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Executives

Prashant Ranade - Chief Executive Officer, President and Director

Bharat Desai - Co-Founder and Executive Chairman

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

Zaineb Bokhari - Head of Investor Relations

Analysts

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Nathan J. Novak - Robert W. Baird & Co. Incorporated, Research Division

Puneet Jain - JP Morgan Chase & Co, Research Division

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Bhavan Suri - William Blair & Company L.L.C., Research Division

Mayank Tandon - Needham & Company, LLC, Research Division

Syntel (SYNT) Q3 2011 Earnings Call October 20, 2011 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Syntel Third Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded today, Thursday, October 20, 2011. I will now turn the call over to Zaineb Bokhari, Syntel's Head of Investor Relations.

Zaineb Bokhari

Thank you, and good morning, everyone. Syntel's third quarter earnings release crossed GlobeNewswire at 7 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, Zaineb. Good morning, everybody, and thank you for joining us today. We are pleased with the progress made during the third quarter. The revenue growth was solid, and barring a previously disclosed onetime expense, we saw operating margins expand nicely from a year-ago period and from the second quarter of 2011. We feel great about our competitive positioning, and we believe we are well placed to grow as the industry remains under-penetrated.

New customer outsourcing decisions, private cloud migration, mobility, business intelligence and testing remain important sources of growth. We are investing prudently in our business to position ourselves to take advantage of these opportunities.

I'd like to share some comments about the environment. While we are keeping an eye on macro economic trends, we would characterize demand for IT services as stable and healthy. Our pipeline is strong, and we have not seen a slowdown in client win rates or spending patterns related to 2001-2011 initiatives.

The global environment is presenting new challenges to our clients as they struggle to manage costs and boost productivity. We have an opportunity in this environment to help our clients achieve their operational and financial goals. One of the hallmarks of Syntel is client service, and we are leveraging our unique capabilities to help our clients compete and in doing so, grow faster than the industry as a whole. 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 third quarter revenues came in at $167.6 million, increasing 7% sequentially and more than 19% year-over-year. Our clients continue to see value in the services we provide, and their focus on driving down costs helps support our growth. Clients continue to move forward with project commitments in the current economic environment.

Revenue growth in the quarter was broad-based across the company, with most key services, verticals and geographies improving sequentially. Arvind will provide further details on revenue performance in his prepared remarks.

Third quarter gross margin expanded by 364 basis points as compared to the second quarter levels, coming in at 39.8%. Revenue growth in the quarter drove improved utilization. Offshore utilization for IT improved from 66% to 70% on a period-end basis, and from 65% to 68% on average in Q3. We were able to achieve this while maintaining our focus on campus hiring, as Syntel's net headcount grew by 266 in first quarter.

The company's SG&A expenses increased $11.8 million during Q3 as compared to a year ago, impacted by a previously disclosed onetime legal cost. Excluding this item, SG&A was below the year-ago quarter, as well as from the second quarter of 2011. SG&A was also impacted by currency-related balance sheet translations and other operating costs. While macroeconomic headwinds remain a concern, we are pleased that at this point in time, client spending patterns have not been impacted.

From Syntel's perspective, we would still characterize the overall demand environment and new business pipeline for our services as stable and healthy. We continue to strengthen our relationship with all of our clients and maintain our focus on building deeper relationships into accounts 6 through 20. We think we'll be able to leverage our deep domain expertise and unique engagement model to expand our footprint with these customers.

Clients are increasingly looking for prospect partners to help them realize business value and achieve their internal goals. We believe that Syntel is well-positioned to provide differentiated value to our clients and be their prospect partner.

In the fourth quarter of 2011, as we focus on creating long-term sustainable value for our clients and other shareholders, we'll continue to invest prudently in our business. To this end, previously planned initiatives such as campus hiring, ongoing infrastructure expansion in Chennai and Pune and the creation of new domain and service capabilities are on track. While this investment will limit margin expansion opportunities somewhat in 2011, we think they will position Syntel to drive growth at or above industry levels for 2011 and beyond.

