

David Mackey

I don't -- yes, I don't think it's anything different, Joe, than how we've guided in the past. Historically, we've had between 75% and 80% visibility to the low end of our guidance as we give guidance in April. We're sitting at 78% now. So certainly, we feel comfortable. We're right in the middle of where we've historically been. As both Bharat and Prashant have mentioned, we think the traction and the visibility is improving in our business as we go forward. We've talked about sequential revenue improvement in the second quarter. So we think things are on a nice path right now. The revenue and EPS guidance that we've given is based on current visibility levels. But it's also based on, as we've discussed, some investments in our business that are really leverageable over the longer haul. So certainly, there are some opportunities as we continue to grow our business and we continue to become more efficient, both from a productivity standpoint on the delivery as well as from the utilization of our infrastructure spend, that there should be some margin opportunities going forward. That being said, we have to kind of watch how the environment moves. And really, the major change to the guidance on the operating margin line is more to do with rolling through a 2% move in the currency from February.

Joseph Vafi - Jefferies & Company, Inc.

All right, great. Thanks very much, guys.

David Mackey

Thanks, Joe.

Prashant Ranade

Thank you.

Operator

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

Jeffrey Rossetti

It's Jeff Rossetti in for Joe. just a couple of quick questions. Could you maybe just talk about the client spending patterns? If it difference -- differs from your top 3 clients versus your overall client base?

Prashant Ranade

The pattern itself is not different between top clients versus remaining clients. We actually see larger opportunity for us because those are outside our top 5 clients. We have several under penetrated blue-chip clients where we have relationships that we can build on to increase our penetration within those clients. But spending pattern, to your question, is similar.

Jeffrey Rossetti

Okay, thanks. Appreciate it. And I believe, just with respect to the pipeline, I think you mentioned that maybe it's healthiest in financial services and health care. And I think you were kind of outlining some of the demand drivers in health care. Could you maybe just talk a little bit about financial services as well?

David Mackey

Sure. I think when you look at, Jeff, the pipeline that we have today, clearly the focus on our business has been in 3 key sub-verticals. It's been in capital markets, it's been in merchant processing and credit cards and it's been in regional and retail banking. We do see good opportunity across all 3 of those sub-verticals. In terms of the types of work, we're seeing, obviously, ongoing strong demand for cost reduction-based services like maintenance. We've also seen a little bit of improvement in terms of how clients are looking for solutions on regulatory- and compliance-related changes, dealing with Dodd-Frank and some of the other issues there. So I think it's fairly broad based across financial services and fairly broad based across our key three sub-verticals. Nothing in terms of one service or one offering or one area that appears to be driving at this point.

Jeffrey Rossetti

Okay, thanks. But those will be the main areas where you see the opportunity to gain market share within financial services and health care?

David Mackey

And I think, as Prashant mentioned, we've got some nice traction on the retail side as well.

Jeffrey Rossetti

Okay, great. Thank you.

Operator

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

Manish Hemrajani - Oppenheimer & Co. Inc.

Thanks for taking my call. A couple of questions from my end. How do you think utilization will play out through rest of the year? Do you have plans in place to slow the pace of hiring through the remainder of the year? I understand that 1Q is probably somewhat of an anomaly during the campus hiring calendar in India, and the fact that you hadn't really done campus hirings last year.

Prashant Ranade

As we have said earlier, we expect utilization to keep increasing from this point on. If you look at our current utilization levels, we have enough headroom to be able to support our growth opportunities. And our hiring, which I mentioned earlier, is more back-end, campus-focused. And so that will start after our beginning of Q3 and will continue. But combination of utilization level, where we are, the demand environment we see and investments which we have made in infrastructure have positioned us well to take advantage of any upside which we see on revenues. And we'll be able to capitalize on those opportunities.

Manish Hemrajani - Oppenheimer & Co. Inc.

Okay. A question on your tax rate. Your tax rate came in at about what 22.5%. From what I understand, STPI actually expired on March 31. So you should have actually gotten that benefit in 1-- Q1 unless I'm missing something here.

Arvind Godbole

Well, the -- we have always required to take the effective tax rate for the full year. And STPI was valued at [indiscernible]. But our calendar year is January to December. So this is the first quarter in which we are to consider the tax rate for the full year. And U.S. GAAP accounting standard code 704270, it requires us to convert the estimated tax rate in this manner. And that is why we guided -- if you'll recall at the last quarter call, we said that it will be -- we expect the tax rate to be in the low 20s.

Manish Hemrajani - Oppenheimer & Co. Inc.

Right. And you're guiding for 22% for the rest of the year?

Arvind Godbole

That's correct.

Manish Hemrajani - Oppenheimer & Co. Inc.

A question on wage inflation. Where do you expect wage inflation for next quarter given that there are wage increases that'll come into play?

Prashant Ranade

We expect our wage increase to be overall around low 10% range. And as we have done in the past, it'd be performance based from individual to individual. But overall, it is expected to be low double digit.

David Mackey

And then also important to remember that a certain portion of the wage increases are variable in nature. So we do have an ability to manage some of that cost increase with changes in the demand environment over the rest of the year.

Manish Hemrajani - Oppenheimer & Co. Inc.

Got it. One last one for me. What are your plans for cash in the balance sheet? Should we look for some sort of increased buybacks at these levels or are you going to keep your power drive by some organic growth?

Bharat Desai

As we've said, our Board does look at our cash position from time to time and determine the best use of that cash. This year, there certainly will be a use of cash in making significant infrastructure and land investments as we've planned. And that's basically it.

Manish Hemrajani - Oppenheimer & Co. Inc.

