Satyam (SAY 3Q05 Conf Call Quotes) Jul-Sep Quarter Results and Q&A

Satyam, like Infosys (INFY 3Q05 Results and Q&A), posted excellent results. Here is a detailed bulleted summary of things that were discussed in the conference call. The mood was upbeat. Indian GAAP results and U.S. GAAP results differ noticeably this quarter, due to an acquisition Satyam did this quarter (Citisoft). Julio Quinteros of Goldman Sachs chided management on the guidance of flat pricing going forward (Infosys management, in their earnings call, said new clients are paying 3-4% more than existing clients). Satyam hired 2,000 employees this quarter (net) compared to Infosys's 7,000 (net).

Ramalinga Raju, CEO; Vadlamani Srinivas, CFO; and Ram Mynampati, President, led the call.

Financial Results:

• Q2 Revenue US $268 million, sequential revenue growth 8.9%. (Annual revenue run rate now US$1 Billion for the first time in company's history).
• 24% sequential growth in EPS (Indian GAAP).
• Operating margins by 119 basis points due to "enhanced efficiency."
• Revising our revenue guidance upward for fiscal 2006: now expecting annual revenue growth rate of 34%, annual EPS growth rate of 30% to 30.5%.
• Guidance is based on an exchange rate of Rs.44.02 per U.S. dollar for the next two quarters; realized rupee rate during the past quarter was 43.8.
• Board has approved an interim dividend of 100% for 2006.

Business Metrics:

• 2000 people hired this quarter (net), highest ever for Satyam. (editor's note: Infosys hired 7,000 net this quarter).
• Added 32 customers, including new names from Retail and Airline industries.
• Consulting and Enterprise Business Solutions package increased 13% sequentially; leads growth.
• Billing rates for IT services have increased marginally compared to previous quarters. (editor's note: Infosys reported that they are increasing prices 3-4% for new clients).
• Nipuna (a BPO subsidiary owned 100% by Satyam) expected to achieve revenue of US$18 million for 2006 (annual growth of 80%); expected to cash break even in Q4 of the current year.
• "We had said earlier that the total headcount will be anywhere between 4,500 to 5,000. Now we have upped it to 5,000 to 5,500."
• Volume growth in offshore work was around 9%; volume growth in on-site work was around 5%.
• Proportion of revenue coming from large deals expected to increase in the next two years.

On business climate:

• "We continue to experience increased momentum in the market, and believe that the demands for business solutions using the global developing model are robust."
• India embracing the same set of solutions as global customers prior to the last two quarters. "I think that’s what is leading to the increase in business. We are increasing servicing customers in India, as well as working with global customers outside the Indian province. In that sense I would say it’s a sign of maturity of the Indian market, I think that is what is reflected in the growth of the domestic market."

On why gross margin improved more than operating margin, and likelihood that further gross margin improvements will be passed down to the operating margin line for the rest of the year:

• will improve quarter-on-quarter; not able to give specific guidance.
• year-on-year, operating margins will be maybe flattish or maybe declining by less than 50 basis points from the last year levels

On tax rates:

• Tax rate for the current quarter is around 11.5% or 11.6%. We expect it to go up in the next two quarters. For the full year we expect the tax rate to remain at the last year’s levels, of roughly around 13.5% or so.
• Tax rate in prior quarters was 17%. Reduction is due to (i) changes in tax regulations, and (ii) increase in offshore income, which reduces tax incidence

On the SAP business (James Friedman of Fulcrum Global Partners noted that SAP reported great numbers, and asked how it affected Satyam's SAP implementation business):

• We don't break out the numbers.
• Europe was up 14% sequentially; SAP contributes to that growth but wins in recent announcements didn’t come from SAP; so not fair to say that all those good opportunities were won by SAP. "I think it’s fairly broad-based."

Lou Misocea, the analyst from Lehman Brothers asked whether headcount is increasing because the orders are already there or just because strong demand is expected to continue. Satyam's response repeated original guidance, and was thus not meaningful in this context.

On competition to hire workers in India, from Accenture and IBM:

• No problem with entry level. Specialty skills is more of a challenge.
• Increased competition certainly does have an impact on our ability to attract resources, but we have been able to manage through it
• Nothing new; fairly predictable
• Multinationals have certainly stepped up broad-based recruitment in India
• "But as I said earlier, the supply line is significant in India. I don’t think that is a major concern at this stage."

On how operating margins have been affected if the Rupee had not depreciated by 1% during the quarter:

• Operating margins would have been lower by 30 to 50 basis points.

On whom Satyam is taking business away from: Accenture, IBM, or someone else?

• "The usual prospects within India and equally importantly, if not more importantly, the large systems integrators such as IBM Global, Accenture, CSC, EDS, Cap Gemini, these are the kind of players that we are essentially coming in competition with and the number of wins which have such players behind a competitive environment is gradually increasing. It is around 50% plus where you have significant competition coming from such players."

On why sales to top 10 clients were sluggish this quarter:

• Churn
• It is a positive, since we are trying to reduce dependence on any one aspect of the business. "In spite of the fact that the accounts are not getting the same amount of bookings, we are able to demonstrate heavy growth rates quarter-on-quarter"

On whether EPS will be impacted due to expensing of stock options:

• Yes, but limited to options given in the past; no options being given out any more
• Charge of maybe around US$10-15 million per year; so US$200 or so; pretty nominal.

On attrition:

• 10% to 11% attrition is still higher than we would like it to be; continuing to monitor the situation closely and we will take whatever appropriate measures to bring attrition figures under control.

[Text in double-quotes is from Thomson CCBN StreetEvents; reproduced with permission.]