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 S. Godbole

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

Syntel's third quarter revenue came in at $167.6 million, up 19% from the prior-year period and 7% sequentially. For the third quarter, Applications Outsourcing accounted for 75% of revenue, KPO is up 15%, e-Business represented 8% and TeamSourcing was 2%. From a vertical perspective, Financial Services contributed 56%; with Healthcare at 17%, Insurance, 13%; Automotive, 3%; and all other accounted for just over 10%.

Vertical growth was led by Healthcare and Insurance, which both grew 8% sequentially. In fact, all verticals contributed to growth. Syntel's customer concentration levels reduced slightly during the quarter. Our top 3 clients represented 51% of revenue, top 5 contributed 63% and top 10 came in at 77%. The fixed price component of our business was 39% of revenue for the quarter. With respect to Syntel's margin performance, our gross margin was 39.8% in the third quarter. This represented an increase versus 39.6% reported in the year-ago period, and a sequential improvement versus 36.2% in the second quarter of 2011.

Our varied costs were positively impacted by 3.5% depreciation in the Indian rupee during the quarter, which improved the gross margins by over 107 business points. By business segment, gross margin for Applications Outsourcing was 36.3%; KPO was 58.3%; e-Business was 40.3%; and TeamSourcing, 37.8%.

Moving down the income statement, our selling, general and administrative expenses were 21.9% in the third quarter of 2011, compared to 17.7% in the prior-year period as well as in the second quarter. On a dollar basis, SG&A was up $6.9 million sequentially. The impact of the onetime items were approximately 700 basis points on the operating margins. SG&A included $4.5 million impact from the balance sheet calculation adjustment, partially offset by increased calculated costs. Operating income during the quarter decreased by $3.2 million from a year ago, coming in at $1.6 million. The company recorded a $3.4 million loss on hedging versus $5.4 million gain in the second quarter. Our tax rate for the third quarter came in at 17.3% as compared to the 20.9% posted in Q2.

In the third quarter, the company recorded a reversal of tax provisions and tax reserves of $1.8 million which were no longer required. Net income for the third quarter was $26.2 million or $0.63 per diluted share, compared to $30.4 million or $0.73 per diluted share in the prior-year period and $27.6 million or $0.66 per diluted share in the previous quarter.

As previously disclosed, the onetime costs reduced EPS by $0.17 per share in the third quarter of 2011. The company's balance sheet at the end of the third quarter of 2011 remains extremely healthy. Our total cash and short-term investments on September 30 were $301.3 million, and DSO levels were down at 53 days.

Capital spending in quarter 3 was $6.2 million as we continued to put up our new buildings in Mumbai and Chennai in India, and initial construction of Phase 3 in Pune in India.

Syntel entered the third quarter with a total headcount of 18,293, of which 5,184 were assigned to KPO. Our billable headcount was 2,797 on-site and 14,275 for offshore, for a total of 17,072. The net additions to global headcount were 266. Utilizing levels at the end of the quarter were 95% on-site, 76% offshore, and 79% globally.

Our delivery mix currently stands at 20%, on-site and 80% offshore. Voluntary accretion during the quarter was 19.1%, an increase versus 16% reported last quarter. Syntel added 10 new customers in quarter 3 and one new Hunting License, which takes the total number of preferred partnerships, 208.

Looking forward, I would now like to provide you with the guidance for 2011. Based on our current visibility levels, Syntel expects revenue to be in the range of $635 million to $640 million and EPS to be in the range of $2.65 to $2.73 for the full year of 2011. The company currently has 99% visibility to the low end of the revenue range and our guidance is based on an exchange rate assumption of rupee [ph] 49 to the U.S. dollar. We expect that operating margins will be in the 19% to 20% range, and that our effective tax rate will be approximately 21%. CapEx for the year is expected to be in the range of $50 million to $55 million including land purchases.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jason Kupferberg from Jefferies.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Just wanted to start with a question here on the implied revenue growth guidance for Q4 based on the full-year outlook. At the midpoint, it appears that you're basically looking for sequential revenue growth of flattish in Q4, and if we look back historically, that would certainly be on the weaker side of what we've seen in the past. In fact, I think even back in Q4 '08 when the world was falling apart, you guys actually had a very small amount of sequential revenue growth. So can you just verify that you are expecting in your guidance, flat sequential revenue growth in Q4 '11? And if so, why would that be weaker than what we're used to seeing in Q4 for you guys?