Okay. Thank you.

Operator

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

Puneet Jain - JP Morgan Chase & Co

Thanks for taking my question. So you said second quarter margins are expected to be higher than 1Q level despite rupee appreciation, wage inflation and visa costs? Can you talk about the expected frequency of margin had been from each of these?

David Mackey

Yes, I don't think we want to get into the individual levers. I mean, historically, I can tell you that the wage increases have cost us between 200 and 250 basis points. Obviously, the other items are things that we have some level of control over and some flexibility. So it's not a problem, I guess, to share on the wage side. But with respect to the others, suffice to say that the moving parts and the leverage we have in the business should allow us to overcome those incremental costs during the quarter.

Puneet Jain - JP Morgan Chase & Co

Right. Any changes in your expectations of timing or on magnitude of facility expenses, that were supposed to come up in second quarter?

Prashant Ranade

I'm sorry, what expenses? I missed that.

Puneet Jain - JP Morgan Chase & Co

Facility.

David Mackey

I think facility expenses. Yes, no major change, Puneet, from our previous expectations. We do expect a bump up in the second quarter as our Mumbai facility comes online. And we would expect a bump either late Q2 or early Q3 as the second building in our Chennai facility comes online.

Puneet Jain - JP Morgan Chase & Co

Right. And can you also remind us the magnitude of that bump up?

David Mackey

Now we have not given specific dollar figures associated with that increase. But we have talked about 6,000 incremental seats being added over the next 2 quarters. And there are pretty standard figures that you can apply to that to figure out the operating cost.

Puneet Jain - JP Morgan Chase & Co

Right. And, any impact you expect from relocating of key employees in Chennai and in Mumbai on attrition or on delivery? Also, attritions so far remains low.

Prashant Ranade

Now attrition has been -- has come down compared to the last two quarters. And we do not provide guidance on attrition levels in the future, and we do not expect significant costs around relocation because that's not how we start the projects.

David Mackey

Yes, I think, Puneet, if you look at where the expansion is in India, a lot of it has to do obviously with growth in our business going forward. So we hope to use these facilities mostly for growth. But thankfully -- certainly, if you look at where the locations are, if we did need to leverage these facilities for other purposes, they're geographically desirable to where we have our other infrastructure.

Puneet Jain - JP Morgan Chase & Co

Got you. Last question for me. So margin guidance for full year is lowered for currency. But you should -- shouldn't you be able to win back some of the links [ph] [1:19:09]impact in hedges? And also, if you can talk about your current hedge strategy, how far and how much you are hedged right now.

David Mackey

I think in the macro level, Puneet, you do see that we have gotten it back. I mean, the operating margin guidance is lower, but we've actually taken up the low end of the EPS guidance. So we have, from a slightly larger incremental revenue base and from an improvement on the hedging and on the interest income, been able to offset the margin compression from an EPS standpoint.

Arvind Godbole

And also, as we -- we have continued to follow the hedging, as we have done in the past quarters. This quarter, it has been slightly higher than what we have done during the earlier quarters. And we can...

Puneet Jain - JP Morgan Chase & Co

Okay. okay, thank you.

David Mackey

Thanks, Puneet.

Operator

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

Vincent Colicchio - Noble Financial Group, Inc.

Most of mine were answered. Just two questions here. At some point, I think it was later in the year last year, you were feeling fairly positive about clients, 11 to 30, in terms of increasing penetration. How do you feel about that now? And can we actually see revenue concentration decline in the balance of the year?

Prashant Ranade

You're absolutely right. Last year, our clients outside the top five clients, our overall growth rates in terms of percentage were higher than our average growth rate for the business. But given the revenues coming from top five clients, the overall percentage has been declining. We expect a similar opportunity for us given that these are under-penetrated, blue-chip clients. But clearly, as we have shared with you earlier, the transition revenues from one client, coupled with the fact that our Q1 revenue was flat compared to Q4, did cause the concentration to increase during quarter 1.

Vincent Colicchio - Noble Financial Group, Inc.

Okay. And so for the balance of the year, it may shift the other way? Or what are your thoughts there?

David Mackey

Certainly, one of our key objectives, Vince, it becomes a little bit of a double-edged sword because when you have good, healthy relationships with clients and they continue to grow, both sequentially and on a year-over-year basis, it can be a challenge to grow outside of those customers. But we certainly see over time the ability for us to do a better job of mining relationships outside of our top five and outside of our top 10. And the objective the company clearly is to continue to reduce customer concentration over time.

Vincent Colicchio - Noble Financial Group, Inc.

Okay. And last question. The e-Business had a very strong quarter. Should we model that business to be the strongest driver for the year? Any help directionally there will be helpful.

Prashant Ranade

So the growth in e-Business mainly came from growth in the Health Care, Life Sciences segment. And unlike past, that growth was more on the maintenance side, not development side. So we expect that revenue not to be as lumpy as it tends to be when it comes from development side.

Vincent Colicchio - Noble Financial Group, Inc.

Okay.

David Mackey

Okay. And I wouldn't expect, Vince, that the e-Business will be the growth driver for the company this year. I would still expect that the Applications Outsourcing will drive the majority of the company's growth. But on a percentage basis, you could see improvement on that segment.

Vincent Colicchio - Noble Financial Group, Inc.

Sure. Okay, thanks, guys.

David Mackey

Thanks.

Operator

There are no questions at this time. This concludes Syntel's first quarter earnings call. A replay of today's call will be available until April 28, 2011 by dialing 1 (800) 642-1687 and entering the pass code, which is 60073439. Thank you.

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