Prashant Ranade

Yes. Seasonally, in Q4 there are more holidays and that is likely to impact our revenues for the fourth quarter. As mentioned earlier, right now, we have 99% visibility into the low end of our guidance and we are setting to grow our guidance as [indiscernible] impact is. And we feel good about our business and our ability to grow faster than the industry, but performing the normal historical factors in the last quarter [ph] setting the guidance. Revenue, of course -- yes. Okay, thank you.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Okay, understood. And then just a follow up, if we start looking ahead to next year, and I know it's premature for you guys to offer specific guidance. You made it very clear that the current spending environment has not really materially changed, despite all the macro uncertainties out there. But what's your read on how the budget setting process for 2012 is trending so far among your clients? Are you hearing of any delays in the budget-setting process? And any preliminary thoughts on how client budgets will actually look in terms of growth for next year? And then how we should think about that in terms of any directional impact on your revenue growth potential for 2012 relative to 2011.

Prashant Ranade

As we have described earlier and shared with you earlier, we don't see any change in client behavior on spending patterns. Having said that, the discussions we have had with clients about the budget -- they begin to get formed up in November. So clearly by November end, we'll have more information about the budget. But overall, demand environment continues to be stable, strong. We feel good about the business as reflected by the strong quarter and revenue growth we have had.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

We will stay tuned, then, on the budget.

Operator

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

Bhavan Suri - William Blair & Company L.L.C., Research Division

Just following up on that line of thought. Obviously, this quarter you had a very strong improvement excluding that onetime charge in operating margin. Your guidance from 19 to 20 full year takes into account for that. I guess I'm surprised by sort of that not being raised a little bit, given sort of the strength you saw this quarter and the continued sort of weakness of the rupee helping you out in Q4.

Prashant Ranade

If you look at our performance, clearly, as Arvind shared with you, our operating margins have improved. But in line with our 20-20 vision, we remain focused on ensuring the investments which we are embarked on in infrastructure and campus hiring, and more importantly, the differentiated offerings. We'll stay on track with those, because they will have long-term benefits for our business. So we are going to ensure that we ready ourselves to take advantage of revenue opportunities that will be out there.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Sure, sure. And then in the quarter, did you see any changes in pricing and sort of as you talk to customers, have you heard of any concerns around pricing or comments around pricing?

Prashant Ranade

Actually, no change, Bhavan, from the last quarter. We see in our discussions with clients, pricing environment to be stable with slightly upward bias, which is clearly healthy for the business.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Sure, sure. And then one question just on the operations here. Business intelligence has been an area of tremendous growth for a lot of folks in the last sort of 6 to 12 months. Can you talk about sort of maybe some of the partnerships you have in the area and what's driving sort of the growth there? Is it driven by the vendors or the customers or kind of both?

Prashant Ranade

It is clearly driven by clients with their focus on improving stickiness and connect with their customers to grow top line, to understand the client behavior patterns, and we do have a number of partnerships with vendors with different tools. And we are seeing traction around business intelligence and analytics in terms of predictive behavior, predicting the behavior and patterns for the clients. So we continue to see interest and additional projects in that area. And that is one of the reasons we have invested in that segment.

Bhavan Suri - William Blair & Company L.L.C., Research Division

If you could quantify, Prashant, how big would be business analytics or intelligence of Syntel's revenue today on the IT side?

Prashant Ranade

We are not breaking that up as a separate segment, because we are focused on 3 or 4 key areas where we are seeing similar traction. But clearly, it represents a substantial growth opportunity. And more than a specific or actual revenues in that particular segment, it improves the relationship with the client that allows us to spread within that client base.

Bharat Desai

Prashant, if I just may add a little bit of color. This is Bharat. In the past, what we saw was clients used data warehousing and business intelligence largely to do reporting on trends. I think we're embarking on a new era where clients are using this explosion in data and information to gain insights to how to better connect with their customers and how to spot trends early to be able to capitalize on them. And especially as we move from this -- into this sea of unstructured data, we think that business intelligence and analytics offers a sizable opportunity.

Operator

And our next question comes from the line of Mayank Tandon from Needham & Company.

Mayank Tandon - Needham & Company, LLC, Research Division

Bharat, you touched on a few of the top initiatives on the part of customers going forward. If you could maybe provide a little bit more color in terms of what are the clients thinking in terms of top of their mind, where they want to spend the incremental IT dollar and particularly around the regulatory work around Frank-Dodd. And then on the healthcare side, how does that kind of play into the equation in terms of their spending patterns?

Bharat Desai

Clearly, both those are areas that are mandated and they have definite deadlines by which these -- that they have to be compliant. And then there is similar regulations in Europe as well, by the way, for financial reporting. So customers are starting to move in that direction and we're seeing some traction both in the life sciences and healthcare area as well as financial services and banking with respect to those areas.

Mayank Tandon - Needham & Company, LLC, Research Division

Has the impact started to kick in or is this more of a fiscal '12, fiscal '13 impact?

Bharat Desai

I think we started seeing the impact in healthcare and life sciences. We started seeing some planning also in financial services and banking. But we think that for both, assuming the deadlines don't move at all, '12 will be a big year for these to be baked into their budgets.

Mayank Tandon - Needham & Company, LLC, Research Division

Got it. And just a little bit more on that. Have you guys been able to maybe size the opportunity for Syntel in terms of how much of this is revenue cannibalization versus other areas where the clients would've spent their dollars on but now they have to spend on regulatory work, which, of course, takes away spending on some of the other items that they would have looked to spend on otherwise?

Bharat Desai

Yes. That's a good question. So remember, almost 2/3 of our revenue comes from doing lights-on work. And we think that some of this regulatory and compliance work may possibly come from areas where they -- which otherwise may have been in the area of capital expenditures. So if that's the case, then we'll probably see this as being incremental from their current spending.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay, that's helpful. And just a couple of quick follow-ups. What about the expectations of a budget flush in the fourth quarter? Do we have any sense at this point, could that be a factor in 4Q or is that off the table?

Prashant Ranade

We are not expecting budget flush to have an impact in Q4 this year.

Mayank Tandon - Needham & Company, LLC, Research Division

Okay. And finally, Prashant, has there been any change in your conversations with your top 3, top 5 accounts that would lead you to alter your assumptions on their ability to grow in the next 1 to 2 years?

Prashant Ranade

No. Actually, I'm encouraged by additional opportunities which I hear about based on some of these new initiatives that Bharat described in answer to your question. And the way I look at it is while we look at the IT budgets, the budget for opportunity is really unlimited. And we've got investment in new initiatives that allows us to take advantage of those. So I don't look at top 5 clients as limiting but rather additional opportunities with them.

Operator

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

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

I just wanted to get a sense of -- I know that we've talked on this call before about clients maybe 5 through 20 or 11 to 20. Maybe you could just talk about any early plans that you have for and what you're seeing from them as far as being able to mine revenue in those relationships, and how you expect that to address that next year.

Prashant Ranade

We are very pleased with the fact that this quarter, like Q2, the growth rate with our clients 6 to 20 was actually higher than the average growth rate for the company. So we are very pleased with that. And that is actually reinforcement of our strategy which we embarked on, which is threefold, which includes client partners, which includes new offerings for these clients, because they are large global brands, and under-penetrated clients where we have established relationship along with our unique engagement model. So those 3 together is what we plan to stay with, because that's what has helped us realize higher growth rates for clients 6 through 20.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

And I assume that the impacts could be positive on the margin side if you're able to grow those clients and hit your targets in 2012.

Prashant Ranade

The margin capital that we have established for ourselves, we remain committed to that. And these new clients -- I'm sorry, these current clients, along with new offerings, will clearly support our both gross margin as well as operating margin region which we have laid out as a 20/20 vision.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And then just sort of switching gears. I wonder if you could refresh -- I heard sort of in the beginning. What was the impact for the tax rate in other income, and how do you think of those 2 factors going forward?

Arvind S. Godbole

Tax rates for the full year we are assuming to be around 21%, and other income currently we are revising. Last quarter we said quarter 2 [ph], but because we had a mark-to-market loss this quarter because of sudden rupee depreciation, we are revising it. So the -- And also, the mutual fund gain this time was less than last quarter. So other income should be around $18 million to $19 million for the full year.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And I assume that the tax rate will return back to normal going forward?

Arvind S. Godbole

Yes. For the year 2011, we expect it to be around 21%.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And then one last question just to touch on it. I know that you put out the press release a little bit earlier about that legal and took the actual hit this quarter. Maybe you could just further tell us if there's anything, any other pieces pending first. And then secondly, maybe you could give us some color on what legal fees you're taking in each quarter and how that would affect margin if they start to tail off here.

Prashant Ranade

If you look at our historic performance over the past 30 years, we haven't had any legal issues like this one. So we feel comfortable in terms of governance, the processes we have, as well as ongoing focus on quality and delivery. As far as impact on specific amounts, because of the confidentiality around this settlement, we cannot reveal that specific amount, but as Arvind described earlier, on operating margin, overall impact of special items was, Arvind?

Arvind S. Godbole

700 basis points.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. But I could assume that there were legal fees that were paid up until the settlement for the cases, is that correct? And those would now fall off whatever the fees were. Is that a fair assumption?

Prashant Ranade

That's correct.

Bharat Desai

That's correct, yes.

Prashant Ranade

That's a fair assumption.

Operator

And our next question comes from the line of Puneet Jain from JPMorgan.

Puneet Jain - JP Morgan Chase & Co, Research Division

Prashant, you talked about the 20/20 vision, and also mentioned investments in the business. So is that different from Syntel's earlier views of not changing the level of investments for currency movements?

Prashant Ranade

I'm sorry, you're saying, are we changing the investment because of currency movement?

Puneet Jain - JP Morgan Chase & Co, Research Division

Yes. So basically just want to know about your investment philosophy in context of this currency-driven margin upside over next -- over the near-term.

Prashant Ranade

I think, as we have identified, the investments in 3 areas: Infrastructure; people, which is ensuring the domain knowledge, our deep domain and expertise; as well as new offerings is critically important. So we'll continue to invest in those areas anywhere we have opportunity to do so, while staying focused on our 20/20 vision. So that's what we plan to do.

Puneet Jain - JP Morgan Chase & Co, Research Division

So will this level of investment increase now given that currency is going to help margins? Or...

Prashant Ranade

No. The currency rates will not change our vision for investment or our plan of investments.

Puneet Jain - JP Morgan Chase & Co, Research Division

Got it. And a follow-up question on 4Q guidance -- 4Q revenue guidance. Do you have higher visibility on the low end of your -- sorry, on the low end of your annual guidance, or maybe do you expect higher-than-usual holidays this year? Basically, why 4Q growth on a sequential basis is going be lower this year than some of the previous years.

Prashant Ranade

Well, if you look at our Q3 performance and look at the actual days in Q4 versus Q3, that translates to just under $3 million impact. So if you take that into account and the fact that we are consistent with our visibility to lowering guidance, we feel comfortable with where we are, coupled with the fact that we haven't seen any demand abatement or a change in customer spending patterns.

Puneet Jain - JP Morgan Chase & Co, Research Division

Okay. And last question for me. So just to be clear, this third quarter tax upside from reversal, it was not incremental to you previously issued annual guidance. Is that right?

Prashant Ranade

Yes. As we operate in multiple geographies and tax jurisdictions, we view the tax positions at the end of every quarter as required. And we cannot factor what is going to happen in the next quarter. So in the earlier guidance, this was not factored and now that we do, we are dealt with in this quarter.

Puneet Jain - JP Morgan Chase & Co, Research Division

So given that you had this tax benefit in the quarter, so why not increase the top end of the EPS guidance for this upside of [indiscernible]?

Arvind S. Godbole

There are other factors as well regards -- we are expecting the full year tax rate to be around 21%, and that is not materially different from what we called earlier. Also, we have commissioned facilities in this quarter, so we are going to have increased costs. So considering all the factors put together and also the foreign exchange view, we have kept -- we have come to this guidance.

Operator

And our next question comes from the line of Manish Hemrajani of Oppenheimer.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

So looking at the macro environment in 3Q, did you see any pause spending in the September quarter? And also, can you comment on that conversion cycle in 3Q versus the first half of the year?

Prashant Ranade

No. As we commented earlier, we did not see any pause or deferrals of the project, again, as evidenced by the growth rate in Q3 that we are very pleased with. As far as decision making cycles are concerned, we did not see any change in the pattern on the IP side. And on a KPO or operations side, those are more transformational. So those decision cycles has been slower, again, consistent with what we have seen in the past.

Operator

And our next question comes from the line of Vincent Colicchio from Noble Financial Group.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Prashant, I was expecting the KPO business to be relatively weak this quarter. It came in fairly strong. Could you explain what was driving the sequential growth?

Prashant Ranade

Actually, our KPO business from quarter-to-quarter did not see substantial growth, but some growth that we did see still came from the transition revenue. While it was lower than Q2, there was some transition revenue and that's what drove some of the growth. But if you look at the overall growth rate on the KPO business, percentage-wise it was flat.

Vincent A. Colicchio - Noble Financial Group, Inc., Research Division

Okay. And so on the -- go moving towards the -- on the e-Business revenue, that was also stronger than I expected. Could you -- is there anything there, besides what you referred to in terms of areas of strength, testing, et cetera? What was driving the strength there on the e-Business side?

Prashant Ranade

Actually, you are right. Our business growth was strong. We are very pleased with it. And what is even more important is it was symmetric. We saw growth across all verticals, across all practices, as well as 3 lines of our business, which is Application Outsourcing, e-Business as well as the KPO, as I mentioned, was flat. But if you look at relative percentages, e-Business growth rate was higher than average. And that business is also moving to more maintenance, which is the sticky business which has ongoing revenue potential.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Okay. Is there anything new to report on your negotiations for a new long-term contract with your KPO client?

Prashant Ranade

No. As we continue the discussions, we are clearly aligned in terms of our long-term goals. We -- both the partners see the benefit and value from the relationship, but there is nothing new at this point to report.

Operator

And our next question comes from the line of Dave Koning from Robert W. Baird.

Nathan J. Novak - Robert W. Baird & Co. Incorporated, Research Division

This is actually Nathan Novak on the line for Dave. On your EPS guidance, with the bottom end increased a little bit x charges, can you give any color around what of that from the depreciation of the Indian rupee?

Arvind S. Godbole

Yes, it did benefit us in quarter 3, but we cannot assume the same benefit in the quarter 4. But what we are seeing is the improvement in the utilizing [ph] and some growth in the top line, which will help us. Actually, we're a little higher EPS than what we talked one quarter back.

Nathan J. Novak - Robert W. Baird & Co. Incorporated, Research Division

Got you. And if you look out a little bit longer term over the next 2 to 3 years, if the rupee sort of stays at this depressed rate, around INR 48, INR 49, do you have any color on where that could bring margins from, relative to 2011 levels?

Arvind S. Godbole

Actually, we follow a consistent hedging policy and regardless of where the rupee will be, we are confident that we'll be able to manage the currency risks. So -- which should not affect our plans or the earnings. That's what we have done. Although we are not going to speculate on the rates or we are not going to take it as comparable positions [ph]. We just do the hedging for protecting our earnings per share, what we expect.

Operator

And I show no further questions in the queue at this time. This concludes Syntel's third quarter earnings call. A replay of today's call will be available until October 27, 2011 by dialing (855) 859-2056 and entering the passcode, which is 18646539. Thank you. You may disconnect at this time.

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